What makes a bank a “bitcoin bank”? Bitcoins, and other altcoins like litecoin and ether, the currency associated with Ethereum, are rapidly becoming a part of investor portfolios across the board, and financial institutions are struggling to figure out how these instruments fit into their overall approach. Let’s look at the key points of cryptocurrency, and how to find a bank that best fits the needs of your cryptocurrency portfolio.
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A Bitcoin Bank Grasps the Technology
There are many, many different cryptocurrency projects, each with differences that any bank hoping to help its depositors will need to understand. Sometimes these are relatively obscure differences. Litecoin, for example, is largely some tweaks under the hood to the code of bitcoin. Ether, however, is used to run a vast, worldwide computational model; investing in ether more closely resembles buying futures, to some degree, than it does buying currency. Before working with any bank, you should first ensure they’ve got a handle on these currencies.
This is true of the basics as well. For example, every cryptocurrency has a blockchain, essentially a public ledger where every coin in a particular network has every transaction ever done with it recorded for anybody to check. So if your bank does transactions in bitcoin, both you and they need to be comfortable with that degree of transparency.
A Bitcoin Bank Understands the Legalities
There are some exciting approaches in cryptocurrency that even non-investors should keep an eye on. Ripple, for example, is an attempt to use cryptographic tokens to speed up cross-currency transactions from minutes to seconds; instead of a laborious “swap” of currency, you simply buy the appropriate amount of ripple, trade it in seconds, and it’s cashed out to the proper currency. But not every nation is embracing ideas like this, and the legal nature of cryptocurrency, both regulatory and under the law, has been changing at speed. Especially if you plan to deal with international clients, your bank will need a firm grasp of the law around these currencies to protect your investments.
Conversely, it’s important to remember there’s no FDIC or even much concern from law enforcement over the theft of or defrauding of altcoins. So you’ll need to assess your legal obligations depending on how you handle cryptocurrencies, and you’ll need a bank that does the same.
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A Bitcoin Bank Knows the Market
One factor that banks need to consider with cryptocurrency is that it can be wildly unstable. Bitcoin is a superb example; having hit $20,000 a coin in December, there’s been a precipitous drop of more than half. The altcoins you store, trade, or allow as tender for certain transactions can swing wildly in value from day to day and even hour to hour, and in some cases that’s built into the coin. Bitcoins are only as valuable as the community of those buying and selling bitcoin perceive them to be, by design. Even more stable cryptocurrencies can’t resist the forces of market psychology, with their value being driven up and then down by the swings of bitcoin. So any bank you work with needs to be ready for that.
Cryptocurrencies are an exciting financial experiment, but the nature of experiments is that nobody is quite sure how they end. So, before approaching any cryptocurrency, keep that foremost in mind.