Do you know what Bitcoins are? Before today, I thought I did but I was wrong. My mission to understand this new form of virtual currency started with an article on Bloomberg called “Bitcoin Buys Burgers to Beer as Shoppers Go Virtual.”
I had always assumed that Bitcoin was like Paypal. You put real currency into an account so that you can use it to buy things easily. It’s like an ATM card with a Mastercard or Visa logo. Only, it’s not.
Bitcoin is actually an entirely separate form of currency. It’s the digital equivalent of using Monopoly money to pay for your meal. It’s not minted or backed by any one country. And though we need to compare it to our native currency just to keep our brains on straight, it actually has no relationship to almighty dollar. . .or the Euro or the British Pound.
Sort of. . here’s where it gets fuzzy for me.
Instead of printing money to represent the amount of gold in Fort Knox, Bitcoins are “mined” by “miners” who are just ab0ve-average Joes with a lot of computer memory to spare.
Here’s how it works:
(Correct me if I’m wrong, because after an hour of reading up on this, I could be.)
I start out by buying Bitcoins with actual US dollars from someone who has Bitcoins to sell. You can find people on sites like LocaleBitcoins.com. If I’m reading this right, I need to hand over $700+ dollars to a stranger to get my coins. (hmmmm). Once I have Bitcoins, I can spend them anywhere that accepts them. There’s a map for that.
In my neighborhood, I can use Bitcoins to buy weatherproofing or a Lamborghini. If I want food, I’ll have to drive into Los Angeles where I can also get hypnotized and my nails done.
When I pay, the “miners” go to work. They subtract the price from my balance sheet and add the amount to the seller’s balance sheet. It can take up to 10 minutes and the miner earns Bitcoin for his trouble. Apparently, there was a time when you could make beaucoup bucks in your sleep mining Bitcoin from home but not so much anymore.
This is where it gets foggy for me. How does the seller get paid for his Bitcoin transaction? I suppose he can spend the Bitcoin on things he needs, but there aren’t that many places that accept it so. . . I guess he can sell his coin to someone else to get the money to pay the electric bill?
It all sounds very rickety, doesn’t it? So why bother?
Pro and Con
For merchants, the upside is that they get to keep more of the money. It only costs about 1% to process a Bitcoin transaction compared to 3.5% for a credit card. And since Bitcoin is like cash, the customer can’t refuse to pay later and cause a chargeback.
The best reason to accept Bitcoin, is to attract new customers. Diehard Bitcoiners will go out of their way to shop or eat in an establishment that accepts the virtual coinage. There are websites and meet-ups groups that will happily promote your business and the way the journalists are gobbling up the story, you could end up as the top story on tomorrow’s news.
The downside is that a very small percentage of the population uses Bitcoin, especially here in the US. It appears to be much more popular in other parts of the world. And if you travel from country to country, it’s a great way to avoid the issues of currency exchange. Also, Bitcoin values are fluctuating like crazy, this makes it hard to set reasonable prices for items.
The biggest downside is the instability of the system. Bitcoin advocates will tell you it’s solid, but there are just as many stories that will tell you no. Because Bitcoin is an untraceable form of currency, it’s often used for illegal transactions. That means the legal system is involved. Remember what happened with online gambling in the US? Here today, gone tomorrow because of money laundering concerns.
Will Bitcom survive? Too early to tell. But if you run a business in a busy metropolitan area, it might be worth trying. A Bitcoin Accepted Here sign could lead to a whole new revenue stream.
Do you have experience with Bitcoin? I’d like to hear about it.