Bitcoin struggles to connect with consumers, retailers


It was supposed to revolutionize the way we buy and sell things online, making it faster, cheaper, safer — and very private.

But these are rocky days for Bitcoin, a form of digital currency that its creators thought would become as commonly used as credit cards and PayPal.

The price of a Bitcoin has been hitting record highs lately, pleasing investors. But the currency is largely being ignored by American consumers and retailers.

Cyber experts say developers are doing a poor job of explaining what Bitcoin is and why they should use it. Retailers don’t like the swings in the currency’s price.

And the unregulated cash and payment system has long suffered from its association with criminals.

Bitcoins can be used with a degree of anonymity, which have made them a preferred currency for buying illicit drugs and weapons at black markets on the internet.

Money laundering also is a problem.

On July 26, a grand jury in Northern California issued a 21-count indictment against a Russian national and the Bitcoin exchange he helped to run for a variety of money-related crimes, including laundering.

Worrisome headlines also are being generated by hackers, who’ve stolen huge sums of Bitcoins from the supposedly secure accounts of consumers and investors.

All of these problems were compounded in late July by a power struggle among the developers who operate Bitcoin. The fight led to the creation of Bitcoin Cash, a rival currency.

“Unpredictable pricing, no safety net, reports of million-dollar hacks, and strong ties to organized crime — it’s no wonder consumers are both intrigued and frightened by Bitcoin,” said Ben Johnson, chief technology officer at Obsidian Security in Newport Beach.

Birth of a currency

Bitcoin has been a source of confusion and drama since the beginning.

The currency was created by Satoshi Nakamoto, a male computer programmer. Or maybe it was a female. Or a group composed of men and women. Nakamoto’s true identity has never been determined.

The reason? No one knows.

This much is certain: In 2008, one or more people using the name Satoshi Nakamoto published a white paper laying out the idea for Bitcoin. The currency was envisioned as, “A purely peer-to-peer version of electronic cash (that) would allow online payments to be sent directly from one party to another without going through a financial institution.”

Nakamoto saw this as a way to cut down on the time and cost of doing business. And it would eliminate third parties — notably central banks — that could seize or change the value of the currency.

Nakamoto and his colleagues released Bitcoin in 2009 as open-source software, meaning that people could read it, modify it and pass it around. This was meant to build trust among users. So was the decision to make all transactions on Bitcoin visible on public ledgers.

The thing that remains private is the user’s personal identity, unless they disclose it.

Tough concept

American currency is easy to understand. Dollars are printed. Coins are minted. They’re physical objects. You can hold them.

Bitcoins are a different matter.

The math and computer science behind creating a Bitcoin is so complex almost everyone struggles to explain it, including the Bitcoin Foundation, which promotes the currency.

The website Lifewire puts it this way: “Bitcoins are, in essence, electricity converted into long strings of code that have money value.”

The conversion is done by computer experts who also verify Bitcoin transactions. These “miners” are rewarded in Bitcoins.

People typically buy Bitcoins through online exchanges that are linked to a person’s bank account or credit card. The currency is placed in a digital “wallet,” software that resides on a computer or smartphone. The wallets can be used to make transactions.

Bitcoin has gotten a lot of attention from investors. This year alone, the currency’s market price has soared from about $1,000 to $3,461as of Thursday. But over time, it’s also suffered big drops.

“(People) who’ve managed to hold onto their Bitcoins had to endure wild fluctuations in price and confidence through a series of hacks, frauds, and technical hiccups,” said Stephen Cobb, a researcher in the San Diego office of ESET, a cybersecurity company.

The hacking is of particular concern. Roughly 33-percent of all Bitcoin exchanges were hit by hackers between 2009 and early 2015, according to a University of Tulsa study released last year. The hacks include the theft of $350 million from a Tokyo exchange. During that same period, almost half of all Bitcoin exchanges closed.

Bitcoin also is playing a growing role in extortion. Hackers frequently release malicious software that freezes access to people’s computer files. Victims then learn that they have to pay ransom to regain access. Hackers usually demand that they be paid in Bitcoin.

The problem was highlighted in May when hackers released WannaCry, ransomware that hit 230,000 computers worldwide. The attack disrupted service at numerous hospitals in England.

“The use of Bitcoin is not inherently nefarious. Many people use it legally,” said Special Agent Davene Butler, who works out of the FBI’s San Diego office.

“However, most user identification (with Bitcoin) remains private and creates a level of anonymity that makes it attractive to criminals. We’ve seen Bitcoin used in extortion, cybercrime, drug trafficking, sales of counterfeit documents and credit card numbers, weapons trafficking and child pornography.”

Bitcoin’s volatility and its association with crime hasn’t entirely alienated the legitimate retail community. Companies such as Microsoft, Expedia, Dish Network and Overstock.com accept the currency. But they represent a small minority of big retailers. And their customers aren’t clamoring for change.

At least, that’s not happening yet.

“Consumers need awareness and education — they need to understand what Bitcoin (is about),” said Obsidian’s Ben Johnson.

He also said “there has to be some form of safety net. Consumers have the FDIC and credit card companies (are) willing to credit fraudulent charges.

“But with digital currency, there’s no central government or central bank that will refund your if someone steals Bitcoin, or if you lose your Bitcoin wallet.”

Fordham University economist Giacomo Santangelo said, “People are not being given ANY incentive to get involved with digital currencies other than the anonymity of transactions, which would not appeal to the majority of consumers.”



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