The Pros and Cons of Bitcoins

By Prakash Santhana

To bitcoin or not to bitcoin? That is the question top of mind for many speculators, retailers, insurers, consumers, and–not coincidentally—government regulators. With the rise of digital currencies like bitcoin, transaction anonymity and speed are becoming increasingly attractive. However, these same features have also drawn the attention of lawbreakers.  

Does that mean you should you should minimize bitcoin as the digital shenanigans of cyber-criminals? Or that you should start prepping your business to accept bitcoins in lieu of standard currency? The best answer is likely somewhere in between.

Cryptocurrencies have appealing advantages over traditional payment platforms, and businesses should become educated about the pros of bitcoin. They include:

· Low transaction fees: Bitcoin has low fees compared to the standard currency interchange charge consisting of a flat fee of 10 to 20 cents, combined with varying percentage fees.

· Speed: The decentralized nature of bitcoin means it bypasses banks and other financial institutions, which means payments and transfers can be completed quickly.

· Double-payment protection: Since each transaction is recorded via the public blockchain (transaction database), the “spending” of the same bitcoins more than once is next to impossible.

· Ease of participation: Without the need for credit cards and PINs, bitcoin users need only a computer or mobile device with an Internet connection in order to set up an account and begin transacting.

That’s not to say that the path to bitcoin riches is paved with, well, digital gold. Instances of fraudulent or other illegal activity have risen as quickly as bitcoin’s popularity. This includes the 2013 FBI shutdown of Silk Road, an alleged black market for drug trafficking, and hackers’ well-known theft of $3 million in bitcoins.

In addition, bitcoin’s anonymity advantage has many concerned about what could go wrong. Such mishaps include the following:

· Illegal activity: As Silk Road revealed, the near-anonymity of bitcoin users makes it a particularly attractive destination for money laundering and the procurement of illicit goods, drugs and activities.

· Theft: Once a bitcoin wallet is “stolen” and emptied, monies contained in an account are—at least today—gone for good.

· Volatility: The publicity about hacks and illegal activity negatively affects the value of the coins, altering the risk-reward scenario for bitcoin speculators.

· Lack of centralized authority: A centralized clearinghouse guaranteeing the validity of a transaction offers the ability to roll back a monetary transaction. There is no such a capability with bitcoin.

Can Analytics Sift the Value From Bitcoin?

Ironically, the true value of this digital currency may exist outside of its financial appeal. Data emerges from every bitcoin transaction, and that data has value. Analytics tools can extract and interpret this data—from the timing and nature of spending to the conditions and limitations of transaction contracts—to provide valuable insights about and beyond the transaction. Here are some examples:

Bitcoin transaction graphs can be created and used to access and analyze vast amounts of data within the public blockchain.

Transaction tracing offers an opportunity to better understand the nature of transactions—a benefit that might offer insurers a way to adjudicate claims against stolen account keys.

Analytics can assist in identity resolution by, for example, mining online message boards and other social media sites where bitcoin topics are discussed to discern themes and identify information shared.

Analytics can help global governments mine information from transactions without affecting the speed advantage bitcoin offers for international transactions.

Predictive analytics can identify patterns and reveal likely scenarios from transactions and bitcoin-centric dialogue that is occurring more frequently via social networks.      

Bitcoin has the potential to alter the commerce landscape in significant ways. Businesses that implement analytical processes and technologies now will be well-positioned to mine the real gold from digital currencies in the long term.

Prakash Santhana is a director in Deloitte Transactions Business Analytics LLP and leads the fraud management practice for payments, banking and securities.

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