Five years ago, an enigmatic digital currency was introduced to global markets. Since its inception, it has been met with controversy, but it continues to cultivate a loyal following and grow in both popularity and visibility. What currency is it? Bitcoin.
Bitcoin is a digital currency that operates on an open source peer-to-peer payment system created by an individual or a group of individuals using the alias Satoshi Nakamoto. Though there are 163 traded virtual currencies today, Bitcoin is by far the most popular, with a market capitalization of nearly $7.9 billion, according to Coin Market Cap.
“We really shouldn’t be surprised that money would become digital at all. It happened to mail, it happened to photography, it happened to DVD, music and books,” said Nicolas Cary, CEO of Blockchain.info, a Bitcoin wallet service that also provides Bitcoin information and statistics.
Though Bitcoin is widely regarded as a virtual currency, not all agree with its classification. Mark Williams, master lecturer of finance at Boston University’s School of Management, said that Bitcoin does not meet the criteria to be considered a viable currency. Rather, it displays characteristics of a commodity.
“Virtual currencies have great price fluctuations. They are not behaving like currencies at all; they are behaving like virtual commodities,” Williams said. “There’s four aspects for currencies to pass the test. They have to have stable price. They have to have stored value. They have to have trust. And it also has to be liquid — it can be quickly converted. If it can’t be used as a transactional currency, meaning folks can’t use it to buy or sell things, then it’s restricted.”
Anders Brownworth, organizer of the Cambridge Bitcoin Meetup Group, said he does not consider Bitcoin a commodity or a currency.
“I don’t think it’s a currency, but I don’t think it’s a commodity,” he said. “It’s not quite a currency yet, it’s way too young to be considered an outright currency. The reason some people make that argument is that there are definitions of currency, created by a nation state or backed by some central bank, that means it will never be. Right now, not many merchants accept it, a small proportion of people have Bitcoin. It’s a very small percentage at this point. It can go one way or another, it’s not mature enough.”
In an effort to foster Bitcoin usage, Boston area businesses have started accepting Bitcoin as a form of payment. Veggie Galaxy, a restaurant in Cambridge that opened in September 2011, started accepting Bitcoin in May, said Kathy Tanner, outreach coordinator at Veggie Galaxy.
“My husband Adam Penn, who started Veggie Galaxy, was visited by two men who were what we call Bitcoin enthusiasts, very gung-ho members of the Bitcoin community in this area,” Tanner said. “They just reached out to him and asked if he had a few minutes to chat and he was interested in hearing new ideas so they came in and they chatted with him about Bitcoin and about how they would love to see Veggie Galaxy accept Bitcoin in payment and how it would bring business to the restaurant.”
Though Tanner said she was initially skeptical, she was convinced after knowing that using an intermediary called Bitpay will shield their business from Bitcoin’s fluctuations.
“Hearing the other business owner talk about how he was doing it in such a way that he was protected, he was not exposed to any of the volatility of the fluctuations in Bitcoin because he used a processor, an intermediary called Bitpay that immediately, at the point of a customer transaction, converts the Bitcoin the customer pays with to U.S. dollars and deposits it in the restaurant account,” Tanner said. “So hearing we could do it that way and that he’s been doing it that way really convinced me, so we decided to go ahead with it.”
Five to 10 Veggie Galaxy customers pay in Bitcoin per week, Tanner said.
Bitcoin’s price has been incredibly volatile since it came into market view. In early December prices soared well over $1,000 per coin, and have dropped as low as $630 on Saturday. But changes in exchange rates are a common risk. What’s more concerning for retailers is the speed of the volatility.
On Saturday at 6:16 p.m. one Bitcoin was worth $634.69. Just eight minutes later at 6:24 p.m. one Bitcoin was equal to $633.88. For a business looking to accept Bitcoin, this means a sandwich can earn them $7 one minute and only $6.99 the next.
Another business aimed at increasing opportunities for Bitcoin usage is Liberty Teller, which operates a Bitcoin ATM at South Station. Chris Yim, co-founder of Liberty Teller, said that his idea for Liberty Teller stemmed from his inefficient Bitcoin purchase experience.
“I got interested in Bitcoin about a year ago,” Yim said. “I bought my first Bitcoin shortly after and it was just an incredibly frustrating process. I bought it on a site called Local Bitcoin, it’s similar to Craigslist where essentially you find a time and place to meet, I bring cash, the other person brings the Bitcoin. I was excited, so I was willing to take these risks. But for this to ever become mainstream, you have to find a way so that people feel safe and secure, that they are not going to get ripped off. An ATM is something everybody is familiar with, so we decided to offer Bitcoin ATMs. At the end of the day, it allows you to purchase Bitcoin in 30 seconds.”
As businesses such as Veggie Galaxy and Liberty Teller increase opportunities for individuals to use Bitcoin, a question that arises is whether Bitcoin should be trusted.
Williams suggests Bitcoin is currently in a bubble, expanding in price with little reason, and predicts that bubble will burst causing Bitcoin’s value to plummet to $10 by mid-2014.
“At the beginning of 2013, Bitcoin was trading for $13 … and like what we saw on MtGox this morning, we had one seller and one buyer that agreed to sell for $94,” Williams said. “That’s an indication that the value can fluctuate wildly. Only last week, it was trading at $800.”
Williams also noted that Bitcoin was the virtual currency of choice for Silk Road, an online market that was shut down by the Federal Bureau of Investigation for illegal transactions.
Brownworth said that controversies such as Silk Road and MtGox, once a major Bitcoin trading platform that has made headlines with transaction-harming technical glitches and recently filed for bankruptcy after shuttering its virtual trading in the United States, actually yield long term benefits for the Bitcoin community because it cleanses the system of illicit behavior.
“My views on, for example MtGox, are it is pretty good for the market … That was pretty damaging, but that was an isolated thing … In the long run, if the bad actors left the system, it is all good in the end,” Brownworth said. “While it may deter people in the short term, in the long term, once the garbage has been taken out, it will allow the system to be more trustworthy.”
Others maintain that despite the controversies and value fluctuation, a major benefit of Bitcoin is that it streamlines the payment process.
“It is a major innovation in payment processing,” Cary, the Blockchain.info executive, said. “For the first time in the world, anyone can accept a payment for no fee. Goldman Sachs released an interesting report [Tuesday] saying total savings for retailers in ecommerce would be in $210 billion in they accepted Bitcoin because credit card companies take fees for every transaction whereas Bitcoin, they don’t exist.”
Bitcoin, Brownworth said, is a form of financial innovation that is more than just a mere currency; it is a network, a protocol that seeks to restructure how individuals conduct and interact with business.
“The thing that Bitcoin stands to disrupt is not a currency; it stands to disrupt the way business is done,” Brownworth said. “For example, if you use Western Union, the equivalent of $100 from one side of the world to another, that may cost you 20 percent. With Bitcoin, you can do that for 5 percent or less, much cheaper, radically cheaper … That’s the theory of disruption and how that might play out. I think that’s the kind of thing that makes Bitcoin so exciting for so many of us: the ability for it to disrupt the way a lot of things are done for a radically cheaper price.”
CORRECTION: In a previous version of this story a mathematical error overstated the loss vendors suffer due to changes in Bitcoin exchange rates. The article has been updated to reflect this change.