Whether you’re in the business-to-business (B2B) or business-to-consumer (B2C) space, Bitcoin and its blockchain technology have the potential to transform the way you do business – and if you’re not already investigating how, 2017 IS the year to start.
Whatever your opinion on the topic, Bitcoin is hard to ignore. From a small-scale experiment in cryptographically-backed payments to an officially-recognized digital currency with a market capitalization approaching $15 billion (£12 billion) Bitcoin has grown exponentially. The blockchain technology that underpins it is being used for everything from supply chain management to securing insurance ledgers.
A Brief History of Bitcoin
Bitcoin was publicly launched in October 2008 by the pseudonymous Satoshi Nakamoto. Although the source code behind it was private until 2009. Based on work started back in 1991 by Stuart Haber and W. Scott Stornetta, Bitcoin aimed to offer a decentralized peer-to-peer system for monetary transactions. These were cryptographically signed and stored in a publicly-accessible distributed ledger dubbed the blockchain.
The science behind Bitcoin is rooted in cryptography: a ‘wallet’, where values are stored, is nothing more than a paired public and private key; transactions are signed by a wallet’s private key and transmitted to the public key of the recipient wallet. To give the transactions value and to power the network, the cryptographic work required to validate these transactions .These would normally require a data center filled with powerful servers but is carried out on a volunteer basis by so-called ‘miners’ who are rewarded through minimal transaction fees. As each block in the blockchain is filled with transactions, completed and verified, miners also receive an additional reward in the form of freshly-minted Bitcoins which serve to grow the supply to its eventual upper limit of 21 million Bitcoins.
Initially, Bitcoins were essentially valueless. Over time, however, they grew in value as more and more people joined the network and contributed computing power. Famously, the first commercial transaction to use Bitcoin took place in 2010 when programmer Laszlo Hanyecz paid 10,000 Bitcoins for a pizza – a sum equal to $9.2 million (£7.36 million) at current exchange rates.
Early growth in Bitcoin was, however, followed by a slump. In 2013, the value of a single Bitcoin rose from around $100 to over $1,000, but a year later was down to less than $250. The currency’s volatility proved problematic for some early investors, but since then its growth has proven steady: current exchange rates have each Bitcoin equal to around $900 – good news for those who invested back when each coin was worth a fraction of a penny.
Bitcoin for Business
There are two primary avenues for businesses to directly benefit from the growing popularity of Bitcoin: using it as a store of value and using it as means of payment. The former has its obvious attraction: money invested in January 2016 would have grown 122% by December that year, outperforming any other currency by a considerable margin. The cryptographic underpinnings, too, make it safer than physical money or precious metals. When handled properly, it is immune to counterfeiting, while taking up as little space as a single piece or paper or USB storage device regardless of how many you have.
While ARK Invest’s Chris Burniske told CNBC that Bitcoin represents a potential safe haven and an alternative to precious metals for a diversified investment portfolio, that extreme growth is shadowed by risk. Exchanges, which provide a way to store and trade Bitcoin against other cryptocurrencies or national fiat currencies, are under constant attack, and several have fallen with the resulting loss of investors’ money. Even without theft, extreme growth can be followed by an extreme fall: while few expect a repeat of the slump of 2013, thanks to the more organic growth Bitcoin has enjoyed over the years since, it takes little more than the news that China is investigating exchanges operating within its shores for the price to waver.
Bitcoin as a means of payment, by contrast, is an option with very few downsides. Services like BitPay and Coinbase act as payment processors, allowing companies to accept Bitcoin and have it immediately converted into fiat currency for deposit into their accounts. This makes accepting Bitcoin no more complex than accepting PayPal or any other digital payment system. Instant conversion to fiat currency removes the volatility, while those who are eager to spend Bitcoin don’t have to face intermediate steps in converting the funds themselves.
Here, though, Bitcoin falls foul of its own popularity among a certain class of individual: criminals. Many of the benefits of Bitcoin – the ability to open an ‘account’ without any form of identification from anywhere in the world, the ability to irreversibly transfer funds across borders instantly – are extremely appealing to those engaged in less-than-legal activities. Despite companies from computing giants Dell and Microsoft to travel sites Expedia and CheapAir now accepting Bitcoin, the currency has so far struggled to shed its reputation as an exclusive tool of the underworld. This is especially true following the FBI’s capture of the individual allegedly behind the Silk Road underground marketplace, which used Bitcoin extensively.
Bitcoin is more than a currency, though, and many businesses are investing heavily in the underlying blockchain technology. Consultancy and accountancy giant Deloitte opened a dedicated blockchain research facility in Dublin early this year, following in the footsteps of the Government of Dubai, Intel, IBM and more.
Each company’s reason for investigating and investing in blockchain technology is, typically, different. The value of a cryptographic, distributed, tamper-proof and inviolate ledger has many applications:
- Banks are investigating its use to speed transactions between accounts while reducing fees;
- Internet of Things (IoT) companies are using the blockchain to store a permanent record of sensor data;
- Logistics firms are working to store supply chain information to improve security and improve efficiency.
Back in April 2016 we wrote that blockchain investment had topped $1 billion (£800 million), and that figure is only growing. While no one has come up with an implementation proven the power of blockchain’s killer app – beyond Bitcoin itself – the sense that the technology will play a major part in the future is hard to ignore.
Time to Act
With increasing investment in novel applications for blockchain technology and Bitcoin itself slowly beginning to gain mainstream acceptance, 2017 is most definitely the year to be investigating how both could benefit your business. Whether it’s as simple as choosing to accept Bitcoin for payment remittance or as complex as joining the likes of IBM and Deloitte in developing your own blockchain-powered applications, it’s clear that ignoring the technology altogether is rapidly becoming the riskiest option of all.