Bitcoin’s price has skyrocketed to unprecedented figure over the past several weeks while other cryptocurrencies such as Litecoin or Ethereum have failed to keep its price in check.
After the rumours that Amazon will accept cryptocurrency as a payment option, Bitcoin reached new record high of $7,350. However, other cryptocurrencies, in particular Litecoin and Ethereum, struggled to keep up with their biggest rival.
Bitcoin is a new type of currency and an innovative payment network that is purely digital. As one of the twenty-first century’s most prolific inventions, Bitcoin plays an important role as an alternative to institution-backed financial instruments such as bonds and currencies.
The underlying blockchain technology which is an implementation of the Bitcoin protocol, is responsible for transforming several industries such as banking, e-commerce, legal contracts, and logistics.
The Bitcoin protocol solves two long-known problems with respect to transactions of value, namely the double-spending problem, where the same monetary unit is spent more than once, and the Byzantine generals’ problem, which focuses on obtaining a verifiable agreement across different parties about a transaction.
Providing a solution to these problems in addition to secure ownership and seamless transactions across geographic borders makes Bitcoin one of the most valuable cryptocurrencies.
There are more than 1,100 cryptocurrencies today that follow the Bitcoin protocol and are traded on cryptocurrency-exchanges, such as LiteCoin, Ethereum, Steem, Dash, and Monero.
Despite its advantages, Bitcoin as a digital holder of value has not seen rapid adoption among either businesses or individuals as a favored mode of payment. Internationally, Bitcoin is facing legal hurdles as governments debate the legality of its use. Fewer than 1% of all global financial transactions happen using Bitcoin or any other cryptocurrency.
But if there is a one company that is able to take cryptocurrency mainstream and introduce it to millions of people around the world then it is Amazon. And the idea of Amazon Coin is not new. First introduced in May, 2013, Amazon Coin is primarily used by owners of Amazon’s Kindle Fire tablet to buy apps, games, and items within apps through the Amazon Appstore.
Amazon Coins, source: Amazon.com
But the fact that Amazon’s legal department registered three new domain names; amazoncryptocurrencies.com, amazoncryptocurrency.com and amazonethereum.com, could be a signal that the Seattle-based company may be gearing up to allow its customers to use cryptocurrency to pay for e-books, movies, or even, ordinary products.
In fact, Amazon’s patent “Funding access in a distributed electronic environment” published in October 11, 2016, might be one of the most important documents revealing Amazon’s intentions to enter cryptocurrency market.
“In a first embodiment, each party determined to be responsible for at least a portion of the cost of access to a set of resources under a customer account might be required to provide an appropriate amount of digital currency with a request. For example, a delegation policy might allow access to resources only where a request for access includes a source of funding, such as a digital cash payment, in addition to valid user credentials and other information discussed herein. Such a request then can be processed and/or have resources allocated without requiring a source of the request to first set up an account with the customer and/or provider. Various types of digital cash, electronic money, or crypto-currency can be used, such as Bitcoins provided by the Bitcoin P2P Currency System,” the patent says.
The International Monetary Fund, World Bank, and several regional banks have released whitepapers recognizing cryptocurrencies. Policies regulating use and exchange of Bitcoin and taxation laws that prevent money laundering in the ecosystem can legitimize perceptions of Bitcoin.
But the main barrier is the lack of physicality of Bitcoin. Users are unable to comprehend how Bitcoins can be purchased, stored, and transacted as a purely digital asset with no physical equivalent. First, the time to convert fiat currency to Bitcoin is often large (i.e., for online wallets, it takes between two and five days to acquire Bitcoins despite paying a transaction fee of 2.5%). There are faster means to acquire Bitcoins, such as Bitcoin ATMs, but the conversion fees are higher. Second, the need to be connected to the internet for any transaction is problematic. Most cash or check-based transactions happen without needing the internet.
High transaction costs associated with converting fiat currency to Bitcoins is another issue. This factor contradicts one of the main motivations for the creation of digital currencies. Cloud-based cryptocurrency exchanges such as Coinbase, Bitfinex, Kraken, Bitstamp, and so on charge commissions that range between 2% and 5% of the transaction value. Similarly, Bitcoin ATMs and currency exchanges charge high commissions for buying and selling cruptocurrencies. The commissions range between 8% and 12%. These rates are higher than those associated with foreign exchange payment modes. The high transaction fees increase barriers for user entry into the ecosystem.
It is likely that Bitcoin will become a cryptocurrency standard with large network effects. Blockchain technology and digital wallets have played a key role in reducing difficulties with point-of-sale systems. Several blockchain-based alternatives such as Litecoin, Ethereum, Dash, Monero, and Steem have been developed using the Bitcoin protocol.
Bitcoin, being a new form of money, is the subject of legal and technical debate at various levels of government. Several national governments, such as those in the United States, India, China, and Russia, are mulling regulations to govern the Bitcoin ecosystem. Several state governments such as those in New York and Florida require Bitcoin money licenses, thereby forcing buyers and sellers of Bitcoin to disclose their identities.
Finally, Bitcoin adoption is affected by a negative brand image. People associate Bitcoin with black-hat hackers, who often use it to engage in illegal activities (e.g., Silk Road, the hacking of Mt. Gox, money laundering, etc.).
A change in perception about Bitcoin will take time, although there is tremendous effort in media outlets such as CoinDesk and the Bitcoin magazine to change Bitcoin’s brand image to a positive one. In fact, more illegal activities are facilitated by regular currency.
Therefore, self-regulation of Bitcoin usage by the community is essential. Developing new applications that can detect illegal activities using fraud-detection algorithms and money laundering detection will propel adoption at a faster pace. Bitcoin’s acceptance by global banking and currency exchange systems will play a role in increasing adoption.