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Bitcoin: A Novel Economic Institution

The Blue Water Team

Over the past few years, bitcoin has emerged as a challenger to traditional financial institutions. This article by ARK examines the growth of bitcoin and its current investment possibilities. 

The Growth of Bitcoin

Bitcoin is part of the natural evolution of commerce and economy. The history of economy demonstrates fundamental changes in how people do business as humans' abilities and methods of earning a living advance. Consider this evolution of commerce that has led to the rise of bitcoin today: 

  • Hunter-gatherer economies
  • Agricultural economies
  • Manufacturing economies
  • Information technology economies

Bitcoin is the result of the shift to information technology. Bitcoin is what ARK describes as an "economic institution," overseen and managed by computer networks in order to create a neutral, borderless way of doing finance. 

The Failure of Trust-Based Financial Institutions

Currently, financial activities are conducted through what ARK refers to as "trust-based financial institutions." This term refers to institutions, such as banks, whose successful, fair, and ethical approach to economic activity depends upon the trustworthiness of those in charge. 

Because of their trust-based nature, these institutions are unable to meet the following four criteria of economic security:

Free exchange of value across the world

  • Many trust-based financial institutions can and do block or remove participants at will, while local rules and regulations restrict these institutions from serving anyone from anywhere. 

Protection of wealth

  • Wealth protection depends upon the ability of law enforcement and governments to keep it safe. 

Consistent enforcement of rules

  • Banks and other trust-based financial institutions can and often do apply rules inconsistently or change the rules without warning. 

Verifiable integrity

  • Financial institutions often lack the capital needed to back customers' deposits. 

The Success of Bitcoin

Bitcoin relies instead upon the more neutral guides of computers and encryption. Bitcoin itself is an asset that appears within the Bitcoin free and open source software. As such, it fulfills the four criteria of economic security. 

Free exchange of value across the world

  • Bitcoin is equally available to anyone, anytime, anywhere. Bitcoin can be received and by means of digital keys that create bitcoin addresses and that are free from even the need to have Internet access. More than $2.5 trillion in bitcoin transactions have occurred to date. 

Protection of wealth

  • The protection of bitcoin depends upon cryptography, not law enforcement. The use of cryptography and digital wallets makes it very difficult for anyone to steal bitcoin. 

Consistent enforcement of rules

  • Bitcoin's rule enforcement is consistent, based upon a system that encourages the establishment of rules that benefit all participants and that prevent participation by anyone who does not follow those rules. 

Verifiable integrity

  • Bitcoin is set up to make every transaction verifiable and to ensure that all rules are carefully followed. 

Thanks to Bitcoin's ability to eliminate trust-based financial institutions and decentralize control, it has the potential transform economic institutions and may present a promising investment opportunity.  Here are some of our FinTech investing ideas.