According to proponents, Bitcoin will be the next big driver of global ecommerce growth. That’s because the digital currency helps merchants avoid transaction fees, makes it easy for consumers without credit cards to purchase online, and creates a powerful tool for Internet commerce in developing countries that lack a payment infrastructure.
But first, the Bitcoin basics. Bitcoin is an electronic currency that uses cryptography to enable secure transactions. Bitcoins are not physical, and they exist only in cyberspace.
The first Bitcoin was issued in January 2009. The total number of Bitcoins is limited, and they are being released slowly over time using a predetermined system. There are currently 12 million Bitcoins in circulation with each valued at roughly $900.
Bitcoin is not backed by any government. The person who invented it remains anonymous and has not been heard from since late 2010. The non-profit Bitcoin Foundation now plays the central role in managing the currency.
Bitcoin at Retail and eCommerce Growth
Last month Overstock.com shocked the business community by announcing it will start honoring Bitcoin in mid-2014. At the same time, Zynga (owners of FarmVille), Bond (a New York City real estate broker), and a Girl Scout troop in San Francisco (yes, really) all publicized they are using the currency too.
The number of physical retailers accepting Bitcoin tripled in the month of December 2013 alone. There are now at least 2,800 worldwide, with more joining every day (check out coinmap.org to see where they are located).
Retailers seeking ecommerce growth are intrigued by Bitcoin for two major reasons. First, it saves them over 3% per transaction by eliminating credit card fees. Second, accepting Bitcoin attracts new customers: the unbanked, those in developing countries, and highly loyal Bitcoin enthusiasts.
Bitcoin and Banking
The financial sector began taking Bitcoin seriously in late 2013. Bank of America Merrill Lynch released a research report stating, “Bitcoin can become a major means of payment for ecommerce and may emerge as a serious competitor to traditional money transfer providers.”
Wall Street firms have started advertising for Bitcoin traders, and two Bitcoin-related start-ups received significant VC investments in the past 60 days.
Supporters, including luminaries like Marc Andreessen, believe Bitcoin will continue to expand rapidly driven by its attractiveness to merchants, its neutrality, and a powerful network effect. They believe the currency’s value will stabilize as usage grows.
Detractors raise a host of concerns. They point out recent dramatic fluctuations in Bitcoin prices plus news connecting it to black market businesses. Their long-term worries include the system being exploited by terrorists, lack of regulation, uncertainty about taxation, and the absence of monetary policy controls.