Merchants, users of bitcoin uncertain on future of the cryptocurrency

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Merchants, users of bitcoin uncertain on future of the cryptocurrency

Illustration by: Kristine Delicana / Contributor

Illustration by: Kristine Delicana / Contributor

Illustration by: Kristine Delicana / Contributor

Illustration by: Kristine Delicana / Contributor

Kwok Chan

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Illustration by: Kristine Delicana / Contributor

Illustration by: Kristine Delicana / Contributor

In a growing trend, traditional payment methods of dollar bills and checks are being replaced by digital currencies that can be used to pay for goods and services.

One of the leaders in this budding technology is Bitcoin, a form of electronic money created in 2009. Its currency depends on a network of computers that deal with complicated mathematical problems to form and record the details of each bitcoin transaction, according to an article by Reuters, an international news website.

Bitcoins are created by “mining,” according to the Bitcoin Foundation. Bitcoin miners use specialized hardware to process transactions and secure the network, which then rewards the network with a certain number of new bitcoins and money collected from a transaction fee.

James Dow, CSUN professor from the department of finance, said it is difficult to use bitcoins because the process is complicated.

“Using bitcoins requires a certain number of computer expertises, while using regular money — anybody on the street can do that,” Dow said.

Bitcoins are kept in a “digital wallet,” a type of virtual bank account permitting people to send or receive bitcoins, purchase goods or save their money, all free from the government’s control and central banks’ intervention, according to a CNN Money article about the cryptocurrency.

Bitcoin’s value lies not in physical properties and central authorities, but people’s confidence and their willing to accept them as payment, according to the Bitcoin Foundation.

Several online retailers like Overstock.com and TigerDirect have already started accepting bitcoins, but its adoption is not common, according to the Reuters’ article.

Francesco Giartosio, CEO of GlassUp, smart eyeglass store that deals in bitcoins, said the main purpose of his company accepting bitcoins as an alternative payment is to test customers’ reactions.

“It is an experiment to see if it attracts interest from people who want to spend bitcoins,” Giartosio said.“I would say the experiment has failed because we have sold only one unit.”

On Feb. 25, Mt. Gox, an industry leader in bitcoin exchange, where people can purchase or sell bitcoins under different currencies, shut down its site and closed all transactions, sparking off a host of prospective investors’ anxiety and wavering their confidence in the digital currency, according to an article by the Los Angeles Times.

Mt. Gox users might have lost more than $300 million worth of bitcoins, which was the latest and biggest failure in the virtual currency.

Giartosio said the closure of a bitcoin exchange company was not an isolated incident, and it would happen again in all likelihood.

“Fortunately, our account at Mt. Gox was empty,” Giartosio said. “It would be wise for people to keep little money in bitcoins.”

Dennis Halcoussis, CSUN professor of economics, said the incident at Mt. Gox had a great impact on bitcoin customers and investors.

“Bitcoin has a problem now because people will not feel confident about its future,” Halcoussis said.

Dow said the incident illustrates that the monetary system relies on a number of different institutions to build confidence and support it.

“A new digital currency might not have those institutions to establish, which makes more speculative and risky,” Dow said.

Marin Dajak, co-founder of www.btcgate.com, an online electronics store that accepts bitcoins, said he doesn’t expect a large number of companies to suffer the same fate as Mt. Gox.

“There is a large number of scammers and hackers out there praying on businesses and users, and while this is bad in the end, it will help strengthen the bitcoin economy,” Dajak said. “I believe the incident of Mt. Gox is a good thing, and it will help bring forward a better, more transparent exchange like Bitstamp.”

Dajak added that the main problem with Mt.Gox was poor customer support and lack of transparency and security.

“While Mt.Gox was extremely important in the beginning phases of bitcoins, it simply did not keep up with its potential and grew too big and too fast,” Dajak said.

Claudio Levrini, manager of Bitroad, a bitcoin exchange company selling electronics, said while bitcoin exchange companies take advantages of the digital currency, it is also their duty to make wise decisions an d take security measures.

“Mt. Gox was on the brink of bankruptcy from November last year, and it was known in the community,” Levrini said. “You are responsible to keep      your money safe.”

Dajak said the companies that take special precautions regarding security will survive and grow.

Nancy Virts, professor of economics at CSUN, said there are no reasons for merchants to accept bitcoins because it is a very risky investment.

“Money has no intrinsic values, not like gold and coins,” Virts said. “Money is not useful unless people are willing to accept them in payment.”

Virts pointed out that bitcoins are not accepted worldwide partly due to lack of the United States government’s support.

“The advantage of dollar bills is that the US government is willing to accept in payment for taxes, and as a result, businesses are willing to accept in payment not just in the US, but all around the world,” Virts said.

Halcoussis said a currency’s stability comes from the level of people’s confidence rather than the government.

“The dollar is relatively stable because people believe that the U.S. government is stable and the dollar will continue to have value for a long time,” Halcoussis said.  “A currency doesn’t have to have a government backing it, but people have to believe it will continue to have value in the future.”

Bitcoin transactions are instant, and its users do not need to have a bank account and disclose their own personal data to third party, Levrini said.

Dajak said there are a variety of advantages of using bitcoins because they are decentralized.

“We are firm believers in bitcoin, and we use it both personally and have decided to use it on our site exclusively to help make it the future of money,” Dajak said. “An added benefit is bringing down processing costs and in turn, offering the lowest possible prices for our customers.”

Dow said the biggest advantages of bitcoins are anonymity and the avoidance of government regulation, which would make it more useful for illegal transactions.

Levrini said the future of bitcoin exchange companies will become more competitive.

“Bitcoin companies are starting to evolve, and some will grow, while others will fall,” Levrini said. “This process will hopefully create a competitive market and push many serious players to participate.”

Levrini said many people are only concerned about bitcoin itself, while the true innovation is the “blockchain” concept, which synchronizes transactions between the digital currency record transactions.

The Bitcoin network depends on the “blockchain,” an electronic ledger that keeps all confirmed transactions of a specific amount of currency from one person to another, according to a blog about  bitcoins. Once these transactions spread on the bitcoin network, they will be synchronized and updated on every participant’s computer.

“We accept bitcoin because we believe that this technology will redefine ecommerce and retail payments,” Levrini said. “The blockchain is an innovation that will change many aspect of the financial world forever, and the bitcoin is just the beginning.”

Levrini added that failures are inevitable, but they will be the evolution of  new technology.

“Bitcoin is just the tip of the iceberg, and we will see many different applications coming from this technology,” he said. “In years to come we will see how big the impact of this innovation will be and what road will the progress take.”

Giartosio said the bitcoins will evolve into other forms of digital money in the future.

“Some bigger projects will replace bitcoins if they do not make partnerships with other countries,” he said. “Like Facebook has replaced MySpace, and Android is replacing iOS.”