Many people who like to stay up on the latest news in finance and technology have probably heard of bitcoin by now. There are many different opinions out there on the virtual currency at this point, and not many people seem to understand the kind of long term effect that bitcoin could have on society as a whole. This new form of technology was created by an anonymous computer genius, Satoshi Nakamote, who decided that the world needed a new way to transfer money from person to person. After years of trying to come up with the perfect formula, Satoshi finally settled on the bitcoin protocol.
There are many different aspects of bitcoin that make it something that should frighten the large banks around the world. The first aspect of bitcoin is that it is a currency and not something like PayPal where it is simply used to transfer money. New bitcoins are created through the bitcoin mining process, which actually makes this currency rather similar to gold. The actual process of bitcoin mining is difficult for most people to understand, but the basic idea behind the mining process is that bitcoin miners are rewarded for confirming all of the transactions on the bitcoin network. This means that any transaction in bitcoins must be reviewed and confirmed by all of the miners before it can be processed. The reason this confirmation system is needed is that people would be able to spend the same bitcoins in their bitcoin wallet more than once if there was not a group of people auditing the system after each transaction.
The second aspect of bitcoin that makes it rather revolutionary is that there is no need for banks to exist in a bitcoin economy. People can securely hold their bitcoins through a number of different methods, and they can easily transfer their bitcoins to someone else in a matter of seconds. Instead of putting one’s money into the bank and then waiting a few days for a bank transfer to go through, people are now able to send money directly from their bitcoin wallet into someone else’s wallet. This process not only takes a few seconds to happen, but it is also nearly free. The fees that are associated with each transfer are awarded to the bitcoin miners for auditing the transaction.
One thing about bitcoin that scares many of the governments around the world is that bitcoin transactions have the potential to be anonymous. As mentioned before, all of the transaction in the bitcoin network are audited by the miners. These transactions are also completely public and can be viewed by anyone who has access to the bitcoin ledger. This makes many people think that bitcoin transactions are not anonymous, but the fact of the matter is the bitcoin wallets involved in the transactions are not necessarily tied to an individual. This means that someone can transact in complete anonymity on the bitcoin network as long as they do not share their bitcoin address with a lot of people. If two people want to do business with each other without anyone, including the government, knowing about the transaction, then all they have to do is make sure that their private transaction is not talked about with anyone else. It is similar to paying someone for something in cash instead of using a credit or debit card. The main cause for concern for the government in this aspect of bitcoin is that it makes it possible for people to avoid tax payments. If the government cannot track how much money you have in bitcoin and what you are doing with that money, then there is no way for them to realize how much money you should be paying in taxes each year. The true ramifications of this fact will not be seen until many different people are only transacting in bitcoin. The government can still see how much money people are putting into bitcoin right now because most people are still transferring dollars for bitcoins at one of the bitcoin exchanges. Once a situation is created where people are being paid in bitcoin and then spending their bitcoins directly at stores instead of transferring those bitcoins into dollars, this could become a serious issues.
One last thing that needs to be mentioned about bitcoin is that it could kill the credit card. The main reason that many small businesses are looking into bitcoin as a viable method of receiving payment is that they do not have to pay the 3% fee to Visa or MasterCard on each sale. Bitcoin is valuable to both the consumer and the vendor, which makes it something to watch closely for the next few years.