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IN THE PRESS


The rise of Bitcoin

The rise of Bitcoin

20 January 2015

By Cynthia Unninayar

Credit card fees, charge-backs, and especially fraud are concerns for any business. A rather new "cyber-currency" called Bitcoin has garnered a lot of attention recently, both positive and negative. Could it be a viable solution to these concerns? To learn more about this new virtual money, CIJ TRENDS & COLOURS spoke with Jacques Voorhees, innovator and tech leader in the jewellery industry, founder of Polygon, and currently CEO of Verichannel.

Jacques Voorhees, CEO of Verichannel
Jacques Voorhees, CEO of Verichannel

CIJ TRENDS & COLOURS: Let’s start with the basics. What is Bitcoin?

Jacques Voorhees: Bitcoin is a virtual currency with two aspects: a payment processing system such as PayPal, and units of measurement that are sent over that system. Bitcoin with a capital "B" refers to the payment system. A small "b" refers to the unit of measurement, or the currency.

The rise of Bitcoin

How did it get started and who owns it?

Its origins are a mystery. In 2008, programmers operating under the alias Satoshi Nakamoto published a paper describing digital currency and, in 2009, launched software that created the first Bitcoin network and bitcoin currency. It’s an open source protocol, like email or the Web’s HTTP. So, no one "owns" the Bitcoin system, any more than anyone owns the email system. Anyone who conforms to the rules can use it; just as anyone can use the Web. There is no company called "Bitcoin." And that’s part of its strength. Companies can fail, and just as the Internet itself kept growing despite the many dot-com failures in the late 1990s, companies in the Bitcoin space can and do fail, yet Bitcoin usage keeps growing.

Are bitcoins backed by anything, and what exactly can they do?

Think of it this way. What is a violin, a truck, or a hammer "backed by?" Nothing, because those things have intrinsic value. You need backing only if there is no intrinsic value. Bitcoins have intrinsic value, like a truck, because they can do something useful. They can move wealth across the Bitcoin payment processing system. A truck has value only because roads exist. A bitcoin has value because the Bitcoin payment system exists. And that system is the most efficient, secure, tamper-proof, instantaneous, and cost-free method of moving wealth (making payments) ever developed in human history. It is the superhighway of payments, but to use it, you need bitcoins. And because there are only a limited number of bitcoins to use on this network, the coins themselves have value.

How does a bitcoin transaction work and are these transactions secure?

Bitcoins are stored in electronic "wallets," which are either online or stored on your computer or phone. To make a payment, you open the wallet and tell it to transfer a certain number of bitcoins to someone’s "Bitcoin address." A Bitcoin address is like an email address, and any bitcoins sent to it will arrive to the recipient instantly anywhere in the world—just like email. In terms of security, no bitcoin transfer has ever been hacked, intercepted, or blocked. That said, it is important for users to keep their wallet file safe. Just as someone could steal your physical wallet if you left it on the street, so, too, could they steal your Bitcoin wallet if you did not protect it. So, while the payment network itself has so far been extremely secure, usage of it demands some level of user responsibility.

What are bitcoins actually worth?

Bitcoin value is set in an open market, as is diamond pricing. Unlike diamonds, though, bitcoins are so new that the market does not know what they are really worth. The price fluctuations—which have been huge—are a symptom of the market trying to determine their value. Right at this moment, one bitcoin is worth US$414. But they’ve been valued at over a thousand dollars each, and in the beginning, a bitcoin was worth less than a dollar each. Obviously, speculating in bitcoin is not for the faint-hearted.

Wouldn’t this price volatility be a problem for using bitcoins in commerce?

No, because vendors who use the Bitcoin system don’t care about the value of an individual bitcoin. If you accept American Express in your store, do you care what the current share price of Amex stock is? No, because you are receiving dollars from the card, not Amex stock. Bitcoin is the same. Most vendors use the system to receive dollars. When a payment is made, the bitcoins are converted to dollars immediately by the payment processor. This means that if merchants sell an item for $5,000, they receive precisely $5,000 into their account, even though the payment was made in bitcoin. And, this is true, irrespective of any fluctuations in the bitcoin price during any part of the transaction.

If merchants have no volatility risk in accepting Bitcoin, since they receive their asking price in dollars as in your example, what is the price fluctuation risk for the payment processor and especially for the buyer who owns the bitcoin and is thus even more susceptible to changes in its price relative to the dollar or any other currency?

The payment processors absorb the risk, but it’s slight for two reasons. First, they are handling large numbers of transactions and they may just as likely lose a few dollars on one as gain on another. It evens out, and is part of their cost of doing business. Secondly, their exposure time is measured in minutes, if not seconds, for each transaction, so it’s a fairly trivial risk. In any case, this is their business and they know what they’re doing. As for the bitcoin owner, who pays in bitcoins, the situation does have risk, but risk exists in owning any currency. The U.S. dollar has lost 97 percent of its value since the creation of the Federal Reserve, for example. There are hyper swings in many new or small-capitalization currencies in the world today. This is why most people will keep only a small amount of their assets in that form at any given time, used for making bitcoin payments. You can transfer in and out of bitcoin, instantly, at any time, online. The people who use bitcoin are those who appreciate its advantages and believe in it. And, as the bitcoin ecosystem expands, volatility will settle down. In the meantime, it is not the vendor’s problem, and can be ignored.

How do I buy bitcoin and how do I store it?

The same sites that provide the sending/receiving functions also are used for exchanging normal currencies into bitcoin, and vice versa, and for maintaining "wallets" for storing your bitcoins. The best way to obtain them depends on where you live. In the USA, the two best services are Circle.com and CoinBase.com. In Europe, I would cite Safello.com.

As a buyer, how do you pay for something in Bitcoin?

When you own bitcoin, you can use it to buy goods and services by going to the vendor’s website and using their check-out system, and selecting Bitcoin rather than a credit card or PayPal. It is just as easy. There are online applications that let you do the same thing in a physical store. Since you don’t need to provide personal credit card details, there is zero risk of identity theft, which has been such a problem with normal e-commerce using credit cards.

Who accepts Bitcoin, and what are its advantages for the jewellery industry?

The list is growing daily. Over 50,000 merchants have signed up with BitPay alone [one of the payment processors]. Names include Virgin Galactic, Dish Network, Wordpress, Expedia, and TigerDirect. In the jewellery sector, Tivol, Reed’s, and Overstock.com are among a growing number to accept Bitcoin. It has several advantages. It’s an alternative to credit cards; processing fees are far less; the value is received instantly; it is immune to fraud; there are no chargebacks; and you can receive payments from anywhere in the world. There is no such thing as a "high risk" territory. A Bitcoin payment from Nigeria is just as secure as a Bitcoin payment from New York.

Apple has launched ApplyPay as a convenient payment alternative. How does Bitcoin compare to this system?

First of all, ApplePay is merely a payment interface, a layering of iPhone technology on existing currency and payment systems. It is a marginal improvement that does make your credit cards and bank accounts easier to use. You might call it Apple’s answer to PayPal, which also requires credit cards and bank accounts. Bitcoin, by contrast, basically changes how money, payments, and trust work around the world. Secondly, ApplePay only works on Apple smartphones, which are held by a very small percentage of the global population. Bitcoin works on any computer, smart phone, and even non-smart phones. Thirdly, the two are not mutually exclusive. ApplePay can potentially cover all types of payments, including Bitcoin. It could very well be the case that, in five years, most people who pay with Bitcoin, do so using their ApplePay system.

Are you and Verichannel involved with Bitcoin?

Yes, among other things, we offer services to help jewelers get on the Bitcoin bandwagon. We feel it is one of the most important cost-reduction and anti-fraud technologies ever to hit the industry.

Jacques Voorhees can be reached at Jacques@verichannel.com.




 

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