Bitcoin is a form of digital currency that allows anyone in the world to pay anyone else any amount of Bitcoin by simply transferring “ownership” of the coins. Transactions are done via the Internet and sending or receiving Bitcoin is as easy as sending or receiving an email. The currency is stored in your digital wallet and can be used to buy virtually anything.
While the current value may be based on speculation, the true value is derived from the network effect. Think of Facebook or Twitter — these social media platforms hold no value unless people use them. More users mean more value for the platforms because there are more people with whom to interact. Companies can engage with followers more effectively, and advertisers reach a much larger consumer base. Bitcoin works in the same manner as a positive externality — the more people that accept and pay with Bitcoin, the more valuable the currency and the technology becomes.
One of the biggest benefits of using Bitcoin is the low transaction fees. Consumers have no problem buying a cup of coffee with our credit cards; however the coffee shop is hit with a two to three percent fee for accepting the payment, and the transaction then has to be cleared by the credit card company and whole host of other regulatory agencies. This is a complicated process that can be avoided using Bitcoin. You pull out your phone, scan the QR code and within minutes the coffee shop has the $5 for the coffee in Bitcoin. On a larger scale, Microsoft has just decided to accept Bitcoin as form of payment for all online sales. With tight margins, Microsoft takes a hit with each transaction made with credit cards online. Five percent margins are automatically cut in half with transaction fees: this is money that can be reinvested back into the business, passed back to consumers, or even taxed by the government. Accepting Bitcoin removes the fees from the process and the company can convert the Bitcoin it receives into dollar automatically to avoid any currency conversion risk.
Bitcoin also has implications on a global scale. Bitcoin allows a farmer who does not have direct access to a bank sell his crops on an international market. All the farmer needs to accept payments is an Internet connection — no bank account, no credit card and no middleman. This farmer can instantly receive Bitcoin for his crops and pay almost nothing to do so. He can also store his money in Bitcoin, which in some situations can be much more safe than storing physical money in local banks. From a transactional perspective, Bitcoin makes complete sense. It can help major companies reduce their fees and keep profitable margins, and it can give virtually everyone access to a world market.
Finally, Bitcoin allows micro-transactions to occur. Micropayments have never been feasible because it is just not cost effective to run small payments through the existing credit card system. Bitcoin has the unique characteristic of infinite divisibility. You can send anyone the smallest amount of Bitcoin for, again, very small fees. Media companies stand to benefit from this because they can now charge for individual pieces of content, instead of charging for a full subscription.
These are just a few of the many reasons why I am bullish on Bitcoin. Merchant adoption is increasing at very high rates, and Venture Capital firms are pouring money into the technology. While I do not think it will replace fiat money, it will instead force a change in our current financial system that will have a huge impact on global economics. The symbiosis of fiat money and crypto-currencies will be a powerful catalyst for extending the benefits of the modern economy to virtually everyone all over the world.