Bitcoin and Its Effect

Audience

We are writing in an Indian management journal widely followed by upper management of firms. Our scope is to suggest whether or not bitcoin adoption should be done. In the current scenario, various uncertainities surround bitcoins ranging from legal to the whole idea of economic viability of bitcoins. In this context, a proper analysis of various issues at hand will give more clarity to managers in decision making regarding adoption of bitcoins.

Abstract

Bitcoin is a cryptocurrency based on peer-to-peer connections which obviates the need of a centralized currency backed by government or financial institutions. Bitcoin is gaining popularity because of the advantages it provides like lower fees, hassle free transaction etc. However, being a new technology and a totally different concept of currency, it has certain challanges associated with it. In this article, the factors on which we have analysed bitcoins are: legal aspects, security threats, economic risk, widespread adoption of bitcoins and competition from other virtual currencies. Through our analysis we want to find whether Indian businesses should adopt bitcoin as a payment option or should they still wait for some more time. On comparing pros and cons of different factors, we have come to the conclusion that rushing towards bitcoins might not be a good option for now. Waiting for the technology and concept to mature is recommended.

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Future of Bitcoins – An analysis for Indian Businesses

Originally introduced in 2008 by a group of programmers who identify themselves with the pseudonym Satoshi Nakamoto, bitcoin is a cryptocurrency which is based on mathematical cryptography. It is a peer-to-peer version of electronic cash which eliminates the need for financial institutions for a transaction and hence serves as an alternative to government-backed currency. Anyone who wants to use bitcoin can buy it from various online exchanges. The bitcoin is then stored in their bitcoin wallet and can be used for transactions on platforms which support bitcoin. Since its inception in 2009, the number of retailers that accept bitcoin has surpassed 100,000 as reported by Bitpay, the leading bitcoin payment processor (“Bitcoin now...”, 2015). Firstpost reports that in India, there are currently around 500 companies accepting bitcoin (“Bitcoins accepted..”, 2016). Through this article, we will cover various aspects which need to be analyzed so that it gives a clearer picture regarding pros and cons of adopting bitcoins to Indian companies and retailers.

Current Legal status of Bitcoin in India and future implications

Currently, the use of bitcoin is not illegal in India. However, it is characterized by the risk that there is no central government authority to regulate against any fraudulent practices. In its press release on 1st February 2017, RBI has made it clear that users, traders, holders, investors etc. dealing with virtual currencies like bitcoins will be doing so at their own risk. RBI has said that it is presently examining various issues related to virtual currency under the legal and regulatory framework of the country. Though we can’t say as for when it will come with proper guidelines, the widespread use of bitcoin may compel RBI to come with regulations targeting the bitcoin exchanges which are the entry point of bitcoin for users (“Can Bitcoin...”, 2013). However, it is widely believed that bitcoin is a favorite choice for terror activities and other illegal activities around the world due to the anonymity it provides. China has already banned bitcoins. Hence, there is a chance that Indian government may not allow the use of bitcoins until certain checks and balances are installed.

Security Threats and Transaction Risks

One of the major threats that arises in bitcoin is the possibility of double-spend. It is basically a practice where one user is trying to spend the same bitcoin twice i.e. spending it a second time before the first transaction is approved by the bitcoin network. As shown by Nakamato in his first bitcoin formulation paper (Nakamato, 2008), it would require 51% of total computational power deployed in bitcoin network. This can only be done by many bitcoin miners pooling their resources together which is deterred by the fact that they can double spend the amount only for a brief period until the fraud is detected. Hence though the risk is very large, the chance of this happening is low.

Bitcoins are characterized by transaction risks because the transactions are irreversible in nature. If bitcoins are sent by error or by fraud, there is no mechanism to reverse the transaction as is there in other digital payments(Bohme, christin et al., 2015). The only solution is mutual agreements between payer and payee where the payer transfers the money back to the payee. Being anonymous nature of the payments, the incentives seem low. However, the biggest threats come from the attacks on bitcoin exchanges. Mt. Gox and Bitfinex are examples of two large bitcoin exchanges which got attacked by hackers causing loss of millions of dollars to users. Tyler Moore, assistant professor of cyber security at the University of Tulsa’s Tandy School of Computer Science, has found that 33 percent of all bitcoin exchanges were attacked in the period from 2009 to 2015. Compare this with the percentage of US banks that were attacked in the same period- 1 percent. This clearly shows the gravity of the situation.

Economic Risk Analysis

One of the major characteristics of bitcoin is volatility. The market value of bitcoin peaked in 2013 with 1 bitcoin equalling more than 1000 US $ and within a year it was at a low of $ 220. An analysis by Alan MacDonell shows that between 2010 and 2013 the volatility has a mean of $21.53 and standard deviation of $36.83 which is quite high by normal currency standards(MacDonell, 2014) .Within two years, it has again reached 2013 levels. This large volatility is an impediment as firms may see it as an investment option and hence are prone to fluctuations that is greater than other normal investments. In a single blow, they can incur huge losses. High volatility leads us to explore whether bitcoin