High volatility in prices of Bitcoin is likely to hinder its general acceptance as a means of payments for online commerce, suggests a report by currency analyst David Woo of Bank of America Merrill Lynch.

The 5 December report also highlights the vulnerability of Bitcoin exchanges to hacking. According to the report, a “highly speculative" market produces unstable returns amid very low circulation and poor liquidity “as investors are enticed by the extreme return opportunities."

According to INRBTC, an online Bitcoin trading platform, 1 Bitcoin was trading at 7,400 on 4 October but just two months down the line, on 5 December, its price rose to 74,000.

Bitcoin’s prices on BTC China, the biggest Bitcoin trading platform in China, fell from 7,000 yuan to an intraday low of 4,523 yuan last week after the Chinese central bank said, “Bitcoin is a certain virtual commodity, does not possess the same legal status as currency and cannot and should not be circulated and used in the market as such." The Chinese central bank also prohibited its banks and other financial organisations from providing Bitcoin-related services and products.

Such volatility in Bitcoin prices may prevent retailers from accepting Bitcoin as a medium of payment. “Stores accepting it (Bitcoins) now are effectively internalizing the cost of this volatility and not passing it onto consumers, but we would not expect such likely unprofitable practices to last," the Bank of America Merrill Lynch report added.

Bitcoin is an open source peer-to-peer electronic cash system developed by Satoshi Nakamoto, the pseudonym for an unknown person or group of people who designed and created the original software. It is similar to a mobile app or computer programme that provides a personal Bitcoin wallet and allows a user to send and receive Bitcoins with them.

According to the Bitcoin website, a public ledger called the “block chain" contains every Bitcoin transaction ever processed, allowing a user’s computer to verify the validity of each transaction.

The authenticity of each transaction is protected by a digital signature corresponding to the sending address, allowing all users to have full control over sending Bitcoins from their own Bitcoin addresses. Hence, the digital money is also known as a “cryptocurrency", since it uses cryptography to facilitate and control transactions.

Bitcoins are fast gaining favour in India. According to SourceForge, an online platform that connects consumers to open-source projects such as Bitcoin and facilitates downloads, there have been 35,648 downloads in India since the launch of Bitcoins on 9 November 2008 (experts estimate there are two or three users for every download).

Of these, close to 70%, or 24,723 downloads, took place in 2013. In October alone, there were 2,067 downloads of Bitcoin, moving India’s global ranking a place up to 16.

Since the Bitcoin users can’t mine their own Bitcoins they use a local exchange to exchange their local currency for Bitcoins but this exposes the users to credit risks, the report said, citing instances where a number of Bitcoin exchanges have been hacked and large amounts of Bitcoins stolen.

But those running Bitcoins in India dismiss such fears. Mahin Gupta, chief executive officer of www.buysellbitco.in, a Bitcoin exchange in India, said, “Our approach is quite different from such exchanges operating overseas. In our exchange, customers do not deposit Bitcoins with us. Whenever a customer wants to sell Bitcoins, he generates an order which we process and send the rupee funds directly into his bank account. We also store our own Bitcoins offline and so we are not vulnerable to such hacking attempts."

Vishnu Yarmaneni, founder of www.inrbtc.com, an online platform where Bitcoin users can buy or sell Bitcoins, said at inrbtc.com damage from hacking attempts remains minimal. “We do not remain a counterparty to any trade executed. We only act as a platform where buyer and sellers meet to trade Bitcoins in a safe environment."

Sunny Ray, director of business development at Buttercoin, a free Bitcoin exchange backed by investors such as Google Ventures, said it is extremely important to apply financial services-level security to keep customer’s Bitcoins safe.

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