Will Bitcoin Usher The New Era of Online Shopping?

Will Bitcoin Usher The New Era of Online Shopping?

September 18, 2014

The internet was realized in an era in which the general population, fed on movie cliché’s and propaganda, was too concerned over flying cars and space aliens to actually ‘get’ how big of a deal the internet really was, and how it would end up changing the world as we know it. Soon we had e-mail, chatrooms, interactive websites, pirated products, phone calls using the internet, video calls using the internet and of course social networks. What the internet did, what it was unknowingly built to do, was to make everything else obsolete and some say that today it is slowly replacing one of the oldest and most enduring creations of man, tangible currency, using its digital counterpart, bitcoins.

What is it?
Bitcoin (upper case ‘B’) is essentially a system through which goods and services can be bought and sold over the internet for units of the digital currency bitcoin (lower case ‘b’). Bitcoin is the system while bitcoin is the actual currency. The system uses software, known as a ‘wallet’, to digitally sign over the ownership of bitcoin(s) from one person to another. The wallet is used to generate unique addresses using which payments are made. The addresses are then used to record the transaction in a ‘block chain’ as proof of their legitimacy. In order to digest all this think about banks and checks. Every time you want to make a payment you need to sign a check to transfer funds from your account to that of the payee’s. The same process takes place when using bitcoins, the only difference being that the signature given and the currency being traded are both digital and that the block chain acts as the bank by keeping account of who’s got how much money and what transactions have taken place. However, bitcoins have a quota on them, when the number of active bitcoins hits 21 million mark no more NEW bitcoins will be generated. It’s this impending scarcity that sky rocketed it’s price in 2013.

There are three ways to attain bitcoins; 1) Buy them with physical currency 2) get them as a payment for selling goods and 3) Through ‘mining’, which we will talk about later.

History
In 2008 a paper was posted on the internet, under the name Satoshi Nakamoto, titled; Bitcoin: a Peer-to-Peer Electronic Cash System. It’s main selling point was that you did not need to trust the person on the other side of the transaction, the transaction itself would always be ‘safe’ by nature. In January 2009 the first open-source bitcoin client was released and the first few bitcoins were issued. Satoshi Nakamoto mined the first block (known as the genesis block) and received 50 bitcoins as processing fee.

The Blockchain
The blockchain is the public transaction log/database that records, has recorded and will record every single transaction involving bitcoins, this is done to correctly identify the owner of each bitcoin and prevent “double-spending”. The people who maintain the blockchain are known as miners and they are rewarded for their maintenance with newly created bitcoins. The miners job is to analyze the payment process and then register the transaction into the blockchain, however, this is easier said than done as analysis of the data involved in each transaction needs extensive calculations. Hence the miners use specialized software and hardware that does the calculations for them. The payment processing fee for bitcoin related transactions is substantially lower than those of credit cards and other money transfers. If fact, the processing fee is being halved each year and will eventually be fazed out once the bit coin ceiling of 21 million hits. Payment processing will then be solely incentivized by transaction fees.

The Wallet

The wallet is a software that generates and stores unique Bitcoin addresses where the payments are sent (each address can only be used once) and is also used to identify the total amount of bitcoins you have. The addresses generated are ‘public-keys’ that are visible to everyone however there is another key, the ‘private-key’, which only the owner of the wallet will know and without which no one will be able to take bitcoins out of the wallet. The private-key is, for all intents and purposes, the safeguard.

The wallet is today available in various forms such as apps for mobile devices and computers, hardware devices, and paper tokens.

Growth
Now, let’s talk about the one figure that really matters; what is a bitcoin worth? Well, in the beginning of 2013, one bitcoin was worth around 10-15 dollars, today it is worth over $500, which is an increase in price of over 50000% in a single year!!!
Also, organizations like Wikileaks and the Electronic Frontier Foundation have begun accepting bitcoins as donations and payments; in fact there is actually a restaurant in the Netherlands that accepts bitcoins as payment for meals.

As of November 2013, Twenty thousand online merchants and 1000 physical stores are accepting bitcoins under its payment processing services. One such payment processing service, called Coinbase, sold $1 million worth of bitcoins in February 2013 alone. A million dollars in a single month, now that’s what I call fast cash! Also, speaking of fast cash, on October 2013 two companies, Robocoin and Bitcoiniacs, launched the World’s first ever bitcoin ATM machine in Vancouver, BC, Canada, allowing people to purchase bitcoins at a downtown coffee shop. Furthermore, in November 2013 the University of Nicosia authorized the payment of tuition fees in the form of bitcoins, calling the digital currency ‘the gold of tomorrow’.

Can bitcoin Replace Actual Currency?

The short answer is no, the long one is this; the value of bitcoins fluctuates wildly, at the rate of 20-30% a day sometimes. No country will accept such a volatile currency as this will radically alter GDP calculation, make predicting future economic conditions even harder than it is today and put an entire county’s welfare in the hands chance and fate. Also, since there is nothing of actual value (like gold) to back up the bitcoin as a currency, its value depends solely on the people’s acceptance of it. We all know how fast people’s tastes change, so if ‘the people’ decide to adopt a newer and more ‘hip’ from of digital currency then the acceptance of bitcoins would fall and so would its value. Furthermore the bitcoin cannot be used as collateral in financial transactions because of a lack of universal acceptance and the fact that the currency has no gold to back it up. Hence, its uses are fairly limited compared to physical currency. Also, using bitcoins for transactions is so discreet that there little to no chance of anyone being able to track the parties involved in the transaction. Due to this lack of ‘paper trail’ governments are unwilling to even adopt it as a side-currency in fear of the illicit activities that may be committed though it. Finally, the way the actual Bitcoin protocol is set up influences it’s pricing to a large degree. The protocol is set up in such a way that the prices will inflate at a decreasing rate and then eventually start deflating at a increasing rate, eventually reaching penultimate value of zero. No country will invest in it because it would be foolish to invest in a currency that is doomed.

However, just because no one thinks it will work doesn’t mean people will try it out anyways. In fact, recently, a US congressman actually presented a bill to allow his election campaign to be funded by bitcoins as a sort of ‘in kind’ contribution similar to stocks and bonds. The commission on November 2013 deadlocked on the issue with 3 democrats, on a six-member voting panel, voting against it. Hence the problems, again, lies with acceptance so don’t expect the bitcoin to replace physical currency anytime in the near future, but you should expect it to become a short-term alternative to stocks and bonds just because of its constant inflationary state.

Taxation

For the longest time people had been wondering how transactions involving the buying and selling could be taxed. Do they treat it as a currency, as a stock or as something which is illegal? It seems however that the answer to this was none of the above three and Singapore seems to have found the answer, which was to treat the digital currency as a product. The Inland Revenue Authority of Singapore decided to treat the purchase/sales of bitcoins as a purchase/sale of a good or service, instead of currency exchange. VAT will added on any transaction involving bitcoins and since the blockchain keeps a detailed list of transactions no will be able to skimp out on the VAT payment.

The 51% problem

The Bitcoin protocol was set up in such a way that the only way to produce new bitcoins was to help create and sustain the infrastructure that is required to make the digital currency work. Because so many people mined bitcoins across the world the integrity of the system was secured. The currency was deemed safe because its network was so diversely distributed and as long as 51% of the people mining for bitcoins were honest people who did not want to destroy the currency’s infrastructure the system was secured. However, what the creator of the Bitcoin protocol did not expect was the introduction of pooled mining – many miners mining together – so, when a pool gathers enough members to realistically ‘own’ 51% of the blockchain it may change records in the blockchain to suit its own selfish needs. This would lead to double spending which would compromise the effectiveness of the currency and thus make it useless.

One pool in particular, Ghash.io, was almost at the 51% mark a couple of days ago (it was at 45%) however they stopped accepting new members into the pool and decided to allow its members to mine in other pools to decrease their own leverage on the blockchain and thus preserve the integrity of the currency.

Bitcoin and Wallstreet

Recently a group of Wall Street brokers, analysts, hedge funds and speculators decided to gamble on the digital currency. They were drawn by Bitcoin’s constant inflationary state and by the prospect of pioneering a new breed of finance. Some of these people are buying and holding the currency to sell it at a higher price in the future, some are starting a bitcoin trading business – storing and exchanging bitcoins – while others are gathering up venture capitalists from Silicon Valley and elsewhere to invest heavily in this new currency. Silbert, of Second Market, has been particularly successful in the venture capital font managing to gather almost $58 million worth of bitcoins through funds from venture capitalists.

The ‘Deep Cold Storage Vault’

As I have described above, in order to mine bitcoins or trade them you need a digital wallet where you can keep all your bitcoins stored up.  Now, there are two ways to go about making a wallet; 1) you can make an online wallet from a wallet providing website and 2) you can download a wallet software into your pc/mac and use that however, the former of the two methods, although more user friendly, is far more risky. You see when you create a wallet on a website (online) you are storing both your public and private key in the website’s server so if the server ever gets hacked by a third party they will basically get all your keys and will have the potential to rob you blind. In hindsight, I will admit that a PC can be hacked just as easily as a sever can but, the thing is, hackers are more likely to target the servers simply because while a pc holds the keys to no more than one or two wallets, a server houses keys to thousands of wallets. Hence, more keys = access to more wallets = more bitcoins.

However, recently a company in London has created a bank vault for digital currencies. The bank uses what is called ‘Deep Cold Storage’ and protects bitcoins stored within it from hacker attacks. Called the elliptic vault, the bank stores its customer’s bitcoins in offline servers using private keys. The customers will then be given a special code using which they will be able to access their respective accounts in the bank. Since the bitcoin is not an actual recognized currency no form of insurance is in place to cover it at present. Hence this new ‘cold storage vault’ comes as sigh of relief for all those who want to make a fortune in the bitcoin wave but are hesitant to begin because of the risks involved.

The Bitcoin Foundation

In Washington D.C., just few blocks north of the White House, resides the most vocal, yet slightly anonymous, advocate of the Bitcoin movement, The Bitcoin foundation. It was founded in September 2012 and its sole purpose is to help people exchange ideas and resources with more freedom. The foundation is largely funded through donations from members which include California’s Lightspeed Venture Partners and a star-up in Boston named Circle Internet Financial. The foundation made its first big contribution to Bitcoin last August when its representatives helped to assuage the US congresses concerns over the growing popularity of the digital currency and the ramifications that it induces. They convinced congress so well that in November, during a Senate hearing, positive appraisals for the Bitcoin were in abundance. The department of justice even went as far announcing that the currency ‘offers legitimate financial services’. Like the Bitcoin protocol the foundation itself is extremely decentralized with Jinyoung Englund, the director of public affairs, resides in Washington. The executive director resides in Spain, legal counsel works from Seattle, and chief scientist Gavin Andresen is in Australia. All of them are, not surprisingly, paid in bitcoins.

Corporate Support
Today, in India, the popularity of the digital currency is growing at a very fast pace. However, government officials, unsure of how to treat bitcoins and how to stop people from abusing it unjustly, are opting to ban any trading involving the crypto currency. However, business owners in India are gathering together and trying to convince the government to not impose the ban. Many of these businesses have yet to even create a platform for the acceptance of the digital currency, but it is evident that they understand the diverseness of its uses. The popularity of bitcoins in India has soared to such heights that the government has created a group known as the Bitcoins Allaiance India (BAI) in order to determine exactly how legal this revolutionary currency is.

Also, Wells Fargo, an American multinational banking and financial services holding company, has called for a Bitcoin summit meeting with a group virtual currency experts, financial executives and representatives from the US government in order to find a potential solution to the money laundering problems that Bitcoin brings with it without actually terminating the currency itself.

Overstock
This year in particular, due to the soaring prices of bitcoins, many companies have begun accepting the digital currency as payments for goods and services. Among these companies the biggest and most mainstream company would be Overstock.

Overstock is one of the leading online retailers in the world selling everything from designer bed sheets to perfumes, from furniture to clothing and their entrance into the Bitcoin buzz has certainly turned a few heads and the fact the company’s first day of operations with the Bitcoin payment plan has yielded a whopping $124,000 will turn even more.

The aftershocks of Overstocks successful journey into the depths of this cyber currency will change the online shopping landscape dramatically. It is believed that Amazon.com, the world’s largest online retailer, might soon follow in overstocks footsteps to usher into this new era of payment plans.

Conclusion

It is still early days for the Bitcoin as a currency, it was created a mere 7 years ago for crying out loud, however, no one can doubt that the currency matured faster than any of its counterparts, both physical and digital ones. Countries all across the world are confused on how to treat this new ‘technology’ they today know both the ‘good’ and the ‘bad’ that this currency brings yet they are still flabbergasted on what to do simply because nothing like this has ever happened before. However, these countries, these democracies, represent the cumulative will of the people and with so many ‘people’ and corporate alike lobbying in favor of the Bitcoin it is only a matter of time before the currency Is accepted worldwide. So the question isn’t; whether you should invest in bitcoins or not, no. The question is WHEN do you plan on investing in it? I say; the sooner the richer.  By Ishtiaqur Rahman

# Name Market Cap Price Total Supply Volume (24h) % Change (24h) Market Cap Graph (7d)
1  Bitcoin $ 10,528,172,251 $ 858.04 12,270,025 BTC $ 20,589,571 -0.84 %
2  Ripples $ 2,193,370,300 $ 0.022 99,999,998,149 XRP* $ 37,097 -0.65 %
3  Litecoin $ 630,443,379 $ 25.31 24,910,104 LTC $ 7,446,552 -0.11 %
4  Peercoin $ 128,790,221 $ 6.12 21,051,635 PPC $ 760,590 -0.02 %
5  MasterCoin $ 70,008,116 $ 124.31 563,162 MSC* $ 24,212 -3.24 %
6  Namecoin $ 50,082,987 $ 6.37 7,866,450 NMC $ 664,749 -0.31 %
7  Nxt $ 35,893,457 $ 0.036 999,997,986 NXT* $ 136,914 -7.42 %
8  ProtoShares $ 17,245,920 $ 12.96 1,331,062 PTS $ 30,456 -1.24 %
9  Quark $ 17,160,434 $ 0.069 247,274,653 QRK $ 78,947 +2.29 %
10  Megacoin $ 16,982,427 $ 0.78 21,749,100 MEC $ 24,374 +5.30 %

Source: http://coinmarketcap.com/

The Bitcoin Ladder
The Bitcoin Ladder ranks Bitcoin-accepting websites by the amount of traffic they receive.

Rung Site Alexa Global Ranking
1 WordPress 21
2 Reddit 122
3 Internet Archive 229
4 OkCupid 684
5 4chan 906
6 Namecheap 915
7 Mega.co.nz 1,310
8 Lumfile 3,354
9 Torrent Leech 5,233
10 Filecloud.io 5,593


Source:
http://www.thebitcointrader.com/2011/12/bitcoin-bounty-ladder.html    

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