Bitcoin set to take over the financial world: Book

A Israeli man buys Bitcoins at a Bitcoin ATM machine in Tel Aviv.
Jack Guez | AFP | Getty Images

Bitcoin, the digital currency which remains a mystery to many, will some day replace the whole global financial system, doing the job of banks, insurance companies, credit card issuers and even trusts, a new book asserts.

This extraordinary scenario is the central theme in "The Bitcoin Big Bang" by Brian Kelly, investor and contributor to CNBC's "Fast Money." Kelly says the transformation is as near as a decade away.

"If the Industrial Revolution was the catalyst for modern economies to move from an agrarian to a manufacturing society, then the Bitcoin is the vehicle that will transport the financial system from centralized to decentralized," writes the author, who runs Brian Kelly Capital from Greenwich, Connecticut. "Over the next decade, creative destruction will be the mantra within financial services, and it will all be due to an anonymous genius who gave his/her/their invention away for free."

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Bitcoin has a long way to go. Right now, it remains a hobby for wealthy members of the tech jet set with only a few obscure retailers like accepting it as payment. Still, some serious venture capital money is lining up behind exchanges and applications based on bitcoin. Also, the U.S. Internal Revenue Service finally officially recognized it this year.

Even an exchange-traded fund is currently being reviewed by the Securities and Exchange Commission for approval.

The price of the digital currency was near $380 on Monday, down 67 percent from its all-time high reached in November 2013, according to Much of the fall came after the Chinese government blocked payment processors from recognizing digital currencies like bitcoin because they were being used by citizens to send money out of the country, subverting capital flow restrictions.

These kinds of hiccups will be common for bitcoin along its journey to world domination, Kelly explains. But once more and more people realize how unique, secure and programmable bitcoin is, the sky's the limit, he writes.

Bitcoin: Expect chaos and drama
Bitcoin: Expect chaos and drama

"The current financial system relies on centralized institutions acting as the traffic cops and collecting a fee for this service," he writes. "The Bitcoin solution ... holds the potential to decentralize the system."

First, the basics on bitcoin as explained in the book: It was created by an anonymous person who calls himself (or herself) Satoshi Nakamoto. This person, whose true identity has still not been disclosed, released a white paper amid the 2008 credit crisis explaining the digital currency. He and subsequent bitcoin "miners" created the early units of the currency shortly thereafter.

Each unit has an encrypted key which fits uniquely into a spot in the so-called blockchain. Every piece of bitcoin created has a unique spot on this blockchain. This special construction ensures security during transactions as well as prevents counterfeiting.

Because of these security features, bitcoin removes an essential element that was thought to be necessary for every financial transaction: trust.

If trust isn't needed, one doesn't need that middleman when making a wire transfer (credit card companies), states the author.

The middleman needed to ensure both parties meet their commitments for a home, car or business loan (banks) isn't needed either.

Kelly writes:

"The Bitcoin protocol replaces the banker with the miner and by doing so removes the cost of a middleman. The traditional role of the banker was to be a trusted third party, watching every transaction and verifying validity. Satoshi Nakamoto designed a way for a computer to replace a banker. Bitcoin can accomplish this task securely through the use of cryptography."

Even the Federal Reserve is expendable, as bitcoin doesn't need a large governing body to tell everyone it is sound. The computer code ensures that, notes Kelly.

And because there is a natural process of creating bitcoins through its encrypted mining process as well as an already-determined maximum amount that can be created, it doesn't need the Fed's money supply function either.

What may not be known to many, but is essential to Kelly's financial takeover thesis, is that each bitcoin has the ability to be programmed with smart instructions. For example, it can be programmed to release a certain amount of money over a designated period of time.

This "smart contract" can be embedded into the bitcoin security encryption; therefore, the parties can't flake on their commitment once it is digitally signed.

"The smart money features of Bitcoin can even be used to eliminate trust banks when transferring generational wealth," writes Kelly.

Read MoreThe big problem with bitcoin regulations

Bitcoin can even streamline the once-thought-to-be-difficult securitization process—the purview of investment banks—through this programmable interface.

"Traditional bankers stand at the center of the financial system and ensure that money moves from one rightful owner to another," Kelly writes. "The Bitcoin miners do the same thing but without the need to employ thousands or erect skyscrapers."

Credit card companies, threatened by bitcoin's ability to transfer money around the world at virtually no cost, apparently already hear the footsteps. MasterCard filed a patent in June of this year to integrate bitcoins into the company's global shopping cart, according to the book.

To be sure, bitcoin has a long road ahead before taking over the whole financial system, which Kellly acknowledges. Before bitcoin and bitcoin digital wallets are widely adopted and accepted, one must still use U.S. dollars and a credit card company to buy bitcoin through an exchange.

And while bitcoin is trustless and secure in a vacuum, these exchanges are not. They are only as secure as their firewalls.

The failure of of Japan's Mt.Gox exchange last year after a hacking was proof of that. Millions of dollars in bitcoins are still missing.

And until Fidelity and JPMorgan Chase close down due to competition from bitcoin-backed upstarts, grandma and grandpa are nowhere close to moving their checking and retirement accounts over to a bitcoin-based system.

Bitcoin may be a trustless transaction system, but a majority of people must understand and trust it can function as such before it starts replacing currencies and related financial middleman on a large scale.

But Kelly, who got his start in the business ironically as an intern for Lehman Brothers, was admittedly a skeptic at first, too.

It was the collapse of his former employer and the disappearance of trust in the financial system in its wake that led Kelly and many others to find bitcoin and ultimately believe in it.

Hopefully, another crisis of that magnitude isn't what's necessary for bitcoin's mass adoption.

"The financial crisis of 2008 fertilized the ground for economic change," the author writes. "Bitcoin and the blockchain will play a starring role in the new economy."

"The Bitcoin Big Bang" by Brian Kelly is published by John Wiley & Sons.