A few years ago, before Bitcoin was invented, we could hardly imagine a world without central banks regulating the amount of money and making sure all inter-bank transactions are cleared. Bitcoin, and other cryptocurrencies for that matter, work just fine without any third party interference. Once set in motion, the algorithm does all the work of a central bank, all while enabling global money transfers (rather than just taking care of those on a local level).
We wanted to take a look at how Bitcoin compares to central banks and the traditional banking system, and here’s what we’ve come up with…
1. Decentralized vs Centralized System
Bitcoin does not need a central authority like a central bank. Also, it can reside on as many servers as possible and none of those servers need to be owned and operated by a government-related entity. In fact, when you install a Bitcoin wallet on your computer, you are getting an option to download the entire ledger that holds all bitcoin transactions ever made.
Compare that to the central bank’s system, which can’t be accessed by anyone without an appropriate clearance. This, however, doesn’t make Bitcoin less secure, as the public ledger only contains keys and amounts of transactions, while the software (miners) checks the previous transactions every time a new block is added to the blockchain.
2. Deregulation vs Regulation
Bitcoin’s regulation is non-existent. Today’s system is pretty much the same as the one that was initially released in January 2009. It is the algorithm that determines the way new bitcoins are added to the system, effectively replacing the board of directors / governors at a central bank. Said algorithm could be changed, but it requires a wide consensus that can’t be reached that easily. This deregulation makes all the difference, making Bitcoin the truly global currency. However, it also makes Bitcoin more volatile than “traditional money.”
3. Limited Supply vs Unlimited Supply
Bitcoin’s algorithm is set to stop rewarding miners after 21 million bitcoins have been issued. When this cap is reached at some point in 2140, no new coins would be released. In contrast, central banks all over the world keep pumping money into the economy like it’s nobody’s business. In the post-math of the 2008 financial crisis, we’ve seen central banks employing so called quantitative easing, which is just another way of printing money (or increase the money supply, since most of today’s money is digital anyway).
4. Open Market vs Banks
Central banks rely on banks to distribute money to the wider economy, which effectively makes any bank a middleman between the capital and customer (whether individual or a business) who needs that money. What’s more, banks are also in charge of managing money transactions between people and companies.
With Bitcoin, there is no need for the middleman, at least not in its traditional form. Bitcoin transactions happen in a public ledger which isn’t controlled by any company or government. Also the new money flows into the system on a predefined basis (algorithm), rather than based on current world affairs. This, however, makes Bitcoin more volatile as certain major events can push its price up and down with no central authority being able to interfere.
5. Global vs National
In the “regular world,” U.S. dollar is the most widely accepted currency, but you will have to exchange it for Euros if you’re visiting, say, France or Italy. In comparison, bitcoin is a truly global currency and you are able to buy a growing number of products and services with it. In some cases, your bitcoins are exchanged to the local currency at the time of transaction, but still… you get to spend your bitcoins (and satoshis) wherever you happen to be, as long as that place accepts bitcoin payments.
This, however, is easier said than done as bitcoin is still far from being accepted and even owned by a mainstream consumer/vendor. Things are changing here, and in the meantime you can use bitcoins to transfer money to people and organizations in other countries without paying high transaction fees.
Conclusion
Both Bitcoin and central banks are currently co-existing alongside each other, and that will likely remain the case for the foreseeable future. Bitcoin and the entire cryptocurrency market did cause the stir in the traditional banking sector, but rather than rejecting it, smart banks have started to embrace the technology. Most of them still can’t trade bitcoins, but they are looking at it, knowing that in the global world, we need a global currency. Or more of them…
The practical question for all of us is whether we can jump in on the opportunity and reap rewards later on. Or miss on it… What do you think?