Cryptocurrency – The next wave of disruption or storm in a teacup?

Bitcoin vs Gold priceWorld economies, business and consumers have been caught up in the whirlwind of activity surrounding cryptocurrencies, but both the benefits and risks are still unclear.

Cryptocurrency is generated by digital algorithms. A ‘miner’ will decrypt these algorithms using a software program to generate additional units of the currency, which can then be traded or transacted with.

There are approximately 70 currencies currently available with the most popular being Bitcoin and Litecoin, and they’re growing in popularity – as of November 2013 the total market capitalisation of Bitcoin had exceed $US7 billion.1

Why is it important?

Bitcoin has attracted investment from seasoned venture capitalists, including PayPal founder Peter Thiel and the Winkelvoss brothers, which have invested millions in digital currency projects.

Cryptocurrencies are completely anonymous, which allows for the creation of a completely private payments system. This has been a major benefit among consumers, along with the ability to send and receive currency instantly without suffering wait times from traditional banks.Cryptocurrency - Benefits and Risk

However, this also plays a part in digital currencies’ risks – a large portion of their use has been dedicated to black market sites. In 2013, the FBI raided the ‘Silk Road’ black market site, which used Bitcoin as its main currency – as a result, the value of the currency fell dramatically.2

Digital currencies are also being examined by various world governments and banks with no conclusions as to how they should be treated in a tax or legal framework.

For instance, in March 2013 the American Internal Revenue Services declared Bitcoin ‘property’, for tax purposes3, and not a currency in the traditional sense. For many ‘investors’, this was seen as a dramatic setback. Additionally, some countries have reacted negatively to the growth of digital currencies.

Case in point: Open for business and accepting cryptocurrency

Already, several businesses are experimenting with accepting Bitcoins and other virtual currencies.4

  • Virgin Galactic is accepting Bitcoin for customers who are interested in flying to space
  • Overstock is one of the first large US retailers to start accepting Bitcoins for purchases
  • WordPress, the popular blogging platform used by some of the biggest media companies in the world (e.g. The New York Times, CNN, Reuters) started accepting Bitcoins in 2012
  • A Bitcoin ATM has already been installed in Sydney5

 

Looking at the future

  • Cryptocurrencies are clearly gaining traction with both consumers and businesses, and this trend is likely to continue as consumers desire private, secure forms of currency
  • The future of any one particular currency is not secured – legal and political interpretations are still developing.
  • While there is a significant amount of investment in virtual currency, no major platforms have yet been broken into the mainstream. Major retailers are still yet to come on board.

What you need to know

  •  For the digital CEO, it remains to be seen how digital currencies will play a part in the future of commerce.
  • It may be too early to start incorporating digital monetary systems into a retail or corporate environment – but over the next few years that tide may change, and change quickly.

Graph: PwC, ‘Digital Disruptor: How Bitcoin is Driving Digital Innovation in Entertainment, Media and Communications (EMC)’, 7 February 2014
1 Idem
2 Euronews, ‘Bitcoin under pressure from hackers and regulators’, 12 February 2014
3 Reuters, ‘Bitcoins are property, not currency, IRS says regarding taxes’, 25 March 2014
4 NASDAQ, ‘What Companies Accespt Bitcoin?’, 4 February 2014
5 ABC News, ‘ATMs being rolled in Australia for online currency Bitcoin’, 31 January 2014