The Internet is wonderfully disruptive. Travel websites have all but eliminated the need for travel agents. Online banks ushered in financial institutions without costly bank branches. Amazon walloped bookstores. Netflix killed Blockbuster. Newspapers are dying a death of a thousand clicks. The list goes on.
Watching the Internet mow down established industries brings to mind the Batman TV series from the 1960’s: Kapow! Bam! Thwack! Will Bitcoins deliver the next ‘Powie’?
Bitcoins are easy to explain but hard to grasp. Persons unknown launched the cryptocurrency in 2009. Computers generate Bitcoins by solving complicated mathematical problems. The math problems get progressively harder to solve as more Bitcoins are generated. The system is designed to cap the number of Bitcoins at about 21 million.
Bitcoins can be bought and sold for traditional currencies on several online exchanges. Owners can transfer Bitcoins to others through the Internet. And a growing list of retailers now accepts Bitcoins as an alternative currency.
Michael Babikian, President and CEO of Transamerica Brokerage is fascinated by the idea of Bitcoin. He says, “It is strictly a person-to-person currency, and you can earn, spend it and – mostly it seems – speculate on it. For most of us, unless we are mathematicians willing to do the tedious equations necessary to “mine” Bitcoin from the ether, if we want Bitcoin we will have to buy it the old-fashioned way with dollars, pounds or Euros. Like currency of all sorts, it is used in transactions that range from contributions to international relief funds to suspected illicit activities.”
So what’s the big deal?
Governments issue currency. Central governments control the printing press giving them significant power and influence. Over the past few years the Fed has undertaken an unprecedented operation to flood the world market with U.S. currency. Quantitative easing has affected the bond market, the stock market, interest rates, employment, trade, and even political careers.
Governments control currency. The U.S. government uses and restricts the flow of currency to detect money laundering and terrorism. Financial institutions must report transactions exceeding certain limits to the government. Governments enforce controls over banks and other financial institutions, including capital requirements that affect lending.
Governments tax currency. State, local, and federal governments have their collective hands in virtually every private transaction. Citizens cannot make money, spending money, invest money, or even give it away without paying the piper in most cases.
Bitcoins have the potential to upend all of this
Bitcoins today are a growing novelty. Criminals use Bitcoins to facilitate illegal activity. It’s much harder to trace than other electronic payment systems and much easier to transfer than cash. Yet a growing number of legitimate retailers have begun to accept the digital currency as payment. And the U.S. government has now imposed money-laundering rules on companies that accept payment in the form of digital currency.
But Michael Babikian believes the speculation is real, even if the currency is virtual: he references the alternative stock exchange, SecondMarket, which specializes in selling shares of private companies, is setting up an investment fund that will hold only Bitcoins. It’s a way, the fund’s managers say, to “provide a reliable and easy way to bet on the future price of Bitcoin.” It’s one way to bring Bitcoin more into the mainstream, but it will also shine a spotlight on the controversies brewing over a currency that lies outside the control of government and banks.
Bitcoins have the potential to be far more disruptive
Bitcoins eliminate the printing press. The digital currency cannot exceed about 21 million units and is not issued by a central bank. A decentralized currency transfers control from governments to people. Governments cannot manipulate Bitcoins to control inflation, interest rates, markets or trade.
Bitcoins eliminate the middleman. To buy something online requires a credit card or perhaps a PayPal account. These middlemen charge fees and are accountable to the government. Consumers can transfer Bitcoins directly to another person or retailer without expensive payment networks. Bypassing established networks reduces costs and accelerates transactions. Sending Bitcoins overseas, for example, no longer requires expensive and time-consuming wire transfers. A free click of the mouse will suffice.
In short, Bitcoins could do to central banks what Amazon did to bookstores. Pow!
While it is scary, “Bitcoin is part of an evolution that’s impacting one the most fundamental parts of our civilization: currency for the exchange of goods and services,” says Michael Babikian.
Is all of this likely? No. It’s about as likely as a courageous woman’s refusal to give up her seat on a bus sparking a civil rights movement; or two guys both named Steve upending the computer industry from a garage with a company named after a fruit; or the Boston Red Sox coming back from a 3-0 deficit against the Bronx Bombers on the way to their first World Series Championship since the curse of the Bambino.
No, it’s not likely at all.
*This post is sponsored by Transamerica Life Insurance Company however all thoughts and opinions are the author’s. Please consult a financial professional when making fiscal decisions as this article is general in nature.