Have you heard of Bitcoin? There’s been a lot of interest in it lately. Bitcoin is one of those things that could become mainstream in another five years. But right now, it borders on the edge of crazy. Of course, they said that about the World Wide Web, Amazon.com and Facebook, too.
Bitcoin is digital currency. Like most things dreamed up by geeks, the tagline on the Bitcoin website is fully buzzword-compliant. It’s not just digital currency; it’s an “open-source P2P digital currency.”
Bitcoin is a way to pay for things electronically, but it has features that set it apart from mundane debit and credit cards. The best analogy for Bitcoin? It’s like the green folding stuff that used to be so common. You know: cash.
First of all, Bitcoin is anonymous. Unlike the trail that follows credit card transactions around, a Bitcoin payment can’t be traced back to you—which makes it great for paying for things that the government frowns upon, like drugs, sex and weapons. Back in the early days of the Internet, the porn trade pushed the envelope of online technology, both in terms of delivering video streaming (which we now take for granted. Netflix, anyone?) and online payments (although it still relied on good old credit cards). One good thing about the vice trade is, it’s not hung up on appearances—if a given technology lets people spend more money, it’s all for it.
Bitcoin’s second major feature is that there are no transaction fees associated with its use—again, just like cash. Although merchants who process a large volume of credit card transactions can negotiate more favorable rates, smaller merchants are more at the mercy of their credit card processors. “Risky” businesses may pay exorbitant rates, or be declined merchant status. Regardless, credit card transactions add to the cost of doing business.
The reason there are no transaction fees associated with Bitcoin is that there’s no central agency like VISA or MasterCard. Like the tagline says, Bitcoin is P2P—transactions are person-to-person—just like cash. When you drop a $5 bill on the counter at Starbucks to pay for your tall-nonfat-mocha-with-whip, it doesn’t travel to the Federal Reserve Bank for authorization. It goes directly from your wallet to the cash register. This also means you need a wallet to store your Bitcoins, one of the hurdles that average human beings must surmount to join the Bitcoin economy.
If you accept credit card payments, you’re also painfully aware of an additional downside: chargebacks. If a cardholder disputes a transaction, the bank that issued the credit card used to pay for it can forcibly remove the funds from your account. In addition, you’re also assessed a chargeback fee. For some merchants, chargebacks are a significant problem (one could argue about who’s at fault when a chargeback occurs, but that’s another column). Because there’s no central authority in control of Bitcoin transactions and, with access to your Bitcoin wallet, it also means there are no chargebacks. When Bitcoins are transferred from buyer to seller, that’s it. Any recourse is up to the persuasiveness of the buyer and the goodwill of the seller. This may or may not be a feature, depending on your point of view. To merchants, though, lack of chargebacks is clearly a selling feature: Only 21 percent of chargebacks are resolved in favor of the merchant.
It’s good that Bitcoin has attractive benefits for merchants, because having merchants who accept Bitcoin for payment is key to bootstrapping the Bitcoin economy. Of course, Diner’s Club, the progenitor of modern credit cards, wasn’t widely accepted initially, either. Restaurants would, in fact, be a great beachhead for Bitcoin.
Probably the biggest strike against Bitcoin is that governments—which rely on their ability to tax transactions and punish those who fail to report income—don’t like a technology that allows people to transact anonymously, just like they frown on “cash under the table.”
But apart from that anonymity, Bitcoin’s benefits for you and me are less clear. Most of its early adopters are the sort of people who object to the increasing visibility of one’s financial life by government, corporations and others, on grounds both intellectual (libertarians) and practical (tax evaders, drug dealers). This gives Bitcoin a bit of the “tinfoil hat” feel normally associated with conspiracy theorists living off the grid.
What can you buy with Bitcoin today? Well, all manner of drugs are available at The Silk Road Anonymous Marketplace (a Google search will turn up the URL if you’re interested). A Howard Johnson (of all places) in Fullerton, Calif., was briefly accepting Bitcoin back in 2011. SpendBitcoins.com, which focuses more on the exchange of dollars and Bitcoins, offers a list of places to spend Bitcoin. Sadly, it’s a little threadbare. Probably the best example is a recent series of columns by Kashmir Hill of Forbes magazine, who attempted (successfully) to live on Bitcoins for a week. You can find the series here. As you might expect, the big problem is finding merchants (and landlords) who will accept Bitcoin as payment. And most merchants won’t accept it unless they have customers asking for it. The time and effort to learn about Bitcoin and set up to accept it seems far in excess of the value of any business lost to libertarian crackpots.
Right now, it seems the decision to accept Bitcoin is based either on the publicity value of being the first in your town, or a proprietor with a geeky bent. For example, the Howard Johnson that accepted Bitcoin did so because the manager of the hotel had an interest in it. Searching the HoJo.com site for the word “bitcoin” turns up nothing.
Another question is: “Can I trust Bitcoin?” The software that runs Bitcoin is open source, which means it can be independently inspected, and some smart people have tried to hack it and failed. There have been reports of Bitcoins being stolen, but it wasn’t due to Bitcoin itself being hacked. Just like cash, if your wallet is stolen, you’re out of luck.
Interested in learning more? I highly recommend this Economist article, which explains a lot more of the fascinating details of the world’s first “decentralized digital currency.”
Are you a North Bay merchant who accepts Bitcoin? Let me know at mduffy@northbaybiz.com.
