“The future of money,” “drug dealer’s dream,” “transformative,” “disruptive”– Bitcoin has been called many things. Beyond its anonymous nature, bitcoin has the potential to change the way we bank, make transactions, and view money. Let’s examine bitcoin’s potential and its challenges.

Future of Bitcoin Adoption

To transfer money to a friend, my bank takes a cut for providing services. To purchase a house, I pay significant fees for registration and stamp duty charges to register my ownership in multiple books and records. Through digital labeling, the indelible record of a bitcoin transaction has the potential to eliminate such third parties (and their costs).

Zerohedge cites findings by a Goldman Sachs analyst, “in 2013 money transfer fees would have fallen by 90% if bitcoin had been used…Global transaction fees at retail point of sale, meanwhile, were $260 billion on over $10 trillion of sales. Using bitcoin, those fees fall by almost $150 billion to $104 billion.” In addition, currently credit card companies charge 2%-4% to retail merchants. Using charge-free bitcoins would be a game changer for small businesses running on thin margins, as these are businesses with low sales volumes.

World Bank report estimates that by 2016 international remittances will be worth over $700 billion. Banks and money transfer services take significant cut ranging from 4% to 10% on the transferred amount. This charge may be direct (such as a standard quoted percentage) or indirect (such as a less favorable forex rate). Bitcoins allow free transactions beyond geographical boundaries (or for a simple 1% charge if using bitcoin service providers like Coinbase or Bitpay). A mere 3% savings on such transactional costs on the projected figure of $700 billion would result in a savings of $21 billion, leaving more money for the end consumers.

The secret of bitcoin lies in the underlying “block chain” – a secure digital ledger on bitcoin networks that keeps track of bitcoins by recording every single transaction. It facilitates agreement by all parties as to who owns how many bitcoins. A bitcoin wallet holder will have an exact replica of the block chain on the secure public bitcoin network, which virtually overrules any attempts of counterfeit. This block chain currently tracks and records money movements – buyer A paid x bitcoins to seller B. However, the same block chain can be utilized to record transaction details to include title deeds and transaction details, which can act as public records. It could nullify the costs of title registration, ownership, and record keeping.

Firms like ColoredCoins.org are adding attributes like coloring to bitcoins, which represent other assets like 100 shares of a company, an ounce of gold, or $5,000. Similar to bitcoins, colored coins can be used to trade the underlying assets. As long as the market participants agree on a standard and honor the conversion of the colored coin to something in the real world (stock, bond, car, or a house), a coloured coin can be used to represent the ownership of that real world thing. Without paying a broker commission, I can sell my green colored bitcoin to you that may represent 100 shares of Apple Inc. (AAPL), which would give you dividend payments and voting rights. Effectively, an extra layer has been built into bitcoins, enabling transfer of ownership of real world commodities.

The Challenges

Bitcoin has evolved as a great cryptocurrency, built on the backbone of a robust and resilient network. However, its scripting language is considered to be vulnerable to attacks. Third-party applications and systems built on top of bitcoin protocol can be insecure and vulnerable, and can lead to bitcoin thefts. However, technology advancements could make the system more robust, particularly if bitcoin gets into the mainstream.

A global cryptocurrency will come with its own set of challenges, including decentralized autonomous control and a lack of geographical and regulatory oversight. How efficiently can rules be created and adopted in the autonomous network will be an area of concern.

The Bottom Line

All in all, bitcoin and its underlying technology have great potential. Applications based on block chains will present technical, legal, economical, and social problems that may be similar to the ones raised by similar peer-to-peer applications like Torrent, Napster, or Freenet. The alternatives offered by bitcoin will have to pass the test of time and trust, before it gets accepted in the mainstream. Nonetheless, while bitcoin might not last, the technology underpinning it will be a game changer and continue to evolve in coming years.

(Read more on Investopedia)

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