Over the past few years, the concept of digital currency has become a very hot topic, and for good reason. As you’ll read here, digital currency is one of the most disruptive technologies that has come about since the silicon chip. And digital currencies will disrupt banking systems and governments in ways that no one ever imagined.
Here’s a quick look at Bitcoin, the leading digital currency.
Warning: Many companies who are providing Bitcoin services have been shut down or are having difficulty keeping up with transaction volume. As I write this, there seems to be a frenzy of activity in the Bitcoin market that’s causing the underlying value of Bitcoin currency to fluctuate wildly. In fact, Reuters reported February 10, “The price of the digital currency bitcoin slid to its lowest level in nearly two months . . . after bitcoin digital marketplace Mt. Gox said a halt on withdrawals it announced on Friday [February 7] would continue indefinitely after it detected ‘unusual activity.’” Banks and governments are struggling to figure out what to do about regulating bitcoins, so the future of this entire sector is still very much unknown. You could lose some or all of your money that you convert to bitcoins, so buyer beware.
I first got introduced to the concepts of digital currency in 2003, when a friend of mine, Todd Boyle, was developing a global, Internet-based “web ledger” concept that expanded on what NetSuite (then known as NetLedger) was doing. Todd’s goal was to create a public, global accounting and payments system where all transactions between buyer and seller would be in a shared transaction repository. It’s a fascinating concept, and in many ways, it’s quite attractive, although scary. The software guy in me likes the elegance of having a single transaction that both parties share, as opposed to having two different sets of books where each party has to separately create and store each transaction. But the accountant in me struggles to see how to get the world to change. What if one trading partner is on this new system, but the other trading partner has old-world books. But still, I think there are interesting and compelling benefits to going in this direction.
Todd was sort of a mad scientist type who was obsessed with eliminating governments and central banking systems, so he struck me as a very intelligent guy who was so far out there that nobody was really listening.
But here we are, 11 years later, and many of his ideas are starting to come to life. I don’t think he’s involved in digital currency any longer, but everything he wrote about digital currency looks eerily similar to Bitcoin.
What Is Bitcoin?
Although the foundation technology that makes Bitcoin possible is advanced mathematics and computer encryption technology, you can think of Bitcoin as the digital version of the cash you have in your wallet. You use your bitcoins by sending and receiving digital messages (think encrypted email) as opposed to initiating a bank transaction like a check, credit card, or cash payment.
Getting Started with Bitcoin Digital Currency
To get started, you need to create a Bitcoin “wallet” and then purchase bitcoins with normal currency. Most likely, you’ll transfer from your bank account into a digital wallet using a service like Coinbase. You could also download an application onto your computer that creates and stores your bitcoins in a secure encrypted wallet, but there’s no way to fill the wallet on your computer unless you receive bitcoins from someone else. You can send or receive bitcoins from your wallet to other people or companies as long as they have Bitcoin wallets. WeUseCoins has lots of in-depth information about getting started and using bitcoins.
How Do You Trade with Bitcoin?
If you want to purchase something with bitcoins, the seller must agree to accept bitcoins as payment. If they do, you’ll send money to their email address or to their special Bitcoin address. If you’re interested in the full story, there are several technical details about private keys and public key addresses. Read more on the Bitcoin foundation site: https://bitcoin.org/en/bitcoin-for-individuals.
Can Your Business Accept Bitcoins?
Merchants can accept bitcoins from customers by “requesting money,” a transaction at a time, or by using services like Coinbase, which give you a merchant tool kit that includes links for your website or shopping cart checkout pages. As long as your customers have a Bitcoin wallet (somewhat similar to a PayPal account), customers can send you bitcoins instead of cash, check, or credit cards. And there are NO FEES to send or receive bitcoins.
The fees come when you buy bitcoins or when you convert them into your local currency. For Coinbase, you pay a 1% fee plus $0.15 per transaction, but 1% is WAY less than the fees you pay with credit cards or even PayPal. However, keep in mind, the underlying value of bitcoins is constantly changing with the market, so whatever amount you accept in bitcoins may be quite different when you go to convert it into your local currency. To mitigate this issue, you can set up automatic “cash outs” to eliminate the exchange rate risk. Coinbase sends payouts to your local bank account once per day when you enable automatic payouts. You can also manually sell bitcoins at any time.
Is Using Bitcoin Safe?
Bitcoin transactions are secured by military grade cryptography. Nobody can take money from you or make a payment on your behalf as long as you take the required steps to protect your wallet.
Security is the key benefit we haven’t been able to achieve with our current banking, credit card, or cash systems. Fraud is rampant across all of our payment technologies, and this is why I believe digital currency is here to stay. Governments and banking systems are extremely nervous about these systems and struggling to catch up with regulation and legal frameworks, so the next several years will be very interesting to watch.
For now, I’m checking it all out, experimenting with an account, and seeing how it all works. Are you jumping into digital currency? Why or why not?