[dropcap size=small]M[/dropcap]ost people, even some cryptocurrency enthusiasts, don’t fully understand the ins and the outs of the Bitcoin software and protocol. Although this has gotten a lot better recently with useful sites such as bitcoin.org topping search results it still has a long way to go in terms of people realizing why it might be a useful tool. The introduction section of the Bitcoin Wiki does the best job of simplifying the technology and philosophy beyond just saying to your average joe: “this is digital money, and you can send it with your smartphone.”
The Bitcoin protocol and software is constantly developing, one major development slip-up could cause serious problems for the entire network. The original Satoshi client had some networking bugs that were ironed out as more nodes started using the software, but there are still many known vulnerabilities. There is also the possibility of a 51% attack on the network, which has become a possibility with Ghash.io in the past. A 51% attack is when a mining pool obtains more than 50% of the total mining hashrate. This control over the public blockchain allows the attacker to reverse transactions, prevent transactions, prevent mining and double spend Bitcoins.
As a merchant if you want to accept Bitcoin payments but want the end value as a fiat currency you will have to convert after the transaction is made. There are services established that allow you to do this, but problems that come with this. Firstly you have to be connected to the internet through wifi or cellular data to accept the transaction. Secondly you will need an appropriate device, such as an Android tablet, and an app that can accept your chosen cryptocurrency. Also lastly most conversion services (markets) will charge you a trading fee for your conversion or like Bitpay will charge you for the service on a monthly basis.
The laws surrounding Bitcoin and digital currencies are not fully established in many territories or are wrongly understood by lawmakers. Although some progress has been made in this respect it is negligible compared to the clampdown made by governments such as the Chinese, who have in the past made the Bitcoin price turbulent due to their flip-flop attitude. I predict that in the future due to the decentralized and anti-establishment nature of the Bitcoin protocol that there will be various attempts at stopping or controlling the technology across the globe by financial bodies and governments. This, and the Streisand effect, is something to keep mindful of moving forward.
Bitcoin has so far had a very turbulent price trend because of the booms and busts that regularly occur. You can see recent evidence of this over the last few weeks. If a merchant wants to accept cryptocurrency but cannot convert to the fiat currency immediately, this becomes a problem as for better or for worse the Bitcoin they accepted yesterday is not worth the same today. However, this is simply a problem that has to be endured as Bitcoin valuation cannot be dictated. Predictions have been made that the price of more established cryptocurrencies will stabilize as time goes on, but this is not guaranteed. The point many cryptocurrency evangelists make about the deflationary nature of Bitcoin also counteracts the notion of a consistent price in Bitcoin; however, it is entirely functional to use Bitcoin as a medium of exchange with a fiat denominated “value” to avoid volatility.
The whole topic of transaction speed is a big can of worms. Bitcoin transactions are instant, but confirmations aren’t. After the transaction is broadcast across the Bitcoin network it is queued to be included in a new block that is to be mined for function of confirming the transaction was correctly sent. Providing an extra layer of security to double check that the initial transaction went through, hence the transaction is “confirmed”. This is one confirmation, for each new block a further confirmation of the transaction is added. A merchant can wait for as many confirmations as they like before accepting the payment for security, but this takes time. Problematic as waiting for more than one confirmation for an over-counter transaction would take too long. Not to mention that entering addresses/amount to send, even when using a QR-code, adds an extra step to the process. Cash is still king in this respect.
In summary Bitcoin and related Cryptocurrencies are an amazing world-shaking development, but I feel that for enthusiasts it can be easy to forget about the negatives still facing the immensely young technology.
Last modified (UTC): June 9, 2014 01:19