We already have a functioning monetary system, and in the West, we currently have a multitude of different ways to pay and transfer money. So why do we need bitcoin?
If bitcoin works the way it is intended to, then the world really, really needs it! However, bitcoin is not fully developed yet, or rather, some areas are under improvement. You can read more about them here. Now on to why we need bitcoin.
In our current monetary system, we are highly dependent on central- and commercial banks. The banks have a lot of power, and we rely on their systems to work and their employees to do the right thing.
Because bitcoin and the blockchain are more efficient, and because there is no bank making money off it, transferring bitcoin is much faster, cheaper and could be safer than the current systems of wire transfers, credit card payments and so on.
Bitcoin can be transferred in seconds from one part of the world to another. Today, domestic wire transfers take at least 24 hours, and international transfers take several days!
Transferring bitcoin is also much cheaper than transferring fiat (government issued) money. Banks are known for being good at hiding their fees, so trying to understand how much you pay for a transfer can be difficult.
Sometimes bank fees come in the form of slow service (every hour your money is in their system they make interest on it). Sometimes the fees are baked into other things, for instance, the fee for exchanging money to other currencies is usually baked into the exchange rate. When you use your debit card abroad you pay 1.5-1.65% for the foreign exchange. Other times the banks are transparent about their fees. For instance, Nordea charges 75 SEK to transfer money to a bank account in another bank, when done at a branch office.
The price of monetary transactions is important. If transaction prices are low, even very small payments are worthwhile and make economic sense. If transaction prices came down, it would help the developing world a lot, which we discuss here. However, it can also benefit people in the West.
For example, online newspapers can make more money if they can charge a small fee for accessing a specific article. Today the newspapers are leaving money on the table because some customers are willing to pay for individual articles but not willing to sign up for binding monthly subscriptions.
Because bitcoin and it’s blockchain security system is decentralized (members of the network provide the security by mining), there is not as much need for commercial banks to provide security and have control/power over the monetary system. Bitcoin and its blockchain just works on its own and is run by the people who use it.
Most of the time the banks use their power in a good way, but there are times when they don’t. When that happens, it’s devastating for society as a whole. Here is an example;
Greed in banks can cause recessions. In 2008 we had a worldwide recession where many people lost their jobs. The recession was set off by greedy bankers who messed things up in their quest to make more money for themselves.
There is a lot to be said about how the 2008 recession happened, but this is the basic outline:
Banks lent money to people who couldn’t afford to buy houses. Banks also created fraudulent financial products with excessive risk built into them - which the customers were not aware of. => (this led to) Some large banks went bankrupt (Bear Sterns, Lehman Brothers, Fannie Mae etc.) => In fear that other banks had similar problems and may also go bankrupt, banks stopped lending to each other => The customers (companies and individuals) suffered because they couldn’t get loans or run their businesses. => Some companies went bankrupt and fear spread in society. => In order to be prepared for possible layoffs, people spent less money and companies didn’t hire. => A recession kicked in.
People can lose their money if banks are badly run and turn to bankruptcy. Fortunately, many governments have policies in place to protect savers from these kinds of scenarios. In Sweden, we have ‘insättningsgarantin’ where the government promises to repay individuals up 950 000 SEK if their commercial banks go bankrupt. Ultimately though, it’s the taxpayers who pick up the tab for bad management on behalf of the banks.
If Bitcoin truly became a world currency, no company would have to worry about fluctuating foreign exchange rates, which is a big headache for the industry and adds additional costs to businesses.
Most of the products we buy today are not only produced in countries other than our own, but also the different components that they are made of are too.
For example, when you buy a shiny new Volvo car, it’s not only shipped from the final assembly plant in Malaysia, but the different parts have been produced and shipped from all over the world. In order to make just one Volvo vehicle, there are countless components shipped back and forth over the globe.
For each international sale of a component, an international monetary transaction takes place. These transactions are costly, take days to clear and usually come with huge foreign exchange rate risk. The cost for all this is pushed onto us, the end consumers.
For example, a company that sells China-produced eyeliners in Sweden may have placed their order on February 1st, 2017, when the exchange rate was 1.27 CYN/SEK. According to common practice, the products were paid for when they start being produced, on April 10th, 2017, when the exchange rate was 1.31 CYN/SEK. In this example, because of the change in the exchange rate, the products were 3% more expensive the day they were paid for compared to the day the order was placed. This may not sound like much, but it is. The average net profit margin for retail companies is 1.5-3%, so fluctuating exchange rates are a big problem.
With bitcoin and blockchain, it is easier for people in the emerging world to access financial services, such as taking loans. The bitcoin blockchain makes it cheap and easy to lend small amounts of money globally, across borders.
Being able to take loans is important because without them it’s much harder to start businesses, buy toilets for shanties, and in other ways get ahead financially. In the developing world, identity verification is complicated because a large portion of the population isn't officially registered as citizens. Also, most people want to borrow a very small amount. These two factors make it too expensive to provide financial services to the world’s poorest. There are Microfinance Institutions (MFI’s) that provide some financial services, but the costs are still too high to offer good solutions for international money transfers.
The good news is that bitcoin can solve all of this! With bitcoin, investors in the rich world can lend small amounts of money to individuals in the developing world and still earn a high-interest rate. Because the transaction cost for bitcoin is so low, the costs won’t eat away the profits.
And this is not a future dream-scenario. You – personally - can do this right now! You can lend money to someone in the developing world who is trying to set up a business. Bitbond gives investors this possibility, their minimum investment is 5 USD and their average investors earn 13% interest on doing this great favor. Here is how it works.
There are several more areas of use for bitcoin and blockchain. We have only listed some of the bigger and most obvious ones. Of course, there are also counter-arguments explaining why bitcoin won’t work in the way that many people hope it will. We discuss some of the biggest bitcoin drawbacks here.
When you dive deep and really try to understand all the pros and cons of bitcoin, you realize that things are extremely complicated. Bitcoin touches advanced technology, economics, government regulation, politics and human (psychological) reactions to everything from adapting to new technology to fear of losing out.
Bitcoin and blockchain are like economics in the sense that it’s almost impossible to make accurate predictions. You can know virtually everything about it, and yet, the field is very complicated and there are many different factors that can influence any given situation.
So, in regard to bitcoin, there is very good reason to be respectful of other’s opinions about how things will unfold. Derogatory comments are never good, but they are even more inappropriate when discussing bitcoin.
With this in mind, you are invited to discuss bitcoin’s future, and areas of use, with other readers on our live chat forum. Discussions are not only fun but also they can help people understand and develop their thinking.
Disclaimer: The information in this article, as all content on BlockBull Review, is not and should not be seen as investment advice. The information is for educational and/or entertainment purposes only, so use it at your own risk. It is possible to lose money when engaging in any investment including cryptocurrencies and past performance does not indicate future performance. Any opinions expressed are those of BlockBull Review's writers who are not broker-dealers or advisors of any kind.