Initially, I discounted Bitcoin as yet another sure to fail attempt at creating an alternative payment system. I’m still leaning hard in that direction, but recent events could prove me wrong:
Recent weeks have been exciting for a relatively new kind of currency speculator. In just three weeks, the total value of a unique new digital currency called Bitcoin has jumped four times, to over $40 million. (Technology Review)
Virtually all of that growth has been in the geek to geek or tech services sector, meaning there isn’t much to buy that could interest the average consumer yet. Still, Bitcoin has attained real credibility in the geek sector. That could be enough to give it a chance of crossing into the mainstream. Bitcoin does have a few advantages that could give it better odds than prior attempts that have failed.
Micropayments. The banking system has made micropayments a virtual impossibility thanks to transaction and discount fees. For the average merchant, a $1 online transaction will rack up as much as as 45 cents in bank fees. That’s why $1 or less items are so rare online. While mega merchants like Amazon get a big break on transaction costs, smaller operations pay the full rate. The creative universe is trending away from the big merchants. Bitcoin provides a way for the buyer and seller to exchange value for value without a toll booth or two in between. We’re already seeing plenty of app developers accept Bitcoin.
Stable Value: The fiaT currency system’s inherent inflation serves bankers and pols well, but it’s not so good for most of us. Bitcoin is a peer to peer system, without ventral command and control. There is a set limit to the number of Bitcoins that can enter circulation. That means Bitcoins will grow in value by design if the system is successful. Caveat: value is set by the open market meaning value swings from speculation is possible.
Security: As a peer to peer system, there’s no central point of failure to hack. There’s also no central command and control to debase its value. Caveat: these could also prove to be a weaknesses.
Ease of access: Bitcoins can be converted into local currency via online exchanges.
Until Bitcoin is accepted at the local gas station or megamarket, it’s usefulness as a medium of exchange will be limited. I suspect government and the banking establishment would intervene before Bitcoin is accepted at Walmart. Having said that there’s a familiar pattern of adoption taking place. Twitter, Digg, and even Facebook began as geek hangouts that were overtaken by the mainstream. It’s already established a following in geek to geek and is getting traction in consumer apps and music. It’s an easy add on for indy authors, workshop and seminar operators. If critical mass is achieved in those categories, look for independent businesses that support them to follow. If that happens, I’m ready to call Bitcoin viable. I’m not on board yet, but I’m watching with interest.