Mobile payments are on the rise, so it only makes sense that new forms of digital currency are popping up, too. One kind of digital currency you may already know about is Bitcoin, a P2P cryptocurrency created by Satoshi Nakamoto.
One of the biggest questions surrounding digital currency (aside from how they work) is whether they’re a viable solution—or, whether they’ll make a splash and then be quickly forgotten. You know, kind of like QR codes.
It’s a little early to tell, but it’s something that could well be a major disruptor in the realm of mobile payments and mobile banking. Before we dive in and look at what Bitcoin has to offer, watch this intro video that will give you a crash course on Bitcoin.
What makes Bitcoin so potentially disruptive?
Bitcoin’s got two major things going for it. First, it handles like cash. That is, it’s immediate, irreversible and anonymous. In just the same way I can hand you dollar bills without you knowing or caring who I am, I can send you bitcoins without you knowing or caring who I am. As soon as they’re sent, they’re yours, just like the dollars I put in your hand are yours. There’s no exposing of my identity, third-party approval, float time, batching, 2- to 3-day delay, bounces or chargebacks. I either have the “cash” in hand to give you or I don’t. The big difference between Bitcoin and hard cash–I can hand you that Bitcoin over the Internet, including across international boundaries. Think of it as “cash at a distance.”
Second, the Bitcoin network is decentralized and distributed. There’s no central authority or server. So, any bitcoins you own can’t be confiscated, frozen or garnished by any government or banking agency because there’s no one single place to go to do it. As long as you have Internet access, your bitcoins are yours to do with as you like. Sort of like cash under your virtual mattress!
I’ve got your attention now, don’t I?
So what are the practical implications of these characteristics of Bitcoin? Let’s look a few cases where Bitcoin could make a big impact.
International payments
Making payments across international borders is a complicated affair, usually involving multiple intermediaries and currency conversions. Often, transactions aren’t fully resolved for many days, which exposes the parties to currency rate fluctuation risk. Using Bitcoin, you can effectively pay a party in another country directly and immediately with cash (no intermediaries), which results in a very short window of currency rate exposure. The receiving party can then exchange the bitcoin for their local currency through a currency exchange or keep it to use for their own payments.
A safer haven
Because Bitcoin is out of the reach of governments, it’s already being used in some countries as a safer repository for money than the local currency in local banks, which may be controlled by unstable or corrupt regimes. There are already online exchanges that will convert Bitcoin in and out of many different currencies.
Anonymity and fraud prevention
Consumers like to pay for things digitally because it’s easier and faster than hard cash—but they don’t like having to give up their account identity to do it. Credit cards (in the U.S., anyway) and checks must reveal your account information to the payee because they’re based on you giving someone else the information (your account number) necessary to withdraw money from your account. This is pretty much a security hole you can drive a truck through. Bitcoin, conversely, is based on giving money, not taking it. A Bitcoin public ID can only be used to deposit money, not withdraw it. People and organizations publicly post their Bitcoin IDs online so others can make contributions or payments to it. It’s fraud-proof by its very nature. In fact, if you’d like to make a contribution to me, my Bitcoin ID is: 1FrTHp5DR3hLAqCVmuzXLmTLkpJFKCAAgP
What’s keeping Bitcoin from becoming popular?
It’s complicated. The software for using Bitcoin is stable and secure, but it’s not yet normal person-friendly. You have to know too much to make it work. At this point, it’s also hard to get bitcoins. It usually involves a multi-step process starting with depositing cash in a bank account of a transfer company, then having that credit forwarded to a currency exchange where you can then trade it for Bitcoin. This is far too complicated and mysterious for the average consumer. What’s needed is the ability to make a direct purchase in cash at a bank or a retail store, which directly gives you bitcoins. Another drawback? Bitcoin is not yet accepted in many places, although more are starting to appear.
Not so legal or polite uses
Like any powerful tool, Bitcoin can be used for both legal as well as socially questionable activities. In fact, the application that would probably quickly propel Bitcoin into mass use would be porn. The porn industry served as a major driving force behind the maturation of on-demand video distribution technology, and it could do the same for Bitcoin. The ability to subscribe to an “adult” site without giving up your personal identity would be highly attractive to many people, even though most, of course, would never admit it.
Sure, Bitcoin has some functionality to fine-tune before the online currency becomes more widespread. That being said, Bitcoin is definitely a tool to watch, especially as mobile payment capabilities continue to become more prevalent.
Any Bitcoin users out there? I’d be interested to hear about your experience so far with the online currency.
Joe Cascio is a long-time friend. He’s also a semi-retired software developer who, between rounds of golf, tinkers with and consults on new technologies. He prefers to write web applications in python and can also develop Android apps. Before chucking the 9-to-5 life for the golf club, he was last employed as the Chief Technology Officer at a medical imaging software company. He comes down unflinchingly on the dog side of the dog-vs-cat question and grew up around Boston with Red Sox crimson running in his veins. I love Joe. You will, too. Find him on Twitter @joecascio. Stalk him regularly.
