Decoding Bitcoin

Joseph Mayans, BridgeTower Media Newswires

With big-name CEOs and Hollywood celebrities making splashy headlines about Bitcoin, it can be easy to lose sight of what the oft-misunderstood technology means for everyday users and small businesses. Is it a currency? Is it an investment? Is it a fraud? Or, is it something else entirely?

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The basics

Bitcoin is a digital currency that debuted in 2009 and is designed to circumvent traditional financial institutions and revolutionize the way people make payments. Instead of relying on a financial intermediary to process a transaction, verify funds, and distribute those funds, Bitcoin allows its users to pay each other directly, person-to-person.

Similar to other digital payment methods such as Apple Pay, Android Pay, and PayPal, Bitcoin users keep a digital wallet. With a digital Bitcoin wallet, users can buy, sell, and send Bitcoins to other users. However, unlike those other digital payment methods which still rely on a centralized intermediary for processing, Bitcoin transactions are processed by a completely decentralized network of users. These users verify and confirm every Bitcoin transaction without actually having access to any personal information. By removing intermediaries, proponents of Bitcoin believe that it will speed up processing times, lower transaction costs, and break down international borders. And, since it bypasses traditional financial institutions and their governing regulations, Bitcoin users are not required to register any personally-identifiable information. However, critics of Bitcoin have charged that this anonymity facilitates money laundering, drug dealing, and can be used to finance terrorist activities.

While its proponents claim Bitcoin is heralding a technological renaissance, a growing number of critics are urging caution. Bitcoin is not like traditional currency. People cannot pay U.S. taxes with it or settle government debt, and most vendors still will not accept it as payment. Unlike the U.S. dollar and other world currencies, which are authorized and backed by the government, the value of Bitcoin relies on the willingness of others to accept it as a form of payment. Also, by operating outside traditional financial systems, users of Bitcoin forgo many of the protections offered to those who use other payment methods. If fraudulent activity occurs with a credit card, users are refunded, if it happens with Bitcoin, there is no protection.

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Investment opportunity?

Like other currencies, Bitcoin can also be an investment opportunity; however, one look at its recent price performance shows its volatility. A single Bitcoin is currently valued at more than $5,600, up from $640 a year ago – an increase of nearly 800 percent. The excitement surrounding Bitcoin’s future has lured many sophisticated investors and day-traders into the fray, looking to capitalize on the wild price swings. Even banking giant, Goldman Sachs, announced it was exploring the creation of a trading desk dedicated to Bitcoin and other digital currencies. While this idea appears to be in its early stages, it demonstrates just how far Bitcoin has progressed as an investment.

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Impacts on business

As the popularity of Bitcoin has grown, so has the number of businesses that accept it. Currently, Overstock.com, Expedia, Microsoft, and Dish Network are some of the largest retailers that accept Bitcoins as payment. The growing network of Bitcoin users has encouraged small businesses to get in on the trend in order to attract new customers. Many of these small businesses report that they are not only paying less for merchant services, but that they are also building a cadre of loyal, Bitcoin-paying customers.

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Risks

While Bitcoin appears to be emerging as a mainstream currency, there are still many detractors.  Jamie Dimon, CEO of JP Morgan, recently called Bitcoin a fraud and said its value could collapse. The Chinese government has also cracked down on the trading of Bitcoin in its market exchanges. Many other institutions and governments are taking a critical view of the currency and other similar “cryptocurrencies.”

As with any innovative and disruptive technology, early adoption comes with a unique set of challenges and opportunities. Whether Bitcoin will become a household norm remains to be seen.

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Joseph Mayans is the economic and public policy coordinator for Zions Bank. He formerly served as a legislative staffer for a member of the United States Senate, where he specialized in finance and technology policy and helped found the U.S. Senate Competitiveness Caucus.