Bitcoin emerges from the shadows

The currency’s value has climbed since the demise of Silk Road, the online illegal drug marketplace that was its best-known vendor. Can bitcoin really become mainstream?

zkyle@idahostatesman.comNovember 2, 2013 

  • BITCOIN 101

    What is bitcoin?

    Bitcoin is a digital currency first released in 2009 that can be traded for many world currencies, including the U.S. dollar, on online exchanges. It is a decentralized currency, meaning no government releases bitcoins into circulation. Some world governments, such as Germany, have acknowledged bitcoin as a legitimate currency that can be taxed. Others, such as the United Kingdom, are allowing trading and appear poised to attempt to regulate bitcoin if its use continues growing. Thus far, bitcoin remains unregulated in the U.S. and in most countries.

    How do bitcoins work?

    Bitcoins are held in password-protected virtual wallets. During transactions, the vendor or receiving party sends a transaction address to the paying party, who then sends the desired amount of bitcoins. Transactions are irreversible. The process is recorded in a public online record called a block chain, making every transaction and every wallet transparent. The catch is that the wallets and transactions are identified only by addresses and not by names, bank accounts or other personal information.

    How do I get bitcoins?

    Bitcoins can be purchased on exchanges or from individual bitcoin traders. Sites such as localbitcoins.com provide forums to negotiate purchases either electronically or in-person, provided the parties are close in proximity.

    Will I get a physical coin, or just a credit?

    Bitcoins exist almost entirely on the Internet, but there are several vendors who will take orders for physical coins. The metal coins have an anti-tampering hologram sticker on them that can be pulled back, revealing a code to access the bitcoin online. While physical bitcoins could be used in everyday business transactions, at the moment they are mostly seen as collectors’ items and illustrations for bitcoin articles.

    What can I buy with bitcoins?

    Bitcoin is best known as tender for buying drugs and other illicit materials on websites such as Silk Road, which was recently shut down by authorities. Bitcoin is also used on some online gambling sites. However, the currency is accepted by a growing number of legitimate businesses, such as the dating site OK Cupid, the online blog host site WordPress and several domain name websites, including namecheap.com. A small number of storefront businesses in America accept bitcoin, which can be exchanged using smartphone apps. But the transactions are clunky, and so far, most of the businesses on the growing list of vendors accepting bitcoin are found online.

    Where do exchanges and traders get bitcoins?

    They “mine” for them. The code governing bitcoins puts the currency into circulation according to a formula that caps the number of bitcoins that will be in the world and aims to prevent inflation. When bitcoins are released, miners use powerful computers with graphics cards — and more commonly, computers with banks of graphics cards — to solve complicated coding puzzles. Solving these puzzles earns fractions of bitcoins, which are deposited in the miners’ virtual wallets.

    Zach Kyle

  • ZACH KYLE

    Zach covers real estate, banking and other business matters. He joined the Statesman in April after five years at the Post Register in Idaho Falls.

Want to make some cash disappear?

Trade U.S. dollars for bitcoins at mtgox.com or any number of other exchanges. Better yet, arrange to meet a bitcoin trader in person to make the swap so your bank account number never gets involved.

Your online bitcoin account, or “wallet,” doesn’t have your name, Social Security number or any other personal information attached to it. Bitcoins can be transferred or cashed out anywhere in the world that has access to the Internet.

Bitcoin is best known for shadowy business, most famously for its use as the tender for Silk Road, the online marketplace that allowed sellers and buyers to make drug sales anonymously. On Oct. 1, the FBI arrested the alleged mastermind of the site, who borrowed his handle, “Dread Pirate Roberts,” from “The Princess Bride.” In the indictment of Ross Ulbricht, authorities claim that Silk Road brought in $1.2 billion in sales since the site’s 2011 birth. After some difficulty, FBI agents hacked into a virtual wallet containing more than $28 million in bitcoins they say were some of Ulbricht’s $80 million commissions from Silk Road sales.

But bitcoin is more than just a criminal’s PayPal.

It’s a form of payment for goods and services accepted by more than 10,000 vendors worldwide.

It’s a commodity with a value that rises and falls.

It also solves charge-back problems that go with credit cards and could be used to transfer funds without paying a wiring service.

It’s a regulator’s headache, and it’s gaining traction.

IS BITCOIN MONEY?

Bitcoin meets several criteria for being considered money, but it’s not quite there, says Peter Crabb, who teaches the theory of money at Northwest Nazarene University.

“It’s only money if it’s well-accepted,” Crabb said. “I can’t go to Wal-Mart and buy something with bitcoin. I can’t go to NNU and get a degree with bitcoin. To me, bitcoin isn’t money right now.”

A growing number of people and businesses disagree.

BitPay, which processes online bitcoin purchases similarly to how PayPal handles credit cards, grew from a client list of 1,000 vendors in 2012 to 10,000 vendors this September, about half located in North America.

BitPay reported that it processed 10,000 merchant transactions in August worth more than $6.4 million globally.

That’s pretty small potatoes, but it’s an exponential rise for the currency, which was valued at less than a penny when it was first released in 2009 and stayed flat until 2011. Bitcoin was valued at $212.84 per coin at 5 p.m. Friday.

BitPay doesn’t have vendor statistics for Idaho, or even the U.S. At least one Idaho business accepts bitcoin: A set of Rexburg apartment buildings for Brigham Young University-Idaho students takes bitcoins as rent payment.

While bitcoin hasn’t caught on in the Idaho business world — and may never — an increasing number of Idahoans are acquiring, trading and buying goods with bitcoins. Localbitcoins.com and other forums provide a vehicle for bitcoin users in Boise or any other city to arrange transactions.

Adam McKinney is a tech support analyst for the University of Idaho who works remotely from Pocatello and is a bitcoin enthusiast. He said Idaho is well-represented in online bitcoin forums.

“It’s surprising how many people in Idaho are found on (forums)” he said. “I don’t know how tech savvy the rest of the country sees us, but Idaho is surprisingly more tech savvy than they realize.”

Technology may blend bitcoins and dollars in ways that make them interchangeable. BitPay recently partnered with Gyft, a gift card app for Android smartphones. Gyft users will be able to load bitcoins onto their accounts and spend them as dollars at more than 50,000 brick-and-mortar storefronts in the U.S., including Gap, Lowes, Nike and Burger King, said Jan Jahosky, BitPay spokesman.

Crabb said the U.S. government protects its currency monopoly, and bitcoin won’t be real money until it’s accepted as a tax payment or as a means of settlement in court disputes.

But a recent decision in a Texas U.S. District Court indicates the government sees bitcoins as legitimate.

The U.S. Security Exchange Commission sued the owner of Texas-based Bitcoin Savings and Trust for operating a Ponzi scheme. Trenden Shavers raised more than 700,000 bitcoins — valued Friday at nearly $150 million — by allegedly using new investor money to cover funds owed to longer-tenured investors.

Shavers’ attorney argued the court lacked jurisdiction in the case because bitcoins aren’t real money. The judge disagreed, ruling that bitcoin “met the definition of investment contract, and as such, are securities.”

INVEST IN BITCOINS, NOT PIZZA

In 2010, a Jacksonville man paid 10,000 bitcoins for two large pizzas. He reported the purchase to a bitcoin chat forum. Bitcoins were less than a quarter of a cent at the time. Today, those bitcoins would be worth more than $2 million.

The story is famous in bitcoin circles. Whether or not it’s true, the pizza story underscores a fact: Anybody who bought bitcoins in 2010 and held them made a lucrative investment.

McKinney wishes he’d started stockpiling bitcoins back then.

He has about 10 bitcoins, and though he occasionally orders products online through Bitmint.com and other cyber vendors, he plans to hold on to some as an investment.

“I see this as a long-term thing,” McKinney said. “I see them in five years being worth $1,000-plus, and I want to have a few of them. I wish I could have been somebody who had 10,000 bitcoins like the guy who bought the pizzas three years ago. That foresight would be nice.”

BITCOIN CHAMPIONS

Most bitcoin users fall somewhere in two groups: techies and Libertarians.

McKinney falls in the middle: a card-carrying Libertarian and professed geek. He said bitcoin is a discussion topic in the university tech offices but few other places. But the chatter has increased in recent months, especially after Silk Road’s closure, he said.

Bitcoin could get to the point where most people are aware of it, especially if a major online market such as Amazon began accepting it, McKinney said. It would also take interest from college students, he said.

“College students will be the ones,” he said. “I have a teenage daughter, and her generation will definitely be the ones to make bitcoin mainstream. I don’t know if bitcoin will ever be great as a daily use currency as much as a way to send money to someone or for relatively instantaneous verification to buy a house.”

McKinney and many bloggers say the end of Silk Road illicit uses could help bitcoin gain mainstream acceptance.

“Until a year ago, Silk Road was really the only outlet for bitcoin,” McKinney said. “I don’t think it would have survived (the end of Silk Road) even nine months ago. This time, it came back in a matter of hours or days. That shows staying power.”

Floyd Noel, a Boise State University junior, has read voraciously about bitcoin since last Christmas. As president of the on-campus Libertarian club Students for Liberty, Noel loves the fact that the U.S. Federal Reserve can’t monkey with bitcoin’s value. As a computer science student, Noel appreciates the elegance of bitcoin’s design and its built-in defenses against inflation. And as an economics student, he tosses around names such as Friedrich Hayek and Milton Friedman when he talks about bitcoin’s merits as a stable international currency.

Noel plans to write an editorial about bitcoin in the campus newspaper, the Arbiter, and possibly create YouTube videos explaining bitcoin in hopes to bring more students on board.

Yet even to Noel, bitcoin is more of a concept and a possibility than a tool. He’s mined (bitcoin lingo for acquiring) a few coins but doesn’t use bitcoin regularly.

“Right now, there just aren’t many uses for it,” Noel said. “It’s still the early days. Think about the Internet in the 1990s and how much more developed it was by about 2002. People were emailing all the time. There was Myspace, and Facebook was catching on. It’s a pretty big jump in usability. But even today, some people don’t use the Internet, so bitcoin may never get penetration, even if it becomes very common.”

Zach Kyle: 377-6464

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