Bitcoin introduction, key facts and opportunities

The number of Bitcoin transactions per day looks like it's waiting for a major retailer to join the party
The number of Bitcoin transactions per day looks like it’s waiting for a major retailer to join the party

Firstly, I want to set some context about Bitcoin and this article. I started this blog when I found myself explaining something to one person, then another, and another, and I thought there had to be a more efficient method of distributing information (together with my opinion!) Three years later, this mantra still holds true. However this article has taken the longest to write because when I have met people to discuss Bitcoin, every conversation seems to approach the subject from a different perspective and I’m asked many great questions, so I’ve delayed this article while I’ve tacked those extra points to this article. At times I felt that I should just write a book, but I never had the guts to ask my wife for the time during our summer holiday!!!

This article is split into five sections mainly to specifically answer some presumptions that people have about Bitcoin:

  1. Introduction, and Bitcoin key facts
  2. Anonymity & Illegality
  3. Opportunities
  4. Conclusion
  5. Further reading

1. Introduction

Bitcoin is a crypto-currency. It’s purely electronic. It’s not a wallet like PayPal. And it’s not a bank account. It’s a currency. There are lots of crypto-currencies, but Bitcoin has the most publicity. Most of them use a similar ‘infrastructure’ and process, so it’s mainly all about branding.

Just like ‘real’ cash, with Bitcoin if you lose it, it’s lost forever. Yes you might find it months later in some corner of your hard drive just like the back of the sofa. But like cash, if it’s lost, stolen or destroyed, you can’t go to a central organisation asking for a replacement. Try going into a high street bank or the Bank of England asking for a replacement £5 note that you’ve lost.

Saying all that, some key differences with cash and Bitcoin is that with cash, most of us carry a small amount of cash while the rest is nice and safe in our bank accounts. With Bitcoin, all of our Bitcoin are in our wallet. If you are paid a salary in Bitcoin and have lots of them, you need to make sure your Bitcoin is very, very safe. There are simple ways of backing it (‘it’ being the keys to your wallet) up, including ironically, using paper.

Also, cash is more widely accepted than Bitcoin but this may change over time (keep reading).

With Bitcoin, it has been designed as a universal global currency, so there are no territorial currency changes required like cash.

When discussing Bitcoin, it brings people down to the core use of money. It forces us to question how those pieces of paper and metals in our pocket seem to have such value, and our faith in their value. In fact, ‘faith’ is often used to describe traditional currencies when we discuss Bitcoin.

In terms of ‘real world’ value of a Bitcoin, this fluctuates because there aren’t that many Bitcoin, so when there is a large transaction, it can impact the value. To give an idea of scale, as of writing this article in August 2014:

A Bitcoin is worth $565.45.

In the last 30 days, the number transactions has fluctuated between 52,500 and 78,000 per day.

The current market capitalisation of Bitcoin is around $7.5bn

Other advantages of Bitcoin include:

  • It is impartial to political pressure, such as when Visa stopped accepting donations on Wikileaks
  • There are fewer intermediaries on Bitcoin, and the ‘system’ has been designed to stay this way
  • The Bitcoin infrastructure is never closed for a Bank Holiday or a National Holiday. Or in the evenings.

At the moment, Bitcoin has some level of inquisitiveness and consumer speculation. I know users who have bought Bitcoin just to observe the end to end process. I think this is unique – I don’t remember people rushing out to buy other new currencies (e.g. the Euro) or opening new wallet accounts such as PayPal or just to see how it worked.

In terms of speculation, I know some people who mine (produce) new Bitcoin. The mining process is too specialist for here, and is a subject worthy of its own article. Suffice to say two points on mining. Firstly, almost all users who transact with Bitcoin don’t and won’t mine. Secondly, the cost of mining just in electricity has already exceeded the return value of Bitcoin.

Finally, transacting in Bitcoin at the moment is a new and often bewildering experience. There are brands of wallets most users won’t heard of, new Bitcoin exchanges to change real world currency into Bitcoin that most users won’t heard of, and few retailers currently accept Bitcoin. It’s currently a technical user experience and you’ll be downloading mobile apps and several desktop apps before you know it.

2. Anonymous & Illegality

Bitcoin has a perception of being an illegal currency because it is anonymous.

However Bitcoin is actually more transparent than cash or card payments. All Bitcoin transactions are stored in a ledger called a Blockchain. The Blockchain is not just freely accessible, it’s actually downloaded by most wallets to users’ computers. Plus, latest transactions are listed in the Blockchain website along with various charts and stats.

The Blockchain only lists addresses of wallets though. It doesn’t identify people. Think of it like a fixed IP address vs. an individual person.

Cash is much more anonymous than Bitcoin. E.g. when a user buys something with a £5 note – you have NO WAY of finding out where that £5 was previously used. It’s entirely possible to trace all the transactions, or an individual Bitcoin.

3. Opportunities

Most people we speak to are interested in the opportunities available from Bitcoin.

Firstly, the current Bitcoin ecosystem has no trusted brands. In order to create a wallet and exchange some hard-earned real cash, it’s difficult to know who can be trusted. This is mainly due to the banking regulations where our trusted high street consumer banks need to remain at arm’s length from Bitcoin. So users end up downloading a wallet, exchanging real cash and putting those Bitcoin into the wallet, without having faith if the Bitcoin will be there in the morning.

Some sites are strict about converting money into Bitcoin and leaving any trace, and this erodes faith in the transaction
Some sites are strict about converting money into Bitcoin and leaving any trace, and this erodes faith in the transaction

I found the user experience was poor from start to finish. Many sites are strict about how to exchange real money for Bitcoin without attracting cash transaction fees from credit card companies, which further erodes trust.

One of the excellent features in Bitcoin is that the system allows a payment to be placed under contract.

North American payments companies market cap

This is far better than other currencies, where money needs to be moved into Escrow or another third-party until a contract is met.

The Blockchain concept is exciting many industries. In fact, the Blockchain concept would be ideal in almost any industry where asset are transferred and a log might be useful.

And finally there’s the defensive position of such a potentially disruptive technology. My favourite quote is “Bitcoin is to banking what MP3 was to the music industry”. The prize of the payments market is very significant, as the table above demonstrates. Many of the new “alternative” and mobile payment products simply offer a different form factor of the traditional plastic card, either moving it to a mobile phone, encapsulating it into a username and password. Whilst these are also useful, they are evolutionary offerings where Bitcoin is transformative.

4. Conclusion

The Blockchain concept is fantastic and I can see it being used for other assets such as cars, property or land.

The use of Bitcoin is slowly increasing (see the chart here).

As with all payment mechanisms, it’s mainly about merchant adoption. If Amazon accepted Bitcoin, that graph above would have a step change. But then again, Amazon will probably create its own crypto currency. And that leads to the final point – Bitcoin may not become the crypto-currency of the future. A bank or payment provider may provide a branded crypto-currency which could become the default, and for global adoption it probably will need to be a very large institution. As we become more familiar with the global economy, we’ll need a more global currency, and Bitcoin looks as good as any at the moment.

 5. Further reading

There is no substitute though, for actually creating a wallet and exchanging some Bitcoin.

Leave a Reply

Your email address will not be published. Required fields are marked *