Bitcoins: A Payments Disruptor or 'Flash in the Pan'?
They could be…then again…
With Bitcoins, it's a matter of trusting that the seller will deliver the goods, as advertised, after he's taken your Bitcoins which by the way, are irrevocably gone. Probably until further safeguards are built into the system, there will be strong headwinds from Bitcoins becoming mainstream.
What do Overstock.com, reddit, wordpress, and Virgin Galactic all have in common? Well, they've begun accepting Bitcoins. But, if you think it's only fringe companies looking at it, consider that both PayPal and eBay are also taking a very close look.
Do Bitcoins have potential to be a new competing standard of payments for credit cards and banking systems, well the Winklevoss Twins (yes of Facebook fame) have invested $11 million in Bitcoins and feel the market cap could reach $40 billion.
Overstock projects 1% to 2% of shoppers, many of whom Overstock believes are not current customers, will pay for future purchases with Bitcoins.
On the merchant side, the ability to eliminate the 2%-3% credit card fees for online transactions as well as no chargebacks is very attractive. But with no buyer protection, will consumers be as attracted to this vehicle. At the very least we will revert further back to the days of caveat emptor in the wild, wild west of the Internet.
Just What Are Bitcoins?
In a nutshell Bitcoins are a math-based currency based on a peer-to-peer network using a decentralized ledger system utilizing a sophisticated blockchain for tracking and valuation purposes..
Unlike credit and debit cards, paper money, or even precious metals, Bitcoin is not based on any monetary standard or backed by any central government. Instead, it is an open-source, mathematically-based digital currency managed by a loose confederation of evangelists. Therefore no government can manipulate it by printing more, raising interest rates, or the like.
A landmark Bitcoin algorithm was first published in 2009 by a programmer using the alias of Satoshi Nakamoto. After initially championing Bitcoin as an alternative currency, the mysterious Nakamoto left the project in 2010 and has not been heard from since. Bitcoins have taken on a life of its own and is now managed by a network of volunteers.
Bitcoins are initially created by "mining" them. You too can allocate computing power to the worldwide Bitcoin exchange. As payment you will regularly receive a portion of a Bitcoin. A computer with some high powered video cards can net you about $180 a month in mining.
About 12.3 million Bitcoins are in circulation as of this publication and rising in a straight line. There is a 21 million limit programmed into the system so about 9 million more can be mined.
Anyone receiving Bitcoins do have the means to readily convert them into cash. Processors like BitPay provide the electronic pathway to facilitate the transaction and convert Bitcoins into whatever currency the merchant prefers at the end of the day.
Why Are Some Merchants Attracted to Bitcoins?
In a nutshell it's low transaction costs and no chargebacks.
Unlike credit cards, the costs to accept Bitcoins are negligible. Merchants can accept Bitcoin for free for the first $1 million in Bitcoin purchases and as little as 1% of the transaction price after that. In comparison, online merchants pay 2% to 3% or higher to accept credit cards.
A Bitcoin purchase is more like a person-to-person cash transaction, with the Bitcoin being pushed by the consumer from his wallet directly to the merchant's wallet. Also, unlike cards, there is no such thing as a chargeback with Bitcoin. Once consummated, all transactions are irrevocable.
What makes Bitcoin so inexpensive to accept is that it is the equivalent of a cash transaction, for which merchants typically don’t pay acceptance fees. Add in the fact there is no risk of fraud or data breach with a Bitcoin transaction and that encryption keys within the Bitcoin algorithm help protect it from being counterfeited, and it is no wonder that Bitcoin is getting more attention from merchants—as well as from those that sell payment acceptance to merchants.
Remember Silk Road?
Probably what really heightened the public's awareness of Bitcoins was the FBI's shut down of Silk Road, a nefarious online black marketplace, and seized his stash of Bitcoins, which totaled tens of millions of dollars.
So, Bitcoins got a black eye as being a means for drug purchasing and assassinations for hire. The very nature of it being anonymous could lend to this kind of activity, but there's a lot of room for legitimate transactions as well.
Volatility is an Understatement
Buying and holding equities in high flying companies or foreign currencies can be risky, but these pale in the volatility of Bitcoins. Back in March, 2013 they were worth $29 each and soared to $1,150 by December, 2013. Today it is valued at $9,387 quite a remarkable climg.
What is the Future of Bitcoins
Ever since the days we got away from bartering and onto some form of fiat based currency, the whole systems I built on "trust". The U.S. government is backing the greenback, Visa and MasterCard, though expensive, have built in enough consumer protections to keep the consumers' trust in the system.
With Bitcoins, it's a matter of trusting that the seller will deliver the goods, as advertised, after he's taken your Bitcoins which by the way, are irrevocably gone.
Probably until further safeguards are built into the system, there will be strong headwinds from Bitcoins becoming mainstream.
About the Author
Al Valente is a business consultant servicing New England and helps customers to make smart investment decisions in selecting their payments processing systems. He is an independent agent for NCR/JetPay and Upserve.
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