The first half of 2013 has certainly been tumultuous for the world's largest cryptocurrency. Announcements of ever-larger businesses accepting bitcoins as payment (the Internet Archive will even pay portions of staff salaries in bitcoins) together with financial troubles in the EU and Cyprus, offset by software issues, cyber attacks, regulation by FinCEN, and most recently, the seizure of the assets of Mt Gox (the world's largest bitcoin exchange) for failing to register as a money transmitter in the US, have resulted in huge volatility. Prices of bitcoin have fluctuated as high as $266 and as low as $50, sometimes halving or doubling in value within hours.
With all these ups and downs, it seems like a good time to reflect on bitcoin's ongoing usefulness from an e-commerce provider's perspective.
For those who aren't already paying their Friday night bar tab in bitcoins, bitcoin is a virtual currency that can be exchanged for cold, hard cash online via a bitcoin exchange. You can also create (or 'mine') bitcoins yourself using a software program that runs complicated mathematical problems and (occasionally – sort of like mining gold) generates a bitcoin as a result. Initially, anybody could mine bitcoins but these days, the competition for bitcoins is so intense (with entire server farms being dedicated to the task) that the chances of striking gold are exceptionally small. Bitcoins are stored in 'wallets' that can either be downloaded to your PC or stored in the cloud. Bitcoin relies on p2p networking and encryption for integrity, and was launched by the mysterious Satoshi Nakamoto (a pseudonym) in 2009 as an answer to a perceived lack of trust in governments, banks and other institutions to maintain the value of currency and conduct secure anonymous transactions.
From an e-commerce provider's perspective, the main advantage of bitcoin is that processing transactions is fast and cheap. The cost of receiving payments in bitcoins is a fraction of a credit card transaction fee, making it feasible to receive very small payments (eg 50 cents). There have also been suggestions that bitcoin could become a centralised currency for virtual worlds and online gaming.
Another promoted advantage is the anonymity and security of bitcoin transactions, since transactions are linked to a bitcoin address that is apparently anonymous. For this reason, bitcoin has become very popular for online gaming, and it is the currency of choice in the internet underworld.
However, recent analyses have shown bitcoin's anonymity to be vastly overstated. All bitcoin transactions are recorded on a public register, so if a person uses the same bitcoin address for multiple transactions, these can all be linked together. Further, participants in a bitcoin transfer will generally be told the other party's bitcoin address. Combined with information posted in user forums and social media, this means that with some relatively simple techniques, a significant portion of consumer-type bitcoin users (ie those that don't go out of their way to preserve anonymity) can be identified.
There are services (eg bitcoin mixers) and techniques that can be used to counter these anonymity problems. Although it will take some time before bitcoin gets big enough for privacy breaches to become a real problem, businesses trading in bitcoins regularly should start thinking about protecting their privacy now, in order to keep details of their finances, supply chain and spending habits away from prying eyes.