The Bitcoin boom: What your business needs to know
It’s often said that new entrepreneurial opportunities emerge from economic adversity, but it’s rare for hard times to explode an idea in quite the manner Bitcoin has benefited from.
The independent digital currency was trading at just $20 in February. And then the Cyprus economic crisis hit, prompting people to pull their cash from the failing banks and into Bitcoin.
As a result, the value of a Bitcoin is nearing $200. Heady days indeed for a currency that was only worth around a cent in 2010. Bitcoin is going mainstream.
But what exactly is Bitcoin and why should small businesses in Australia care about it?
Bitcoin is a decentralised digital currency that allows people to pay each other directly without the need for a financial institution middle man. Payments can be made anonymously in a way, worryingly for governments, that can’t be tracked, traded or taxed – a kind of free market bonanza that cuts down on the hassle and cost of dealing with banks.
The concept was created by a mysterious figure (or group) called Satoshi Nakamoto in 2009. Initially only known about by a select band of hackers and tech geeks, the concept has rapidly taken hold and is now being embraced by some businesses as a payment method, alongside standard credit card transactions and the likes of PayPal.
Of course, a currency is only worth something if it’s relatively scarce. To create Bitcoins, you need a highly complex computer algorithm that produces the currency very slowly, with a cap of 21 million Bitcoins to be churned out by 2140.
Select bands of Bitcoin ‘miners’ have emerged – Ozcoin Pooled Mining, based in Perth, claims it is the third-largest Bitcoin miner in the world – but most users obtain the currency through Bitcoin exchanges, such as MT. Gox.
Physical Bitcoins have been created, but the currency is typically traded digitally, stored on a user’s hard drive in a virtual wallet.
Around 11 million Bitcoins are currently in circulation, with 25 new ones created every 10 minutes. The total value is now closing in on the $2 billion mark, more than the currency stock of 20 separate countries.
This valuation increase is illustrated by the fact that US programmers who swapped 10,000 Bitcoins for two pizzas in 2010 – at around a cent a piece – would’ve paid $1.7 million for the pizzas in today’s prices.
Above: Value of Bitcoins in US dollars over the past year: Source.
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Why should I care?
Because other businesses are caring. Yes, there’s the bar in New York that is accepting Bitcoins for a helpful publicity boost, but there are plenty of retailers who are taking a genuine interest.
Why? Well, the process is easier – it doesn’t involve a bank and the transactions are processed on the same day, rather than take days.
Also, it can be cheaper. BitPay charges 1% on Bitcoin transactions, whereas credit cards will slug you 3-5%.
Bowdie Mercieca, founder of Australian online retailer UndieGuys.com.au, has accepted Bitcoin since the start-up launched in 2011, initially as an eBay shopfront.
“We use Woo Commerce, a plug-in that’s based on WordPress,” he tells StartupSmart.
“The buyer chooses the option of Bitcoin, it works out the exchange rate and the transaction is processed.”
“In terms of the process, it’s similar to bank transfer, perhaps a little easier. It takes time to install the plug-in, but it’s very seamless. Previously, the process had to be manual, but now it’s becoming more popular, a lot more software is available for retailers.”
Demand for Bitcoin payments in Australia is still small. Mercieca says he’s had just five purchases using Bitcoins, most of them from the US.
But there are other benefits – by being listed on blogs as one of a fairly select group of retailers taking Bitcoins, UndieGuys is getting traffic, and therefore customers, that it wouldn’t otherwise have.
“With more interest, this possibly will increase – we can see incoming links from Bitcoin websites and there are lots of enquiries about how it works,” Mercieca says.
But he adds: “I initially added it because my background is IT and I was interested in the concept of it. At the moment, it’s still a bit technical. Most retailers probably won’t consider it until it goes fully mainstream.”
The fact that Bitcoin’s value has rocketed in recent months does little to dispel the theory that it is little more than an investment commodity, rather than mainstream currency alternative for the masses.
But even if Bitcoin is a bubble set to burst, the idea behind it should pose a few interesting questions for start-ups who process payments.
What charges are you paying for your transactions? Are you really getting a fair deal? How can you reduce these overheads? And should you be thinking a bit more laterally than just going to your bank?
Ultimately, Bitcoin’s legacy may be to help small businesses think a little more about what moving money around actually costs them.