What is Bitcoin – Part 2 – Practical Benefits

This is Part 2 of a Series on Bitcoin. Click to read Part 1 – What is Bitcoin?, where I discuss what Bitcoin is and give a basic overview of how it works. This post assumes some basic familiarity with Bitcoin and discusses why I believe Bitcoin has the potential to be a disruptive technology, giving you an idea about the practical benefits of bitcoin. But first, to give you a summary, Bitcoin is a fast, secure, and (potentially) private way to store and transfer wealth outside of traditional banking systems, anywhere in the world.

Bitcoin’s Security Helps Prevent Fraud

First, I’ll let Tom Hanks, portraying FBI agent Carl Hanratty in the 2002 movie, Catch Me If You Can, explain check fraud.

Because Bitcoin uses cryptography to verify transactions, it’s extremely difficult (if not impossible) to create “fake” transactions. Certainly, Bitcoin eliminates the possibility of faking a transaction by simply seeing a copy of someone’s check or credit card. So, in a real way, Bitcoin eliminates check and credit card fraud as we currently know it.

Frank Abagnale would have used different cons today.

Bitcoin’s Low Fees Encourage Growth

Although personal checking accounts are generally free, we all know one problem with checks is that they can bounce. Funds might not be there. This problem is often solved by using certified checks (checks issued by a bank that guarantees that the money will be available), wire transfers, credit card transactions, or other consumer services such as Paypal. However, certified checks cost about $10, wire transfers can cost $30, and credit card processors and Paypal take upwards of 3 percent of a transaction. For many transactions, these fees are prohibitive (or, at the very least, restrictive).

Although I am not endorsing any specific provider, Bitpay is one company offering Bitcoin transaction processing services. Just to give you an example, they offer to conduct Bitcoin transactions for a 1 percent fee. LocalBitcoins is a company that facilitates person-to-person Bitcoin transactions, and they suggest that Bitcoin transaction fees are between 0.0010 and 0.0001 Bitcoins per transaction, depending on the current transaction volume (that’s about 6 to 60 cents, based on current / USD exchange rates).

Bitcoin’s Pseudonymity Helps Preserve Online Privacy

With credit card transactions, purchasers have to submit a lot of personal information online, just to validate a credit card, even if the seller isn’t delivering any physical goods. In contrast, Bitcoin is like cash. You don’t need to give away your personal information to a third party just to make a payment for digital goods or services (e.g., purchasing a license for some consumer software, renting movie online, or paying for a subscription for a website). With more and more companies being hacked each year, who should you really trust with your personal information? Bitcoin can help with that.

Bitcoin can be used as a payment system

Given Bitcoin’s low fees, pseudonymity, and its resistance to traditional fraud techniques, Bitcoin has the potential to replace credit cards and Paypal for accepting payments. And, the list of companies that accept Bitcoin continues to grow and grow and grow.

Bitcoin can be used to store and transfer wealth

Just like many people use gold as a store of wealth, so too do people think about bitcoin as a way of storing wealth. In other words, fiat currency like the U.S. Dollar, the Japanese Yen, or the Brazilian Real, are all subject to inflation and deflation. Central banks can produce more currency, increasing the money supply, and decreasing their respective values over time. In contrast, there’s only so much gold. Yes, we mine more gold. But, in all of human history, only about 165,000 tons of gold have been mined, and we’re only mining about 2500 tons a year. In other words, gold can be exchanged for goods and services, and because there’s only so much gold, over time, its value doesn’t change much (at least in comparison to fiat money).

Just like gold, there’s only so much Bitcoin. Right now, more Bitcoins are being generated, but over time, the amount of new Bitcoins decreases (by design), eventually stopping altogether. So, just like gold, Bitcoin has the potential to be a store of wealth (with the added plus that Bitcoins can be directly transferred for goods and services, or exchanged for fiat currency).

In addition to being a store of wealth, because Bitcoin is not physical like gold, it can be used to transfer wealth. One of the reasons that Bitcoin has become popular in China is because wealthy Chinese are using Bitcoin as a way to transfer their wealth outside of China.

Bitcoin provides poor and underserved people access to financial tools

Because Bitcoin is decentralized, has low fees, and can work pretty much anywhere, Bitcoin has the potential to give the underserved access to a banking system, even if there are no banks. In countries where the poor don’t have access to banks, Bitcoin can provide a way for people to store their wealth electronically, rather than “under the mattress,” so to speak. In fact, because people in many developing countries have access to cellphones, even if they don’t have access to a banking system, they can use Bitcoin. In other words, just like cellular networks are taking hold in developing nations instead of traditional land lines, so to, could Bitcoin take hold.

Conclusion

While there are certainly a lot of questions about what will happen with Bitcoin, the technology shows a lot of promise. Even if you don’t adopt Bitcoin yourself, we should all understand a little bit about what it is and how it has the potential to disrupt.