A Flip of the Coin
No cash, no credit? No problem
Most consumers these days are well acquainted with the range of technologies available to help them fork over money quickly and easily – without using cash – to pay for just about any type of product or service.
Most people have multiple credit card accounts, of course. But increasingly even carrying cards is becoming passé, because anyone with a smartphone and a mobile-pay app can simply scan information stored on their phone into a reader and walk away with their purchase.
But even the tech-iest of consumers may be out of the loop when it comes to one of the most interesting payment methods in the marketplace: Bitcoin.
People around the world are racking up more than 100,000 financial transactions every day using a kind of currency that doesn’t actually exist. Bitcoins are found only in the world of virtual reality, but that doesn’t mean they can’t be used to buy real merchandise.
Bitcoins are a way of using and moving money without a bank account or credit card. Individuals can use dollars to purchase Bitcoins, store them in a virtual wallet linked to their smartphone and then scan their account information at participating establishments to pay for merchandise or for other purposes.
Eight million users have set up Bitcoin wallets. Some $3.5 billion worth of Bitcoins are now in circulation, and 88,000 merchants accept them as a form of payment.
The growing use of a six-year-old currency that exists only in online accounts was a topic of discussion recently during the national Risk Insurance Management Society conference in New Orleans.
In a session that explored the insurance risk potentially posed by Bitcoin, Ty Sagalow, CEO and founder of Innovation Insurance Group, described the currency’s somewhat mysterious roots.
Bitcoins, he said, were created in 2009 by a super-geeky computer coder named Satoshi Nakamoto, who thought through how the system might work, wrote tens of thousands of lines of code and pressed a button on his computer keyboard. Voila! Bitcoin was born – or at least announced over the Internet.
Whether a person named Satoshi Nakamoto actually exists remains a topic of speculation, Sagalow acknowledged. But whoever masterminded Bitcoins did a good enough job to convince a lot of people the currency has staying power.
Sagalow said it’s no surprise that the use of Bitcoins still raises eyebrows among skeptics, given the “shady” nature of its early history.
“It was first used for the purpose of buying illegal drugs, or to pay for murder for hire – some really bad stuff,” he says.
But gradually Bitcoin rose above its dark past and began winning over Silicon Valley-funded corporations who liked both its technological and investment appeal.
Bitcoin today is valued in the marketplace in much the same way as any other currency. They fluctuate against other the money, and in early May one Bitcoin was valued at $235.80.
Regulated exchanges for the currency now exist, but the full regulatory aspects of Bitcoin use are yet to be explored, and that will involve myriad state and federal agencies, Sagalow said.
Robert Parisi, who’s managing director with giant insurance broker Marsh USA, told risk managers who attended the local conference that insurance companies aren’t yet sure how to approach the matter of covering Bitcoin or its use.
“Bitcoin has some volatility, so you can’t have the same approach to storing it as you would a commodity,” he said, adding that the currency has a certain “perishable” quality.
Parisi said the currency’s price volatility is one aspect of Bitcoin that concerns insurance carriers. An upward move in price can benefit an owner, but the currency’s value can quickly turn the other way, and trying to understand exactly how a Bitcoin is created and what causes its fluctuations “is a very complex problem,” he said.
In addition, the security of Bitcoin use hasn’t been fully tested.
Bitcoins held by an individual or business are protected in much the same way a safe deposit box at a bank secures valuables. Once stored in a virtual wallet, the currency can only be removed or accessed through the use of two “keys” – or codes – one held by the Bitcoins’ owner and the other held publicly.
“A person could lose the thumb drive that has the private key on it, then they’re no longer able to unlock their Bitcoin wallet,” Parisi said.
Still, noting that the great majority of people in the world do not have bank accounts or credit cards, but a surprisingly large number have smart phones, some experts think Bitcoin could become a simple and reliable currency for millions of people.
“I honestly believe that Bitcoin is the cutting edge of where monetary systems may be going,” James Kirtland, a vice president with Voya Financial Inc. told the audience. He did not suggest, however, that the transition would occur quickly.
“The biggest hurdle we have with Bitcoin is, we don’t know enough about it,” he said.
CoinDesk Research recently released a report on Bitcoin use worldwide. Here are a few findings:
The total amount of Bitcoin investment into start-up businesses by venture capital firms reached $676 million in first-quarter 2015.
Bitcoin’s price stabilized after a rocky start, recently hitting $235.
More than 8 million people have set up Bitcoin “wallets.”
The number of merchants who accept Bitcoin has reached 88,000.
Bitcoin’s market capitalization reached $3.4 billion.
Source: State of Bitcoin, Q1 2015, CoinDesk Research.