Let’s discover as to how Bitcoin (the system), bitcoins (the tokens), or both might be incorporated into the mainstream banking system
Bitcoin has proved to be an important asset class this year in 2017 when compared to gold and dollar by market indices. As much as we recognise that Bitcoin is relatively new, and constantly evolving however we cannot ignore that Bitcoins (as tokens) have the potential as an asset class.
The most intriguing aspect of this new asset class is most likely its low correlation with traditional investment opportunities. While conventional assets such as equities and bonds can also show little correlation when the market environment is developing smoothly, the correlation spikes when times are rough. One stock goes down and others tend to follow. Bitcoin, however, has shown almost no correlation to any other assets and asset classes during the past, turbulent years. Be it indices, government bonds or gold – Bitcoin’s performance has not been proven to be related to the performance of any traditional assets. That makes Bitcoin an interesting option for any portfolio as it may serve to reduce risk. A correlation this low is shared by only very few assets. Moreover, investments in Bitcoin are expected to be very well suited for hedging against geopolitical events, since Bitcoin was designed to be highly independent from disturbances in any single market or a region due to its decentralized structure.
The biggest reservation towards investing in Bitcoin is usually its volatility. The correlation argument as well as the hedging argument only hold weight as long as Bitcoin itself does not become a liability. Although returns on Bitcoin have been historically high and, over time shown consistent growth, it remains true that Bitcoin is a high-risk investment.
It is, however, worth noting that price swings have decreased considerably over the last few years. The more people that know about and use Bitcoin in their day to day life for various purposes, the more likely it becomes that those price swings will subside further. So far, investments in the cryptocurrency have proven to be as lucrative as they are risky. While this constitutes no guarantee for future developments, the market capitalization of Bitcoin has nearly tripled since January 2017.
Two fundamental use cases might emerge in this scenario where bitcoins enter the realm of mainstream banking. One as asset, as mentioned above, and one as a security.
Banks can offer bitcoins as an investment option to its subscribers, for example: Falcon Private Bank is the first Swiss bank to offer its clients the opportunity to invest directly in Bitcoin from their cash holdings and own the underlying asset itself. The product offering, which recently received the go-ahead from the FINMA, the Swiss Financial Market Supervisory Authority, provides a secure and regulatory safe means for clients to diversify into and expose themselves to Bitcoin, with easy access and attractive pricing, opening up the crypto-asset to an entirely new group of investors. Clients of the Swiss bank are now able to buy, hold and sell Bitcoin through the bank itself. The trade desk of Falcon Private Bank exchanges a range of currencies to and from Bitcoin, and ensures that the client’s Bitcoin portfolio is kept safe in offline, multi-signature storage at all times. This product is the first in a line of crypto-asset management products from Falcon Private Bank. Other major crypto-asset classes and products are expected to follow.
Individuals can offer bitcoins as securities to bank to avail loans. However is it possible to take a mortgage using Bitcoin as collateral, especially with the recent China crackdown on Cryptocurrencies and India on the verge of incorporating a national blockchain based currency (named Lakshmi) instead of accepting Bitcoin as a mainstream solution? On the innovation curve it’s safer to say that as most banks wish to stay away from “bitcoin” due to enforced regulatory issue by the governments and central banks, it will be the private sector which will take a leap of faith and provide springboard to provide loans against bitcoin. If wave 1 of Bitcoin adoption stage was set on the pedestal of Peer-to-Peer (P2P) currency, next wave of Bitcoin going mainstream will be set on the stage of P2P lending arena empowered by Blockchain which will provide protection against risks such as counterparty, regulatory, market linked inflation, etc. For example: Bitbond, a German P2P bitcoin loan platform, connect lenders and borrowers while facilitating loans in bitcoin. The platform also checks the credit-worthiness of applicants and the purpose of the loan while determining an interest rate for a loan. To facilitate its global marketplace, the startup uses the Bitcoin blockchain for international payment processing. Let’s see wherein can we map Bitbond in context of banking services:
And Bitbond scores borrowers based on business accounts, much like a KYC verification pattern as observed by mainstream banking. The only difference being data streams are different which banks don’t usually consider.
The P2P marketplace will eventually come under regulation, much like the scene in India where mobile P2P lending apps now have to register them as NBFCs and regulated by Reserve Bank of India directives. And regulation breeds positivity for mass adoption allaying any fear, uncertainty or doubt. Bitcoin as a system hence practically proves to be banking on blockchain.
What do you think will Banks do in the future for Bitcoin inclusion? Bloomberg reports Banks are already in activation mode.