A lot of attention has been given to Bitcoin, the digital currency that is supposed to revolutionize the financial industry, yet it is only understood by a few, and seems too technical for the rest. Slowly, we are seeing a lot more businesses adopt Bitcoin in Europe, the US and the Far East. Though, not many have done so in the Middle East, as the adoption trend has not hit hard yet.
How does Bitcoin work?
Bitcoin’s technical aspects make it a complex subject to grasp. So far, articles range from geeky and technical, to financial and mouthy. What I have come to understand from people around me and the world in general, is that Bitcoin is way too complex at the moment to become mainstream, just like the internet was in 1992. No one had a clue how the @ sign was supposed to be pronounced, or what a “website” meant.
So to make you fit the category of “Tech Early Adopters”, and by taking the simple, non-technical approach, here is an introduction to Bitcoin.
Bitcoin – The Definition
Bitcoin is a form of digital currency that is created electronically and held in a Bitcoin wallet. No one owns it. No one controls it. It is not printed or minted like Dirhams or US Dollars, but is mined by computers that solve mathematical problems.
Hold on, so it’s like a credit card?
Credit cards allow you to make payments online and in shops, so that you don’t need to carry physical Dirhams or Dollars. But the big difference here is that Bitcoin is not owned by anyone. It is decentralized.
This means that no bank, central bank, or money transfer corporation owns Bitcoin. No one controls Bitcoin or your money, which puts a lot of people at ease as they become in control of their own money.
How does a transaction work?
A bitcoin transaction happens between bitcoin wallets, which is a similar concept to email addresses or bank account numbers. When I send bitcoins to you, my wallet instructs the bitcoin network to take bitcoins from my wallet and transfer it into your wallet.
Such a bitcoin wallet is typically a mobile app or software. The transaction is instant and takes seconds, even if we are in different countries, and is almost free of charge (less than a fraction of a fils).
So if no one owns it, who created it?
Bitcoin was proposed by a software programmer called Satoshi Nakamoto, in 2008, as a new financial experiment that relies on mathematical proof instead of bankers, in order to create a system that is free from central authority, with low transaction fees, instant speed of transfer, and free from human error.
The experiment worked and ended up building its own multi-Billion dollar economy.
[Raising capital: Is crowdfunding the right option for you?]
Where do I get bitcoins?
There are 4 main methods of getting Bitcoin. Just like Dirhams or US Dollars, you can get bitcoins by:
- Working and receiving your salary in Bitcoin, if your employer chooses to do so.
- Exchanging Dollars or Euros to Bitcoin on a currency exchange, this can be done online, at some ATMs or face to face with someone who has bitcoins.
- Selling products and services and receiving Bitcoin as payment.
But the 4th way is where Bitcoin is different from other currencies:
- Earning bitcoins by mining them.
What is bitcoin mining?
Mining is the process of creating new bitcoins. The name comes from gold mining, that is, to spend effort and resources in the extraction of gold from the ground.
In the same way, Bitcoin uses resources in the form of computing power to issue more bitcoins. These bitcoins are created, and are then divided into smaller parts and distributed between all the people, as a reward, for spending their computing and power resources to mining bitcoins.
These mining computers also serve as a transaction processing service, making Bitcoin a self-sustaining payment network.
So why don’t I just create unlimited bitcoins and get rich?
Bitcoins are released at a fixed rate of 25 bitcoins every 10 minutes. And there will only ever be 21 million bitcoins in existence. This makes competition between miners extremely high and mining very difficult.
But bitcoin mining did and still is big business, and a lot of people are indeed getting rich by operating huge mining operations around the world.
How can I use Bitcoin as a business owner?
Still relatively new, Bitcoin is a digital currency that can be used by everyone today to make payments, and transfer value across the globe. So how can you use bitcoin and benefit from it for yourself, your business and your customers?
In a world where we still rely on bank cheques to make payments, there are various issues that affect us as consumers and business owners that can easily be fixed using technology. Below, I mention a few of these issues with reasons why you should take the time to consider using Bitcoin.
- No one can steal your information: When making a payment using a credit card, the store’s bank is using your information as a verification to access your funds and “pull” these funds out into their account. Bitcoin works in a completely different way, as it uses a “push” method. So when you go shopping, you ask the business for their Bitcoin wallet address, and you are pushing your money from your wallet to theirs. No sharing of information. No personal details from you or the business. No room for fraud at any point of this transaction.
- Bitcoin is Fast. Very fast: With credit card payments, depending on the banks used by both parties, funds can take anywhere between 24 hours to 2 weeks to reach their destination. The same is for cheques and wire transfers. A bitcoin transaction is instantaneous, and will happen typically in a few seconds, whether you are paying someone in front of you or on the other side of the planet. Bitcoin even has extra features that allow businesses to increase their safety requirements of confirmation, which will still make bitcoin, by far, faster than any inter-bank transfer.
- Bitcoin is Almost Free to Use: A typical bitcoin transaction is charged at about $0.01 per transaction. Regardless if you are transferring one dirham worth of bitcoin, or 100 million dirhams worth, this fee will still be the same. In some cases, bitcoin transaction fees are zero, as the fee is calculated based on the volume in “bytes” that is being sent.
But hold on. No on uses Bitcoin!
This is, of course, not true. Since the beginning of Bitcoin in 2009, the number of user wallets created are in the tens of millions. Large businesses around the world, including Google, Microsoft, Dell, Dish, Wikipedia and PayPal have all adopted bitcoin. There are now over 100,000 businesses worldwide accepting Bitcoin today.
In the Middle East, there hasn’t been very much activity from businesses accepting Bitcoin. I have helped The Pizza Guys, a pizza restaurant in Dubai, be the first business in the Middle East accept Bitcoin, and they have so far attracted a large community of bitcoin enthusiasts who want to try paying with bitcoins.
So yes, the bitcoin economy in the Middle East is small, but it is growing. It doesn’t cost you anything to learn, adopt or accept bitcoin. There are people with Bitcoin wallets looking for ways to spend it. Can they spend them with you? This is a question for you to answer.