SPECIAL FEATURE STORY: Inside the Bitcoin revolution

Bitcoin is the most exciting tech innovation since the internet. In this special feature, My Business Editor Justin Grey outlines why SMEs should be listening to the Bitcoin buzz.

Bitcoin is the most exciting tech innovation since the internet. It’s here to change the payments and transactions industry forever – and that’s just the start. Here, My Business Editor Justin Grey outlines why SMEs should be listening to the Bitcoin buzz.

Downstairs and a wee amble from My Business HQ on York St in Sydney’s CBD, tucked underneath a camera store and adjacent to a Golf World is a small, seemingly nondescript bar. Peer into its display window, at knee height to passersby, and the joint is anything but nondescript. Star Wars memorabilia – an All Terrain Armored Transport Walker here, a Stormtrooper helmet there – is lovingly displayed next to a vintage Atari 2600 video game console with game cartridges bigger than that mammoth iPhone 6 Plus. Amongst this striking homage to tech culture icons of yesteryear - and equally as eye-catching - is a sign that reads, “Bitcoin accepted here”.

The watering hole is The SG Bar. Owner James Newtown has been accepting Bitcoin as a form of payment for drinks and his killer homemade pies for the past year. The Bitcoin proposition literally walked into James’ bar. A group of Bitcoin fanatics even started congregating at the bar on Wednesdays, which led to the birth of The SG Bar’s ‘Bitcoin Wednesdays’.

“Well, it’s that kind of geeky bar, isn’t it?” James muses with a smile. “A regular just approached me, told me about it, and said how it was booming. I met with a guy who runs a Bitcoin point of sale system, it took about eight weeks of investigating and researching before I decided to sign up to it.

“Some people travel here because they can pay in Bitcoins – they’ve heard about it and there’s that novelty of travelling to a particular place to use it,” James says. “Then some people will see the sign in the bar, and go, ‘oh, shit, do you accept it?’. Then they ask to pay with it. It’s novelty the first time, and then you have the regular users who keep coming back touse it.”

BITCOIN WHAT?
With its origins dating back to 2009, Bitcoin is the leading force in the burgeoning world of cryptocurrency, or decentralised digital currencies that use cryptography to secure transactions and control the creation of new units. Bitcoin is built on an open-source software platform that records all transactions and payments in a public ledger. 

The most basic explanation is that Bitcoin is money for the internet. It’s something that you can readily and easily transfer over the internet at a very low cost. And, critically, it is managed by its users, rather than by a company, bank or government. Bitcoin’s ledger is reconciled every 10 minutes, so all transactions are reconciled and cleared much faster than other existing electronic payment systems.

Most people who aren’t Bitcoin fanatics have likely had a less than stellar introduction to the notion of Bitcoin via two much-publicised dramas. Bitcoin has been increasingly embroiled in the ongoing Silk Road saga since the launch of the website – an online black marketplace where assorted illicit and illegal items are bought and sold using Bitcoin – in early 2011.

The other major maligning force in Bitcoin’s history to date involves the dramatic collapse of Mt. Gox, once the world’s largest bitcoin exchange, in February of this year. Mark Karpeles, CEO of Tokyo-based Mt. Gox, filed for bankruptcy protection after nearly half a billion dollars in Bitcoins vanished into the ether, allegedly due to being hacked.

Many a Bitcoin skeptic usese these cases as the basis for denouncing both Bitcoin’s potential and legitimacy. However, those in the know, such as Jeremy Glaros, CEO of Bitcoin trading solutions company Coinarch, suggest otherwise. Jeremy believes that Bitcoin – as a technology idea and an industry – has evolved beyond the issues thatprecipitated those events.

“You’re now seeing more and more serious companies get involved,” Jeremy explains. “Around the time that Mt Gox collapsed, it was a bit of a cottage industry. The Bitcoin space was more of a community looking out for each other and doing something they thought was interesting, as opposed to a really business-oriented thing. And that’s what allowed something as badly mismanaged as Mt Gox to get a foothold and then fall over.

“But now we’re seeing much more serious businesses getting involved and serious money being thrown around. Companies are raising millions of dollars – and in some cases tens of millions of dollars – to build out the killer business in the Bitcoin space.”

Rick Day, Co-Founder of Aussie Bitcoin exchange igot.com, adds that Bitcoin wasn’t created to enable the likes of Silk Road. “Silk Road took advantage of the anonymity that Bitcoin offers,” Rick says. “Bitcoin has grown exponentially since then. We have big retailers like Dell, Overstock, New Egg, Cheapair, and Expedia adopting Bitcoin. Investor interests in Bitcoin globally have grown from merely $20 million invested in 2013 to $250 million in the first seven months of 2014. Talented and well-known entrepreneurs have built beautiful and productive tools around Bitcoin and its blockchain technology.”

BITCOIN’S APPLICATION FOR SMEs
There are a number of general benefits to using Bitcoin as an alternative currency. But the main reason you should be considering introducing the Bitcoin option as a form of payment for goods and services in your business is simply its low usage cost. Many SME business owners are already struggling with overhead costs and taxes. On top of this, many credit card companies are charging around two or three per cent for the privilege of using their merchant services.

Let’s not be mistaken – this is a meaningful amount of money, particularly on larger transactions, and it all adds up in a hurry. However, if you were to accept that same payment in Bitcoin, you could realistically expect those merchant fees to drop to a fraction of that amount. Instead of two or three per cent, you could pay as little as 0.2 per cent which, in the bigger picture, will help improve your bottom line, or even give you scope to reduce prices for your customers.

Chris Guzowski, CEO & Founder of ABA Technology, a start-up that is introducing Bitcoin ATMs into Australia, believes that SME business owners may not be across just how much they’re currently forking out in transaction fees.

“The cost of accepting credit cards is multi-faceted, from a monthly fee, to a minimum transaction fee, to a percentage of the transaction, all charged by the merchant services provider,” Chris argues. “The banks are very good at hiding fees, so people don’t realise what they’re being charged. For financial services we’re paying a fee – and it’s a large one. And these can all be avoided using Bitcoin.”

The other positive of accepting Bitcoin payments – especially for online retailers – is that it eliminates having to deal with ‘card not present’ transactions, where the customer may dispute charges and get their money back. Bitcoin is non-reversible by nature. There are no chargebacks and there are no exchange rate risks, as most merchants instantly convert it to Australian dollars on Bitcoin exchanges.

HOW IT WORKS
Using Bitcoin in your business is, more or less, is as easy as accepting other forms of electronic payment. Your Bitcoin using customers buy Bitcoins through a Bitcoin exchange, such as iGot.com, or a Bitcoin ATM (essentially a Bitcoin exchange on wheels). They store these Bitcoins on their smartphone using a Bitcoin wallet app.

When they purchase goods or services from your business, they use their Bitcoin wallet app to scan a QR code on, for example, an iPad at your counter, which immediately processes the payment. Like any other form of electronic payment, Bitcoin requires the merchant to have a point of sale system in place to process the payment.

At The SG Bar, James uses the BitPOS point of sale system, a nifty software developed by three awesome blokes in Sydney. James is currently processing Bitcoin payments on his smartphone.

“We just use an internet page and login,” James explains of using BitPOS. “It comes up with a keypad, you put in the digits, a QR code comes up, they scan it with their phone, the transaction takes five to 10 seconds and then it’s done. You then put it through the till system.”

And, with Bitcoin still being quite a fluctuating commodity, James minimises his exposure to risk through the prompt conversion of Bitcoins into Aussie dollars at the current exchange rate. “I don’t ever actually own any Bitcoins – everything goes through the BitPOS point of sale system,” he continues. “They can either keep it or sell it straight, but either way I get my Bitcoin money transferred to Australian dollars that night. The risk to me is virtually non-existent. It’s traded that night, so generally before I close the bar at midnight, it’s traded.”

AUSSIES TAKING THE BITCOIN LEAD
Bitcoin is still in its relative infancy and being further defined and built out every day. Being open source, it’s evolving at a rapid rate and many hands around the world are currently working on game-changing Bitcoin applications that have the potential to disrupt the payments and transactions industry in all sorts of awesome ways. There are certainly still a few creases that need to be ironed out before Bitcoin really catches fire as an alternative form of payment. These mainly involve its perceived security flaws, its still volatile exchange rate, and a lack regulation (and official recognition) from government.

However, if there ever was a country in which Bitcoin is set to have a fair crack, it’s Australia. Aussies are early adopters of Bitcoin and there is a disproportionately strong groundswell of support for the Bitcoin movement in Australia. Rick from iGot.com puts this down to Aussies’ penchant for being early adopters of technology.

“We’re a very savvy nation when it comes to technology,” he opines. “Bitcoin usage has gone up in Australia [as much as seven per cent of the global Bitcoin trade]. We’ve had people buying Bitcoin, and then selling it for a profit to buy cars, put a down payment on a house and even pay suppliers. Transactions are on the rise [and] Australian consumers have a fair share of the Bitcoin liquidity.”

“The stats say that Australians are actually disproportionately high owners of Bitcoins,” Jeremy from CoinArch adds. “Because Bitcoin has had such a dramatic price run, there are lots of people who are treating it more like gold – something that you’d put under the bed, hope it increases in value, then sell off – than Australian dollars that you’d use to buy things with every day. I think Australians have probably been more the former than the latter, but there’s no question that there are lots of interesting [Bitcoin] businesses that have popped up and it does seem that we’re a fair way along the curve. Australians are as interested in Bitcoin as anybody out there.”

THE FUTURE IS UNWRITTEN
Australia’s Bitcoin leaders have come together to form the Australian Digital Currency Commerce Association (ADCCA), an organisation with a united voice to engage government and other stakeholders on unified Bitcoin discussions. A Senate inquiry into Bitcoin is on the horizon as a direct response to the ATO’s recent ruling on Bitcoin. Chris from ABA Technology believes that as long Bitcoin start-ups can make Bitcoin easy to use, we’ll see more and more people use it, which will lead to a much greater adoption of Bitcoin by business owners.

“But it’s still very, very early days,” he adds. “I compare Bitcoin at the moment to being like the internet when nobody had websites. It’s more of a payment platform than a currency, but the more people use it, the more it can come to be defined as a currency. Ultimately, its purpose is a means of payment, its function is money, and its best use is to facilitate trade.”

And Chris has no doubt about the broader applications for Bitcoin technology beyond the scope of digital currency. “Bitcoin is the invention of digital scarcity. Until now, you couldn’t have something that was digital and scarce. With Bitcoin, something that is digital can’t be replicated, and that is the true invention here. The first application of it is Bitcoin, a currency, but there are a lot of other applications as well. And the fact that it is completely decentralised and not controlled by any one institution or government means the whole world can innovate around this technology to give it more practical functionality.”

One thing that’s certainly not lacking in the Aussie Bitcoin industry is passion from those making things happen. And James the barkeep has seen it first-hand.

“They’re pretty passionate about it,” he says of The SG Bar’s ‘Bitcoin Wednesdays’ crew of Bitcoin innovators. “In the year that they were coming here, that’s all they talked about. Not even a chance of subject into, you know, weather, or current affairs… .”

To get your head around the mind-boggling potential of Bitcoin, take a look at bitcoin.org. It’s a brave new world... .

This feature was the Cover Story in the November 2014 print issue of My Business. To read more in-depth features for SME business owners immediately upon publication, subscribe to My Business magazine now. 

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