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Bitcoin: Will it be a major threat to our banks?

Bitcoin has been in the news lately following an incredible run this year that has seen the price of the cryptocurrency increase by 175%. Some view it as an investment class, while others think it’s either a scam or a giant opportunity to take part in the start of the currency of the internet.

The Currency of the Internet

Imagine this future: the year is 2018, the currency tussle between many of the world’s largest developed economies has escalated into full-scale war (evidenced by extreme government intervention in monetary policy and various currency easing projects), and consumers and business owners in both developed and developing economies finally say: “enough is enough, we want a fairer playing field free of extreme inflation and currency wars, which erode pricing power and unfairly disadvantage people in countries with fewer monetary levers to pull.”

The solution

A potential solution for this problem, but also many others, is the rising use of cryptocurrency. Currently the majority of people on the planet have no idea how cryptocurrency works, or what it is, but many have heard of bitcoin.

There are many cryptocurrencies, bitcoin is one, others with significant market cap are Ripplecoin and Ethereum, while Citibank is thought to be creating one, and there have been discussions that our big four banks are investigating how they can utilise the technology behind cryptocurrency.

What can you do with cryptocurrency?

Cryptocurrency is traded on an exchange much like ‘regular’ currencies and can be exchanged for goods at many major online and bricks and mortar (US) retailers like Amazon, Ebay, and Best Buy, while a larger number of smaller independents have embraced the currency(ies). Seemingly in Australia there’s a growing list of small and larger retailers making paying by bitcoin, or similar currencies, an option.

What impact will it have on the banks?

It’s possible that 2018, spurred by the extreme volatility and government intervention/manipulation of exchange rates worldwide, could be the year that cryptocurrency takes off. This could spell trouble for the widely held shares of Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB), Australia and New Zealand Banking Group (ASX: ANZ), and Westpac Banking Corporation (ASX: WBC).

Increased cryptocurrency use could result in fewer overseas purchase fees for those that buy goods online from Amazon, fewer ATM withdrawal fees as an online currency never requires ATMs, fewer business transaction fees as cryptocurrency transactions are generally free to execute, fewer loans written as cryptocurrency-based loans take off, and fewer everyday accounts opened and term deposits taken out as online cryptocurrency-based offerings generate superior returns.

Is this a genuine threat?

Many point to the flaws of bitcoin (primarily relating to the lack of transparency, crime-related transactions, history of fraud and price fluctuations) as the reasons why cryptocurrency cannot take off, but like any pioneer, newer currencies are learning from the mistakes made by the first movers.

Cryptocurrency has a place in the future of transactions, however its place in the future won’t be known until it gains more mainstream traction. The impact could be huge or tiny, or even positive if the banks figure out how to make money from it. For now, it’s a risk that investors need to be aware of and potentially investigate a little, however one thing is for sure – it’s not for risk-averse investors as I have no doubt the ride will be rough.

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Motley Fool contributor Andrew Mudie has no position in any stocks mentioned. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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