I'm here to talk to you about Bitcoin and cryptocurrencies in general. What they are, why we care, where Bitcoin comes from, how it's used to make payments, and the trends. I will be focusing more on the "What is Bitcoin" part because I find that many people who have heard of Bitcoin miss the point and dismiss the idea for the wrong reasons.
Before I go into all of that, a few words about what I do. I run a website called BitBargain, which is a peer-to-peer marketplace. BitBargain allows people to easily buy bitcoins and litecoins from each other online. The whole process is very simple and it only takes a few minutes.
On average, we sell around 20,000 GBP worth of coins daily, which is roughly half the market share of mainstream domestic bitcoin sales in the UK. Other places to buy bitcoins from include Finland based but internationally operating Localbitcoins, which focuses on cash transactions in person. Mt.Gox and Bitstamp are the biggest exchanges, but they are less popular in the UK on a retail level because you need to use international bank transfer to send money to them, which means high fees and delays, at least compared to domestic UK bank transfers. There is also Bitcoin-OTC. OTC stands for "Over The Counter". Technically, it’s a bunch of chatrooms and a web of trust system. In essence, it’s a barter community where people go to trade what they have for what they need (and that usually involves bitcoins). So... Let's start. What is Bitcoin?
Bitcoin is like: Linden Dollars in the online virtual reality Second Life.
Bitcoin is like: Gold and other tradeable items in World or Warcraft.
Bitcoin is like: Amazon Coins.
But at the same time, Bitcoin is unlike any of them. Linden dollars are created by whoever owns Second Life, Warcraft gold is created by Blizzard, Amazon Coins can only be used on Amazon. But Bitcoin and cryptocurrencies in general are different. They are created by solving complex mathematical problems, and unlike those other virtual items, bitcoins were meant to be used as a general method of exchange. Bitcoins can be redeemed with anyone who offers something in exchange.
So where did Bitcoin come from?
The idea of Bitcoin came in the form of a whitepaper, released in 2008 by some anonymous programmer. It describes ways to solve different problems like double spending with the use of asymmentric encryption and a peer-to-peer ledger that contains all Bitcoin transactions ever, called the Blockchain.
The topic very fascinating, but I'm not going into the details right now. The point is: it works, and it's solid.
Of course, an idea alone does not a market make, so the first step was to turn this idea into a software, which was finished a few months after the release of the whitepaper. In 2009, the first ever Bitcoin transaction was sent, and there was no stopping from there. It did take some time for it to go to the next level, though. For a year, it was nothing more than a toy for programmers, basically a challenge to create more bitcoins than the others. But the coins didn't have much use or value. That changed in a heartbeat.
In 2010, one of those programmers, Laszlo had an idea. He made a forum post saying: "I just think it would be interesting if I could say that I paid for a pizza in bitcoins“ He's arranged for someone to order a pizza for him in return for 10,000 bitcoins.
These are the actual photos of said pizza, by the way. Like I said, bitcoins didn't have much use or value then, so 10,000 was reasonable.
Today, those same bitcoins could be sold for around eight hundred thousand british pounds!
It may have been just one pizza, and it may have been just a simple trade, but it was the ignition that gave Bitcoin a huge boost. Very soon, exchanges opened up and the Bitcoin trade picked up.
In just five days, the price of Bitcoin increased by almost tenfold. Businesses started accepting Bitcoin as payment, and it grew from there.
Today, the price of one Bitcoin has increased to over a hundred dollars
They've created Bitcoin ATMs
Real world shops accept bitcoins
On every contintent
There is Bitcoin gambling
Specialised Bitcoin hardware
Bitcoin credit cards
Bitcoin options and investments
A Bitcoin version of all good things that we have come to know and love on the internet.
We hear about Bitcoin in the media.
Even BitBargain was featured on the BBC's Newsnight.
So... Why do we care about bitcoins? It's not backed by the government It isn't a shiny metal that we can hold in our hands We can't use it to pay at Tesco (yet) So then what's the big deal?
Some people like refer to Bitcoin as pandora's box, and I am one of them. You see, Bitcoin brings a solution to the money-trust problem that has existed since the beginning. To understand the fundamental change that Bitcoin could bring, we need to look at the history of money, go back to where it all started.
First, there was barter. I have a cow, you have a chicken, we swap. But if you need a hammer and you have no use for my cow, there is not going to be a deal until we find someone who has a hammer to give and needs a cow. So, to make life simple, we came up with a medium of exchange.
Gold coins did the trick, because precious metals are hard to come by, everyone likes them because they’re shiny, and you can exchange it for goods and services. On the other hand, checking the authenticity of gold, using it to buy cheap items is problematic, and it's also hard to carry around (as demonstrated right there). Gold is just not convenient for everyday use.
So then came the banks and said: "Give me your gold. I will keep it safe, and give you this paper certificate. You can bring it back to me whenever you like, and I will give your gold back." On one hand, this was a great idea. A piece of paper is easier to carry around, count, use for payments. On the other hand, this solution requires and implies absolute trust in the bank or whoever is holding your coins. If the bank prints more money than the gold you have, or if they give your gold away without your permission, or if the bank doesn't keep its promise to give you the gold, you’re out of luck. Unfortunately, that's exactly what happened.
Today it's even worse: money is just an I O U that is printed by the tons, and created out of thin air, it's a representation of debt, and is worth less every day. And if this wasn't enough, the banks and governments can simply take your money whenever they feel like it. Our initial reaction is to dismiss this possibility saying that “it would be illegal”. But what is legal can change very quickly.
And that's exactly what we saw in the case of Cyprus, where 10% of the people's deposits were taken away overnight against their will.
And it’s not just Cyprus affected. I’m an optimistic person but I feel like that was just the beginning. The Cypriots could have prevented their money from being taken away so easily by sticking to cash, but money printing and inflation would still be a problem.
And there’s one more problem with cash: we like to buy things on the internet, and stuffing cash into the computer isn't feasible. That's where cryptocurrencies come into play.
We do not need banks to “keep our assets safe” or print money for us. Bitcoin is limited in supply like gold, evenly distributed like gold (at least originally), but it’s still convenient to use and easy to split with precision. Even if you don’t find these arguments compelling, it’s hard to dismiss Bitcoin when you look at the numbers.
Bitcoins went from just a fraction of a dollar to over $130 dollars in 3 years. There WERE a few bubbles, and they did pop, but Bitcoin always climbed back to where it was before the bubble.
These bubbles are not very surprising: cryptocurrencies are a new phenomenon and the market cap is only 1.5 billion dollars worth of BTC, which is nothing compared to the trillions of dollars out there. A small market like this is easier to influence with speculation, but the more people that use bitcoins and the more merchants that accept it, the bigger the market grows and the more stable the price will be.
We're already seeing around $30 million dollars worth of Bitcoin transactions happen every single day.
Now I'm done talking about Bitcoin itself, let's move on to something more specific, like payments.
The most important aspect of Bitcoin to merchants is the lack of chargeback risk. When you send the customer an expensive item and the money is taken back from you, it's hard to not be frustrated about it. If the owner of the card made a mistake, why should you pay for it? Why shift liability to those who do not deserve it? And this doesn't just affect the merchants. Higher risk means higher fees for the customer. Not to mention, the customer will find it hard to get an item shipped to anywhere other than their registered address. With Bitcoin, this isn't a problem. Once the merchant is paid, he can ship the item anywhere in the world without a worry.
If you're new to Bitcoin, you may find this surprising. In the Bitcoin world, it's you who sets the fees. I’m going to spare you the details, but the point is, in practice you can send millions of pounds worth of coins with less than a pound worth of fees. The transaction will be seen by everyone in just a few seconds, and the network will confirm it in 10 minutes.
And speaking of time...
With credit card payments, the customer's funds are held for days before the merchant gets to spend the money. With Bitcoin, there is no need for a big security buffer. Once you have the coins, you can spend them.
Bitcoin payments do not need a payment processor at all. A large portion of businesses accepting Bitcoin are their own banks. For example, I set up Bitcoin payments on my webhosting provider service in less than two hours and that includes automatic activation of services.
This is what I love most about Bitcoin. The community. If you have an online business, normally it takes a lot of money to advertise and a lot of time to get regular customers. But in the Bitcoin world, you just list your site for free and the customers are pouring in. And not only that, they also tell other people about your business, word of mouth actually works. Just create a good business, list it, and the community will take care of the rest.
These are examples of some of the most popular sites that already accept bitcoins as payment. The IT service industry is very strong. You can get domain names, webhosting and virtual servers from hundreds of companies out there. But it doesn't stop there. Take Puro Express for example. They let you order cigars, pay with bitcoins, and even get a 10% discount!
These are some other items that you can order online. Alpaca socks were one of the first items you could buy for bitcoins online. That presidential desk is from the Luxury Bitcoin Store. The car, the painting and the others are just a few of the hundreds of listings on BitMit, the Bitcoin equivalent of eBay.
Bitcoin isn't just LIKE gold, it can also be used to BUY gold. I'm not exactly sure if they ship to the UK and how much it costs, but it does work in the USA.
Bitcoin gambling is very popular. The impressive thing about it is that most Bitcoin gambling sites are provably fair. They release mathematical proof for every outcome that you can check for yourself. And the cherry on top: competition is high, margins are low. On just-dice.com for example, the house operates with a half percent margin. This means that you actually do have a 49.5% chance to double your bet.
This is a map of Europe, which you can use to find local businesses near yourself who accept Bitcoin as payment. I remember a bit more than a year ago I was looking at the same map and didn't see even one shop in the UK. Today, there are over 30, and 22 of them are in London.
Now let's talk about Bitcoin payments in real world shops and how it's done.
The largest Bitcoin payment processor is called BitPay. They process millions of dollars worth of bitcoins every month. Their fees are low, but their business is still booming. A picture is worth a thousand words, so let's watch a video.
As you can see, buying cupcakes with bitcoins is trivial. However, I still feel that it is a bit of a hassle, especially when there’s a queue forming behind you while you’re tinkering with the QR code. If the terminal used NFC and it was connected to the cash register, it could be a LOT faster. I have no doubt that with an improved solution, BTC-NFC payments could spread like wildfire.
There IS an Android program out there that can send and receive Bitcoin payments. It's called Bitcoin Wallet. What is more important, it also allows you to send a payment request through NFC, so the two parties just put the phones close, the request is displayed on the buyer's screen, and the coins are sent with a simple tap. However, my personal opinion is that the software, just like Bitcoin in its raw form, is just too complicated for the average user. To use it properly, you need to learn at least a bit about confirmations, public and private addresses, wait for the blockchain to sync, and backups. But it doesn't have to be that complicated. We could just build a similar software that uses the payment processor's servers and make it all smoother. It still wouldn't compromise the idea of Bitcoin, because people could still deposit and withdraw their coins whenever they liked. But there's no need for real Bitcoin transactions for every cup of coffee, every cupcake or every pint of beer. I see a lot of potential in payment processing, especially with NFC.
International payments also hold a big potential. With Western Union or Moneygram, you pay 4-10%, so the more money you send, the higher the fees. Not with Bitcoin. Depending on the market, the person at the other end may end up receiving more money than you sent.
Bitcoin proxy services exist and we will likely see more of them in the future. The idea is the same as in the case of Laszlo. Pay someone Bitcoins, they order you a pizza or groceries.
Trading gift cards for bitcoins is already popular in the OTC community.
Physical bitcoins do exist and they look awesome. I’m not aware of them being used for payments. They are traded as a commodity, like any precious metal. Some physical bitcoins are actually made out of silver. But in the distant future I can imagine physical bitcoins with RFID chips implanted. The cash register could authenticate and count them automatically.
Finally, we should remember that the traditional banking and payments system cuts off buyers from merchants in different parts of the world. There are over a billion people in China, but we don't see many UK businesses catering to them because of trouble with payment methods and the high levels of risk. But China is catching on to Bitcoin now, and this could be a game changer.
I guess the bottom line is, cryptocurrencies are here to stay and they have great potential.