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One of the main difference would be that crypto is a decentralized and global digital currency, or, in other words, outside the control of the banks and not backed by a central government. As a result, cryptocurrency is immune to the old ways of government control and interference. Both fiat currency and cryptocurrency can be called money or currency. Both, in their essence, are mediums of exchange that are used to store and transfer value. Cryptocurrency, as well as fiat currency, can be used to purchase goods and services. Both have their value governed by supply, demand, work, scarcity, and other economic factors.
Bitcoin has created a new way for people to store their money.
By purchasing and holding tokens, investors can put their money into something safer, more accessible and potentially more lucrative than simply holding on to a handful of cash. There are, of course, several key differences between purchasing bitcoin and traditional banking.
Structure vs. Asset
First, and perhaps most obviously, investing in bitcoins is not structurally the same thing as putting money in a bank account. A bank account stores currency in its existing form, in an existing institution. This comes with fraud protection, membership programs, and any insurance against loss or theft (such as, in the United States, the FDIC).
Storing money in bitcoins is structurally an investment. It is an asset purchase similar to buying real estate or foreign currency. There is no institution or structure because you’ve used your money to make a purchase. Where a bank actually stores your money, an asset (like a bitcoin) merely stores its value. There are a lot of differences between investing in bitcoins and opening a bank account, and almost all of them flow from this one.
As a peer-to-peer electronic cash system, bitcoin is often praised as “the better way” of storing and transferring money. Indeed, bitcoin’s decentralized network gives people more privacy with their transactions and the ability to move their money despite restrictions imposed by governments. It allows individuals to transfer funds without third party oversight. For some people, this gives them the advantage to store and send money without being flagged.
The banking system is open to manipulation of figures, exchange rates, and tampering by high profile bankers and governments, and due to the ease at which traditional money is printed slowly loses its value. Many banks operate on ‘fractional reserve banking’, where they only have a supply of cash at any one time for a certain percentage of customers at once, if all customers attempted to withdraw their money at once, the bank would fail.
Disadvantages of traditional banking
- Open to manipulation of figures.
- Fractional reserve banking makes this a higher risk option.
- Inflation slowly can erode value of held cash.
- Lack of transparency about how the system runs.
- Bank fees can be expensive, especially for businesses.
- Banks in different countries often work differently and linking them can be tedious, and many use different currencies.
The traditional banking system is already established, and payments from all major debit/credit cards and cash are accepted almost everywhere. Use of cash does not require an internet connection or any other technology. Manipulation in the banking system has caused incidents such as the financial crash of 2008. Bitcoin was actually created due to the manipulation of the banking system and the need for something in the control of the people.
Bitcoin works in a fundamentally different way to the fait system. The bitcoin network has many nodes. These nodes are distributed around the world, run by bitcoin enthusiasts, major mining pools, etc. These nodes are all attempting to solve mathematical problems, while at the same time holding a memory of all the recent transactions that just occurred after the previous problem was solved and the previous memorized transactions are written into a ‘block’ and recorded on the blockchain, which is a distributed ledger.
This is the clever part about bitcoin, the distributed ledger is a type of database called the blockchain. The system is designed where all the full nodes hold a full copy of the entire blockchain.
The system is designed where most of the node must agree that a transaction was valid, or in reality 51% of nodes must do this. The idea being that if at least 51% of the networks computing power is honest and well distributed, the ledger is tamper-proof even by people with wealth and power. Banks are attempting to incorporate their own private blockchain, but as the computing power will be run by the banks themselves, this does not fully guarantee in any way that it is tamper-proof.
The blockchain is therefore a tamper-proof record of what transactions happened, the fact they did happen, and solves the problem of a decentralized digital currency. The more computing power on separate nodes which is added to the network, the more secure the network is. Any chances to the bitcoin protocol rules must be agreed by at least 51% of nodes, although in reality this figure is higher due to variations in block solving time, and that the other 49% of the network which is still a large majority can reject the rules of the other 51% and still ‘work’ on its own.
Transaction Fees
Unlike the traditional banking system, which can charge quite high transaction fees, bitcoin allows transactions globally with very little cost.
Advantages of bitcoin
- Trust less, does not require trust of any one entity or corporation to work. Even the creator himself cannot manipulate it to his own advantage on his own.
- Cheap to send transactions with no extra charges between countries, money can be sent with ease from one end of the world to another in seconds.
- Bitcoin debit cards exist to serve as a link between bitcoin and the traditional system, allowing its use even with merchants who do not accept bitcoin directly.
- Free from the manipulation which plagues the traditional baking system.
- One easy to use currency that is global.
- Acceptance gradually increasing.
Disadvantages of bitcoin
- Not accepted by the majority of merchants currently, although some major ones support it.
- Blockchain databases are expensive to secure, the power consumption of the entire bitcoin network is enough to power a small country, although this is well distributed.
- Has legal issues in some countries, such as Ecuador.
- Provides an easy way for dishonest entities to move money with limited ability to trace them.
- The inability to reverse transactions in the event of fraud.
- The risks of a 51% attack, especially in the case where large mining pools hold a large quantity of the networks mining power, this has been somewhat negated with the opening of many more mining pools.
Bitcoin is a relatively new technology, but is slowly gaining traction due to its ability to be tamper-proof and free from the manipulation which cost average people around the world billions. The need to put the power in the hands of the people lead to the creation of bitcoin. In any country with an internet connection, the bitcoin network can be used, the one exception being North Korea which does not allow its citizens access to the public internet.
It can send transactions around the world with ease, and the price is slowly becoming more stable as it becomes more accepted in the mainstream. In many places you can buy your coffee with it, you can purchase games and in some cases do shopping with it. Using a bitcoin debit card can complete the link between it and the traditional system, while they both co-exist. If you want to be a part of helping free people from the control of rich individuals and corporations, want an easy way to move money around the world for business or personal reasons, using bitcoin can assist in this.
Both systems are currently co-existing alongside each other. Both look like they are here to stay for the foreseeable future, although the rise of bitcoin is causing banks to rethink certain areas, like transaction fees and how they link between countries, among other things. The banking system is open to manipulation while bitcoin is pretty much tamper proof and allows the control of no one individual or corporation.
Chances are the adoption of bitcoin or other decentralized currencies will increase due to its ease of use and being tamper proof.
In poor countries with limited access to the internet or areas without electricity such as many places in rural India for example, there are still hurdles to cross there. Both bitcoin and the traditional banking system will co-exist for the foreseeable future, although bitcoin is potentially the start of the fall of the manipulated banking system and allows a safe place to store savings and cash away from prying eyes, it is easier to conceal a private key than it is to hide funds in bank accounts. This could protect people in the event of malicious divorce cases, among other things; provided no link between the two systems is proven and no laws are broken. In traditional banking your every action can be audited and picked up by governments, for both good and ill.
Traditional banks can charge high fees for transactions between countries, while bitcoin can do it for very little cost, anywhere in the world bar North Korea, at the same rate.
Use of a decentralized currency like bitcoin has responsibility, due to the lack of chargebacks and the privacy it offers over traditional banking. loss of private keys or being scammed means no one reimburses you and the coins are lost forever in the event of a private key loss. Only if you are ready for such responsibility should you begin with bitcoin, as the banks do take on many of these responsibilities and reimburse customers usually if they are hacked and funds stolen, etc.
Conclusion
Overall, both systems are here to stay for the foreseeable future, although bitcoin has the potential to change commerce, and the financial system as we know it. Both systems have their advantages and disadvantages which have been discussed. Both will co-exist for the foreseeable future. The world of finances and commerce has the potential for a revolution in how it operates due to the invention of bitcoin and other currencies derived from it and the blockchain. The blockchain has other uses as well, such as smart contracts, as used in the Ethereum platform. Bitcoin is an advance in technology, that puts more power in the hands of the people.
Additional resources:
Introduction to MLS Bitcoin club
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