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Is Bitcoin an investment medium or a payment system?

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Is Bitcoin an investment medium or a payment system?
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The title of this article is a question that I posed to a group of panelists discussing the future of digital payments at a recent Refresh Miami event. Mention Bitcoin to colleagues in your work place and you will hear responses expressing everything from confusion to enthusiasm to outrage.

Generally speaking, Bitcoin is not well understood and on the eve of my visit to Money 2020, I wanted to unlock some of the mystery and intrigue around the cyber-currency.

To do so, I sat down with one or two trusted sources on digital payments and e-commerce to learn more. It’s less important “who” they are than “what” they know. I’m choosing to keep their comments anonymous as most responses from Bitcoin backers carry a highly emotional component.

Save for one very thoughtful response to a group of questions from @junseth which you can find here, what I mostly received were incredulous responses implying my lack of understanding of Bitcoin potential or my willingness to grip the inefficiency that exists in today’s payment system. Neither is true, and my earnest question was clearly the equivalent to poking a stick into the Bitcoin cage.

Sitting down with my expert colleagues, here is what I learned:

  1. Bitcoin is a community-driven open source project conceived by the mysterious Satoshi Nakamoto and outlined in a paper published Nov 1, 2008
  2. Satoshi Nakamoto is believed to own over 5% of the Bitcoins within the system – which at its peak was worth over $1 billion. Given the lack of transparency around his identity and level of control, our sources termed Bitcoin a purpose-built “business model” rather than a “payment system”.
  3. Bitcoin is a largely anonymous, yet transparent digital currency created by strong public/private key crypto algorithms and peer-to-peer networking
  4. New currency is created is by existing currency being exchanged/paid to another party. A cryptogram is generated, the equation for which has to be “solved” in order for it to be logged into the register. Whoever solves the equation first wins newly-created Bitcoin.
  5. With each Bitcoin created, the process of solving equations becomes exponentially more difficult until one can no longer solve equations or win newly-generated Bitcoins.
  6. The maximum number allowed in the system is 21 million.
  7. The cryptography is used to “control the creation and transfer of money, rather than relying on central authorities”
  8. Purchasers/payers (vs. receivers/vendors) pay the processing fees associated with Bitcoin transactions, those fees often being pretty close to zero
  9. The token-based model means that if coins are stolen, lost, or destroyed they are gone (with no recourse)
  10. The system prevents double spending (the hard problem) through computational techniques based upon public announcement (via the block chain ledger) of all transactions

Additional comments from my expert sources framed the current market dynamics for Bitcoin:

  1. Despite all the hype, there has been no growth in Bitcoin transactions over the past year
  2. Most Bitcoin today is “saved” rather than used for transactions
  3. Bitcoin is a highly volatile digital currency, driven primarily by speculation (like a penny stock)
  4. Since December of last year, the value investments in BitCoin has plummeted by over 75%.

To wrap up our conversations, our expert group answered my original question this way:

  1. Bitcoin is a virtual currency, but not structured to be eligible as a true payment system. This opinion is framed by the lack recourse protocols (there is no chargeback process defined), registered ownership, stability, and regulatory oversight.
  2. Transaction confirmation times today range between 5 and 10 minutes, this latency being due to decentralized, public validation of transactions, making Bitcoin effectively too slow for mainstream transacting.
  3. BitCoin is not properly regulated to ensure fairness and invites participation and usage for illegal activities. The group expressed the importance to have a level playing field in how crypto-currencies are approached, regulated and looked after
  4. There will need to be a better defined role for governments and regulators if Bitcoin is to transcend its current position as investment vehicle and move closer to the mainstream payment business.
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