Bitcoin vs. Traditional Banking: How Are They Different?
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.
Putting your money in a bank keeps it in its original fiat currency. If you put dollars in, the contents of your bank account will remain dollars. Investing in bitcoin transfers your money into a bitcoin token. If you purchase bitcoins, the contents of your wallet will be bitcoins.
Fiat currencies are set by government policy. As a result, the value can contract or expand based on the central treasury’s judgment. A bitcoin token, on the other hand, is a fixed currency commodity. That means that the supply will not contract, and will only expand at a set rate up to a certain number of tokens in circulation.
This leads to…
A bank account will change based on two factors: the value of the underlying currency and the value of the interest paid. A bitcoin will change primarily based on the token’s market value.
Money in a bank account accrues interest at a fixed rate, set by contract between the consumer and the bank. The currency itself can also change, typically through inflation which causes the value of each dollar in the account to erode. Although that erosion is tempered by the interest rate paid by your bank, it’s extremely rare for the bank to pay an interest rate that keeps up with actual inflation.
Inflation is heavily influenced by government policy. In the United States, it generally stays at or around two percent per year, the target goal of the Federal Reserve Bank.
A bitcoin, on the other hand, will change based primarily on market forces. With no regulating authority, and the supply of bitcoins in the marketplace fixed, the price of a single token is almost entirely dictated by supply and demand. This means that no government can erode a bitcoin’s value through inflationary policy, but it also means that the bitcoin is subject to far more severe swings in value.
Where inflation in the United States averages around two percent per year, the value of a bitcoin can fluctuate by more than 15 percent in a single day. As a result, money invested in a bitcoin can accrue far more value than money left in a bank account, but it is also subject to more severe losses.
Access to Cash
The final major difference between a bitcoin and a bank account is ease of spending.
A bank account involves merely the storage of your money. As a result, spending any of that money involves a third party transaction that fetches that cash from your institution. This could mean stopping by an ATM or using a debit card, both systems which then check your account and transfer spendable funds accordingly.
Given that your bank will hold fiat currency on your behalf, the money is universally spendable within its economy. A dollar held in a bank account can be spent on any transaction in the United States.
As an asset, a bitcoin is far less fungible. It can only be spent with a merchant who wants a bitcoin and those are relatively few and far between (although markedly growing in number). On the other hand again, as an asset, a bitcoin involves only a single transfer. Instead of fetching spendable money from your bank account, you simply transfer your bitcoin to someone else. There are fewer steps because you are directly handing the merchant something he or she wants.