Bitcoin Means for Micro-Transactions for IT

Bitcoin may be the world’s newest currency. If not, it is certainly the most unconventional. But, it is catching on. As Reuters wrote recently: “Venture capitalists show no sign of shying away from investing in startups related to Bitcoin.”

Think of Bitcoin as electronic money, or maybe virtual money since no government backs it or controls it. Yet, businesses already are doing business with bitcoins. According to Reuters, there are 11.7 million bitcoins in circulation, with a market capitalization of over $1.7 billion. The price (value) fluctuates, but so does the value of conventional currencies although bitcoin fluctuations may be less well understood.

Wikipedia describes Bitcoin as a cryptocurrency—a type of currency that relies on cryptography to create and manage the currency—specifically, the creation and transfer of bitcoins is based on an open- source cryptographic protocol that is independent of any central authority.  Bitcoins can be transferred through a computer or smartphone without involving an intermediate financial institution. The concept was introduced in a 2008 as a peer-to-peer (P2P), electronic cash system.

For IT, Bitcoin promises to the way financial transactions, especially very small (micro) transactions, can be conducted fast and securely with little or no overhead.  Today, about the best you can do is PayPal, but with a slew of middlemen it is not very efficient when it comes to micro transactions.

A product or service selling at a micro price today isn’t really feasible from either an IT perspective or a financial perspective. But, with Bitcoin it might be since it removes a lot of financial and technical overhead.

The same big name investors that invested in Facebook Inc, Twitter, Groupon Inc, and Founders Fund, which includes three founders of PayPal, are putting serious money into Bitcoin investments even though the currency exists solely in cyber form. Proponents see it as the future of money, and in some investing circles, according to Reuters, it has created a buzz reminiscent of the early Internet.

For IT, Bitcoin may be the currency you will need as the global digital economy ramps up big. The benefits on bitcoins or something like it may be tremendous.  For starters, Bitcoin appears to address the problem of micro-transaction payments, where the cost of processing a credit or debit card transaction greatly exceeds the value of the transaction.  If you can do a lot of micro-transactions at almost no cost, the payback adds up.  The value of, say, 10 million half-cent transactions adds up to real money.

Then there is what Bitcoin itself says about the product.  For example, Bitcoin’s high cryptographic security allows it to process transactions in a very efficient and inexpensive way. You can make and receive payments using the Bitcoin network with almost no fees.

Furthermore, any business that accepts credit card or PayPal payments knows the problem of payments that are later reversed because the sender’s account was hacked or they fraudulently claimed non-delivery. The only way businesses can defend themselves against this kind of fraud is with complex risk analysis and increased prices to cover the losses. Bitcoin payments are irreversible and wallets can be kept highly secure, meaning that the cost of theft is no longer pushed onto the shoulders of the merchants.

Accepting credit cards online typically requires extensive security checks in order to comply with PCI compliance. Bitcoin security, however, makes this approach obsolete. Your payments are secured by the network and not at your expense. OK, maybe that is not completely reassuring, but it is as good as or better than you have now.

Finally, there is what Bitcoin calls accounting transparency. Many organizations are required to produce accounting documents about their activity and to adopt good transparency practices. Bitcoin allows you to offer the highest level of transparency since you can provide the detailed information you use to verify your balances and transactions.

OK, it isn’t perfect, but when Europe was precariously balanced on the edge of insolvency and countries like Greece, Cyprus, Italy, and Spain were in grave financial danger interest in bitcoins apparently soared and their value rose dramatically. Bloomberg Businessweek reported that Spaniards apparently were active buyers of bitcoins during the crisis, viewing the currency as a safe hedge against their own government seizing bank accounts and savaging their own conventional currency.

Maybe the most important thing to say about Bitcoin is that it is the future as the digital economy ramps up to rival the conventional economy. As users all over the world turn to smartphones for online commerce, IT will need something like Bitcoin. Besides, you don’t want some all-powerful government dictating even more regulations and issuing compliance mandates. Several governments are skeptical, to say the least, about the idea of Bitcoin but none apparently have shut it down.  As a P2P technology, Bitcoin is governed by the people that ultimately use it, maybe that will even be your own organization, and not by Big Brother.

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