Bitcoin: Some Parts Brilliant, Some Parts Sure To Bomb

A version of this post originally appeared on Re/code.

The rollercoaster ride for Bitcoin enthusiasts continued this week: There was good news from UK regulators, who have taken a relatively progressive stance on virtual currencies, and bad news with the latest heist of 890 Bitcoin (roughly $600,000) and the resulting demise of Flexcoin, a Bitcoin storage service. The breaking news frenzy perhaps reached a new peak with the claim that the real Satoshi Nakamoto has been identified. There’s no doubt that additional revelations are on the horizon when it comes to the first crypto-currency, and with that, the debate about the longevity and usefulness of Bitcoin will continue. In our new report on Bitcoin, we address the following questions:

1.       What is Bitcoin?

2.       Who are the main players?

3.       What headway has Bitcoin made?

4.       How viable is Bitcoin as a consumer payment alternative?

5.       Should I worry about crypto-currencies like Bitcoin disrupting my business?

6.       How can I outsmart crypto-currencies?

Here’s the bottom line: Bitcoin is deeply flawed as an alternative currency or payment method for mainstream consumers. It will, however, be a catalyst for a more efficient global payments system because it demonstrates one way to tackle the many embedded inefficiencies.

Bitcoin Is Not A Viable Payment Alternative For Mainstream Consumers

According to a Bizrate Insights survey of over 7,000 online buyers, less than 1% of online buyers have used Bitcoin. Yet Bitcoin enjoys very high awareness for a new technology: 34% have heard of Bitcoin and 25% are curious enough to plan to give it a try.[i]  However, mainstream consumer adoption of Bitcoin will be stymied by Bitcoin’s questionable consumer value proposition. It is risky, it is complex, and the Bitcoin market is illiquid — all leading to little consumer upside. Highly motivated mainstream consumers who take the time to understand how and where to use Bitcoin must be willing to absorb the currency volatility risk, the security risks of losing their funds altogether, and the lack of standard commerce protections if they don’t receive the product or service they expect. Sure, Overstock.com reaching $1M in Bitcoin sales is interesting, but it is benefitting from pent-up demand among existing Bitcoin holders who have relatively few options in the illiquid Bitcoin marketplace. In its current state, Bitcoin offers little beyond novelty to compel a mainstream consumer in a developed market to choose it over the many other options available for offline and online purchases.

Crypto-Currencies Hold Disruptive Potential For Global Payments Systems

Despite a shaky consumer value proposition, Bitcoin will be a catalyst for improved efficiency of today’s payment and commerce ecosystem. Why? Because current payments systems don’t fully meet the needs of consumers engaging in cross-border commerce and remittances or the needs of the unbanked and underbanked. These consumers must cope with payment options that can be inflexible, inconvenient, costly, slow, or wholly inaccessible. Businesses have many pain points as well: The cost of payments can be hefty (some businesses spend more on payment processing than on personnel), slow settlement can lead to cash-flow constraints, and fraud management and resolution can be costly along with ensuring payments security. As a protocol, crypto-currencies could also enable new business models for digital commerce that don’t yet exist today. In the same way that the early days of PCs, software, and the Internet inspired computing innovation, a plethora of failed startups, and many very successful ones like Amazon.com, eBay, and Google, the emerging crypto-currency ecosystem will also inspire innovation and disruption for payments and commerce globally.

So while Bitcoin as a brand may never reach mainstream consumer adoption, incumbents in the global payments ecosystem should consider the emergence of Bitcoin and crypto-currencies (the protocol and burgeoning ecosystem) as an early warning siren of more innovation to come that will transform today’s payment systems. The winds of change will be felt by players across the traditional payments ecosystem that are responsible for the speed, cost, and risk involved in digital commerce, both for B2B and B2C payments. For instance, firms like Azimo, CurrencyFair, TrasnferWise, and Xoom are already working to offer less expensive, more convenient international remittance services. And a large tech company such as Apple, Google, Amazon, or Facebook with a large installed user base could create a solution to transfer funds inexpensively, quickly, securely, and conveniently – bringing transformation to the existing payments ecosystem with an overnight disruption. So just as Uber and Square empowered consumers looking for transport or small merchants looking to accept credit cards, crypto-currencies promise to provide an attractive alternative for portions and players in the existing payments ecosystem.

What does the emergence of crypto-currencies mean for your business and what should you do about it? Read our full report here.

A version of this post originally appeared on Re/code.