Bitcoin

Some misconceptions cleared up.

You have undoubtedly heard of this crypto-currency. It frequently pops up in the media and it has gained a lot of popularity, but also a lot controversy over the past few years. Bitcoin is still a rather scary and complex thing to a lot of people, because there are a lot of misconceptions. I hope to clear some of these up for you in this post.

Bitcoin is very relevant to digital disruption, more specifically in the finance and payment sectors. A lot of businesses are concerned about digital disruption and there are a lot of non-believers.

Most of the negative arguments they brought up against Bitcoin aren’t actually true, it is simply misinformation being fed to the public. People who hear negative things about something in the news tend to automatically write it off, without further looking into it.

Pretty much anyone who takes the time to properly look into Bitcoin will find out that most of these arguments are false, which gives them more faith in its future.

So let’s have a look at what exactly Bitcoin is and some of the common misconceptions about it, starting from the beginning:

Satoshi Nakamoto, a pseudonymous person or group, created the Bitcoin protocol and reference software in 2008. It was released in 2009 as a peer-to-peer payment system and digital currency, the first of its kind.

“Sounds rather shady…an unknown person who made it, can’t be trusted!”

It doesn’t matter who made it, as it is completely transparent and open-source (meaning anyone can view the core code that operates Bitcoin). No specific person controls or owns the system, despite us being so used to someone being in control. Everyone who joins the Bitcoin network becomes part of the automated system that runs it.

“Peer-to-peer” means it is decentralized; there is no government or business that controls the system and that is one of the reasons for its popularity. Nobody needs to store your personal information and there is no account to get locked or frozen. People love being in control of the things in their life and that is exactly what Bitcoin allows them to do.

It is a payment system because people can send each other bitcoins, with low or no fees to pay because there is no middleman needed. This will likely make it very disruptive for the payment sector in the near future.

Think about Western Union for example. In 2012, they completed 231 million C2C transactions worldwide, worth $79 billion (79% of their business). This means an average of $342 per transaction and the fees on such a transaction range between 5 and 15%.

Other examples are Visa and Mastercard. These don’t matter for the customer as the merchant pays the 2-3% fee, but this cuts a large portion out of their profit margin, which is usually only a few percent.

“What exactly is a Bitcoin?”

It is a digital currency and just like with any currency, it can be split up into smaller parts. This means you can have 12 Bitcoin, but also 0.00000002.

The media frequently uses images of physical bitcoins to give people the idea there is a physical form of it, but Bitcoin is completely digital, there is no coin to hold in your hands.

“Where do I keep the bitcoins then if not in my wallet or bank?”

There are wallets for Bitcoin too. If you sign up on any Bitcoin exchange or website where you can purchase and sell bitcoins, you automatically have a wallet which looks something like this: 1EsxcKgumRu94gbLchsMu6yBRWY5rXMNKt

Of course that means the middleman we tried to cut out is back, which is why there is wallet software listed on Bitcoin.org. With this software you can simply and securely store your bitcoins on your computer, a back-up drive or even your mobile phone or web browser. Just like your real life wallet, you have to keep it secure. You can read all about that and much more on Bitcoin.org.

“How do I know what a Bitcoin is worth?”

There are countless websites out there with live updated graphs where you can track this. bitcoinwisdom.com is a great example of this. The price is determined by supply and demand, just like with anything else in the world. This also means that on each exchange, the prices will be somewhat different, as they are not linked together.

“But the prices are too volatile for merchants!”

It is actually easier, cheaper and safer for them to accept Bitcoin than credits cards or PayPal. It is safer because there is no such thing as credit card fraud and customers cannot charge back. The merchants can accept Bitcoin themselves and it only takes a few minutes to set up the automated system.

Alternatively they can use a service like Coinbase at a 1% fee. Coinbase is a company backed by investors from Silicon Valley, which enables merchants to do point-of sales. So Coinbase will automatically and instantly exchange the bitcoins into the asking price of the merchant. The merchant never even has to see the bitcoins and therefore has no risk from fluctuation. At the time of writing this post, over 60000 merchants are using Coinbase for this service.

Overstock is an example of a company that uses Coinbase, they are a competitor of Amazon (and thus pressure Amazon to accept bitcoins too). Their profit margin is only a few percent, which they can’t afford to risk in the fluctuation that happens very rapidly.

So when I buy a $100 product at Overstock, I pay the current equivalent in bitcoins. Coinbase keeps these and Overstock gets $100 minus the 1% fee. The first $1M worth in transactions is free for any business.

Credit cards and PayPal have a minimum transaction fee, but Bitcoin does not which is a massive and revolutionary advantage. It allows for micro-transactions, where people can pay tiny amounts for reading articles on a news website for example. At first, digital disrupted the news sector, but suddenly it may actually save it and make things easier than ever before.

“So where do bitcoins come from?”

Bitcoins are acquired through mining. The technical aspect of this is quite complex so I won’t go into detail about it here. You don’t need to know all of these details to understand Bitcoin anyways.

What you do need to know is that anyone can make his or her computer available to the Bitcoin network to help mine bitcoins or process the transactions for a Bitcoin reward.

It is a costly process to mine as it uses more and more electricity, which gradually increases over time. Everyone who helps to contribute to it gets rewarded. In total there will be 21 million bitcoins and right now there are around 12 million of them.

“Why would I buy Bitcoin first if I can just pay with money? It’s hard to get them.”

This sounds similar to what people once said about the Internet. It was not easy to get online, you had to use dial-up, it was slow and there was not much to do on it. Lots of people said it wasn’t going to work out. However, as technology advanced, it did become easier and very accessible for anyone. Nowadays it’s as simple as filling in a password or plugging in a cable.

At the time of writing this, the first ATM machines for bitcoins are already out there. I think we have all seen enough happen to realize technology will solve this problem for us. In fact, in Australia they are already getting 100 of them very soon.

“Doesn’t matter, I can hardly even buy anything with bitcoins.”

First off I’ll refer to the above here, in the beginning there wasn’t much to do on the Internet either and hardly anyone you knew used Facebook. It only becomes more widely accepted and used when people adopt it. We have seen this happen over and over.

It also depends on where you buy something. There are plenty of places in the world where you cannot pay with dollars; it doesn’t make the currency worthless. There are a lot of online websites that do not accept PayPal, that doesn’t make PayPal useless. It took them years too to become widely accepted.

Of course, business owners in general often don’t have the time or interest to look into Bitcoin, they hear too many negative things about it in the news or simply don’t know enough about it. On the other hand, there are more businesses accepting Bitcoin every day, it simply takes time to adopt something new.

“I heard Bitcoin is used by criminals.”

As is almost anything. This argument is just something the media likes to use to make Bitcoin look bad. We know that Bitcoin is not controlled by a government or business, but that doesn’t mean illegal activities such as money laundering cannot be tracked. Every trade is publically but anonymously posted on the server, which means there is always a trail left behind.

So everyone can see x bitcoins were sent from address A to address B, just not who the people behind it are. In order to do money laundering at a mass scale, it would need to be done through an exchange, meaning we already know one of these 2 addresses. The trail of the other address can then always be tracked and the exchange can help identify the criminals.

Also, almost all criminals use computers and the Internet, does that make these things evil? They pay with dollars, or Euros, or another currency, should we just stop using these then?

Anyone who wants to have more freedom will do what they can to get it, which includes both innocent people and criminals. The amount of criminals is always a minority.

Oh and one last one I often hear… “I wish I bought some bitcoins a year ago”
We cannot predict the future, perhaps you will say the same in another year.

After reading this, you might think that Bitcoin is still not your thing, but I also hope you realize there is a lot of potential and there are a lot of new doors opening up. The negative view on Bitcoin likely comes from a lot of companies out there that are very scared about what is going to happen when the people regain control of their money.

Hopefully the post helped you to realize that there is more to it than you might have thought. I got the fantastic opportunity to write a chapter about Bitcoin in a book about Digital Transformation. That should be much more in-depth than this post was.

Any feedback or questions will be much appreciated, thank you for reading.