This post is part a series of articles that explain, in plain English, new technology tools and platforms that are changing the face of finance.Check out other articles in this series here.
What is Bitcoin?
Imagine the following happy scenario: You have just finished designing a cooking website for Dan. You live in Nevada, Dan lives in London. When Dan goes to his bank to send you your payment, he discovers that the transaction fees for sending a direct wire to your account will be very, very high. He is also told that it will take several days for the transfer to go through. When Dan goes to Western Union, it's the same story. "Can I pay you in bitcoin?" Dan asks. "Maybe," you say. "What's bitcoin?"
Bitcoin is a peer-to-peer, digital currency. It's a decentralized payment system, which means that all bitcoin transactions are almost instantaneous (up to ten minutes), have minimal or no transaction fees, and can be made anonymously.
How do you get bitcoin?
If you decide to let Dan pay you in bitcoins, you'll have to have to open a digital wallet. A digital wallet is where you store your addresses, the files into which bitcoins can be uploaded or downloaded; to minimize the risk of theft, it's safest to open a new address for each new bitcoin transaction. Once you have the wallet, you can buy bitcoins on exchange sites or from another person, you can download them from special ATM machines, or you can get paid in bitcoin.
Another way to get bitcoins is to become a miner. Miners are the guardians of the bitcoin network - they confirm each new bitcoin transaction by creating bundles of bitcoin transaction records called blocks. Once a block is established, it is added to a chain of all the previous blocks (the blockchain), a ledger of all of the past transactions conducted with bitcoin. The miners have a real incentive to keep the bitcoin network secure; each time they create a new transaction block, they're awarded 50 bitcoins.
Is it Safe?
Sure, bitcoin is safe - or at least as safe as any other type of currency. Hackers are mostly out to steal your private keys and to hack into third-party websites that store or exchange bitcoins for you. Luckily, there are steps you can take to keep your bitcoins secure, such as backing up and encrypting your wallet, or even keeping your wallet offline.
Can bitcoin change the financial services industry?
To a certain extent, bitcoin has already caused a paradigm shift in the way that the financial services industry relates to digital currency. Some large banks have already partnered with bitcoin-focused firms, and many are developing tools and technologies to test blockchain applications.. Though little has come to market, it’s clear that bitcoin will have a significant impact on the financial sector in the future.
So, has the bitcoin revolution begun?
From a user’s perspective, the answer is a firm no. Less than 0.1% of internet users use bitcoin, and there are indications that since 2013 there has actually been a decrease in the number of new users joining the bitcoin network. However, as far as the financial industry itself is concerned, the answer is less clear cut. Bitcoin, and especially its blockchain technology, certainly have the ability to radically transform the sector, not only by showing them how to become faster, safer, and lower-cost, but by introducing new marketplaces, encouraging micro transactions, and by enabling new brands to become major players in the industry.
The only question is whether incumbent financial institutions will be able to see past the immediate threat that bitcoin could pose to their profits and embrace the shared ledger technology that could eventually transform the financial services industry as we know it.