I first heard about bitcoin while I was watching a CNBC segment during the Cyprus economic crisis in March 2013. At the time, all banks in Cyprus were shut down until the government, along with their creditors, negotiated how deep the ‘hair cut’ would be for accounts over a certain amount. Bitcoin shot up in value from around $20 per bitcoin in early 2013 to around $260 when the Cyprus crisis erupted. Suddenly, commentators, bloggers and analysts were talking about bitcoin being a store of value – much to the skepticism and ridicule of traditional banks and mainstream media pundits. At that point, I decided to learn more about what enthusiasts have hailed as the next paradigm shift in money and finance.
So what is bitcoin? Fundamentally, it is a protocol that is open source, decentralized and peer to peer. It is a medium of exchange, as well as an emerging protocol that allows unimagined applications and business models. Bitcoin is NOT a company or a central organization and it has no corporate, national or political affiliation. It has already spawned a large and growing worldwide ecosystem of companies, services, organizations and individual enthusiasts. Currency is just one application, but there is so much more to bitcoin. Perhaps the best way to understand it is through this video here. The Wikipedia entry for bitcoin is also fairly up to date.
So what gives bitcoin its value? Well, the market price of a bitcoin is determined entirely by supply and demand. As a currency, its supply cannot be manipulated by governments, companies or individuals because the total number of bitcoins in circulation can never increase beyond its programming. The technology is regulated by mathematics, is cryptographically secure, and is confirmed by a rapidly growing and globally distributed bitcoin network.
However, the real value in bitcoin comes from the applications it enables. Consider the following:
- Remittances: Expats abroad can send savings back home essentially for free – the transaction costs of sending funds is about 3 cents, and the fee is optional. It doesn’t matter if you send the equivalent of one dirham, a dollar or hundreds of Euros. A single bitcoin can be divided into 100 million units (currently up to 8 decimal places) making it ideal for both large and micro transactions. The transaction happens instantaneously, as fast as sending an SMS or a text message and it’s confirmed by the network within minutes.
- Internet Tipping: You can tip people who post interesting content or post engaging comments on Twitter, Reddit, YouTube, and Facebook with zero transaction fees. New artists can instantly post content on the web and earn cash instantly. You can send your friends on Facebook bitcoins instantaneously and anywhere in the world – also for free and in any amount you wish without paperwork or forms to fill out.
- Microtransactions: publishers and newspapers can post articles online and charge by the article. Consider paying 5 fils or a few pennies to instantly unlock an article to read online – without subscribing to anything and without giving away private information like you would when using a credit card. In fact, The Chicago Sun-Times became the first U.S. newspaper to accept bitcoins.
- Reserves: Governments are now seriously considering the benefits of keeping a portion of their reserves in bitcoin – much like they have traditionally done with gold and other major currencies like the USD, Euro or Yen. Their motivation: bitcoins cannot be inflated away through the arbitrary printing of currency to pay for unsustainable national debt, and bitcoins are not controlled by any government, company or individual so it remains neutral with no political strings attached to it.
- Killer Apps: Unimagined apps, businesses and services will continue to be developed on top of bitcoin’s decentralized, peer-to-peer protocol which will always remain open source.
- Payments: Over 100,000 merchants (and growing!) can accept bitcoin payments much like they would credit cards – except without the fees that Visa and MasterCard charge. Their bitcoin purchases can be instantly converted to a currency of their choice. Some entertaining commercials were recently aired (late December 2014) on national television in the U.S. and for the first time in bitcoin’s history, a national audience was introduced to bitcoin:
Today, it’s no longer small businesses or obscure organizations that accept bitcoin. Increasingly bigger names have jumped on board: Microsoft, NewEgg, TigerDirect, Warner Brothers, WordPress, DISH Network, Expedia.com, Dell Corporation, and many more. Also accepting bitcoin are charities and even political parties in the U.S., Australia and Europe.
Will bitcoin become mainstream? It is difficult to answer. The protocol is still in its very early stages. Imagine the internet in the early 90s just as the browsers made the web accessible. Much more development needs to happen for the protocol to scale as a global mainstream technology. Usability needs to improve with less tech savvy individuals. However, as an open and globally active protocol, it is dynamic and there are scores of bitcoin improvement proposals competing for the best ideas that would ultimately be vetted and adopted in the core protocol. There are an estimated 50,000 highly creative and dedicated programmers actively building new apps and services related to bitcoin and the underlying network. Bitcoin has captured the imagination of some of the world’s biggest venture capitalists and individuals who founded or started big name companies (Yahoo, Twitter, Facebook, Netscape, etc).
And lately, banks have begun investing in the technology. Coinbase, a U.S. start up in the bitcoin processing and exchange business, just last month raised $30 million in funding from the following big name players: the New York Stock Exchange, Fortune 500 financial services group USAA, Spain’s largest bank BBVA, and the Japanese telecom gian DoCoMo, altong with individual investors: Former Citigroup CEO Vikram Pandit and former Thomson-Reuters CEO Tom Glocer.
When I look back on 2014 and the relative success of bitcoin, I found the following infographic to be quite informative.
Other Video Resources:
By Omar Odeh
A member of the Khalifa University community