The impact of Bitcoin on traditional finance

The impact of Bitcoin on traditional finance

Gianluca Lombardi December 28, 2022
4 min read
  • Bitcoin is a digital currency that has attracted considerable attention and acceptance in recent years.
  • Although initially considered a fringe technology, bitcoin and other cryptocurrencies are increasingly entering the mainstream and are being used for a variety of financial transactions.
  • In this article we will look at the impact of bitcoin on finance and traditional banking, its history, the differences with traditional financial systems and the potential benefits and challenges it presents.

The History of Bitcoin

bitcoin on the top of a traditional finance building

In 2008, an individual or group using the pseudonym Satoshi Nakamoto published a white paper entitled Bitcoin: A Peer-to-Peer Electronic Cash System. The paper describes a decentralised electronic money system that uses a distributed ledger, known as a blockchain, to record and verify transactions.
In January 2009, the first block of bitcoin’s blockchain, known as the ‘genesis block’, was mined. This marked the beginning of the bitcoin network and created the first 50 bitcoins.
In the years that followed, bitcoin gained a small but convinced following, with more and more merchants and individuals adopting it as a form of payment.
In 2013. The US Internal Revenue Service issued guidance that bitcoin and other virtual currencies be treated for tax purposes as assets and not as currency. This made them subject to capital gains taxes and other financial regulations.
In 2017, the Chicago Mercantile Exchange (CME) and the Chicago Board Options Exchange (CBOE) began offering bitcoin futures trading, allowing investors to speculate on the future price of bitcoin.
In the same year, bitcoin underwent a major upgrade called SegWit (short for Segregated Witness), which improved the efficiency and scalability of the network by allowing more transactions to be processed in each block.
In the years since, bitcoin has continued to gain popularity and acceptance, with more and more merchants, financial institutions and individuals using it for a variety of purposes, including as a store of value, a medium of exchange and speculative investment. However, it has also faced significant challenges, including volatile price fluctuations, regulatory uncertainty and concerns over its potential use for illicit activities.

How bitcoin differs from traditional finance and banking

bitcoin sitting above an illustration of a bank 2

  1. Decentralisation: bitcoin is decentralised, i.e. it is not controlled by a central authority, such as a government or financial institution. Instead, it relies on a network of computers working together to verify and record transactions in a distributed ledger known as a blockchain.
  2. Use of cryptography: Bitcoin uses cryptography to secure and verify transactions. Each transaction is recorded on the blockchain and encrypted using sophisticated mathematical algorithms, making it virtually impossible to alter or tamper with.
  3. Limited supply: the supply of bitcoins is limited and the maximum number that can be created is 21 million. This is in contrast to traditional fiat currencies, which can be printed by central banks as needed.
  4. Peer-to-peer transactions: Bitcoin allows peer-to-peer transactions without the need for intermediaries such as banks or payment processors. This allows for faster and cheaper transactions, especially for international payments.

The potential advantages of bitcoin for traditional finance and banking

  1. Faster and cheaper international transactions: because bitcoin is decentralised and uses peer-to-peer transactions, it allows for faster and cheaper international payments than traditional methods that rely on intermediaries such as banks or payment processors.
  2. Increased financial inclusion: Bitcoin and other cryptocurrencies have the potential to increase financial inclusion, particularly for the unbanked or underbanked who may not have access to traditional financial services.
  3. Reducing dependence on central banks and state-issued currencies: bitcoin and other decentralised cryptocurrencies allow for a more stable and secure financial system, not subject to the influence of central banks or governments.
  4. Increased security: because bitcoin uses cryptography and a decentralised network to verify transactions, it is considered more secure than traditional financial systems, which are vulnerable to hacking and other security breaches.
  5. Innovation potential: the decentralised and open nature of bitcoin and blockchain technology has also encouraged the development of new financial products and services, such as decentralised finance (DeFi) and non-market tokens (NFT), which have the potential to disrupt traditional financial models.

Challenges and criticisms of bitcoin

  1. Volatility and speculation: bitcoin and other cryptocurrencies are known to be highly volatile, with significant price fluctuations in short periods of time. This makes them risky as an investment and some criticise them for being more like speculative assets than a stable medium of exchange.
  2. Lack of regulation: because bitcoin is decentralised, it is not subject to the same level of regulation as traditional financial systems. This raises concerns about the potential for illegal activities such as money laundering, tax evasion and fraud.
  3. Limited acceptance: despite its growing popularity, Bitcoin and other cryptocurrencies are still not widely accepted as a form of payment by merchants and financial institutions. This limits their use and acceptance.
  4. Environmental concerns: the energy consumption required to mine bitcoin and maintain the blockchain network raises concerns about its environmental impact.
  5. Scalability: as the number of users and transactions on the bitcoin network grew, the network faced scalability issues, resulting in slower transactions and higher fees.

Conclusion

In conclusion, bitcoin and other cryptocurrencies have received considerable attention and acceptance in recent years, and their impact on traditional finance and banking is still being debated.

While they offer the potential for faster, cheaper and safer international transactions and greater financial inclusion, they also face significant challenges, including instability, lack of regulation, limited acceptance and environmental concerns. As the adoption and use of bitcoin and other cryptocurrencies continues to evolve, it will be important to carefully consider both the potential benefits and challenges they present.

Gianluca Lombardi

Gianluca is the editor-in-chief of this site. A finance graduate, he is an active trader who has tested all trading platforms and knows all their secrets. Technology is his passion; he spends much of his free time in the metaverse. Gianluca loves learning new things, researching, discussing and writing about technology, especially when it comes to cryptocurrency and blockchain technology.