Coins or change?
A Ponzi scheme or the beginning of a new financial order? These are the two extremes of opinion concerning bitcoins. The system, designed by an unknown developer in 2008, is gradually becoming mainstream. Think of it as the bittorrent of money, and you’re close to an understanding of what it is.
First things first, Mark Zuckerberg’s visit to Budapest had nothing to do with bitcoins. Although the Facebook-founder jokingly hinted that there was a tie-up, and his words triggered avid speculation in the local media, it turned out that he was staying in Hungary to get his hands on a somewhat more traditional ‘Hungaricum’: a puli shepherd dog.
All in all, even in the face of the inevitable disappointment of Zuckerberg not attending, the first Hungarian Bitcoin Meetup hosted by Colabs turned out to be a great success. Three of the five presenters have just got back from the Bitcoin 2013 conference in San Jose, fully informed and inspired by the buzz.
“There are two important aspects of bitcoin, one is often over-emphasized, and the other is usually overlooked,” says Tamás Blummer, founder of Bits of Proof Zrt, a startup that aims to bridge the gap between the decentralized nature of the bitcoin world, and the requirements of an enterprise-class IT environment. “Bitcoin as a currency is very spectacular due to its highly volatile currency rate against the dollar, and it tends to grab everyone’s attention. But the real value, I believe, is in the other perspective: bitcoin as a payment network,” he says.
These two understandings of the bitcoin are virtually (pun intended) independent from each other. Although as the only currency to date without any physical form whatsoever, bitcoin has novelty in itself, the revolutionary part is the peer-to-peer network that enables users to transfer money without the participation of a third party, be it a bank or any other service provider. Needless to say that subtracting this element from the system results in dramatically lowered transfer costs, and increased speed. The extent of this change, bitcoin experts agree, is so epic that it might as well mean the end of the world’s financial system, as we know it. Alternatively, if they are wrong, and bitcoin-skeptics turn out to be right, the whole scheme might collapse in an instant.
In a world where virtual products and services account for a two-digit part of the GDP, the importance of a standardized and integrated virtual currency cannot be over-estimated. As the first currency whose only form is one that can be transferred over the wire, unlike gold or Hungarian forints, the bitcoin enables payments to be truly and inseparably tied to the purchased service or product.
“If you have ever tried the ‘one click buy’ option on Amazon, you know how massively euphemistic that name is to describe the service,” says Tamás Blummer. “You have to register yourself, then register a credit card, before that specific one click. And it is highly likely that your account will only be charged days after the transaction. With bitcoins and a digital wallet installed on your computer or smartphone, a one-click buy is, indeed, possible. The transaction is completed and confirmed immediately, and all this in an irreversible manner. Just as with cash: once you give it away, it belongs to the recipient, and the only way to get it back is to ask him or her to give it back. No charge backs or card frauds are possible,” he explains.
Knock, knock, Neo…
Payments are the most spectacular part of the system, but they are only the beginning, experts say. With the third party and the necessary – and sometimes unfounded – trust avoided (instead of trusting banks, states, and financial institutions, the only thing you have to trust in a bitcoin world is the cryptographic algorithm that is in the core of the entire system and that accounts for the validation of all transactions) some important limitations of the traditional financial world become meaningless.
For one, transactions in the “traditional” world require human beings to initiate them – a limitation that is no longer necessary when it comes to bitcoins. It is possible to design an application that automatically purchases everything it needs to keep running, and collects the revenue from its operations all by itself. Digital rights management can also face dramatic changes, as the cryptography used to secure the bitcoin transaction can also protect the product itself. Since the protection is purely provided by digital data, it can be carried by practically anything from an audio file to a car key. And if you fear that this leads to a world where the machines will rise, and we all end up running away from Arnold Schwarzenegger, while Guns’n’Roses is thundering in the background, well, you might not be too far off the mark, after all.
Getting started with bitcoins
Traditionally, bitcoins are generated via a procedure called ‘mining’, which basically consists of a computer program processing complex mathematical operations. Since, unlike a government-issued fiat currency, a bitcoin has no central issuing authority, the system needs to limit the amount of bitcoins. Currently around 10.5 million bitcoins are traded on the market, and the system is designed to make the mining operations more complex as the number of participating computers grows. So while mining is technically ‘money for nothing’, unsurprisingly it is an increasingly competitive area, and the entry costs of the industry is already very high.
To start participating in the bitcoin frenzy, therefore, it is better to buy bitcoins for traditional money (there are stock exchanges that make this possible), or simply to start accepting bitcoins as payments for your products and services. One bitcoin currently goes for around $110, although the volatility is extremely high. Currency rates in April 2013 have seen highs of $266 and lows of $76.
The legal bits
Although it is often emphasized that the anonymity of the bitcoin allows it to be related to illegal businesses, pro-bitcoin experts highlight that cash has precisely the same characteristics. But, as with cash, anonymity doesn’t mean that bitcoins fall outside of the legal and tax system.
Bitcoins traded for traditional money pose us with an easy case, as each bitcoin sold means ‘real’ revenue that is subject to taxation. But as the bitcoin is not currently recognized as a currency, bitcoin transactions currently count as product for product or barter transactions from a taxation point of view.
“The legal environment’s reaction to this new currency will be critically important,” says Tamás Blummer, adding that since the system directly harms players in the financial sector, the usual money centers of the world, where these players are particularly strong, are unlikely to come up with pro-bitcoin regulations. “This is where Hungary has huge potential,” the expert says. “Coming up with a bitcoin-friendly regulatory system may draw in vast amounts in the form of this new currency, and may transform the country into one of the financial hotspots of the new world,” he adds.
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