Are Cryptocurrencies A Threat To Traditional Banking?

Cryptocurrency

The world is changing. The traditional part of life is fast becoming a thing of the past, and we are all making way for a new lease on life.

The current movement from a personal banking experience to one where people do not even have to meet their tellers is engaging the world in a new way. We all have the notion that the traditional system of banking slows down daily life. If you are a keen observer, you will notice that there are a lot of online businesses are accepting non-traditional methods of payment such as Bitcoin payments and other non-traditional currency payments.

This new generation of currencies has grown in popularity over the past few years. Instead of being able to touch the coin physically, more and more individuals would instead move forward the transaction towards the next recipient. The movement is of a more digital transaction rather than a physical transaction.

How does this new system work? Cryptocurrencies have found allowed for trading to happen among and between applications without the end-user ever touching the money.

Basic Information of Cryptocurrency

The system of cryptocurrency is ever-growing. There are already so many different cryptocurrencies that we see today. From the operation of Bitcoin, Litecoin, Gemini, and Dash, other digital currencies that are well-encrypted through the use of blockchain technology to get ahead of the competition.

Most of the national currencies function very differently from the cryptocurrencies. While there is a central government that regulates a tradition currency, digital currencies get controlled by an interconnected network.

A code controls digital currencies. They rely mostly on networks, and there is not a single transaction that can have some impact on the currency. In a way, it is independent of any regulation and cannot get likened to what the traditional banking system has.

How Does The Cryptocurrency World Work?

The world of cryptocurrency works in a very particular manner. Compared to traditional banking systems, it got characterized by specific networks with particular tasks.

The system functions in such a way that all of the transactions get stored from the inception of the currency on a publicly accessible network ledger. This ledger would use techniques that enhance the record-keeping to make sure that it is accurate. The methods are mostly cryptographic, and all of the user’s identities get encrypted in the secured network.

The owners of the cryptocurrency have a wallet in digital form. The ledger, which got connected to the network, must ensure that the portfolios show an accurate balance. The transactions must also make sure that the owner is only spending what is available for them.

The next point of inquiry to ask is: how does one value the cryptocurrency?

The value of the cryptocurrency depends on a lot of factors. The most common factor that individuals take into consideration is the process of mining. Mining, a term coined specifically for cryptocurrency trading, occurs when a user, called a miner, can solve a very intimidating computational problem to confirm the transaction and add it to the ledger available.

The currencies have a limit. In the case of Bitcoins, the limit is 21 million Bitcoins. When a miner wants to confirm a transaction, he got rewarded with a new piece of the threshold.

So, how exactly does that equate to value for the currency? The value of the coin comes from the amount of the user. Since the users back the transactions and accept the cryptocurrency as a new way of payment, it has a standard value. This fact is the primary reason why the value of cryptocurrencies, like Bitcoin, has skyrocketed to enormous proportions for a period.

In the case of a Bitcoin, for example, if you mined a $100 worth of Bitcoins back in 2010, you should have an investment that is already about $2 million today. This value got backed by traditional banking systems that even allows ATMs for Bitcoin withdrawals.

How does the system work? Based on some experts, the system works in such a way that regular currency and your contact number will get placed on Bitcoin ATM. A check on the cryptocurrency wallet will reveal the exact purchase you made.

What Will Happen To Banks?

Most analysts are saying that banks would suffer the most significant change in the industry.

If traditional banks make more money on their investments and financing, the shift will move from loan financing towards peer-to-peer networks. Instead of going towards traditional banks for loan financing, borrowers may opt to go for the cryptocurrencies.

Is the threat real? The reality is that the danger is real. Most banking research reports have found that traditional banks will become redundant with the entry of cryptocurrencies. If the banks would continue to ignore new consumer behaviors and preferences, they should expect threats to come forward and cryptocurrencies to transact and transfer money on their own.

A report even laid down the predicate saying that Bitcoin can handle more transactions than the current system.

The Problem With Cryptocurrencies

The problem with cryptocurrencies that most industry experts have is the fact that it may be a possible way for crime perpetrators to save the proceeds of their crime. While traditional banks can cover such transactions and identify potential threats, cryptocurrencies using peer-to-peer networks have less regulation.

In this case, traditional banks should go digital and get the good points of cryptocurrencies in their favor. They should offer similar transactions that come with the network system and blockchain technology.

Some experts also remind banks that it is better to offer customer-driven policies to take back the market rather than fight off the competition. Exorbitant fees, debits that come long before they allow credits, as well as big fees for insufficient funds,  should become a thing of the past. While the banking industry cannot change what the new cryptocurrencies have to offer, they could at least try to provide and create friendlier transactions.