Bitcoin – a digital currency – has the potential to disrupt the century-old monetary system of fiat currency.
For centuries in the United States, and millennium, in other areas of the world, currency has been controlled by governments. Governments control the production of currency and make it illegal for there to be “unofficial” currency. Interest rates today are set by a small group of central bankers.
Bitcoin has the potential to change all that. Just under six years old, bitcoin was introduced as an open-source software in 2009. Bitcoins are based entirely “online” and there is nothing material backing them.
The biggest appeal of bitcoin to retailers is the promise of low transaction costs. Because it is a digital currency it offers the convenience of not having to deal with physical currency, which would require a bank to process transactions. With no central repository, bitcoin allows for transfers at a low cost. This is good news for many businesses.
The big challenge for bitcoin is this: will bitcoins be widely accepted?
Challenges facing bitcoin
With any new idea, there are many challenges facing bitcoin. They include:
- Price volatility – It has been said that bitcoins are seven times as volatile as gold. Gold is historically a fairly volatile investment, so volatility is clearly an issue for bitcoin. Currency fluctuations are natural since they are a product of supply and demand, but ultimately you would hope that a digital currency like bitcoin could operate in a much less volatile fashion.
- Theft – Because bitcoin users are given a high level of privacy, it can be difficult if not impossible to recover stolen bitcoins. Bitcoin transactions are irreversible and the identity of users involved is extremely difficult to identify. There have been a couple of high-profile thefts in recent times, one being the theft of over $100 million worth of bitcoins from Sheep Marketplace.
- Investment Bubble – Many have said that bitcoins are becoming an investment bubble, including the well-known economist Robert Shiller. Because the production of bitcoins is limited and becomes more and more difficult, people are potentially paying more for bitcoins than they truly are worth. This could eventually cause a price correction, significantly dropping the value of all bitcoins.
These are just a few of the challenges that bitcoin faces as it tries to play a bigger role in the global economy. There are of course many advantages – such as the ability to be “outside” of the establishment or of any single country. The decreased regulation allows for bitcoin to subject itself more to the supply and demand of the market which, in theory, would make it a stable store of value that is not subject to
Will bitcoins be widely accepted?
The most difficult challenge facing bitcoin is whether or not it will be able to gain widespread acceptance. While there are many smaller retailers who have started to accept bitcoins, bitcoin needs the larger retailers to get on board for it to become a widely accepted currency.
As of today, the following large companies accept bitcoins:
- Atomic Mall
- Clearly Canadian
- Dell
- Dish Network
- Expedia
- Newegg
- PrivateFly
- Overstock.com
- the Sacramento Kings
- TigerDirect
- Virgin Galactic
- Zynga
Keep in mind that as of this writing bitcoin is not even six years old. The progress that has been made in the past six years alone is remarkable. There are challenges ahead, but it seems like bitcoin is here to stay.