Microsoft recently announced that it would allow its digital content to be purchased with bitcoins. The change is limited in that it only opens Microsoft’s Windows, Windows Phone, and Xbox platforms to the new payment method, there is a daily exchange cap, and only US-based customers can make bitcoin payments. This means that Microsoft is not truly entering the bitcoin economy, as the corporation itself will not be accumulating or spending bitcoins. Nonetheless, the price of bitcoin rose approximately four percent in the wake of the move.

Microsoft’s reticence to fully embrace bitcoins from the outset may stem from several setbacks the digital currency has suffered over the past year. Aside from the value volatility associated with the size of its current user pool, and the risk of bitcoins being used for illegal activity or money laundering due to transaction anonymity, the bitcoin industry has been marked by several online thefts. For example, online illicit goods marketplace Sheep Marketplace lost $40 million in bitcoins in November 2013 (resulting in the marketplace’s closure). Similarly, Silk Road 2.0 lost $2.7 million worth of bitcoins to hackers in February 2014, while Tokyo-based bitcoin exchange Mt. Gox filed for bankruptcy protection the same month after it lost 850,000 bitcoins worth over $480 million. Less than a month later, Alberta, Canada-based bitcoin exchange Flexcoin shut down after a cybertheft of $650,000 in bitcoins.

Despite these issues, bitcoin has continued to receive votes of confidence in the form of adoption by many major retailers, with the addition of Microsoft to the list being the most recent vote cast. Bitcoin has also spawned a multitude of copycat cryptocurrencies, with some offering trivial tweaks to the bitcoin system while others deviate dramatically in both technical underpinning and function (though none are currently challenging bitcoin’s near stranglehold of the cryptocurrency market). There have even been seemingly paradoxical suggestions to emulate the bitcoin framework to create a new fiat currency, though some formulations of this concept have failed without actually getting off the ground. Furthermore, there has been an increase in educational efforts to counter governmental skepticism of cryptocurrencies and to preemptively restrain their regulation.

Bitcoin’s real world applications are endless, so its adoption by Microsoft (albeit in a currently limited manner) may signify a recognition of the legitimacy of digital currencies in general. Could this signify a trend towards decreased volatility, better security, and faster consumer adoption? Or are the aforementioned disadvantages and risks of bitcoin too large to overcome, even despite adoption by large retailers like Microsoft? The volatility of bitcoins, in particular, has led to predictions that bitcoin will be replaced by alternative cryptocurrencies with superior features. There are services like Bitreserve that shield end-users from bitcoin volatility by converting their bitcoins to fiat equivalents (namely, US dollars, Euros, Pounds, Yuan, or Yen) on-the-fly. However, if most users immediately converted their bitcoins to fiat currencies, then the value of bitcoins would go down, so this is not a permanent third-party solution. Instead, the bitcoin industry needs to quickly and decisively address the issues that have resulted in significant price drops and the closure of various bitcoin market exchanges over the past year if the currency hopes to justify the latest endorsement by a big economic player like Microsoft.

Neil Issar

3 Responses to Microsoft Takes a Tentative Step Towards Innovation with Limited Bitcoin Adoption

  1. Neil Issar says:

    Since Bitcoin’s value steadily declined throughout all of last year, the IRS’s treatment of Bitcoin and other convertible virtual currencies as capital assets probably didn’t hurt most people’s wallets (since they are unlikely to have experienced any significant capital gains). But the anonymity issue (and associated potential for tax evasion) you mention is interesting. I wonder how many people will think they are protected from IRS scrutiny by the supposed anonymity of virtual currencies. I also wonder how many tax accountants actually understand the nuances of bitcoin tax reporting, since the rules do not appear to be the same for cryptocurrency miners as for the casual bitcoin enthusiast.

  2. Megan McLean says:

    According to Forbes, the IRS started taxing bitcoin last year. Treated just like stocks, taxation seems relatively straight forward, but the idea of keeping track of how much you purchase, when you purchase, and for what price, and comparing that with the time, amount, and price of sale seems like an administrative nightmare. I wonder if this is a deterrent for users. Moreover, it seems to me that providing such a detailed user log to the IRS would erode some of the anonymity associated with bitcoin. I am interested to see how bitcoin users respond to this new tax.

    http://www.forbes.com/sites/kashmirhill/2014/04/15/how-i-paid-my-bitcoin-taxes/

  3. Emma says:

    Bitcoin is definitely heading mainstream. How long before Governments worldwide start to question how they can control it, tax it and manipulate its value?