Will Bitcoin replace money in the future?
Although the concept of Bitcoin has been around for more than 40 years and the innovative system has grown in popularity in the past decade, what it is and what it can do is still not very well known. How does a digital and intangible currency that does not exist in the real world have value? Is it safe and reliable? Will it be a replacement for money in the future?
In this blog, we will discuss:
- What is Bitcoin?
- How does Bitcoin provide security for transactions?
- Will Bitcoin replace money in the future?
- Bitcoin and Kaplan Business School
What is Bitcoin?
Bitcoin is a decentralised digital currency and can be transferred to anyone anywhere (peer-to-peer) in the world without having to go through a centralised service like a bank or Paypal. Bitcoin is a money protocol that no one owns or controls. It cannot be censored or confiscated by any third parties and is cryptographically secure.
It is quick, secure and reliable. There are no prerequisites to signing up or minimum or maximum spend limits. Bitcoin can be exchanged for other currencies, products and services.
Managing transactions and the issuing of Bitcoin is done collectively by the network. The network is secured by individuals called miners who are rewarded with transaction fees and newly generated Bitcoins from verifying transactions. Transaction information and Bitcoin digital account balances are recorded on a public ledger that is maintained on multiple computers worldwide.
The value of Bitcoin is linked to its use and adoption as a medium of exchange. As long as users want to buy and sell bitcoins, those bitcoins will have value.
How does Bitcoin provide security for transactions?
1. Decentralised
Bitcoin is a decentralised system which means it is not under the control of any government or central bank but is operated by a global community of miners and codes. Unlike governments that can print more money, coins cannot be created (the exact amount was defined in the Bitcoin protocol when it launched in 2009) which prevents inflation and devaluation of its value. There will never be more than 21 million Bitcoin (each is divisible into 100 million ‘satoshis’). This scarcity is a driver of its perceived value.
2. Anonymity
Many of us have a bank account and your balance and transactions are known to you and your bank. With centralised systems, governments, banks, and other third parties can take or freeze your funds. With Bitcoin, the only person who knows about and can access your digital wallet is you. You can conduct financial transactions using only your digital identity. Your wallet has a private key which is issued to sign transactions to provide proof that they came from you. Bitcoin is ‘pseudonymous’ meaning if you can link an identity to one transaction (e.g. IP address, social media etc) then all subsequent and preceding transactions can also become identifiable.
3. Consensus
Bitcoin is an open source that relies on the community to maintain and develop its underlying code. Any user can review the Bitcoin protocol and verify whether all processes are running correctly. The blockchain technology prevents a user from changing the code to benefit from it. Each participant voluntarily chooses how they wish to participate, and software selection and which transactions to include in each block are determined by a consensus.
Bitcoin is antifragile where any threats or opportunities are communicated to the developers and their resolutions and updates travel through the system, improving its defences.
If a new functionality or feature needs to be added, the community can initiate a fork (i.e. a change to the set of rules) to upgrade the network. Anyone can "fork" Bitcoin by taking a copy of the open-source code and making changes to it. However, as the network is so decentralised with thousands of miners, nodes and users, achieving any changes to the consensus rules requires an overwhelming majority to apply the changes in their version of the software.
4. Unchangeable
Bitcoin operates on blockchain technology. This means all records of operations are performed on the blockchain. The transaction is permanent, time-stamped, and verified by the global community. All the information you need is embedded and once data is added, it cannot be deleted or modified. Payments are protected against theft thanks to cryptographic encryption and digital signatures.
All Bitcoin transactions are irreversible.
Will Bitcoin replace money in the future?
Adoption
The adoption of technology usually grows gradually and then suddenly. Let’s talk about the internet. In 1990, only a handful of governments, businesses and individuals were using the internet and then in 2000, everyone wanted to adopt it. Before the iPhone was invented in 2007, people talked on the landline and mobile phones were large and expensive. By 2011, every adult was carrying a smartphone.
The adoption of Bitcoin and other cryptocurrencies is in its early stages and there is more room to grow.
There are now over 425 million crypto users worldwide and it is predicted that crypto will reach 1 billion users by 2030. The high connectivity of today’s world will increase the rate of global cryptocurrency adoption faster than any other technologies in the past. The total market of all cryptocurrencies is now US$2 trillion.
Responses by people and government
The value of Bitcoin to the general population is still not obvious. There needs to be more education about it or a catalyst (e.g. hyper-inflation) to encourage people to explore Bitcoin.
According to Cointelegraph, Bitcoin is designed as an alternative to the existing financial system which means governments and banks are not incentivised to facilitate Bitcoin adoption. However, there are countries like El Salvador that are beginning to use the bitcoin lightning network for daily transactions. This is a ‘layer 2’ network built on top of Bitcoin that enables high-speed, ‘instant’ transactions for scaling.
More and more people are using Bitcoin to make payments via their mobile phone, just like a Google or Samsung wallet.
Weaknesses of Bitcoin
There are inequities of digital access in many countries that prevent mass adoption and leverage of Bitcoin. Even though Bitcoin is being used increasingly, its price fluctuations from month to month can make it unreliable for daily transactions which is the case in most Western Countries. Countries who experience hyperinflation will view these fluctuations as minimal.
While Bitcoin is welcomed in many parts of the world, several countries perceive it as a threat to their monetary systems and have banned it. More than 40 countries do not allow their financial institutions to partner with crypto companies.
As there is no centralised authority that manages Bitcoin, transactions cannot be reversed, and errors cannot be rectified. Balances that are stored in digital wallets can be lost if users forget their private key.
The validation of transactions by miners also requires enormous amounts of computer power and energy.
Verdict
As long as there are governments, there will be demand for that nation’s currency. Bitcoin will not replace currency but instead offer people more choices as to which currency they can use to trade and store value and its technology will change how we conduct payments, banking and other financial transactions. Low-income households can access digital payments and international payments will be cheaper, quicker, and easier to track.
Bitcoin and Kaplan Business School
Kaplan Business School is currently the only higher education provider in Australia that teaches Bitcoin as an entire elective subject (instead of a subtopic under blockchain technology) in the Master of Information Technology (specialisation in Cybersecurity).
Students are taken through a deep evaluation of Bitcoin as a technology by analysing it through three conceptual layers which are:
- Base layer 1 - the Bitcoin Network where all the mining and transactions occur
- Layer 2 - the Lightning Network (LN), bringing high-speed transactions and scalability for mass adoption of day-to-day transactional usage, and
- Layer 3 - Decentralised Applications (DApps) which take the attributes of Bitcoin and applies them beyond money.
Students will explore Bitcoin wallets and carry out micro transactions as well as apply innovative ideas to design evolutionary and disruptive Layer 3 Bitcoin DApps.
The Bitcoin subject also covers the attributes of good money, monetary policy insights, securing generational savings and escaping hyperinflationary economies, energy and data security and gaming.
Bitcoin Alive Event
Watch the Bitcoin Alive 2023 video featuring Djuro Mirkovic, Academic Director of IT at Kaplan Business School on the panel.
