If Bitcoin is to succeed—if using the virtual currency is to be as hassle-free as handing over a portrait of a dead president in exchange for goods and services—it will require one thing: A consensual hallucination.
We must all, in concert, forget the mystery around Bitcoin creator Satoshi Nakamoto, overlook the collapse of the Mt. Gox Bitcoin exchange, forget the speculative rise and fall in price, the early associations with the illicit Silk Road trading site, and the giddy declarations from old school cypherpunks. We must ignore the whole mining construct, and even set aside the fact that the IRS now classifies Bitcoin as property, not currency. And that’s hard—really hard. We must then collectively find a reason to use Bitcoin, even though our current hodgepodge of debit, credit, cash, check, money order, PayPal, and other payment methods work well enough for most of us.
Is it reasonable then to expect Bitcoin to ever go mainstream? Talk to experts involved in Bitcoin policy-making, banking, and the Federal Reserve, and the answers turns out to be yes—provided, of course, that the government gets involved. Or, in some instances, gets out of the way.
Why Bitcoin is intriguing
First, though, it’s helpful to review exactly what Bitcoin is. Bitcoin is both a digital currency and a peer-to-peer digital payments system; it’s the first system to effectively guarantee trust over the Internet. That is, Bitcoin payments can be sent from one party to another across the web without the need for a central bank, central server, or trusted intermediary.
How? Bitcoin’s clever use of math and global computer capacity ensures that any transaction is successful, verifiable, and irrevocable. That’s unprecedented in the world of virtual currency. Previous efforts, such as CyberCash, for example, required linking a person to a credit card. The pioneering DigiCash, tragically dependent upon 1990s computing power, could only work when a central party, such as a bank, first verified the transaction. Bitcoin requires none of this, and that’s what makes it potentially revolutionary.
Bitcoin’s originating document, “A Peer-to-Peer Electronic Cash System,” constructed this bold new reality through means of a blockchain—the computer file that acts as a public ledger for all Bitcoin transactions. Through a process called mining, the Bitcoin blockchain ensures that every transaction, literally, is publicly recorded and verified. This makes counterfeit transactions, double-spending threats, denials of purchase, and other fakery extremely unlikely. It doesn’t prevent the theft of Bitcoins, though, as some users have discovered in recent months.
Bitcoin vs. the world
Given its Earth-shifting potential, why, then, hasn’t Bitcoin taken off? There’s multiple reasons it remains on the fringe.
Competition: Apple CEO Tim Cook recently claimed that his company has 800 million iTunes accounts, most of which are linked to a credit card. The opportunity to buy and sell using only an iPhone, linked to that iTunes account, has tremendous appeal for users. To no one’s surprise, Apple is widely rumored to be working on a payments service; in the meantime, the company has banished Bitcoin apps from its App Store. (And that’s just as well: Since one of Bitcoin’s benefits is its removal of third party intermediaries, it can push transaction fees close to zero. That doesn’t really square with Apple’s take on micropayments, in which it commands a specific cut.) As for Google, it may decide that our uniquely personal, real-time, location-based purchase activity is so valuable that it will offer us financial incentives if we use the Google Wallet application instead of any competing option. Data is money, after all.
Personal risk: Your Bitcoins are a digital file. And digital files can be stolen. The Mt. Gox theft from earlier this year is just the most widely known example of this. Members of the Bitcoin Forum maintain a list of all known Bitcoin thefts, and it is depressingly long. To limit theft, private companies offer “cold storage: facilities where the owner’s Bitcoins are securely kept offline. The recent Bitcoin theft at Flexcoin, where thieves nabbed every one of its Bitcoins not in cold storage proves the value of this method. But stashing your Bitcoins in cold storage means you can’t access them immediately. Worse, there are no agreed-upon industry best practices and certainly no FDIC-like guarantees for these facilities.
Transaction speed: The very math that makes Bitcoin work regrettably slows down transaction volumes to glacial speed. Bitcoin transactions are cleared via “mining.” Mining is the process whereby miners—people and computers—are incentivized to make sure that every single Bitcoin transaction gets faithfully added to Bitcoin’s public ledger, ensuring no funny business. Already, the blockchain contains more than 38 million transactions. The Bitcoin mining network can only process around 7 transactions per second. By comparison, Visa can handle up to 10,000 transactions per second. Right now, this isn’t much of a problem, but as more people use Bitcoin, transaction speed will be crucial. (There are several workarounds in development, including a Bitcoin wallet that allows transactions to go through more quickly, syncing transactions with the full blockchain every few seconds, but not in real-time.)
No credit: It’s easy to envision Bitcoin as digital cash. Cash is king, right? Except Americans love to buy on credit. Credit card debt in the U.S. is $15,000 per household, nearly $1 trillion total. Credit will be hard for Bitcoin to dethrone.
In government we trust
How, then, can Bitcoin overcome these many obstacles and gain acceptance with the general public? Jerry Brito, senior research fellow at George Mason University’s Mercatus Center and the co-author of “Bitcoin: A Primer for Policymakers,” believes that it’s “only a matter of time before a Tim Berners-Lee type figure comes along and [makes Bitcoin] the financial equivalent of the Web.”
OK. But what happens until then?
Brito believes that regulatory uncertainty is the biggest barrier Bitcoin faces. For example, who refunds the Bitcoin payer if the goods are not as promised? When shopping for hockey gear, for example, you receive a Toronto Maple Leafs jersey instead of the Montreal Canadiens jersey you ordered: How should Bitcoin ‘banks’ fully and legally protect Bitcoin depositors? If the Bitcoin exchange rate skyrockets, must Bitcoin holders pay capital gains on their holdings? How do merchants manage Bitcoin record keeping? All these questions demand an answer from regulators.
This need for regulatory certainty is likewise echoed by Coinbase, a start-up that offers a range of Bitcoin-related services. “Clear and consistent government regulation will help lead to widespread use,” a company spokesperson told me. “If intelligent regulation surrounding Bitcoin is put in place, it will further encourage mainstream merchants and consumer adoption, which could be a tipping point for Bitcoin going mainstream.”
How Bitcoin can grow
Assuming those rules get put in place, why would people turn to Bitcoin? According to Adam White, director of business development for Coinbase, thousands of merchants are already using Bitcoin due its lower transaction fees.
Fees matter dearly to merchants. Visa, for example, charges about 1.5 percent of the cost of an item plus a network interchange fee. For every $100 the merchant sells on credit, nearly $2 goes to Visa’s fees. Bitcoin offers a real chance to shave this to 1 percent of the item’s price, for example, or theoretically, down a quarter once there are enough competing Bitcoin processors on the network. It’s certainly possible that some merchants will pass on a portion of these savings to their customers.
As for consumers, White cites Bitcoin’s privacy benefits as an attractive reason to turn to the currency. “Consumers paying in Bitcoin are protected from the risk of having their personal, identifiable information intercepted and stolen which can happen with credit cards,” White added. “There is no risk of identity theft when paying with Bitcoin.”
The risk may be low, but it seems doubtful that any online transaction carries zero-risk of identity theft. Still, Bitcoin could make online shopping a more painless process: There’s no need to type in a 16-digit credit card number plus a security code if you’ve got a pocket full of Bitcoins.
Bitcoin accepted here
The list of companies, non-profits, and political action committees that accept Bitcoin already totals in the thousands. Bitpay maintains a searchable database of outlets that accept Bitcoin, which includes the likes of Overstock.com, Virgin Galactic, OKCupid, Big Fish Games, the Chicago Sun-Times, Wordpress, and Tesla.
Admittedly, the current list of Bitcoin merchants seems tilted in favor of those with first-world needs. Bitcoin, however, knows no boundaries. Micropayments and money transfers, both of great importance in the developing world, can be expedited quickly, safely and at far less cost when using Bitcoin.
David Andolfatto, vice president and economist for the Federal Reserve Bank of St. Louis, agrees that Bitcoin offers a clear path to lower transaction costs, which is a particular benefit in developing economies. More important, Andolfatto, adds, Bitcoin provides a means for citizens to route around laws that require them to use their nation’s (fiat) currency. In many countries, the national currency is often manipulated for short-term gain. These manipulations incite inflation and thus limit the individual’s purchasing power.
“I’m not sure what would motivate widespread [Bitcoin] use here in the U.S. [although] I think its prospects for growth look quite good in the developing world, where rampant inflation is the rule rather than the exception,” Andolfatto said.
In Bitcoin we trust?
For now, though, Bitcoin has some hurdles to overcome before it makes the leap to an accepted form of currency. Thefts are far too common. Regulation remains uncertain and security is lacking—both crucial elements for any new tech to go mainstream. Many larger merchants, such as Amazon and eBay, refuse to accept Bitcoin. Some governments, such as China, effectively ban its use. Many of the biggest tech companies and financial institutions on the planet have a vested interest in watching Bitcoin disappear.
And yet, there are reasons to be a believer in Bitcoin. More people are downloading Bitcoin wallets, multiple industry sources say. There is a thriving Bitcoin developer community. Exchanges are popping up and making it easier than ever to turn Bitcoins into dollars. Tens of millions of dollars are being invested in Bitcoin-related start-ups. There are even Bitcoin lobbyists. That’s an ecosystem, and, yes, it does feel like it’s the start of the web all over again.
Bitcoin is peer-to-peer. It is scalable. Bitcoin supports personal privacy and enables transactions at near-zero cost—not all of which need be strictly financial in nature. It decentralizes trust and limits financial threats from governments and middlemen. These should guarantee Bitcoin a bright future, despite the many obstacles before it.
This story, "How Bitcoin can go mainstream" was originally published by TechHive.