Bitcoin, Anyone?

The Rise of Crypto Currency

It is the era of technological revolutions. New technologies emerge and disrupt the way we spend our time, the way we think and generally the way we interact with the world around us, from the development of cars without human drivers to use of facial recognition technology to make payments to the 360-degree selfie.

In recent years, a new type of technology has sparked debates – Bitcoin, a crypto currency. Bitcoin came into the market more than seven years ago and has turned some investors into millionaires. Before we go into the usage of Bitcoin in the Middle East, as well as what it means for the retail sector, let’s understand what it actually means:

How Bitcoin is mined

Introduced in 2009, Bitcoin is a type of unregulated crypto currency created by an unknown individual or group of individuals going by the name of Satoshi Nakamoto. Bitcoin establishes anonymity of its user’s identities allowing buyers or entities to purchase anonymously; no intermediaries are required, meaning no need to whip out those bank credit or debit cards. A shared public ledger called ‘blockchain’ records all transactions.

The Bitcoin network operates through a process known as ‘Mining’, which is essentially the verification of bitcoin transactions by individuals, known as ‘miners’, and their addition to the blockchain. Miners sort new transactions into fixed sized blocks and then solve complicated mathematical problems through the usage of a significant amount of computing power. The miner who first solves the problem (unlocks the block) gets to place the next block onto the blockchain, confirming the transactions. With each new block added to the blockchain the previous block transactions are confirmed again securing the payment for the receiver, more than one number of confirmations may be set by the receiver before a transaction can be considered accepted; 6 confirmations are required by some merchants. The system then generates new bitcoins, currently 12.5 bitcoins for every block unlocked (this value will half every 210,000 blocks mined, total number of mined blocks was 498,480 on 9th December 2017); the miner collects these new bitcoins and transaction fees as a reward. .

A person can accumulate bitcoin by buying bitcoins through exchanges, selling services / items for bitcoin or mining bitcoins. The bitcoin system was created so that there can only be 21 million bitcoins in circulation, on 9th December 2017 there were 16.7 million coins in existence, based on various opinions this supply is expected to reach its limit by 2140.

The typical process to use bitcoin involves the user opening a desktop or mobile Bitcoin wallet to sell, store and spend bitcoin. The user can create Bitcoins by converting their dollars / dirhams to Bitcoin (BitOasis, a digital currency wallet, provides this service for users in United Arab Emirates, Saudi Arabia, Kuwait, Bahrain and Oman).

According to Blockchain.info, on 18th August 2010 the price for one bitcoin was 0.07 dollars, on 9th December 2017 it was USD 15,143. There has been rapid price appreciation over the years, naturally with a few fluctuations along the way.

According to Blockchain.info the total USD value of bitcoin supply in circulation on 9th December 2017 has exceeded USD 250 billion ahead of organizations like Citigroup, Oracle and Coca Cola.

Bitcoin Middle East

Bitcoin in the Middle East has been gaining popularity drawing investors. In the real estate market, Aston Plaza and Residences, a residential and commercial property development in Dubai Science Park, by Knox Group of Companies, announced in September 2017 that it would accept bitcoins as payment for its residential units.

Some online retailers have introduced bitcoin as a mode of payment, such as Overstock.com, Microsoft online stores and Newegg.com.

Some internet and brick and mortar retailers around the world are also accepting bitcoins as an additional mode of payment, such as Subway franchises in Buenos Aires.  However, the adoption of bitcoin among retailers is not as high as the hype around it.

Based on certain reports, using Bitcoin as a method for payment may be considered inconvenient for consumers due to the time taken for transactions to be confirmed by miners and the rising transaction fees. According to Blockchain.info, on 9th December 2017 the median time for a transaction to be added onto the blockchain (only transactions with miner fees) is 12 minutes.

The higher number of transactions has led to miners having to prioritize transactions to the amounts that produce the highest fees (individuals who want their transaction confirmed quicker pay higher fees), leading to longer times for lower fee transactions to be confirmed that can go up to an hour or a few days.

Transferring bitcoins from one Bitcoin address to another is subject to transaction fees, according to Investopedia in the beginning of 2017 it was USD 0.392 as of 9th December 2017 it had risen to USD 21.567 (on average) for bitcoin payments, which may price out the value of small purchases at various retail outlets.  

Moreover, the rapid fluctuations in its price promotes its use as a trading asset rather than a currency for retailers.

The unpredictable and unregulated nature of bitcoin, the time taken for transactions to be confirmed and its rising transaction fees may reduce the attractiveness for retailers to introduce this as a mode for payment.

The future of bitcoin is uncertain, some saying it is likely to disappear, while according to an analyst at Saxo Bank saying that it will rise to USD 100,000 per coin in 10 years. For the time being Bitcoin appears to be attractive to consumers for trading rather than a payment method at retail shops.