If you’re familiar with Bitcoin it could well be because of the controversies that have seen the digital currency grab frequent headlines over the last five years. From bubbles to Silk Road to congressional hearings, the entire concept of digital currency seems to drag behind it suspicion, misunderstanding and technophobic baggage that often obscures the real facts.
If you’re not familiar with Bitcoin – it is a digital currency and payment system created in 2009. It is a decentralized way of transferring value from one individual to another with no middle man. This value is based on an in-built scarcity that means only a certain amount of Bitcoins can ever be produced.
The technical process behind Bitcoin has been explained thoroughly elsewhere and in the same way that you do not need to understand the ins and outs of international finance to spend cash, you do not need to be a cryptographer to accept or spend Bitcoins.
Advocates of cryptocurrencies point to the wealth of opportunities it offers for business and individuals to accept and make purchases without the costly interference of a middle man or restrictions imposed by a central government. This kind of freedom brings great opportunity, but can also create an instability and lack of trust.
In this article we’ll look at who is currently using Bitcoin and what they gain from it and then examine what Bitcoin and other digital currencies means for both investors and for small businesses.
The first ever Bitcoins are issued. The crypto-currency was created by ‘Satoshi Nakamoto’ a pseudonym for an individual or group that remains unknown to this day.
Lily Allen claims on Twitter that back in 2009 she was asked to perform live in virtual world Second Life in return for ‘thousands of Bitcoins’. She turned down the offer and a potential payday that would now be worth around £6million.
Laszlo Hanyecz orders two Papa John’s pizzas for the price of 10,000 Bitcoins, in what is believed to be the first ever Bitcoin purchase. Those pizzas would now be worth around 4 million dollars. The dipping sauce alone would have cost $100,000.
Bitcoin suffers its first big crash in price following a security issue with main exchange Mt. Gox, the sudden closure of mybitcoin.com and claims of 100,000s of stolen Bitcoins. The value slumped to $3 by October 2011.
James Howells throws away a hard drive containing 7,500 Bitcoins he had purchased for next to nothing in 2009. He has since spent months scouring a landfill site in Newport, Wales to retrieve the coins that are worth £3-4 million.
A positive endorsement from the U.S senate sees the price of Bitcoin rocket to $1000 in time for Christmas.
The operator of Silk Road, a website operating as a marketplace for drugs and other illegal paraphernalia is located and arrested, temporarily closing the site. The FBI seized $28million worth of Bitcoin that had been used to trade on the site.
The Winklevoss twins, made famous by their legal wrangles with Facebook creator Mark Zuckerberg, create ‘Winkdex’, an index that tracks the value of Bitcoin. Their intention – to create a more stable indicator of Bitcoin value.
At the beginning of 2014 the value of Bitcoin is $800.
Who Uses Bitcoin?
Bitcoin has grown in popularity across quite a broad coalition of users over the last five years. The first group could be described as ‘advocates’, people who have an interest in Bitcoin beyond using it to process payments or for a return on investment. They may be technophiles, libertarians, free market evangelists, people who see digital currencies as giving a platform to open finance the same way the internet has democratized communication.
The second group is investors and speculators, both those who seem Bitcoin as a long term prospect – the future of assets and those simply looking to get rich quick. No doubt many people did make a very good return on their investment given Bitcoin’s ten-fold value increase between July and November of 2013. On the other hand you have investors like the Winklevoss twins who believe in the future of digital currencies, as Cameron Winklevoss said in Spring 2013 – “At some point that narrative will shift to ‘virtual currencies are here to stay.’ We’re in the early days.”
Third group is tech-savvy businesses that recognize both the potential of Bitcoin, but also the publicity that comes along with adopting a new and controversial form of technology. The level of this publicity diminishes over time as more and more businesses get on board, but given that Bitcoin would only make up a relatively small portion of their trade, the risks are low and opportunity for links and headlines very promising.
The final group is perhaps the most interesting and it is the multitude of small and micro businesses that are using Bitcoin to avoid the barriers to entry that come with using traditional payment processing options. Credit card fees can be prohibitively expensive and depending on your location you may not have access to payment processors at all. PayPal, for example, is not available in over 25 countries including Ghana, Moldova, Iran, Montenegro, Pakistan and Paraguay.
“A multitude of small and micro businesses that are using Bitcoin to avoid the barriers to entry that come with using traditional payment processing options.”
Bitcoin by Country
In terms of regulations and legal status it’s still relatively early days for virtual currencies, it is currently banned in a handful of countries – Russia, Lebanon, Thailand, Taiwan and Lithuania and restricted in others such as India, China and Indonesia. Most Western countries’ rulings on Bitcoin are in regards to either tax or money laundering, a U.S senate hearing in November 2013 described virtual currencies as “a legitimate financial service with the same benefits and risks as other online payment systems.”
This endorsement sent the price of Bitcoin sky-rocketing as any suggestion of legitimacy, especially from the U.S. senate, erases the stain on digital currencies left by association with criminal activity and instability. This battle for credibility will continue and will only become fiercer as digital currencies grow and multiply, particularly in countries where censorship of the press and the internet is dominant.
For every example you can find of Bitcoin being used nefariously, either for drug-dealing, money laundering or as a get-rich-quick bubble; you can also find an example of someone who believes in the power of digital currencies or is actually putting that power to good use. Which side prospers will likely depend on how regulators and politicians react to digital currencies going mainstream, either to embrace the potential or drive it back underground.
Brands that Use Bitcoin
Investing in Bitcoin
The biggest hurdle to investing in Bitcoin is the uncertainty of not just its value, but the nature of its existence as an asset. If you have invested in a physical asset like gold, luxury cars or artwork you are aware that the value can plummet overnight, but you can also be pretty sure that those assets won’t cease to exist or be outlawed by the state.
This uncertainty and the lack of centralization makes it incredibly difficult to predict what will happen next. The fact that digital currencies are still in their infancy means there’s no track record or history to hold up as evidence of long term stability or growth. This same factor is of course what makes the potential rewards so great, a few hundred dollars’ worth of Bitcoin in early 2013 would have been worth tens of thousands by Christmas.
Many objections to investing in Bitcoin centre on the risk of fraud, of being hacked or losing your data whether it be through tossing out a hard drive or forgetting your details. But, all of these issues apply just as much to physical assets as they do to digital ones. Your priceless antiques may catch on fire, you may get scammed by a Ponzi scheme or you might be careless enough to lose the details to an account where riches are stashed.
The difference with Bitcoin, however, is the uncertain legal status and lack of central accountability mean some of the safeguards that come with traditional finance are unclear or non-existent. There have been prosecutions involving Bitcoin, but none against alleged Bitcoin thieves or hackers, whether there will be in the future is hard to say. January 2014 saw the first insured Bitcoin storage service Elliptic Vault, underwritten by Lloyd’s of London, they are likely to be the first of many companies to offer a safer way to store your digital currencies.
“The difference with Bitcoin, however, is the uncertain legal status and lack of central accountability mean some of the safeguards that come with traditional finance are unclear or non-existent.”
The lack of centralization also offers benefits to investors in removing barriers of entry and to trade, there are no limits on how much you can buy and sell and minimal transaction fees, meaning avoiding the expensive commission you’d pay dealing in other assets. Trading is complicated however by the factors that complicate more traditional finance such as moving money between countries, as well as the unregulated, unreliable nature of Bitcoin exchanges.
Bitcoin is the most well-known digital currency, but it is not the only one, alternatives such as Litecoin and late-2013 meme inspired Dogecoin have shot up in popularity as investors look to discover the “next Bitcoin”. So much so that $30,000 worth of Dogecoin was used to send the Jamaican bobsleigh team to the Sochi Winter Olympics, thanks to an online campaign.
These altcoins are even more unpredictable and difficult to buy than Bitcoin, but do offer the opportunity to get in earlier in the evolution of a currency and potentially see a bigger return. They also offer an alternative in that event that one is outlawed or closed down – if Bitcoin dies – then Litecoin or Dogecoin takes its place and digital currencies stay alive.
As it stands the unpredictable legal status of Bitcoin, combined with security issues and price volatility mean investing is not for the faint-hearted. In the past few weeks one of the most prominent Bitcoin exchanges, Mt.Gox went bankrupt after security flaws saw it lose 750,000 Bitcoins belonging to users across the globe. Because the trading activity and use of Bitcoin for purchases is still relatively low it means any large trades or external factors can have a large influence on the whole currency. If Bitcoin continues to grow and penetrate the mainstream consciousness these problems will iron out, but until then if you’re afraid of your investments taking the odd bump in the road, you might want to stick to the old favourites.
Bitcoin for Small Business
The benefits of accepting Bitcoin for small businesses are clear, you avoid the costly transaction fees of credit cards companies or PayPal and broaden the availability of your products to people who do not have access to other forms of payment. There is also no chargeback – once a purchase has been completed using Bitcoins it is permanent.
In the past the use of Bitcoin has also been a publicity boon for companies seeking to make headlines with their use of a cutting-edge technology. Considering there are now 1000s of companies worldwide accepting Bitcoin, you’re unlikely to make huge waves by adopting it, it does however send out the message that your company is both innovative and forward-thinking.
Most small businesses accepting Bitcoin use a third party merchant service like BitPay or Coinbase, mainly because of the volatility and difficulty in buying and selling Bitcoin, as detailed above. This does mean adding a third party to a process that sells itself on cutting out the middle man, however, their negligible fees make them a completely different proposition from using a credit card company. BitPay, for example, charge a flat fee per month with no transaction charges.
These type of processors also remove the volatile price changes of Bitcoin from affecting retailers, what they charge the customer in Bitcoins will be equivalent to whatever price you set in your local currency. If you sell smoothies for five pounds, you will get five pounds whether the equivalent Bitcoin amount is 10 or 10 million.
Should you choose to accept Bitcoins directly it is also a fairly straightforward process, using certain apps customers can send the payment straight to your ‘Bitcoin wallet’. This does mean you have to convert them into a local currency yourself or find a supplier that accepts Bitcoins and does leave you open to price fluctuations.
If Bitcoin, and indeed other digital currencies, continue to grow and stabilize they could provide an important solution to the need for quicker and more flexible electronic payments, especially when it comes to mobile devices. Removing the middle man and allowing customers to make online and offline payments using nothing but a digital currency and an app could revolutionize retailing.
“If Bitcoin continues to grow and stabilize it could provide an important solution to the need for quicker and more flexible electronic payments.”
The risks for merchants accepting Bitcoin using a payment service provider are fairly low, in fact any risks tend to be weighted towards the consumer, considering the lack of fail-safes offered by Bitcoin compared to credit cards or PayPal. The number of small and micro-businesses using Bitcoin should also indicate that it does not require large infrastructure investment or advanced technical knowledge.
Although a small business offering Bitcoin as a payment option may only reach a relatively limited audience, what is far more important for them to consider is that the future of digital currencies will be inextricable from the future of retailing both online and in stores. Any business that wants to be ahead of the game should recognize the potential of digital currencies, just as those retailers who recognized the power of the internet led the way at the turn of the century.