Almost 30% higher over the past two weeks, Bitcoin appears to be gaining from the banking industry’s problems. But can it really take the place of banks?
Many think that Bitcoin’s (BTC -0.44%) recent rise and the fact that it crossed the $28,000 mark for the first time in nine months are related to the recent upheaval in the banking sector. Although it might surprise you, one of the main motivations behind the creation of Bitcoin was to act as a bank substitute. In 2009, Bitcoin was introduced to the world by its eponymous developer Satoshi Nakamoto in response to the massive bank bailouts that followed the effects of the Great Recession.
Nakamoto probably doesn’t find it surprising that the early 2023 banking chaos helps Bitcoin. Its main objective was to give individuals a different way to save and distribute money that wasn’t dependent on the frequently dubious and extremely opaque activities of banks.
A creative strategy to take on banks
We must look at what makes Bitcoin special in order to completely comprehend why it is thriving and how it can become a more appealing alternative in the future.
Decentralization is first
Bitcoin can’t be controlled by a single organization like a government or financial institution because it runs on a decentralized network. Users benefit from greater freedom, autonomy, and resilience to censorship and manipulation thanks to this high degree of decentralization.
Inclusion of finances
While people in rich economies can easily access financial products, this luxury isn’t always available to people in other regions of the world. With Bitcoin, you don’t need a bank to transmit money, pay remittances, or hold value—all you need is an internet connection.
Openness to security
All Bitcoin transactions are public and immutable since the currency runs on a blockchain, which means they can never be changed or deleted. Transactions on the Bitcoin blockchain are simple to verify and trace because of this transparency and security combination. As a result, the possibility of fraud and corruption virtually disappears.
Despite the fact that Bitcoin transactions are visible to the public, there is an additional layer of anonymity because transactions are not associated with any personal data. Public addresses, which are made up of a random, special combination of letters and numbers, are the sole data associated with transactions. Although it is theoretically possible to track every transaction coming from a specific location, it is still unlikely that anyone would actually be able to identify the person responsible.
The 2021 Taproot update made it possible for Bitcoin to implement smart contract capabilities. Smart contracts allow for the automation and streamlining of many financial operations by carrying out predetermined actions when certain conditions are satisfied. Inevitably, new business models and improved efficiency result from this.
We can only speculate, but it would be reasonable to suppose that Bitcoin is functioning exactly as Satoshi intended. Banks frequently engage in fraud and corruption and are not as secure as they claim to be. When they do fail, however, they are bailed out while the public suffers the worst effects. As people recognize this, Bitcoin will probably continue to attract interest from those seeking an alternative to the status quo.
An important disclaimer
I’ll be the first to acknowledge that the idea of Bitcoin dispensing with banks currently seems a bit unrealistic. Bitcoin’s detractors nearly always bring up the fact that, as long as its volatility stays this high and savings stored in banks are covered by the U.S. government up to $250,000, Bitcoin will never be a viable alternative to traditional banking.
These price swings, however, are probably a passing occurrence. Assets with a modest market cap tend to be more volatile. Bitcoin’s volatility will probably decrease when the currency’s overall value starts to rise.
As more individuals become aware that banks aren’t fully risk-free and frequently use consumer assets for speculative operations, it appears that Nakamoto’s vision may be materializing right before our eyes for the time being. Should the financial industry see additional volatility, Bitcoin may well keep rising.