Technology evolves -- it is the nature of the beast -- and the way people pay are no exception. eBay (NASDAQ:EBAY)'s Paypal was one of the first technology-driven currencies, but there is a new form of online payment on the horizon -- bitcoins.
Bitcoins are a new digital currency which are traceable, difficult to steal, and incredibly portable. Users can start using bitcoins in one of two ways -- by purchasing the bitcoins from someone or by "mining" them.
Mining bitcoins "is essentially a way of processing and verifying transactions, by generating "blocks" which are permanent records of BitCoin activity on the network (a block includes all recent transactions, a random number and the preceding block's hash) and new BitCoins," writes Make Use Of. "These blocks are then added to the "block chain" in chronological order, and once added to the chain a block is very difficult to modify (making it hard to "double spend" your BTC) as each subsequent block must also be modified. Once a block has been created, a bounty (currently 50BTC) is awarded to the individual who created it. This bounty halves every 210,000 blocks, and it is estimated that by the year 2140 the maximum number of BitCoins - 20,999,999.9769 BTC - will have been generated."
Basically, "bitcoins are created by solving a puzzle that involves getting a certain result with random hashes, which is effectively what mining is all about," explains Make Use Of. Mining can be done on your own or as part of a pool, but either way "you'll need a working "miner" that will make good use of your hardware". For as easy as it sounds, it is an extremely competitive business. According to Wired, "Bitcoin mining is a bit of a zero-sum game. The Bitcoin peer-to-peer network produces 25 bitcoins every 10 minutes. That's a constant. But people who have more cryptographic processing power have a better chance of winning those 25 bitcoins."
After you have bitcoins, regardless how you acquire them, you will need to store your bitcoins in a "wallet". According to the Bitcoin website, "Your Bitcoin wallet is what allows you to transact with the world. It gives you ownership of Bitcoin addresses that you can use to receive coins from other users and then lets you send those coins onwards. Just like email, you can receive bitcoins when you are offline, and all wallets are compatible with each other."
Bitcoins Come With A Warning
It sounds simple, but it is not so straight forward as all that.
As a completely different form of currency, bitcoins are transferrable worldwide without the issue of currency conversion. However, that also means that the value of bitcoins can be also extremely volatile.
According to the website: "The price of a bitcoin can unpredictably increase or decrease over a short period of time due to its young economy, novel nature, and sometimes illiquid markets. Consequently, keeping your savings in bitcoin is not recommended. Bitcoin should be considered as a high risk asset, and you should never store money that you cannot afford to lose with Bitcoin. If you receive payments with Bitcoin, many service providers allow you to convert them instantly to your local currency."
Point in fact, the price of bitcoins in April varied from $50.01 to $266, averaging just $114.94.
EBay and the Legitimacy of Bitcoins
Volatility like that can understandably give would-be users pause but, for the less risk-averse, the legitimacy of bitcoins could soon see a bump. The digital currency is currently accepted by a handful of sites -- Reddit and Wordpress included -- but if eBay follows through on plans to integrate the new currency into its existing PayPal payments network bitcoins could soon become fairly commonplace.
"It's a new disruptive technology, so, yeah, we're looking at Bitcoin closely," said eBay Chief Executive John Donahoe. "There may be ways to enable it inside PayPal." While the company has yet to make any commitments to use bitcoins, Donahoe was careful to say that "virtual currency is something that's here to stay, " explaining that bitcoins and other virtual currencies like airline miles will have a role in retail within the next five years.
What it Means for Investors
By adding bitcoins to its PayPal system, eBay is staying at the forefront of consumer trends. Whether the technology catches on or not, eBay is bound to find ways to profit from its inclusion. Already, eBay has managed to boost revenue from PayPal by pushing its use in physical stores. According to the Wall Street Journal, "PayPal brought in $1.55 billion in revenue for eBay in this year's first quarter, an 18% jump from a year earlier." Going forward, adding another method of payment is bound to push that number even higher, making eBay a good long position.
Investors can also expect a rise in the share price of certain processor companies, like Advanced Micro Devices (NASDAQ:AMD). According to We Use Coins, "while any modern GPU can be used to mine, the AMD line of GPUs architecture turned out to be far superior to the nVidia (NASDAQ:NVDA) architecture for mining bitcoins and the ATI Radeon HD 5870 turned out to be the most cost effective at the time." Obviously, if this case holds true, the difference is bound to give AMD an edge or, at the very least, detract from nVidia. Over the long run, this could be a major competitive advantage for AMD and position it well as a longer term investment.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.