The true entrepreneur will always keep their ear to the ground, hoping to spot and exploit the latest trends, be they social, financial, economic or occasionally all three wrapped into one. Bitcoin is one such phenomenon, with its quasi mythical origins, ground breaking software, and fairly obvious potential, however to date early adopters outside of the murky world of sites such as Silk Road, the now defunct online drug store (watch out for Silk Road 2, origins unknown), have been few and far between.
Bitcoin’s somewhat seedy reputation has been cemented by the seizure of Silk Road, the bankruptcy of the Mt. Gox exchange, which at one point was handling 70% of all Bitcoin transactions, the extreme volatility of the online currency, and concerns regarding safety and online theft.
Like any other fiat currency, however, Bitcoin’s do not simply disappear into thin air, and the US government has done more than anyone to restore their reputation, successfully auctioning off Bitcoins seized from Silk Road in much the same way that the Miami vice squad might auction a speedboat seized as part of a drugs raid.
In essence, an online currency which you can use to pay for goods and services, anonymously if you wish, and without paying any of the extra fees associated with credit or debit card transactions, is a good thing, and yet to date there is a surprising scarcity of products which have fully taken advantage of this unique and progressive opportunity. Sure there are the exchanges, such as Coinbase, Cryptsy and Bter.com, and ecommerce sites such as Overstock.com and Tigerdirect.com who have sought to exploit the novelty value of accepting payment via Bitcoin, but the vast majority of enterprise has eschewed Bitcoin, seeing little by way of commercial value or opportunity to get excited about.
The fact remains however, that Bitcoin is still very much a part of the zeitgeist, and endlessly in the news, so, after a spell in the rehabilitation clinic, could all that finally be about to change?
“Bitcoin only really kicked off when people started buying questionable goods online”, says Jason Chia, early Bitcoin adopter and market maker. Bitcoin began as a “digital goldmine”, whereby so called “miners” were rewarded with freshly minted Bitcoins by processing transactions to a public ledger known as the “block chain”, however the costs of running the software to process the payments quickly enough are becoming prohibitive. Miners are initially rewarded with 25 new coins per block added to the “block chain”, which diminishes by half after roughly 4 years, and when the arbitrary limit of 21 million Bitcoins is reached, profits will be generated solely by the charging of transaction fees associated with prioritising one user’s transactions ahead of another’s.
It’s easy to see why this kind of unwieldy complexity is unattractive to any company outside of the financial sector. Jason compares it to 3D television, much vaunted at the time it was released, but ultimately unable to progress beyond “gimmick” status. “Everyone was into it at first, but you know what, they realised, you can live without it”.
Volatility is another big issue: the value of one coin can fluctuate wildly depending on the latest lurid media allegations, although the price has begun to stabilise at around $625 since the US Marshals auction. “You still wouldn’t keep it as working capital”, warns Jason, “most businesses convert it to fiat currency as soon as possible to avoid being exposed to currency risk.”
It seems like most firms still regard Bitcoins as too hot to handle, and in fact those that have taken the plunge and sought to be brave and differentiate themselves by occupying the Bitcoin space, are ironically at risk from the currency’s new-found stability. Now that the likes of Ebay, WordPress, and Paypal are considering integrating Bitcoin into their payment systems, “early developers are feeling the pain”, explains Jason: “the larger players are now starting to get on board and the smaller firms are floundering. If Amazon decides to accept Bitcoin tomorrow, there goes the USP of your Bitcoin only business”
Another one bites the dust, so is there any room for Bitcoin in the entrepreneur’s world? A contactless Bitcoin payment card has been mooted, but how does it circumvent the same administrative charges as Mastercard and Visa ? There goes that USP again. The currency markets? Sure, “if you can trade Carbon Credits you can trade Bitcoins”, but its niche, and the barriers to entry are prohibitive. Best left to the experts, although the Winklevoss brothers are preparing to launch a Bitcoin Exchange Traded Fund (ETF).
One area currently being explored by the Chicago Sun Times is the realm of micropayments. The paper has begun to accept online Bitcoin donations for the articles it publishes on its website. This is highly attractive to a global audience, who may wish to express their liking for a particular feature or viewpoint, but have until now been restricted to the comments section or discussion forums. Quite literally, readers can now give their 2 cents worth via Bitcoin, a denomination that Paypal cannot handle because it is too small. The concept has the potential to go way beyond the mainstream press. Bloggers, Hints and Tips Sites, plugins, travel guides, and good customer service could all be rewarded with small online tips; users might pay a small fee to remove a site’s intrusive advertising banners, online games players could obtain power-ups and extra lives via one click of the mouse.
Micropayments have the power to change the way we interact with the World Wide Web, making it user, rather than advertising driven. Such a role reversal is unprecedented; we may finally discover what people really wanted to hear about, purchase and promote all these years, rather than what advertisers have tried to ram down our throats.
So perhaps Bitcoins will come good after all? Well, an online currency may well add a new dimension to our experience of online, however there is no guarantee it will be this one. New currencies are cropping up all the time, such as Namecoin, and Dogecoin, so online currency, having endured and finally overcome its first set of growing pains, may be about to enter a period of fragmentation and subsequent consolidation that will be equally as likely to put consumers off as its iffy past. Time will tell, but it is still a brave businessman who puts Bitcoins at the heart of their monetisation strategy, technology platform, or community project. As Jason puts it, “the best Bitcoin strategy out there is still to get into industry as a payments facilitator, getting none of the fluctuation risk but getting a piece out of every transaction that is to be processed”. Or simply buy and hold, for now”
this article first appeared on Forbes Online on July 17th: Bitcoin