Buying Into the Bitcoin Craze

Although the peer-to-peer currency Bitcoin is unlikely to replace traditional banking, it might have a role to play in e-commerce. The costs associated with Bitcoin transactions are significantly less than with other payment networks.

Bitcoin has no central issuing authority and isn’t tracked by any authority. However, the currency’s value exceeds that of some small countries, including the Seychelles, Liberia and Gambia. That fact alone arguably makes Bitcoin a market player, whether anyone likes it or not.

Bitcoin’s E-Commerce Advantages

Unlike the pieces of paper with images on them that we trade for goods and services, Bitcoins don’t exist in physical form. Instead of exchanging a piece of paper with drawings — or an electronic representation of the piece of paper, like a wire or bank card transaction — payers send Bitcoins through the Internet natively.

“Bitcoin is a frictionless Internet payment with no national borders,” said Tony Gallippi, CEO of BitPay.

“The ability to send an instant payment anywhere in the world, like you can send an email, will have a profound impact on business and consumer spending in the future,” he told the E-Commerce Times.

Bitcoin operates using public-key cryptography to enable instant payments to anyone, anywhere.

Payment service providers like BitPay make it easy for e-commerce vendors and other businesses to accept Bitcoin as a form of payment by setting up merchant account-style Bitcoin billing systems.

Banks aren’t involved, so the fees that accrue each time money is touched by an institution — used to build banks and fund bankers’ bonuses — don’t add up. Those fees can cut deeply into online operators’ profits.

There are limited transaction costs with Bitcoins, because they aren’t handed from one institution to another, sometimes circling the globe, before they reach the payee.

The e-commerce vendor conceivably gets to keep more of the transaction with a crypto-currency that manages its own transactions — including issuing its own money. Bitcoin money is “mined,” using complicated computations.

Bitcoin’s Place in the World

“Bitcoin is a long-term solution to long-term problems, being built by volunteers with a long-term perspective,” said Mike Hearn, a developer who has been working on efficient Bitcoin solutions for Android.

“We will only really be able to judge its impact many years from now. I am skeptical it will replace regular currency — at least not within our lifetimes. Email has not replaced the postal service, the Web did not replace books and magazines, and Bitcoin will not replace dollars or euros. I expect it to run alongside them for the foreseeable future,” he told the E-Commerce Times.

Bitcoin builds upon the idea that money is any object, or any record, or indeed anything that’s accepted as payment for goods and services — in this case, it’s a digitally created and transferred tool.

“Bitcoin or something like it will be with us for the next 10 to 100 years,” said David Sterry, founder of Exchange Bitcoins, which runs CoinDL.

“I’m not sure anything will replace all currency, but Bitcoin could certainly surpass gold, and many smaller nations’ currencies in market cap and velocity,” he told the E-Commerce Times. “It already has done the latter, of course, but so far it’s been just very small countries that it has surpassed.”

What of market swings? Bitcoin opened April at US$93 and rose to $266 on exchange Mt. Gox by April 10. On Thursday, its value was around $104.

Despite the swings, Sterry was bullish. “CoinDL has seen a nice uptick in sales after this recent correction from $260 on top of slow but fairly steady growth in sales.”

As actor Jeremy Irons said, playing John Tuld in the 2011 movie Margin Call, “It’s just money. It’s made up. Pieces of paper with pictures on it, so we don’t have to kill each other just to get something to eat.”

Getting Started With Bitcoin

If you’re ready to try using Bitcoins,

1. Install a Wallet. The original free Bitcoin client is available for Windows, Mac or Linux.
2. Obtain some Bitcoins. You don’t have to get into purposefully hard Bitcoin mining. You can use a currency exchange like Mt. Gox; buy directly from a location like BitInstant; or trade over-the-counter with others at #bitcoin-otc.
3. Spend Bitcoins. Buy music at CoinDL and other merchants.
4. Get a Bitcoin merchant account. Approach a Bitcoin solution provider like Bitpay to accept Bitcoin on existing e-commerce websites.