Is bitcoin going to destroy Goldman Sachs? The answer is ABSOLUTELY NOT

I have come across a number of posts lately where people have talked about a future where banks will cease to exist because of bitcoin. This rhetoric can be read on steemit, twitter, reddit and heard on YouTube. The main problem with this rhetoric is that it is ill-informed and shows that people have no clue about what banking is and why, not only will it sustain beyond bitcoin, it will actually flourish.

To understand why bitcoin is not a threat to banking, we first need to understand what banks are and what bitcoin actually is. So let's dive into banking.

Banks are the enablers that move our economy. They are the middlemen that provide financing for new projects or help raise financing for new projects. Banks are also custodians of money. The picture below shows different aspects/divisions within a bank -

The chart above shows most of the revenue generating units within a bank. Besides this, a bank will also have a retail side for taking deposits and lending to retail customers. There will be other services provided to retail customers for which banks will charge fees. Cost centres typically include operations, technology, finance, hr etc.

The above in a nutshell and simplistically speaking is what a bank looks like. Now we need to figure out what bitcoin solves and how will it threaten the existing banking infrastructure.

Bitcoin was created as a trustless way to transfer digital value over the internet, thats it and it continues to be that tool. Digital value is bitcoin and the network used to transfer value is the bitcoin network. Over time, because the innovation has been established to be truly phenomenal, early adopters have accumulated bitcoin because its value should increase over time as adoption goes up. As adoption went up, trading became a phenomena and now bitcoin is evolving into an investment asset class. To me, the biggest and most important feature of bitcoin is control over my money. I can now store my liquid assets or money on my pc or cold wallet without needing to turst a counterparty. If you think about it, that's what gold is. It is a way to store value that is inflation proof and does not erode in value. Bitcoin, because it is finite achieves the same goals, except the adoption of bitcoin is far lower than that of gold.

Now that we know what banks do and what bitcoin does, lets understand why bitcoin is not a threat but a resource for banks. Bitcoin impacts banks negatively in the following ways - banks lose retail and corporate deposits, and lose out on fees that they make on cross currency fx transfers. It does that but it wont do that for long. Banks rely on swift payment protocol for executing a remittance request. Because of the number of middlemen involved, it is slow and costly. Banks too rip off retail customers by charging high spreads. However, banks can evolve to ditch the existing technology and use a private blockchain to transfer value over the internet at a lower cost than what bitcoin can achieve. We also need to understand that while lightning can make bitcoin transactions cheaper, at the end of it, someone still has to convert bitcoin to fiat to transact in the real world and that's where banks come in. Coinbase currently charges around 1.5% as transaction fees + fx spreads that can be anywhere between 0 to 2%. Compare that to sub 0.5% fee for fx that banks charge to institutional clients, sometimes even retail. Banks can easily provide cheaper and faster ways to send and receive money on a private blockchain and continue to make the money they make.

Second, what if banks started to provide you interest to borrow your bitcoin, then converted your bitcoin to cash to use as liquidity while hedging and upside or downside using the existing futures market? Doable? Very much so. So they can still source liquidity from retail customers even if we have bitcoin.

None of the other businesses are in anyway under threat from bitcoin. ICO funding hasnt been institutionalized because well, there isnt any regulation around it and also because it is inefficient. Banks can arrange ico funding or tokenised debt and equity offering. Frankly, call it token or demat, securities are digital anyway. Bitcoin isnt a threat to any asset class. It will lead to multiple job losses in manual jobs but banking profitability will remain intact and shareholders will continue to flourish.

So thats my 2 cents folks. As long as we have govts, & centealization and as long as consumables are valued in fiat, bitcoin isnt going to be a threat. May be to custody businesses or gold. As adoption goes up and vol comes down, due to its scarcity and innovativeness, bitcoin at most will replace gold as a way to efficiently store value. And since, economy continues to grow, bitcoin will continue to rise in value as it will remain inflation proof. However, even that scenarios is many years away and that is because 1% bitcoin content on the internet is educational and the rest 99% is plain fucking bullshit.

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A steemit original