Banking on Bitcoins

Stephen Yagielowicz

It sounds perfect: an alternative currency that works in every country; has no chance of chargebacks; miniscule fees; and provides the world’s greatest investment opportunity.

Seemingly a dream come true for investors and website owners alike, bitcoins (BTC) are among 2013’s hottest topics across a variety of industries and institutions, including the field of online adult entertainment.

Bitcoin sounds like something from science fiction: A purely digital currency, created by an anonymous hacker, that operates outside the world’s traditional banking systems. -Steve Hargreaves, CNNMoney

“Bitcoin sounds like something from science fiction: A purely digital currency, created by an anonymous hacker, that operates outside the world’s traditional banking systems,” Steve Hargreaves recently wrote for CNNMoney, adding that “The four-year-old currency is very real, though, and it’s trading an all-time high, tripling in value in the last two months alone.”

It is the type of statement (appearing in a respected financial media) that can easily drive speculators wild; fueling a frenzy of interest and investment in this volatile vehicle. But separating bullshit from bucks isn’t always easy — and with many adult webmasters eying the bitcoin platform, XBIZ wanted to take a closer look at what is required in order for a porn site to process bitcoins as a payment mechanism.

Here’s what we discovered:

According to its Wikipedia entry, Bitcoin is a decentralized digital currency based on an opensource, peer-to-peer Internet protocol introduced by a pseudonymous developer named Satoshi Nakamoto in 2009. Bitcoins enable funds to be transferred internationally between users via an electronic wallet file, or through a website, without an intermediate financial institution. Bitcoins are also divisible into 100 million smaller units, known as “satoshis,” which are “defined by eight decimal places.”

At their current value, these satoshis are worth a tiny fraction of a penny, theoretically bringing an infinite level of micropayment price point options to digital media marketers.

But by bypassing the established monetary system and its governmental oversights, this new economy is sure to provide a haven for money laundering and illicit activities that will not go unnoticed (or unchallenged) by today’s tax and rule-hungry authorities; placing the long term future of these alternative “currencies” into considerable question, especially on the domestic U.S. front.

As with all currencies, trust plays a major role in establishing value, but unlike hard currencies such as gold, or dollars that are “backed by the full faith and credit of the U.S. government,” and their counterparts around the world, the bitcoin basis is far different, with “miners” and “blockchains” muddying the waters.

Wikipedia explains that the bitcoin money supply is automated, limited, divided and scheduled, then given to servers or “bitcoin miners,” which verify transactions and then add them to an archived transaction log which is updated every 10 minutes.

“The log is authenticated by ECDSA digital signatures and verified by the intense process of brute-forcing SHA256 hash functions of varying difficulty by competing ‘miners.’ Transaction fees may apply to new transactions depending on the strain put on the network’s resources,” Wikipedia states. “Each 10-minute portion or ‘block’ of the transaction log has an assigned money supply. The amount per block depends on how long the network has been running.”

It’s heady stuff where technical vulnerabilities can play havoc, such as the 23 percent drop in bitcoin value recorded on March 12 — caused apparently because not everyone scrambling to get in on the bitcoin craze is using a current version of the “bitcoin mining” software powering the system’s backend.

“It’s essential for all miners to enforce exactly the same rules about what counts as a valid block. If a client announces a block that half the network accepts and the other half rejects, the result could be a fork in the network,” Timothy Lee wrote for Ars Technica, highlighting the problem where “Different nodes could disagree about which transactions have occurred, potentially producing chaos.”

And there’s really no one to call and complain to.

One company explicitly targeting bitcoin processing for adult websites is OKPAY, but a mid-March press release announced its temporary suspension of these services, stating that “A bitcoin block too big for version 0.7 was mined by miners using version 0.8, creating a fork in the blockchain. After some deliberation in the community, it was decided that miners should downgrade their version and continue the 0.7 fork until the issue is resolved.”

Those are fairly nebulous concepts for an adult website owner simply trying to charge visitors for access, and used to the ease and transparency of credit and debit cards, SMS and ACH sales, among other vehicles.

“In order to avoid any possible problems it was decided to temporally suspend all bitcoin deposits,” the release added, noting that “Bitcoin deposits will be restored as soon as situation will be stable and clear. We apologize for the inconvenience this may cause you. Thank you for your patience.”

In this author’s opinion, however, “stable and clear” are not words applicable to the bitcoin phenomenon; which seems to find some of its biggest backers within the hacker and pirate communities, as well as among anarchists and scam artists seeking victims.

For example, Pirate Party founder Rick Falkvinge is a big bitcoin backer encouraging investment in this sham currency, which he claims has a target market cap of $600 billion to $6 trillion — placing the value of each bitcoin at $100,000 at the low market cap to $1 million at the high market cap — saying that “present-day projections of $100 that present themselves as ‘daring and optimistic’ actually come across as rather shortsighted and almost dealing with peanuts.”

Of course, Falkvinge discloses at the end of his pitch that he’s “all in” in on bitcoins, inevitably skewing his perspective — which is tempered by the reality of today’s bitcoin price on the local Sacramento market at $51.70, with Mt.Gox trading at $46.90.

As for how those values translate into your desired price points, Preev.com offers a free online Simple Bitcoin Converter for those seeking the most current exchange rates.

While mining and the mathematics behind the process is beyond this article’s scope, it’s worthy to note that electricity prices play a huge role; with many miners only able to operate profitably where energy costs are lowest — including regions typically flagged as “high fraud areas” by sites processing credit cards — or environments where electricity is not paid for; such as when it is stolen, or on the miner’s parent’s monthly electric bill.

For example, game makers struggling with sagging sales have turned to bitcoin as a means of monetizing free games, including those lost due to piracy — with Coinlab stats showing “the average gamer will generate 50 cents to $2 per day for the game companies by making that [unused] computing power available,

working out to more than $15 per gamer per month.” This can exceed the monthly revenue of many video game subscriptions, and could generate revenues from “shared” games, but there’s a hidden catch as Bitcoin Magazine’s Vitalik Buterin points out.

“While bitcoin mining may make software developers some small change in the near term, it is ultimately not only useless for this purpose but highly environmentally irresponsible,” Buterin explains. “If the business model is to survive longer than a year at all, it will be by deception, relying on users’ ignorance of the cost that they are paying for the electricity that the mining software is consuming overnight.”

Using our goal of bitcoin-based adult content access, one of the first questions that we should ask is, “What would it take for a consumer to join my bitcoin-enabled website?”

One high profile player to adopt bitcoin as a payment mechanism is WordPress.com, which explains that its mission is “to make publishing democratic — accessible and easy for anyone, anywhere,” a process hindered by limits on traditional payment networks — such as PayPal, which blocks access from more than 60 countries (and which bars adult entertainment from its processing services).

“Some [countries] are blocked for political reasons, some because of high fraud rates, and some for other financial reasons,” WordPress.com’s Andy Skelton stated. “Whatever the reason, we don’t think an individual blogger from Haiti, Ethiopia, or Kenya should have diminished access to the blogosphere because of payment issues they can’t control.”

It is a similar doorway through which adult entertainment offers must pass.

“Our goal is to enable people, not block them,” Skelton adds, showcasing WordPress’ checkout area, which features a new Bitcoin payment section displaying the amount due in BTC, along with a transactionspecific wallet address and QR code for easy payment via mobile device.

“If you’re already using Bitcoin you’ll find this payment method even easier than paying by credit card,” Skelton explains. “It typically processes in a few seconds — less time than it takes to fill in a credit card form.”

As for how extensive the company’s use of the technology is, Skelton says that it is not mining or handling bitcoins and relies exclusively on the services of BitPay.com to track exchange rates, generate the quotes and the wallets, to receive BTC payments from customers and to remit the payouts in dollars to WordPress.com.

Heralding the fact that “credit cards were never designed for the Internet,” BitPay notes that your website can reach 195 countries, but asks, “Can your payment network?”

The company provides merchants with direct daily deposits of all funds collected, automatically adjusted for the current exchange rate. The cost is an ultra low .99 percent, with no setup or monthly fees — a far cry from the rates and limitations typically faced by adult merchants.

While BitPay prohibits processing payments for “items that are considered obscene” and “certain sexually oriented materials or services,” its Compliance Department is able to provide specific guidance on a case-by-case basis. Many other gateways are available.

Skelton also adds that WordPress doesn’t wait for order confirmation during the order process, which can be delayed; instead preferring to streamline the customer experience.

“Making you wait for confirmations would virtually eliminate our risk, but we’re confident that with digital products like ours the risk is already acceptably low,” Skelton explains, adding that “Bitcoin is famous for its irreversible transactions, but we will still honor our refund policy.”

That last bit sets a high bar for those eyeing bitcoin for its chargeback-free payments, because they will still face customers expecting refunds.

“With bitcoin we join a new digital economy that doesn’t leave anyone behind,” Skelton concluded. “[Bitcoin essentially makes] financial transactions open source — something WordPress.com is behind 100 percent.”

Indeed, from paying for domain registrations and web hosting, to design and support services, including staff payouts, bitcoin is taking the tech and open source communities by storm — especially internationally, where traditional payment barriers are usurped.

While more traditional adult website operators have been slow in adopting bitcoins, there is an expanding ecosystem devoted to bitcoin’s “adult entertainment” applications.

For example, Reddit’s “Girls Gone Bitcoin” site (www.reddit.com/r/girlsgonebitcoin) enables young ladies to display themselves in various stages of undress — accompanied by an address via which they may receive bitcoin tips from viewers.

If seeing a hot, nerdy chick flashing her tits is your thing, you’ll love it.

“I think the hate is derived from confusion and lack of knowledge. A lot of people don’t know what bitcoin is,” Girls Gone Bitcoin star LadyBytes told Bitcoin Magazine. “My response to them: Get used to it; this is the future of porn.”

It’s a bold statement, but you can expect this payment mechanism to power the next generation of live adult cam sites — and perhaps swiftly transform the adult marketplace with new pay tube profit models emerging.