What Service Providers Need to Know About Bitcoin

By Pino Vallejo

Brought to you by The WHIR

A growing number of web hosts accept Bitcoin, and as the digital currency gains users and acceptance, the trend is likely to grow. As a cryptocurrency based on blockchain technology rather than a national currency, Bitcoin is considered by its proponents to provide unmatched privacy and security, compared to other currencies or payment systems, with little or no transaction fees or taxes.

Some of these same advantages also make Bitcoin popular among those conducting criminal business online, and security issues with Bitcoin exchanges and wallets contribute to its extreme volatility.

Bitcoin is the most prominent cryptocurrency, Gartner says, defining cryptocurrencies as “a subset of digital currency that is decentralized, and based on a set of algorithms and protocols that enable a peer-to-peer, cryptographically based payment mechanism, medium of exchange and store of value.”

What is Bitcoin?

Bitcoin was developed by the mysterious Satoshi Nakamoto and released as open source software in 2009. The currency supply is created through “mining,” and transactions with it are conducted peer-to-peer and verified by network nodes. Each transaction is recorded in a public database, the blockchain.

Blockchain technology is based on the concept of a distributed database, in which all transactions are broadcast to a peer-to-peer network of users. The network validates the users and transaction with an algorithm. The transaction can be an exchange of cryptocurrency, but can also involve other types of data, such as contracts.

The database (or “ledger”) which is the record of transactions is shared (or “distributed”) by all networked nodes running Bitcoin software, according to Wikipedia. The processing of “mining” bitcoins consists of writing a new portion or “block” of the algorithm which includes a cryptographic hash of the previous block along with a number generated to continue the algorithm. The creator of the new block is awarded a set number of bitcoins (currently 12.5), with public keys for verification and private keys to establish ownership.

The Gartner Hype Cycle for Emerging Technology 2016 said that blockchain now consists of nearly two dozen distributed-ledger products, though it is “still five to ten years from mainstream adoption.” Since then Gartner VP for technology Peter Sondergaard called blockchain’s short term impact was “over-hyped.”

Other cryptocurrencies include Ethereum, another open source blockchain which has significant corporate backing, as well as smaller currencies like Ripple and Namecoin. There are also “forks” of bitcoin such as Bitcoin XT and Bitcoin Classic.

Pros and Cons of Bitcoin

Bitcoin.org touts the security and low transaction cost associated with Bitcoin as its primary benefits for businesses accepting it as payment.

There is no fee for receiving Bitcoin, and fees for confirming spending are flexible. It can be traded across borders without extra fees, delays, or limitations, and because payments cannot be reversed, there is no risk of chargeback fraud. Processing payments does not require PCI or other regulatory compliance, and no sensitive customer data is stored. Multi-signature payment authorization for organizations and accounting transparency are also benefits for businesses, according to Bitcoin.org.

The irreversibility of payments could be considered a drawback by some service providers, although transactions can be reversed by the party receiving bitcoin. Other potential challenges with Bitcoin include keeping your wallet secure, as coins can be stolen by hackers, and an uncertain and evolving regulatory environment with variation between countries, accompanied by embryonic internal industry governance. Bitcoin has been associated with online criminal activity at times, due to its use on platforms like Silk Road.

The greatest potential problem may be price volatility. When the WHIR covered Bitcoin in 2012, one bitcoin (BTC) was worth roughly $12. It passed $1,000 each in late 2013 amidst drastic fluctuations. By the time the Mt. Gox exchange suffered a massive breach, losing 850,000 bitcoins worth an estimated $450 million in early 2014, they were worth $530. The price fell to roughly $200 in early 2015, but had recovered to over double that by that by the year’s end. It rose relatively steadily throughout 2016 to nearly $800 per coin, and has spiked in 2017.

The price of a single bitcoin surpassed the price of an ounce of gold in March, leading to an anxious article in The Economist on just what type of bubble Bitcoin is. Regardless of the answer, the currency’s volatility may represent the greatest drawback for businesses.

How Web Hosts Can Accept Bitcoin

To use bitcoin, it is necessary to have a Bitcoin wallet to store it, and a public Bitcoin address which it can be sent to. To accept payments in Bitcoin, businesses generally use a payment processing service (though in theory you can process your own payments). Bitcoin community documentation recommends merchants use a full node, rather than a light wallet, as it makes payment confirmation easier and is less vulnerable to attack.

Popular payment services for Bitcoin include BitPay and Coinbase, and a helpful guide for small businesses implementing Bitcoin payments is available from the Bitcoin Wiki. Companies in the cloud and hosting ecosystem that currently accept Bitcoin include NameCheap, MonsterMegs, and WordPress.com, while bithost.io resells Digital Ocean cloud hosting.

Data from Bitpay showed over 100,000 merchants were accepting bitcoin by early 2015, and there are now close to 300,000 Bitcoin transactions every day, according to Blockchain.info. Whether it is worth adopting for internet service companies depends on several factors, including their customer base and home jurisdiction. The explosive growth and continuing development of Bitcoin and digital currencies make it important to pay attention to, regardless.