Traded on exchanges around the world it was valued, only a short time ago, at less than a penny. But recently, a single unit of this remarkable money was valued at:
- More than 1,360 Australian dollars
- 896 euros
- 750 British pounds.
- And 1,242 U.S. dollars.
The U.S. Department of Justice has described it as a “renegade currency” while the European Central Bank have said it could negatively impact their reputation.
A senior economic adviser has called it “a competitive threat” to all currencies, and the evidence is building in support. For example, you can already use it to pay for a meal at over 12,000 restaurants in 45 US states, use it to rent an office in Toronto, pay a dentist in Finland, or even have it used to pay your salary in France – because it’s fully integrated into the banking system.
If you haven’t already guessed, this new currency is BITCOIN.
Forbes magazine called Bitcoin “the currency of a $10 trillion dollar global market” while according to Time magazine it could be the “perfect money.” In fact, Fox Business said Bitcoin may well become “the world’s payment method of choice.”
Remember, Warren Buffett once said “People are right to fear paper money. It’s only going to be worth less and less over time.”
Paper money has value only because people agree to place value in it. And those who point out that a digital currency is only comprised of numbers in a computer are missing the fact that the balance in their own bank is exactly the same thing!
So what IS Bitcoin?
Funded in 2009, the correct description of Bitcoin is: a decentralized, convertible, virtual, cryptocurrency.
“Convertible” means that it can be bought with and sold back for legal tender. Indeed, that’s how most people acquire bitcoins – by simply buying them through an Exchange.
But it’s the decentralized nature of the currency that makes it so different. In a centralized system governments can control the value of currency by printing money, or digitally creating it (through Quantitative Easing for example.)
However, cryptocurrencies were created so that centralised fracional reserve banking would be fundamentally impossible. As The Economist magazine puts it, “Rather than relying on confidence in a central authority, it depends instead on a distributed system of trust. Or, really “mistrust.”
The integrity and balance of every ledger is maintained by a community of mutually distrustful parties, referred to as ‘miners,’ who are continually testing the mathematical integrity of the ‘blockchain’ – a peer-to-peer encrypted ledger which creates and records bitcoin balances.
Bitcoin isn’t alone. There are about 15 active cryptocurrencies such as Namecoin, Litecoin and Peercoin, which use different technologies for their creation. Actually, according to Wikipedia there have been many others but they failed to succeed since they brought no technical innovation.
However, much like the battle between VHS and Beta, Bitcoin appears to have become the global standard for cryptocurrency.
No government treasury can inflate away the value of your savings by printing more Bitcoins. No bank can recklessly lend them to people without capacity for repayment.
As the Daily Telegraph puts it: Bitcoin has no bank to maintain security, record ownership, or handle transactions. None is needed.”
Is it legal?
Yes, cryptocurrencies are legal in all countries except Iceland while in Russia, although legal, they can’t be used to buy anything! That’s because Russian law makes it illegal to buy goods with anything but the rouble.
Although legal in the US, the status is uncertain. The IRS has determined that bitcoins are property and therefore profits are subject to capital gains tax.
However, the Eastern District of Texas federal court ruled that because bitcoins can be exchanged for government issued currencies, then it could be considered real currency. This gave the SEC jurisdiction over cases of securities fraud involving cryptocurrency.
Is it safe?
If the currency is safe, it is the exchanges, or “wallets” that are risky. Bitcoins are created by processing complicated mathematical equations of increasing difficulty, which is called “mining.”
There is a rapidly growing industry in the supply of high powered computational chips and equipment, which are pooled through mining contracts.
(Yes, really! You can learn more here: weusecoins.com/en/mining-guide)
So although it is theoretically possible to crack Bitcoin’s security, in practice it’s beyond even the computing power of a giant like Google.
It’s also worth noting that because governments can’t create bitcoins, they can’t provide backing for banks, or corporates, whose assets are held in bitcoins. So when the Chinese GBL trading platform shut down in October 2013, $5 million in bitcoins disappeared.
Worse, the Mt Gox Bitcoin Exchange – which was the world’s largest at the time – declared bankruptcy in February 2014, losing $473 million worth of their customers’ bitcoins.
On the other side of the (virtual!) coin, governments can’t access your Bitcoin account. Remember, in 2013 Cyprus froze all accounts in its banking system and announced it would take up to 60% of balances above 100,000 euros in order to recapitalize the banking system.
Suddenly, Bitcoin seemed less risky and transaction volume soared.
What of the future?
“Do I need to take Bitcoin in my business?)
This is a trend that is moving so fast that it may very soon hit the tipping point where yours, and every other business, will need to accept it for payment.
In fact, that point may not be far off. PayPal is the world’s largest online payment processor, with 60% of all web transactions. Their president has confirmed they’re considering accepting bitcoins.
And eBay in Latin America is already accepting Bitcoin payments.
Bitcoins are attractive for consumer transactions, because of their low fees. That’s because using the Bitcoin network is free, except for a voluntary fee you can use to speed up transaction processing. This means you can pass the savings on to your customers and get a competitive advantage over other businesses
Support site weusecoins.com suggests asking your supplier:
- Can I get a unique Bitcoin address for each transaction?
- How is the exchange rate calculated?
- How fast are payments approved?
- What is my exchange rate risk?
- How do I receive the funds?
- Are there any fees involved?
- How can I see a listing of my sales?
For lesser value purchases, a Wallet app on a smartphone can accomplish the same thing.
You’ll need to make big efforts to reassure customers about your stability and credibility. That’s because Bitcoin transactions can’t be reversed. There is no consumer protection against fraud because, unlike conventional electronic payment methods, such as credit cards, it isn’t possible to cancel and chargeback a transaction.
But for the merchant, that’s actually a positive! Because there are no chargebacks in Bitcoin, then a confirmed transaction is protected by the full “hashing power” of the network. So your business can accept Bitcoin payments from any country in the world, with no risk of fraud or chargebacks.
How to get started:
Step 1: Get a ‘Wallet’ for storing your bitcoins
‘Hardware’ wallets are in development. Just like a real wallet, you’ll be able to hold it in your hand. For now, there are three main options . . .
- Software wallets. This is software you download to your own computer, so you have more control than using a third-party onlline service.
- Web wallets. Easier and more convenient to use, they’re hosted online by third-party providers.
- Mobile wallets. Both iphone and Android apps are available.
Step 2: Get yourself some bitcoins!
Because you’re in business, the easiest way to get bitcoins is to accept them as payment for your products and services.
‘Mining’ for bitcoins was possible on your own computer in the beginning, but the hash calculations have now become so difficult that it would take years to earn any! You can invest in specialized bitcoin mining hardware and buy into a mining contract, but this is now so competitive that it is very risky for new entrants.
For most people, the solution is simply to buy bitcoins, either directly from someone who has them, or through an exchange. LocalBitcoins.com is a clever service where you can search for people nearby who are willing to sell, or you can buy from a site such as CoinJar. You can search Howtobuybitcoins.info – an international directory of bitcoin exchanges.
Step 3: Set up a payment method
In retail stores, bitcoins can be used side-by-side with local currency and credit cards. The merchant will need a Point Of Sale device or Shopify tablet system to calculate the exchange rate and process the bitcoin transaction.
BitPay and Coinbase have merchant tools with USD currency exchange and Coinkite provides a Terminal and POS system.
For online transactions, there are currently 44 shopping cart interfaces available here.
Step 4: Spend your bitcoins
More and more businesses are accepting Bitcoin payments. A useful directory is coinmap.org, which maps nearby merchants.
Or there’s the Bitpay Merchant Directory at bitpay.com, currently listing more than 30,000 businesses and charities who are accepting bitcoins.
One of Bitcoin’s developers describes it as “a catalyst for change that creates a new and different world.” It’s true that we’ve needed banks to keep track of who holds what balance, but now Bitcoin (and other cryptocurrencies) have shown that banks can be replaced by software and clever mathematics.
In the wake of the Global Financial Crisis, it’s not difficult to understand why there’s such interest in a new system of money that lies beyond the reach of banks and governments.
With ATM machines now available for Bitcoin this could soon become a currency you need to accept for your business.
I suggest you should watch developments, closely.