Disruptive nature of bitcoins

In 2014, a research analyst at the French financial institution, BNP Paribas revealed five ways in which Bitcoin could potentially disrupt the banking industry. Even though the risks that were talked about by the institution were mostly speculative in nature, it was the first time that bitcoins were recognized as a disruptive force in the industry.

In this article, we will look at the disruptive nature of the technology, and try to determine whether significant steps need to be taken to reduce the danger if any.

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Over-reliance on the PIN

Governments all around the world have been reluctant to respond to the growth of the digital currency, with suspicion revolving around the various ways in which it could be used to threaten the existing financial systems. Bitcoin is the first currency to its extent that is digital in nature and is seen as a competitor to Paypal, debit cards and other forms of currency. In all these other forms of the currency, a pin system has been utilized that does not give the person direct access to the entire value of the currency but instead acts as an enabler for him to use the currency. In the case of bitcoins currently, all a user needs to know in order to own the digital currency is to know the private key of the bitcoin wallet. Bitcoin in this way becomes a ‘bearer’ instrument with no additional security features. This might currently be a minor issue with the use of bitcoins, but as the number of users and the value of individual transactions keep on increasing, surely there will exist a greater need of individuals to have better security features so that a potential financial meltdown is avoided.

Ripple network's XRP crypto aims to solve problems faced by financial institutions while implementing blockchain technology.

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Network compromise

A report by The Economist talked about the potential network breach that can be caused by Bitcoin and its alternative Ethereum. The report cited a 2016 attack on the Ether network that caused the theft of around 3.6 million units in Spiegel as an example. In order to significantly change the value of bitcoin, a ‘51% attack’ needs to happen where a majority stakeholder can then impact the value of the entire system. Although such an attack is currently not possible due to the rigid framework of the currencies and the lack of widespread utility, it is a possibility in the future, considering the steady rise that we have seen in its use and the slower acceptance of Asian markets. More freedom, more nodes and increased value of transactions have led to experts believing that such an attack is like in the future. The report also states that such attacks have a history of affecting the rise of currencies in the past, and bitcoin is no exception to the situation.

Credit instrument

Bitcoin in its present form is not seen as a large-scale credit instrument, with acceptance still hard to come by in various forms. The first problem with the emergence of bitcoin as a proper credit instrument is with the lack of reversibility in the case of transactions. The only way a bitcoin transaction can be reversed is with the agreement of all the parties involved. The lightening network should improve micro-payment situations considerably. In order to grant credit on bitcoin transactions, the bitcoin service providers can easily join hands with BTC exchanges in order to come up with a system where it is possible to transact on credit, regardless of the worth of the bitcoins in the particular wallet. Currently, bitcoin accounts provide the option to pool wallets in order to participate in transactions of more worth. While this is a positive step considering the prospective future of the currency, various steps need to be taken in order to lend acceptance to the currency in the form of governmental regulations.

Mainstream market performance

Bitcoin has been cited to underperform in some parameters used to determine whether a currency would be a success in mainstream markets. Bitcoin has been deemed too volatile, for starters. Bitcoin, when looked at as a currency, appears to be too volatile and random with its value fluctuations, having a 60-day fluctuation rate of around 15.25 percent, while the currency rate even in highly volatile periods of average currencies seldom goes beyond the one percent mark. Moreover, bitcoin has a limit on the number of transactions that it performs in a given time period, with the fees soaring after that. In 2017 and early 2018, transaction fees ran as high as 55 dollars per transaction, making it hard and inconvenient to use for mainstream consumers and small businesses. If bitcoin has to have a future where it cruises towards the status of a mainstream currency, there need to be rules and regulations in place to make it viable for everyday transactions.

Implementation of Lightening network and Segwit should drastically change the high fee situation on bitcoin network.

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Disruptive impact on other industries

With the advent of bitcoin and underlying blockchain technology, various industries have benefitted from their usage and applications in various forms. However, certain industries in the service sector are sure to undergo damage on their part. Payments and money transfer currently involve a long and complex process that revolves around agents and a central money transfer operator. Bitcoins provide a more efficient and easier way to perform such transactions, with its peer to peer network granting the users access to direct way of performing transactions, without the extra fees and the time wasted. The blockchain technology will also in time disrupt the way academic credentials are recognized and verified across the world, with MIT media labs in talks with Learning machine in order to come up with Blockcerts, an application based on blockchain technology to build an ecosystem of academic sharing and credential verification that is easier and more efficient than the current manual process. Blockchain technology also has various applications in the field of medicine and real estate. In such a scenario, blockchain technology has given a swift means of replacing jobs in various fields without giving the industry enough time to accommodate them. Such a disruptive impact may lead to large-scale unemployment in various industries across the world. Such disruptions in the way industries transact and communicate will surely lead to changes of the highest order. In order to accommodate them, governments and inventors need to come up with rules and regulations so that the industry is able to accommodate that blockchain technology without disruptive incidents.

What do you think about bitcoin and blockchain disruptions? We welcome your comments.

By Rishabh Bhatnagar:
Rishabh is a law student with a passion for Blockchain / Cryptocurrency, Internet of Things (IoT), Cloud Computing, Artificial Intelligence, and Startups. He is an avid reader with a taste for writing. He likes learning about new things and is a writer at TechSutram. You can contact him at our contributors' section.Opinions expressed by techsutram contributors and partners are their own.