Bitcoin and The Future of Digital Currency

Business and technology commentators have been all abuzz recently with talk about cloud computing and hosted application management systems. What will this mean for business in the future? Is it a secure way to handle your customers’ information? How can your business recover from a disaster if your data is all in the cloud? What these conversations often overlook is the fact that much of our digital lives already operate in the cloud. For example, no one has ever been expected to find storage space for their email inbox on their computer. That storage happens in the cloud and pretty much always has.

While we’ve been talking businesses everywhere have been moving their employees, often seamlessly onto systems like Google Drive, or encouraging a mobile-heavy work model. These changes can save a great deal of money and offer much more flexibility for a modern business and the innovations still on the horizon are more exciting still. For me one of the most interesting frontiers in emerging technologies is virtual currency, and a conversation about virtual currency in 2013 pretty much has to be about Bitcoin.

The history of Cloud Money (abridged)

Although it is certainly not the first example of virtual currency, Bitcoin has found much more success and longevity than its predecessors such as Beenz or B-money. It came onto the digital scene in 2009 and was exchanged almost exclusively on a platform called Mt Gox. While the original intent of Mt Gox was to allow aficionados of the global trading card game Magic the Gathering to exchange their cards across international borders (Magic the Gathering Online Exchange), it’s infrastructure was ideal for the buying and selling of virtual money. Bitcoin is created by an open-source algorithm on a peer-to-peer basis, making it possible for businesses to engage in meaningful negotiation with their customers and eliminating the need for a third party who profits off of each transaction.

As of August, 2013, Bitcoin is a billion dollar market centered largely in Japan and is accepted by a growing number of businesses of all sizes. While a large number of internet users have embraced this currency, financial analysts are still largely hung up on the idea that it is ‘fake’ money. Because there is no central agency to tell users the value of their Bitcoins, traditional investors and analysts assume that it is more arbitrary than national currencies like the dollar or Euro. In reality all currency is based on mutual agreement, and for most of us this became starkly clear around September of 2008. Although Bitcoin’s value may fluctuate, no one is printing more for political purposes or scooping it up off the market to manipulate price.

Internet users prefer to go straight to the source in general, which allows them better customization and more competitive prices. This growing trend has essentially eliminated middleman industries like travel agents, since customers can see all of the prices available to them at once, choose the best option, and not pay a fee to anyone. It has also offered people an opportunity to crowd source assistance when they have a startup idea or a need, skipping right over grant applications through foundations and charities. They visit a network’s site to watch their favorite shows, or trade in their $60/month cable bill that includes 300 channels they’ll never watch for an account with Netflix or Hulu they can completely customize for under $10 a month. For these consumers, virtual currency is simply another logical step in the same direction; they’re eliminating the middleman of banks, bankers, and investment firms.

The latest Bitcoin developments

Only time will tell whether or not businesses that accept or invest in Bitcoin now will benefit in the long run, but early adopters are seeing some short term payoffs already. Aside from broadening their customer base by offering yet another payment option, they’re receiving added marketing value. They’re frequently mentioned in articles like this one, and there is a large community of digital consumers who will reward forward thinking moves like this at every turn.

Of course, the legality of Bitcoin will largely determine its future, and that issue is far from resolved. Initially Bitcoin appeared to be a small step above a bartering system for the internet marketplace, and that being the case regulators were happy to ignore its very existence. The fact that their complacency was at an end became clear in May of this year when The Department of Homeland Security seized ad shut down Dwolla, a startup based in Iowa that processed transactions exchanging Bitcoins for dollars. This month a court determined that Bitcoin is a currency, and therefore could be subject to US regulations.

What the future holds for virtual currency

It’s unlikely that the digital economy will lose its taste for an anonymous, peer to peer currency system. Although it may continue to mystify traditional financial analysts, users are completely willing to tolerate the informality and value fluctuations that come with Bitcoin. From their perspective bankers are simply expensive barriers to the money they’ve earned, and they’ve watched the fairly wild fluctuations in the value of the dollar, making fears from changing prices seem unfounded. They also have access to newer platforms like Bitpay, which creates an indexed price for Bitcoin.

The culture on the internet places a high premium on the value of anonymity, and this is one of the most popular advantages of virtual currency. Much has been said about the way that digital money can be utilized by criminals, but they are certainly not the only people who appreciate the confidentiality. Data mining has made even the illusion of privacy a top commodity, and many users fear how their data may be collected and used against them later. The Edward Snowden legal defense fund recently started accepting donations in the form of Bitcoins, and whether you believe that he is a patriot or a criminal, his supporters can now contribute to his defense with less fear of retaliation.

Businesses are also beginning to take advantage of the savings and flexibility that virtual currency offer. With the traditional model, a small business had to pay for their bank account, pay each institution for the right to accept their debit and credit cards, and pay a fee for each transaction. By accepting Bitcoin they are able to conduct a transaction with their customer, negotiating price if appropriate and paying out much less of their profit margin. While there is some uncertainty about the future of Bitcoin, there is very little when it comes to virtual currency in general.