We’ve been hearing a lot about Bitcoin lately. Yet, the problem with Bitcoin as an investment is that it is highly volatile. Just last week, it was trading at over $250 per coin, only to hit a low of $53 within days. That’s not an investment you would feel overly comfortable putting your money in, not to mention that it isn’t very easy to acquire Bitcoins compared to other currencies.
But what Bitcoin represents is important. It shows that although the internet has devoured other industries like travel (remember travel agents?), the financial world is still operating pretty much the way it did prior to the web.
Moving money around is not very easy. Although I can send money to an email address using eBay Inc (NASDAQ:EBAY)‘s PayPal, the person receiving that money must pay transaction fees. Wiring money to someone through a bank can take days and also costs money in fees.
Why all the fees via PayPal? Does it really cost all that much to move money electronically? Despite what financial institutions might tell you, Bitcoin proves that it does not. Sending money to someone with Bitcoins will cost you nothing and can be completed almost instantly.
But fees are part of PayPal’s business. Without them, how will the company make money? In the first quarter of 2013, Paypal brought in $1.5 billion in revenue for eBay, totaling 41% of the overall company revenue. If you believe that payment methods like Bitcoin will thrive, investing in eBay stock is a bad idea.
We are living in a society that is becoming less dependent on paper money. Just ask Visa Inc (NYSE:V), as their transactions have gone up with increased debit and credit card usage. It doesn’t take much to realize that we are heading towards a future where money could be entirely electronic.
That’s good for Visa Inc (NYSE:V). While Bitcoin represents somewhat of a threat to their business, the reality is that consumers will still need to use cards to make payments for things. That’s not going to go away in a cashless future. Plus, Visa Inc (NYSE:V) makes money from things like fees on the merchant side and on credit.
This concept of a virtual currency is nothing new. Facebook Inc (NASDAQ:FB) introduced its own digital payments system called Facebook Credits in 2009. They recently announced that Credits will also be displayed in local currencies.
Facebook Inc (NASDAQ:FB) is already in enough trouble. If you can explain to someone what Facebook Inc (NASDAQ:FB)’s business model is, you’re in the minority. Facebook Credits is just another sign that a social network is better off being a virtual video game arcade than an actual publicly traded business. There’s a reason why Facebook Inc (NASDAQ:FB) Credits are also displayed in a user’s local currency: these “credits” don’t have any monetary value.
Therein lies the difference between Bitcoin and other virtual currencies. Bitcoin is based on open source mathematical algorithms. In other words, that means it is very hard to cheat the Bitcoin system, and this is why a lot of folks in technology believe that it might be the future of money. Math-based currency likely has future as a monetary instrument, but it probably is not going to be Bitcoins.
The fact that Bitcoin has gotten this far, and has value as a social construct, proves that there is a place for an electronic currency that is hard to counterfeit. But because the number of Bitcoins that will be created is small, at around 21 million, that makes it hard to envision it becoming more than just a store of value.
Fortunately, there are new competing efforts to take Bitcoin’s ideals and make them more mainstream. One of them is OpenTransactions, which is quite technically oriented, making it very attractive to software developers or those who want to use a payment system with some degree of anonymity. Then there is Ripple, which is attempting to make the digitization of money an easier shift for the masses by being compatible with existing fiat currencies.
Although banks make a lot of money with the way that financial transactions operate today, it’s clear that Bitcoin is a harbinger of things to come. Of course, there’s nothing stopping companies in the banking system from developing their own Bitcoin-style currency. And this digital shift is probably going to happen whether the financial industry likes it or not. It will be interesting to see how they eventually react to this new technology that could cause major changes to how money is transacted.
The article Why Digital Money’s Future Will Involve Something Like Bitcoin originally appeared on Fool.com and is written by Daniel Cawrey.
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