Bitcoins

A Dispatch From Inside The Digital Currency Bubble.

(By Farhad Manjoo, Slate.com, 09  April 2013)

Let me begin this column with a lengthy disclosure. One morning last week, I stopped at my bank, filled out a withdrawal slip for $1,027.51, and walked away with an envelope full of cash. The odd amount was deliberate; I had been instructed by LocalTill to be exact in everything I did. What’s LocalTill? Don’t bother Googling it—its shady-looking website offers only murky details, explaining that the firm is a way for “merchants to accept secure transactions when selling goods online.” It’s something like PayPal, except LocalTill isn’t tied to your bank account or credit card, and instead deals only in cash. This makes its transactions less traceable, less regulated, and, as I would soon experience, more final.  Next, per LocalTill’s instructions, I drove to a local Bank of America branch and asked for an out-of-state wire transfer slip. I scrawled out LocalTill’s New York bank account number and handed my wad of cash to the teller. This was a dizzying moment: I’ve been on the Internet forever and have been well-schooled in frauds that begin with the instruction, “First, wire your money to an out-of-state account …” Yet here I was doing exactly that. If LocalTill was a scam, I’d have no recourse. So why was I willing to take such a risk?

Bitcoin, of course. Bitcoin is a “digital currency” invented in 2009 by a cryptographic expert who went by the pseudonym Satoshi Nakamoto, but whose true identity remains unknown. It exists only in computers, minted at a regular rate by a network of machines around the world, and its value isn’t regulated by any government. The currency, like its creator, clings to the shadows. Bitcoins are like cash in that they aren’t tied to your identity, and transactions made with bitcoins are irreversible and untraceable. But they’re like credit cards in that they aren’t physical. In the past, if I wanted to pay you for certain unmentionable services rendered, I’d have to get a fancy briefcase, fill it with bills, then take a long, dangerous trip with my stash. Bitcoin allows me to transfer money to you online, instantly, for free. As a result, it’s perfect for the black market—a couple of years ago, it became a media sensation when Gawker reported on its use as the central currency on Silk Road, a site that sold virtually any drug in the world. Lately bitcoin has also been hailed as an emerging global safe haven, a place for nervous Europeans and panicky gold-bug types to store their wealth away from the prying reach of financial regulators.

I’m not very panicky about the world’s currencies, nor am I looking to buy drugs online. Indeed, I don’t care at all for bitcoin as a currency. Instead, I wanted to buy bitcoins as pure, shameless speculation. I wanted a chance to ride a rocket ship. Partly due to its growing legitimacy as a currency but mainly because of speculators like me, the value of bitcoin is entering a bubble phase—its exchange rate with real-world currencies is hiking up at an incredible, likely unsustainable pace. In 2011, back when Gawker reported on Silk Road, you could buy a bitcoin for about $9. Since then the price has seen terrific fluctuations, but it has generally gone up. At the start of this year, each bitcoin was worth about $20. From there the chart turns into a hockey stick—by March, bitcoins hit $40, and within a month they’d doubled again.

The bitcoin bubble, in one chart. The line shows the rise of prices over time. (The prices are on the right Y-axis.) The bars show the volume of trades each day (those are the numbers on the left vertical axis).  Courtesy Bitcoincharts.com.

Three weeks ago, I began hearing about bitcoin everywhere I turned. One afternoon I had lunch with a partner at Andreessen Horowitz, the large Silicon Valley venture firm, who told me that he’d been fielding pitch after pitch for start-ups that offered bitcoin-related services. After lunch, I got an email from David Barrett, the CEO of the fantastic expense-reporting start-up Expensify. Barrett wanted to let me know that his firm would soon let people submit expenses and get paid by their employers in bitcoins. He explained that the feature wasn’t a gimmick. Bitcoin would be helpful for people who regularly submitted expenses internationally; other services—like PayPal—charge hefty fees for moving money overseas, but with bitcoin people could send money for free.

I made a mental note to start looking into a story about bitcoin’s apparent rise to legitimacy. But before I could get started, bitcoin took over the media. Henry Blodget was calling bitcoin "the perfect asset bubble." Felix Salmon published a lengthy treatise on why the bubble was sure to burst. The New Yorker spoke to some of bitcoins' leading boosters about the future of the currency. Meanwhile the price just kept going up: Early last week the value of bitcoins soared past $100 each. This week, it went past $200. If you want a bitcoin today, it will cost you about $235, and if you wait till tomorrow, it will be more.

Hence, my disclosure. No one is quite sure why the price of bitcoins has spiked so quickly, but one of the leading theories is that it’s been hit by what Quartz’s Zach Seward calls a “demand crisis.” The world’s supply of bitcoins is essentially fixed, but because people in the media keep talking about it, demand keeps rising. This leads to higher prices—and as prices go up, people who currently hold bitcoins develop greater and greater expectations for the currency. This causes bitcoin holders to hoard their stash, which further reduces supply, which in turn boosts the price and sparks yet more media attention—and the cycle continues until the bubble  pops.  Thus, by writing about bitcoin, I’m serving, in some small way, to raise its price. And as of last week, that benefits me directly. Thankfully, my wire transfer to LocalTill went through; after taking its $21.51 processing fee, the firm transferred my $1,000 to Bitfloor, one of the many online bitcoin exchanges where people trade bitcoins for cash. I immediately put in a purchase order, and within seconds the deal was done. I was the proud owner of 7.23883 bitcoins, which I’d purchased for about $138 each. If I sold my coins now, my original $1,000 investment would be worth $1,700—not a bad return in less than a week’s time.

But I’m not selling just yet. I agree with Blodget and Salmon that the bitcoin market is a bubble; at some point, as in all bubbles, prices will stop rising and they’ll likely plummet, and a lot of people will lose a lot of real and imagined money. But that’s pretty much all anyone can say about the market with any certainty. When the bubble will burst, at what price and for what reason, is completely unpredictable. And until then, while prices are going up, you could make a lot of real money from this digital funny money.

My own guess is that the bubble’s popping isn’t imminent, and I think that when prices do fall, they’ll land somewhere higher than the $138 I paid for my bitcoins. I’m certain that I’ll be able to double my investment, and I might even hold out to triple it. (After that I’ll get shakier about keeping bitcoins.) Why do I think prices will get that high? Because at the moment, it’s a logistical nightmare to turn dollars into coins. You’ve got to take several leaps of faith, trusting sites that look like they were put together by teenagers. I initially tried to buy coins using MtGox, the largest trader, but the cash-processing service it uses refused to accept deposits greater than $500. What’s more, last week, shortly after bitcoins hit $142, MtGox was hit by a denial-of-service attack that took it offline for several hours. The site I used, Bitfloor, is hardly any safer. Last fall it was hit by an epic hack that resulted in the theft of 24,000 coins, at the time worth $250,000—and worth, amazingly, $5.6 million today.* (Bitfloor now claims to store most of its customers’ coins in machines that aren’t connected to the Internet, and it uses two-factor authentication to protect its users’ accounts.)

At the moment, the shadiness of the bitcoin market dissuades mainstream investors. And—as we saw in the housing and dot-com bubbles—it’s when the masses get involved that bubbles really take off. Over the next few months, I expect that we’ll see better, more secure services for transferring dollars into bitcoin exchange systems. You’ll be able to send money to sites like MtGox instantly from your bank account. At that point—when ordinary people can order up bitcoins as easily as they bought shares of Pets.com back in 1999—the real money will pour into the bitcoin economy, and that’s when prices will begin to get really crazy.  That’s just a theory. It could be a stupid one; bitcoin could collapse tomorrow. And remember, I’ve got a conflict of interest here—if this piece gets you interested in bitcoin, I get richer. Still, though, one week into my bitcoin trade, I’m very, very pleased with myself.

Update, 3:13 p.m.: The bitcoin market is extremely volatile today, with the price ranging from a low of $120 to a high of $266.

http://www.slate.com/articles/technology/technology/2013/04/how_to_buy_bitcoins_a_dispatch_from_inside_the_digital_currency_bubble.html?wpisrc=nl_lunchln

 

A Primer On Bitcoin Economics: Internet’s “Gold Standard” Prone To Wild Price Swings

(By Associated Press, 11 April 2013)

 

Bitcoin, the virtual currency composed of digital bits, is based on cutting-edge mathematical schemes that guard against counterfeiting. But it’s also based on an old idea, now dismissed by mainstream economists, about how a currency should operate — an idea that could be setting bitcoins up for an abrupt plunge.  Bitcoin was started in 2009 as a currency free from government controls, an entirely digital means of exchange for a digital age. It’s a rapidly growing phenomenon that has taken root as a payment method on some websites for both legal and illegal goods.  Each “coin” has been worth less than $10 for most of the currency’s history, but this week the value surged past $200 — with the recent bailout crisis in Cyprus seen by many as one of the triggers of the surge. Wednesday saw a “flash crash,” as the value dipped close to $100 before recovering.  The meteoric rise in value is also linked to what some economists say is the biggest problem with the currency: that the supply of bitcoins increases only slowly, at a rate that’s coded into the system.

 

That’s a contrast to a regular paper currency like the dollar, whose supply is managed by a central bank like the Federal Reserve. The Fed engineers the dollar supply to increase slightly faster than the growth of the economy, which means that the value of the dollar falls slightly every year, in the phenomenon known as inflation.  New bitcoins are “mined” or generated by computers. They get harder to generate all the time, which means the inflow of fresh bitcoins keeps falling. There are about 8 million bitcoins in circulation today, and the maximum that can be generated is 21 million. By 2032, 99 percent of those will have been created.

Since the supply of bitcoins grows so slowly, any increase in demand leads to higher prices. That’s known as deflation, and it’s widely seen as a disaster when it happens to a real-world currency. As money becomes more valuable, our incentive is to hold onto the money instead of spending it — slowing down the economy.  “What we want from a monetary system isn’t to make people holding money rich; we want it to facilitate transactions and make the economy as a whole rich. And that’s not at all what is happening in Bitcoin,” Nobel Prize-winning economist Paul Krugman wrote in 2011.  When the supply of money is fixed or increasing only slowly, deflation can feed on itself. Investors will look at the rising price of the coins, and conclude that they’re set to rise further. So they buy more, sending the price even higher. This goes on until the market is sated. In the ideal outcome, the value of the currency then stabilizes at the new high level. In the worst case, the value plunges.

This boom-bust cycle has already happened once before for Bitcoin. It hit nearly $31 in June 2011, then crashed, hitting $2 five months later.  In essence, Bitcoin is similar to the “gold standard,” the monetary system in force before modern central banking started to take root in the 1930s. Under the gold standard, each unit of currency was worth a certain amount of gold, leaving governments few means to increase the amount of currency in circulation.  No country uses the gold standard today, but some libertarians want to revive it, and see Bitcoin as a modern-day alternative or complement.  “If you wipe away the misguided economics courses that we have, deflation doesn’t have to be a negative,” says Jon Matonis, a board member of the non-profit Bitcoin Foundation, created last year to foster and protect the system. “It’s not a bad thing when a citizen’s purchasing power increases.”

http://www.washingtonpost.com/business/a-primer-on-bitcoin-economics-internets-gold-standard-prone-to-wild-price-swings/2013/04/11/28b38a6a-a25d-11e2-bd52-614156372695_story.html

 

Bitcoin Is Ludicrous But Tells Us Something Important About The Nature Of Money

By Neil Irwin, Washington Post, April 12, 2013)

 

There was a great piece in the satirical news source The Onion a few years ago in which it “reported” that Fed chairman Ben Bernanke experienced a moment of existential panic during a congressional hearing as he paused, shook his head, and said, “It’s just an illusion . . . Just look at it: meaningless pieces of paper with numbers printed on them. Worthless.”  Which brings us to bitcoin. It is a digital currency, which a certain variety of techno-utopian futurist crowd views as a form of money unencumbered by the shackles of privacy-reducing international anti-money laundering laws and inflation-tolerant central banks. Its value has been extraordinarily volatile over the last several weeks, rising from $20 a couple of months back, to over $250, to around $60 on Friday, with a couple of trading halts in between.

 

Bitcoin really is a tiny market in the scheme of things, and its recent gyrations mean that the dollar, euro and yen have nothing to fear from the competition. If a currency can lose 75 percent of its buying power in two days, it may not be the best store of value. But it also an important window into the strange and uncomfortable mystery of “What is money,” which is a harder question to answer than one might think.  We can all agree that the dollar bills in my wallet are money, as are the quarters and dimes in the jar on my dresser. So are the funds deposited in my checking account. The investment I have in a money market mutual fund probably counts, too; after all, I can write a check from that account and use it to buy things. Gold isn’t money, but can be readily traded for money, so it can be a reasonable substitute if you’re into that sort of thing. My refrigerator is definitely not money; even though it has value, it would be a lot harder than gold to convert it into money if I fell on hard times.

The common thread here is that money has almost nothing to do with physical form. It also doesn’t have much to do with who creates it: The dollar bills were issued by the Federal Reserve, the checking account created by my neighborhood bank, the money market fund was created by a mutual fund manager, the gold was mined out of the ground, and the refrigerator was made by General Electric.  Rather, what makes money money is what you can do with it. If you can purchase the goods and services that you want and need with it, it is money; if you can’t, it isn’t.  Money is memory, said Narayana Kocherlakota in an important 1996 paper (he is now president of the Minneapolis Fed). It is the way we as a society record how much capacity to buy stuff each of us possess. In other words, The Onion was right. Money really is just a symbolic, mutually shared illusion.

That reality has important implications for all the monetary debates that captivate people today, from David Stockman’s assailing 80 years of economic policy to fretting over whether the Bank of Japan will unleash some dangerous inflation genie with its new bout of activism to the question of whether the euro zone can hold together.  Once you accept that money truly is an idea rather than a thing, it becomes clearer that there is no single “right” way to run a monetary system. It is merely trying to figure out, through trial and error (and mankind has had plenty of error over our history), what system works best. 

Some societies, including this one until 1933, have strictly tied the value of their money to gold or other precious metals. That has some advantages, most notably that a government can’t create more of it from thin air and thus allow inflation to take hold. But it has some significant downsides as well. For one, the government may not be able to create new gold from thin air, but miners can definitely get it out of the ground. And it is a strange state of affairs when the price level of an entire society is allowed to fluctuate based on advances in mining technology or the discovery or non-discovery of new reserves.  All of the advanced nations in modern times instead have a central bank to be in charge of issuing money. The logic is that rather than tie the value of money to some material, instead put some politically independent, sober-minded economists in charge and assign them some goal. In practice, many countries have made that goal “manage the money supply so that prices rise about 2 percent each year, no more, no less). Because these institutions are imbued with the power of the state, the money they issue has the credibility of the entire government behind it.  As Joe Weisenthal wrote Thursday, “the U.S. dollar isn’t just important because other people think it is. The U.S. dollar is important, because the world’s strongest entity, with the full force of the U.S. army, the FBI, the CIA, the NSA, and various local authorities with guns demands that you pay them in U.S. dollars. That’s not faith. That’s the law.”

So why would somebody want to go and invent bitcoins? There is a certain theoretical elegance to the idea of a borderless currency, with its supply limited by the difficulty of working out very tough mathematical problems. But going back to where we started, money is useful inasmuch as it can be used to buy things. And two massive things stand in the way of bitcoin ever being anything more than a monetary curio. Ironically, both are byproducts of the things that bitcoin enthusiasts most like about it.  First, because it has the endorsement of no government, it will never be usable for official transactions. If you are an American, you will eventually have to pay your taxes, which means getting hold of some dollars, and as long as everyone needs to use dollars, that will be the way the currency in which an overwhelming majority of U.S. transactions occur.  Second, the cap on the supply of bitcoins may reassure people that there will be no inflation, but in fact it ensures that it can never go into widespread use. A currency needs to be elastic — that is, its supply has to rise and fall in order to keep prices stable even as people’s demand for money varies. Part of the reason the Federal Reserve was created a century ago is that the dollar was at that time an inelastic currency, its supply was basically fixed based on how much gold banks had in their vaults. That meant that when harvest season came around in what was then a heavily agricultural nation, there was always a shortage of cash and a spike in interest rates, and in some years a banking panic.

Bitcoin exacerbates that problem. Its supply is capped in the long run. That means that if it ever came under widespread use, demand for bitcoins would rise faster than supply (which is what happened between February and earlier this week), and the price rise rapidly. That may sound good — your money is more valuable! — but in fact it means that prices of goods and services are plummeting. That’s deflation, which as the Great Depression showed us, is not much fun. It is a situation in which everyone has every incentive to hoard money rather than spend it, leading the gears of commerce to grind to a halt.  In effect, bitcoin is a reminder of this fundamental truth: To function in a modern economy, you’re always putting your faith in something, whether you like it or not. And you may not like putting that faith in a powerful, independent central bank imbued with power from the state, but the alternatives may just be a lot worse.

http://www.washingtonpost.com/blogs/wonkblog/wp/2013/04/12/bitcoin-is-ludicrous-but-it-tells-us-something-important-about-the-nature-of-money/

As if I didn’t think Bitcoins were sketchy enough, there are now a bunch of other e-currencies flooding the market, including this one which sounds like more of a joke than a viable form of payment.  Are people going to want to start using “vanity currencies” now?  Will the movie theater accept “Sandra Bill-ocks” as payment?  Can I pay my Amazon bill using “Ke$ha”?  If you thought the battle for dominance by Betamax versus VHS or HD-DVD versus BluRay was bad, imagine how things will get if we have dozens of competing currencies. 

Plus, I don’t want my money to be a speculative investment.  For example, Bitcoin’s value has fluctuated wildly in the last couple of months.  One week it might be worth 8 times less than what it was the previous month.  I want my dollar to buy a dollar’s worth of goods.  Yeah, I know inflation changes the value of a dollar but that is over an extended period of time and all goods are adjusted relative to the dollar.  With e-currencies, it is only the form of payment that is fluctuating, not the market.  There should just be one form of payment in use and it should be the legal tender issued by this country.

Kanye West Vs. Coinye West: Cease-And-Desist Sparks Early Rollout

(By Chris Martins, Spin, January 7 2014)

The creators of Coinye West have moved up the release date of their Yeezus-inspired cryptocurrency after receiving a cease-and-desist letter from the product's namesake. While the Kanye-honoring Internet money (à la Bitcoin, Ripple, Litecoin, Peercoin, and Dogecoin) was originally set to go live on January 11, it'll now arrive today, January 7, at 7 p.m. PST. The Coinye Facebook account has been taken down, but the Twitter profile lives on:  You'll note the original square-jawed face of Coinye has been replaced with South Park's West-as-gay-fish. Quoted previously, the currency's seven anonymous makers came across as fans: "We chose to represent Kanye because he is and always has been a trendsetter, and he's always keeping things unique."

But according to Wall Street Journal, his lawyer Brad Rose has given them reason to change their tune (perhaps to one about hobbits).  "Given Mr. West’s wide-ranging entrepreneurial accomplishments, consumers are likely to mistakenly believe that Mr. West is the source of your services." Rose also promised that in the event of an unauthorized Coinye roll-out, his firm would "notify the cryptocurrency community at large of your infringing actions and pursue all legal remedies against any business that accepts the purported COINYE WEST currency."  As a result, in addition to the expedited release, the cryptocurrency's developers dropped the "West" from their creation's name, shut down the old homepage, and founded a brand new site with an Indian domain. 

http://www.spin.com/articles/kanye-west-coinye-cease-desist-cryptocurrency/?utm_source=spinfacebook&utm_medium=social&utm_campaign=spinfacebook

Virtual Currency Songcoin Aims to Save the Music Industry

(By Kyle McGovern. Spin, February 26 2014)

Coinye West may be out of print, but a new virtual currency made for the music industry will soon hit the market. Evolver.fm reports that Songcoin — an alternative, online currency exclusive to the music business — will launch next week. The aim behind the forthcoming exchange system is to lessen business fees and offer special promotions for users.  "We're looking at providing people with a way to not pay transaction fees, not go through international wires, and a way for people to just kind of have something pretty much alternative to a dollar," says Kasian Franks, co-founder and CTO of Pimovi, the company that will administer Songcoin. "The value of alternative currency has been proven by Bitcoin."

But Bitcoin isn't in the best of health at the moment. Mt. Gox, the world's largest Bitcoin exchange, recently shut down after revealing it had lost roughly $367 million in Bitcoins because of a loophole in software (via Reuters). In a leaked document (via Gigaom), Mt. Gox noted, "At the risk of appearing hyperbolic, this could be the end of Bitcoin, at least for most of the public." 

Good thing Songcoin isn't meant for "most of the public." According to Franks, Songcoin will have built-in features designed to benefit musicians and their fans.  "If you use Songcoin to purchase a concert ticket, then we can work with ticket vendors to build in discounts so that if you use Songcoin, you're going to get a cheaper rate, for example," he explains. "We're going to start by building a music recommendation system... and if people can use this system to discover music, we can put tip jars next to each artist, and let the artist know that we've set up these tip jars, and eventually, Songcoin will take on a nice valuation, so Songcoins will be worth more and more."

When asked why musicians would accept an alternative currency when the industry as a whole is limping along, Franks says, "If someone came to me and said, 'Hey, Kasian, there's an alternate currency called Songcoin, and we'd like to tip you in this virtual currency, and we'll see how it goes,' I don't even know how anybody would turn it down. Not only musicians and artists, but music journalists as well should be tipped… you just cut and paste the code into an article."  Yes, please.

 

Bank Of America Pegs Bitcoin -- Here's Why It's A Waste Of Time

(By Jay Jenkins, The Motley Fool, December 7, 2013)

 

This week, Bank of America (NYSE: BAC  ) became the first major U.S. financial institution to cover the digital currency Bitcoin. In the report, analyst David Woo estimated a maximum fair value of $1,300 and a maximum market capitalization of $15 billion.  Let's hope this is just a PR stunt, an attempt to make the bank appear younger, hipper, or part of the tech in-crowd. Because for actual investors, this exercise in prognostication is a waste of time. Here's why.

Covering tulips in 1637
What is Bitcoin, exactly? Proponents will tell you it's a nonfiat currency. It's a way to do transactions in the modern age free from the government, bank, and regulatory restraints of our current fiat system. They'll tell you it's the future of commerce. It's a panacea from financial oppression.  Others will tell you that Bitcoin is a flash in the pan asset, not a currency at all. It's a tulip bulb. It's a series of ones and zeroes being traded -- no, speculated upon -- without any underlying value or practical application. There is even a website devoted to maintaining the current Bitcoin-to-tulip bulb exchange rate (690 at the time of this writing, if you're looking to trade your leftover Thanksgiving orange tulips).

At this point in time no one really knows what bitcoin really means in the big picture. It seems equally likely to me that it could be the start of a commerce revolution or yet another time- and money-wasting folly of group psychology.  Bank of America's calculation assumes, preposterously if you ask me, that bitcoins will become "a major player in e-commerce and money transfer, and a significant store of value with a reputation close to silver."  Whoa!! What?!?  Why is that preposterous, you ask? Several reasons.

1. Pump and dump
Like it or not, bitcoin is wrought with fraudsters, schemers, and other clever bad guys. The New York Times has reported of several instances of such schemes, including Boiler Room-style pump and dumps executed using Twitter.  Earlier this week the Chinese central government barred the nation's banks from accepting bitcoin. The Bank of France issued warnings as well. Despite these soft actions, the fraudsters still act without fear of repurcussion. From the Times article:

[The lack of law enforcement] has allowed more than 30 episodes in which at least 1,000 Bitcoins -- or $1 million at the current rate of exchange -- were stolen or transferred illegally, according to a frequently updated list on the most popular online forum for Bitcoin. Of those cases, 10 involved losses of more than 10,000 Bitcoins, or $10 million at the current value. The authorities have only been publicly involved in one of these cases.  Hard to justify bitcoin as a major player in e-commerce or as anywhere near the store of value of silver when scammers can operate with this much impunity. 

2. Its essentially impossible to bet against bitcoin
Fortune magazine's Stephen Gandel spent a good amount of his time this week attempting to short Bitcoin. Gandel, a very smart financial mind, couldn't figure out a reasonable method to achieve the trade.  Traditionally, a short trade requires shares to be borrowed from a current owner. Besides the fact that no mechanism to allow borrowing exists, would you be comfortable letting digital cowboys borrow your money in the Wild West?  Gandel was able to buy put options, derivative contracts that did allow him to bet against a rise in bitcoin value, but the costs involved with executing the trade didn't make economic sense. The trade would have lost money even if the value of a bitcoin plummeted 55%! Hard to justify losing money when a price moves 55% in your favor.  Does this sound like the silver market to you? Me either.

3. The entire bitcoin market is vulnerable to a complete shutdown
Would you consider illegal drugs as a viable investment? Drugs are in demand, and as the War on Drugs raging on, the product is in short supply.  But the economics don't matter in that example because of government intervention. Your entire investment could be scooped up by the DEA at any time (and also, there is the whole legality/jail time issue).  The same is true of Bitcoin. With the Chinese government all but banning the currency from mainstream adoption, a significant portion of the market is wiped out overnight. The New York Times estimated that about 30% of global bitcoin purchases come from China. 

The supply and demand implications of this fact are huge! The supply of Bitcoins is essentially fixed (not technically, but close enough for this point). Overnight the demand side declines by 30% based on the decision of just one government. With no inherent value, the downside risk to Bitcoin prices are absolutely tremendous.  What happens if and when the U.S. government changes from its current "watch and wait" policy? Or European Union states? Or Japan? 

Thanks for the effort, BofA, but no thanks
Bank of America should be applauded for attempting to stay ahead of the curve. Unfortunately, this report provides no real value to investors or even bitcoin speculators. The assumptions built in are simply erroneous at this point in bitcoin's evolution.  Perhaps time will prove me wrong, but for now I won't be buying any bitcoins and I'll only be buying tulips for Mother's Day.

http://www.fool.com/investing/general/2013/12/07/bank-of-america-pegs-bitcoin-heres-why-its-a-waste.aspx

 

So, Bitcoin Is Crashing

(By Mark Gongloff , The Huffington Post, 06 December 2013)

Well, it had to happen some time: Bitcoin is crashing.  The price of the crypto-currency tumbled nearly 21 percent on Friday to $877.46 on trading site Mt. Gox and has fallen more than 29 percent since closing at a record high of $1,237.96 on Wednesday, according to Bitcoin data tracker BitcoinCharts.com.  Much of Bitcoin's meteoric rise in the past few months has been due to speculative trading in China, the Wall Street Journal pointed out earlier this week.  China's central bank shot a gigantic hole in that trade on Thursday by telling Chinese banks they couldn't use the untraceable digital currency, calling it "not a currency in the real meaning of the word."  That doesn't mean Chinese investors can't keep speculating in Bitcoin, but it is a blow to the credibility of the four-year-old currency.

 

Created by an unknown hacker or hackers known as Satoshi Nakamoto, Bitcoin has the potential to be a long-lasting digital alternative to national currencies like the U.S. dollar and the Chinese yuan. But it has also become favored for illicit uses such as money laundering and drug-dealing, raising concerns about whether policy makers will ever embrace it fully.

Regardless of Bitcoin's long-term potential, there is little doubt its price has jumped too far too quickly: It traded for less than $100 just six months ago.  An official for Bitcoin exchange BTC China, where a growing percentage of Bitcoin trading takes place these days, told the WSJ that most Chinese investors are just hoping prices will keep rising long enough for them to sell and turn a profit. The People's Bank of China, in its statement on Thursday, reminded traders that might not be the soundest approach to investment, according to the New York Times:  “The price can be easily controlled by speculators, creating severe turbulence and huge risks," the PBOC reportedly said. "Ordinary investors who blindly follow the crowd can easily suffer major losses.”

http://www.huffingtonpost.com/2013/12/06/bitcoin-crashes_n_4400392.html?icid=maing-grid7%7Cmain5%7Cdl2%7Csec1_lnk2%26pLid%3D415937

  

 

The Bitcoin Crash Of 2013: Don't You Feel Silly Now?

(By Michael Hiltzik, L.A. Times, December 7, 2013)

 

People who thought that bitcoins could serve as either an investment vehicle or an alternative world currency got their heads handed to them on Thursday and Friday. That's when the price of the attention-grabbing crypto-currency got crushed, falling from a quoted $1,200 per "coin" to less than $600. At this writing, it's quoted on the Mt. Gox exchange at about $830.  The whipsaw validates what we wrote about bitcoins just two weeks ago: they're useful as a medium of transfer, but even then you have to be nimble.  If you were a Greek or a Spaniard using bitcoins to move money out of your home country without having to worry too much about your local foreign exchange or banking rules, and you figured on Thursday that you could get around to transferring your asset back out of bitcoins and into dollars or sterling--whoops! You lost half your stake in a matter of hours. The minimum time required to complete a trade in bitcoins is ten minutes; that's about how long you should hold them to keep exchange rate risk low.

And if you were taken in by all the talk about bitcoins replacing gold as a storehouse of value, well, now you've been taken down. Much of that talk was generated by the peak quote of bitcoins last week at $1,200, which was sometimes described as equivalent to or even higher than the price of gold. That's an absurd statement, of course: $1,200 bought you an ounce of gold bullion, but on the bitcoin market it only bought you a putative claim on the outcome of a mathematical algorithm.  The proximate cause of the bitcoin crash was a warning by China's central bank against treating bitcoins as legal tender. The Beijing government didn't ban bitcoins, however, stating that Chinese citizens are still free to engage in bitcoin transactions at their own risk.  The bitcoin market's reaction underscores what Stanford economist Susan Athey has said--that the value of bitcoins lies in their potential to facilitate transactions. The more transactions you think can be done in bitcoins, the higher their price. Because the Chinese government's statement may reduce confidence in bitcoin trades there, the market plunged.

Bitcoins will undoubtedly rise in quoted value again, and also fall again. The one inevitability about them is their volatility, to which there's no end in sight. What does this tell us about bitcoins' future as an alternative currency? This is the hope of gold bugs and other critics of central banks and their fiat currencies, but plainly bitcoins aren't anywhere near that stage yet, and probably never will be.  Bitcoin advocates love to talk as though their new medium will be a counterforce to governments' tendencies to devalue their own currencies for economic gain. As Boston University economist Laurence Kotlikoff recently wrote: "Anyone familiar with current U.S. monetary policy might well wonder whether our country wouldn't be better served with bitcoins replacing the dollar."  You can stop wondering. The answer is no.

http://www.latimes.com/business/hiltzik/la-fi-mh-the-bitcoin-crash-20131207,0,7011276.story#ixzz2mr4zfpDA

 

Damn it.  This next article really bothers me because it makes a lot of sense and has several valid points, particularly micropayments.  It makes a strong argument for legitimizing Bitcoins.  My two main concerns still remain though.  First, the fluctuation of the market.  If I am a vendor and I sell a product for two Bitcoins and then I go to restock my supply but have to pay four Bitcoins to my supplier because the value wildly decreased in the last few days, then I will lose money on the transaction.  If I instead convert it to cash immediately rather than keeping the Bitcoins for future transactions, then why would I bother with the expense needed to maintain an accounting /processing system for that type of alternative  payment?  I'm not really concerned about privacy or masking the customers identity.  

Second, what happens if the whole Bitcoin ledger disappears?  I admit, I'm a bit uncertain about how the process works from a computing standpoint but if the whole system is based on computer code, what is to keep it from being unwritten?  We know nothing about the identity of the system founders.  Who's to say they aren't fiscal terrorists who want to move everyone to a new form of currency and then erase that system once everyone is dependent upon it.  Yeah, I know I'm a bit paranoid but again, we know hardly anything about the developers of the system or the permanence of the currency.  So far, it remains an intriguing and scary endeavor.

 

Why Bitcoin Matters

(By Marc Andreessen, New York Times, 21 January 2014)

Editor’s note: Marc Andreessen’s venture capital firm, Andreessen Horowitz, has invested just under $50 million in Bitcoin-related start-ups. The firm is actively searching for more Bitcoin-based investment opportunities. He does not personally own more than a de minimis amount of Bitcoin.

A mysterious new technology emerges, seemingly out of nowhere, but actually the result of two decades of intense research and development by nearly anonymous researchers.  Political idealists project visions of liberation and revolution onto it; establishment elites heap contempt and scorn on it.  On the other hand, technologists – nerds – are transfixed by it. They see within it enormous potential and spend their nights and weekends tinkering with it.  Eventually mainstream products, companies and industries emerge to commercialize it; its effects become profound; and later, many people wonder why its powerful promise wasn’t more obvious from the start.  What technology am I talking about? Personal computers in 1975, the Internet in 1993, and – I believe – Bitcoin in 2014.

One can hardly accuse Bitcoin of being an uncovered topic, yet the gulf between what the press and many regular people believe Bitcoin is, and what a growing critical mass of technologists believe Bitcoin is, remains enormous. In this post, I will explain why Bitcoin has so many Silicon Valley programmers and entrepreneurs all lathered up, and what I think Bitcoin’s future potential is.  First, Bitcoin at its most fundamental level is a breakthrough in computer science – one that builds on 20 years of research into cryptographic currency, and 40 years of research in cryptography, by thousands of researchers around the world.  Bitcoin is the first practical solution to a longstanding problem in computer science called the Byzantine Generals Problem. To quote from the original paper defining the B.G.P.: “[Imagine] a group of generals of the Byzantine army camped with their troops around an enemy city. Communicating only by messenger, the generals must agree upon a common battle plan. However, one or more of them may be traitors who will try to confuse the others. The problem is to find an algorithm to ensure that the loyal generals will reach agreement.”  More generally, the B.G.P. poses the question of how to establish trust between otherwise unrelated parties over an untrusted network like the Internet.

The practical consequence of solving this problem is that Bitcoin gives us, for the first time, a way for one Internet user to transfer a unique piece of digital property to another Internet user, such that the transfer is guaranteed to be safe and secure, everyone knows that the transfer has taken place, and nobody can challenge the legitimacy of the transfer. The consequences of this breakthrough are hard to overstate.

What kinds of digital property might be transferred in this way? Think about digital signatures, digital contracts, digital keys (to physical locks, or to online lockers), digital ownership of physical assets such as cars and houses, digital stocks and bonds … and digital money.  All these are exchanged through a distributed network of trust that does not require or rely upon a central intermediary like a bank or broker. And all in a way where only the owner of an asset can send it, only the intended recipient can receive it, the asset can only exist in one place at a time, and everyone can validate transactions and ownership of all assets anytime they want.

How does this work?  Bitcoin is an Internet-wide distributed ledger. You buy into the ledger by purchasing one of a fixed number of slots, either with cash or by selling a product and service for Bitcoin. You sell out of the ledger by trading your Bitcoin to someone else who wants to buy into the ledger. Anyone in the world can buy into or sell out of the ledger any time they want – with no approval needed, and with no or very low fees. The Bitcoin “coins” themselves are simply slots in the ledger, analogous in some ways to seats on a stock exchange, except much more broadly applicable to real world transactions.  The Bitcoin ledger is a new kind of payment system. Anyone in the world can pay anyone else in the world any amount of value of Bitcoin by simply transferring ownership of the corresponding slot in the ledger. Put value in, transfer it, the recipient gets value out, no authorization required, and in many cases, no fees.

That last part is enormously important. Bitcoin is the first Internetwide payment system where transactions either happen with no fees or very low fees (down to fractions of pennies). Existing payment systems charge fees of about 2 to 3 percent – and that’s in the developed world. In lots of other places, there either are no modern payment systems or the rates are significantly higher. We’ll come back to that.  Bitcoin is a digital bearer instrument. It is a way to exchange money or assets between parties with no pre-existing trust: A string of numbers is sent over email or text message in the simplest case. The sender doesn’t need to know or trust the receiver or vice versa. Related, there are no chargebacks – this is the part that is literally like cash – if you have the money or the asset, you can pay with it; if you don’t, you can’t. This is brand new. This has never existed in digital form before.

Bitcoin is a digital currency, whose value is based directly on two things: use of the payment system today – volume and velocity of payments running through the ledger – and speculation on future use of the payment system. This is one part that is confusing people. It’s not as much that the Bitcoin currency has some arbitrary value and then people are trading with it; it’s more that people can trade with Bitcoin (anywhere, everywhere, with no fraud and no or very low fees) and as a result it has value.  It is perhaps true right at this moment that the value of Bitcoin currency is based more on speculation than actual payment volume, but it is equally true that that speculation is establishing a sufficiently high price for the currency that payments have become practically possible. The Bitcoin currency had to be worth something before it could bear any amount of real-world payment volume. This is the classic “chicken and egg” problem with new technology: new technology is not worth much until it’s worth a lot. And so the fact that Bitcoin has risen in value in part because of speculation is making the reality of its usefulness arrive much faster than it would have otherwise.

Critics of Bitcoin point to limited usage by ordinary consumers and merchants, but that same criticism was leveled against PCs and the Internet at the same stage. Every day, more and more consumers and merchants are buying, using and selling Bitcoin, all around the world. The overall numbers are still small, but they are growing quickly. And ease of use for all participants is rapidly increasing as Bitcoin tools and technologies are improved. Remember, it used to be technically challenging to even get on the Internet. Now it’s not.  The criticism that merchants will not accept Bitcoin because of its volatility is also incorrect. Bitcoin can be used entirely as a payment system; merchants do not need to hold any Bitcoin currency or be exposed to Bitcoin volatility at any time. Any consumer or merchant can trade in and out of Bitcoin and other currencies any time they want. 

Why would any merchant – online or in the real world – want to accept Bitcoin as payment, given the currently small number of consumers who want to pay with it? My partner Chris Dixon recently gave this example:  “Let’s say you sell electronics online. Profit margins in those businesses are usually under 5 percent, which means conventional 2.5 percent payment fees consume half the margin. That’s money that could be reinvested in the business, passed back to consumers or taxed by the government. Of all of those choices, handing 2.5 percent to banks to move bits around the Internet is the worst possible choice. Another challenge merchants have with payments is accepting international payments. If you are wondering why your favorite product or service isn’t available in your country, the answer is often payments.”  In addition, merchants are highly attracted to Bitcoin because it eliminates the risk of credit card fraud. This is the form of fraud that motivates so many criminals to put so much work into stealing personal customer information and credit card numbers.  Since Bitcoin is a digital bearer instrument, the receiver of a payment does not get any information from the sender that can be used to steal money from the sender in the future, either by that merchant or by a criminal who steals that information from the merchant.

Credit card fraud is such a big deal for merchants, credit card processors and banks that online fraud detection systems are hair-trigger wired to stop transactions that look even slightly suspicious, whether or not they are actually fraudulent. As a result, many online merchants are forced to turn away 5 to 10 percent of incoming orders that they could take without fear if the customers were paying with Bitcoin, where such fraud would not be possible. Since these are orders that were coming in already, they are inherently the highest margin orders a merchant can get, and so being able to take them will drastically increase many merchants’ profit margins.  Bitcoin’s antifraud properties even extend into the physical world of retail stores and shoppers.

For example, with Bitcoin, the huge hack that recently stole 70 million consumers’ credit card information from the Target department store chain would not have been possible. Here’s how that would work:  You fill your cart and go to the checkout station like you do now. But instead of handing over your credit card to pay, you pull out your smartphone and take a snapshot of a QR code displayed by the cash register. The QR code contains all the information required for you to send Bitcoin to Target, including the amount. You click “Confirm” on your phone and the transaction is done (including converting dollars from your account into Bitcoin, if you did not own any Bitcoin).  Target is happy because it has the money in the form of Bitcoin, which it can immediately turn into dollars if it wants, and it paid no or very low payment processing fees; you are happy because there is no way for hackers to steal any of your personal information; and organized crime is unhappy. (Well, maybe criminals are still happy: They can try to steal money directly from poorly-secured merchant computer systems. But even if they succeed, consumers bear no risk of loss, fraud or identity theft.)

Finally, I’d like to address the claim made by some critics that Bitcoin is a haven for bad behavior, for criminals and terrorists to transfer money anonymously with impunity. This is a myth, fostered mostly by sensationalistic press coverage and an incomplete understanding of the technology. Much like email, which is quite traceable, Bitcoin is pseudonymous, not anonymous. Further, every transaction in the Bitcoin network is tracked and logged forever in the Bitcoin blockchain, or permanent record, available for all to see. As a result, Bitcoin is considerably easier for law enforcement to trace than cash, gold or diamonds.

What’s the future of Bitcoin?  Bitcoin is a classic network effect, a positive feedback loop. The more people who use Bitcoin, the more valuable Bitcoin is for everyone who uses it, and the higher the incentive for the next user to start using the technology. Bitcoin shares this network effect property with the telephone system, the web, and popular Internet services like eBay and Facebook.  In fact, Bitcoin is a four-sided network effect. There are four constituencies that participate in expanding the value of Bitcoin as a consequence of their own self-interested participation. Those constituencies are (1) consumers who pay with Bitcoin, (2) merchants who accept Bitcoin, (3) “miners” who run the computers that process and validate all the transactions and enable the distributed trust network to exist, and (4) developers and entrepreneurs who are building new products and services with and on top of Bitcoin.  All four sides of the network effect are playing a valuable part in expanding the value of the overall system, but the fourth is particularly important.

All over Silicon Valley and around the world, many thousands of programmers are using Bitcoin as a building block for a kaleidoscope of new product and service ideas that were not possible before. And at our venture capital firm, Andreessen Horowitz, we are seeing a rapidly increasing number of outstanding entrepreneurs – not a few with highly respected track records in the financial industry – building companies on top of Bitcoin.

For this reason alone, new challengers to Bitcoin face a hard uphill battle. If something is to displace Bitcoin now, it will have to have sizable improvements and it will have to happen quickly. Otherwise, this network effect will carry Bitcoin to dominance.  One immediately obvious and enormous area for Bitcoin-based innovation is international remittance. Every day, hundreds of millions of low-income people go to work in hard jobs in foreign countries to make money to send back to their families in their home countries – over $400 billion in total annually, according to the World Bank. Every day, banks and payment companies extract mind-boggling fees, up to 10 percent and sometimes even higher, to send this money.

Switching to Bitcoin, which charges no or very low fees, for these remittance payments will therefore raise the quality of life of migrant workers and their families significantly. In fact, it is hard to think of any one thing that would have a faster and more positive effect on so many people in the world’s poorest countries.  Moreover, Bitcoin generally can be a powerful force to bring a much larger number of people around the world into the modern economic system. Only about 20 countries around the world have what we would consider to be fully modern banking and payment systems; the other roughly 175 have a long way to go. As a result, many people in many countries are excluded from products and services that we in the West take for granted. Even Netflix, a completely virtual service, is only available in about 40 countries. Bitcoin, as a global payment system anyone can use from anywhere at any time, can be a powerful catalyst to extend the benefits of the modern economic system to virtually everyone on the planet.  And even here in the United States, a long-recognized problem is the extremely high fees that the “unbanked” — people without conventional bank accounts – pay for even basic financial services. Bitcoin can be used to go straight at that problem, by making it easy to offer extremely low-fee services to people outside of the traditional financial system.

A third fascinating use case for Bitcoin is micropayments, or ultrasmall payments. Micropayments have never been feasible, despite 20 years of attempts, because it is not cost effective to run small payments (think $1 and below, down to pennies or fractions of a penny) through the existing credit/debit and banking systems. The fee structure of those systems makes that nonviable.  All of a sudden, with Bitcoin, that’s trivially easy. Bitcoins have the nifty property of infinite divisibility: currently down to eight decimal places after the dot, but more in the future. So you can specify an arbitrarily small amount of money, like a thousandth of a penny, and send it to anyone in the world for free or near-free.  Think about content monetization, for example. One reason media businesses such as newspapers struggle to charge for content is because they need to charge either all (pay the entire subscription fee for all the content) or nothing (which then results in all those terrible banner ads everywhere on the web). All of a sudden, with Bitcoin, there is an economically viable way to charge arbitrarily small amounts of money per article, or per section, or per hour, or per video play, or per archive access, or per news alert.  Another potential use of Bitcoin micropayments is to fight spam. Future email systems and social networks could refuse to accept incoming messages unless they were accompanied with tiny amounts of Bitcoin – tiny enough to not matter to the sender, but large enough to deter spammers, who today can send uncounted billions of spam messages for free with impunity.

Finally, a fourth interesting use case is public payments. This idea first came to my attention in a news article a few months ago. A random spectator at a televised sports event held up a placard with a QR code and the text “Send me Bitcoin!” He received $25,000 in Bitcoin in the first 24 hours, all from people he had never met. This was the first time in history that you could see someone holding up a sign, in person or on TV or in a photo, and then send them money with two clicks on your smartphone: take the photo of the QR code on the sign, and click to send the money.  Think about the implications for protest movements. Today protesters want to get on TV so people learn about their cause. Tomorrow they’ll want to get on TV because that’s how they’ll raise money, by literally holding up signs that let people anywhere in the world who sympathize with them send them money on the spot. Bitcoin is a financial technology dream come true for even the most hardened anticapitalist political organizer.

The coming years will be a period of great drama and excitement revolving around this new technology.  For example, some prominent economists are deeply skeptical of Bitcoin, even though Ben S. Bernanke, formerly Federal Reserve chairman, recently wrote that digital currencies like Bitcoin “may hold long-term promise, particularly if they promote a faster, more secure and more efficient payment system.” And in 1999, the legendary economist Milton Friedman said: “One thing that’s missing but will soon be developed is a reliable e-cash, a method whereby on the Internet you can transfer funds from A to B without A knowing B or B knowing A – the way I can take a $20 bill and hand it over to you, and you may get that without knowing who I am.”

Economists who attack Bitcoin today might be correct, but I’m with Ben and Milton.  Further, there is no shortage of regulatory topics and issues that will have to be addressed, since almost no country’s regulatory framework for banking and payments anticipated a technology like Bitcoin.  But I hope that I have given you a sense of the enormous promise of Bitcoin. Far from a mere libertarian fairy tale or a simple Silicon Valley exercise in hype, Bitcoin offers a sweeping vista of opportunity to reimagine how the financial system can and should work in the Internet era, and a catalyst to reshape that system in ways that are more powerful for individuals and businesses alike.

http://dealbook.nytimes.com/2014/01/21/why-bitcoin-matters/?_php=true&_type=blogs&_r=0

Bitcoin — Boom Or Bubble?

(By Robert J. Samuelson, Washington Post, 19 January 2014)

The baffling Bitcoin boom is either an exercise in self-delusion — a high-tech Ponzi scheme that will come crashing down — or an imaginative new Internet technology that could change how millions of people around the world conduct everyday business. There is little middle ground.  Called a “digital currency,” Bitcoin originated in early 2009 with a software program written by Satoshi Nakamoto. Who is Nakamoto? Good question. It’s a pseudonym, and we don’t know who’s behind it — whether man or woman; individual or group; American, Japanese, Russian or some other nationality. But what seems clear is that Nakamoto owns bitcoins worth “hundreds of millions of dollars,” says Jerry Brito, an analyst at the Mercatus Center of George Mason University and a Bitcoin enthusiast.  You can do two things with bitcoins: buy stuff, just as with traditional money; and hold them as an investment or speculation, hoping their price will rise.

Some shopping does occur with bitcoins. The first retail transaction is usually attributed to Laszlo Hanyecz, a computer programmer in Florida, who in May 2010 persuaded someone to order two pizzas for him in exchange for 10,000 bitcoins. Recently, Overstock.com — an online retailer — agreed to accept bitcoins; the Sacramento Kings basketball team will do likewise. According to coinmap.org, about 2,600 stores and businesses worldwide accept bitcoins, with concentrations in Western Europe, California and New York.

Still, bitcoins today are mainly a financial gamble. They’re traded on electronic exchanges, where price swings have been mind-blowing. When Hanyecz bought his pizzas, bitcoins were perhaps worth less than a penny each. In late 2013, prices exceeded $1,000. Short-term variations are enormous. Here’s one stretch in 2013: On April 6, the price was $142.63; on April 16, $68.36; on April 30, $139.23, according to data from coindesk.com. Prices now bounce between $800 and $900. At $800, Hanyecz’s pizzas would cost $8 million.  Basic economics teaches that money serves three roles:

● a medium of exchange, buying and selling;

● a store of value, something whose stability protects wealth;

● a unit of account, a way to price goods and services.

Bitcoin’s wild price fluctuations seem disqualifying on all counts. A business that accepts bitcoins takes an immediate risk that the funds will lose 5 percent or 10 percent of their worth before they can be converted into traditional money (dollars, euros, yen). By this logic, retail uses will remain limited. For similar reasons, bitcoins flunk as a store of value and unit of account.  What has boosted bitcoins’ price is speculative mania and specific events that increased demand. Cyprus’s financial crisis in 2013 reportedly caused European investors to convert euros into bitcoins as a way of evading controls on moving money abroad. Prices rose when Baidu — China’s Google — said it would accept bitcoins in some situations. Because it’s hard to identify owners, bitcoins may also lubricate crime, money-laundering and tax evasion. Bitcoins were used on “Silk Road,” a Web site that peddled illegal drugs.  To skeptics (including this writer), Bitcoin seems a collapse waiting to happen. There’s nothing behind it except clever programming. It’s extremely vulnerable to hostile government actions. Baidu reversed its decision after China’s central bank criticized Bitcoin; Germany’s Bundesbank has done likewise. The FBI pierced Silk Road’s anonymity and shut it down. Could bitcoins be worth $80 or 80 cents instead of $800?

Hold it, retort Bitcoin’s defenders. The standard “bubble” analogy distorts Bitcoin’s technology and potential.  It won’t replace the dollar or the euro, says Brito of the Mercatus Center. Instead, Bitcoin represents a payments technology that competes with Visa and PayPal. Against these, he says, Bitcoin has some huge theoretical advantages. Except for cash, most payment systems require a middleman (usually a bank) to move funds from the buyer’s account to the seller’s account. By contrast, buyers and sellers of bitcoins deal directly with each other. Bitcoins are deposited automatically in the seller’s electronic “wallet.” Savings could be sizable, Brito says.

Jeremy Allaire is chief executive of Circle Internet Financial, a start-up company striving to commercialize Bitcoin. With time, he thinks Bitcoin’s price volatility will subside or be hedged. He says that Bitcoin’s frantic trading is not just mindless speculation. “People are making a bet,” he says. The bet is that Bitcoin will emerge as a global payment platform operating through smartphones, tablets and other devices. If Bitcoin captures even a small share of the multitrillion-dollar global payment market, its current price will be dramatically undervalued, he says. There are now about 12 million bitcoins; the underlying software is supposed to stop production at 21 million.  Ours is an era when technologists are leading us in directions that neither they nor we fully understand. That’s why it’s so hard to know whether Bitcoin represents constructive innovation — or just another old-fashioned swindle.

http://www.washingtonpost.com/opinions/robert-samuelson-is-bitcoin-for-real-or-a-fad/2014/01/19/8c04af9e-7f9e-11e3-95c6-0a7aa80874bc_story.html?hpid=z2

 

 

Bitcoin Experiment In Real Life

(By Geoffrey A. Fowler, Wall Street Journal, February 18, 2014)

Personal Tech Columnist Geoffrey Fowler spent a week shopping with the Internet's mysterious bitcoin currency. The result? Cupcakes and Grumpy Cat.  Deep in the unregulated underbelly of the Internet, bitcoin is the crypto-currency of the realm, making as many headlines for its volatile price as it has for its popularity with criminals seeking anonymity.  These are reasons enough to keep most people away. But bitcoin keeps popping up in more places as a way to pay for legal, everyday things. So I spent a week using the virtual currency and my experience surprised me: It was neither anonymous nor shadowy.  Though my hunt for places to spend bitcoin did turn up a questionable massage parlor, it didn't require venturing into fishy corners of the Internet. I used bitcoin to buy cupcakes and sushi at local shops, and I got a Grumpy Cat sweatshirt at Overstock.com.

Bitcoin isn't ready to replace credit cards or PayPal. It lacks wide acceptance, consumer protections and stability. The currency is in crisis right now, after hacking attacks disabled two of the biggest exchanges, making bitcoin lose a third of its value. During the course of a week, my own bitcoin lost as much as 7% of its value.

But that isn't stopping me from keeping a small wallet of the first major Internet currency. I'm no speculator, I'm not investing my savings in bitcoin, or recommending that anyone does that. I'm interested in what it might enable—a "tip jar" for online art, or small daily donations to charity. And if you're intrigued, too, this column will hopefully help you keep from losing your shirt.  The good news is you don't have to put much money at risk to try it out. I didn't even buy an entire "coin"—just 0.25 of one, or about $160. I signed up for a virtual wallet, which promises to safeguard the string of code that is your money, and exchanges dollars for bitcoin (and vice versa). I recommend Coinbase, whose wallet connects to your regular bank account and charges a small fee, about 1%, with each trade.

Are these people trustworthy? Coinbase is backed by some big names in Silicon Valley, but has nothing like the government-backed guarantees of using dollars in a regular bank. In the past 15 months, Coinbase says it has set up nearly one million consumer wallets.  What surprised me most is how Coinbase strips some anonymity out of the currency. To buy bitcoin, it asked me for my bank account information, my credit-card numbers, even my bank website login details. The company doesn't retain all that info but it is used to speed up the verification process, which can normally take four days.  The point of gathering all this information, says CEO Brian Armstrong, is to prevent "shenanigans," so the traditional banks will see Coinbase as legitimate.

Coinbase has done a good job of simplifying bitcoin use. To pay for sushi at a local shop, I used the Coinbase app on my Android phone to scan the QR code presented by my server. (Apple hasn't yet approved the Coinbase app for iPhone, but you can make payments via the Web.)  Once I confirmed my sushi payment, the money transferred instantly. For consumers, bitcoin's speed can be a dual-edged sword: If something goes wrong, there's no third party to intercede and get your money back. And returns can be tricky on a currency with a wildly fluctuating value. (Fortunately, I had no complaints about my sushi.)  Making a purchase online works much the same. At the Overstock.com checkout page, I chose to pay by bitcoin, and then scanned an on-screen code with my phone. 

So why bother using bitcoin? Bitcoin doesn't really solve mainstream consumer problems like speed and convenience, says Mark T. Williams, who teaches finance at Boston University and is a bitcoin skeptic. "It solves a problem if you want to send stuff secretly."  Though Coinbase and other wallets collect information about you, you can still try to make transfers or payments anonymous. If someone gives you bitcoin, you can set up a Coinbase wallet without entering many personal details—though you'll need to verify yourself if you want to turn your bitcoin back into dollars.  Getting merchants on board will be a slog. Some 3,000 businesses around the world accept bitcoin for payment, according to Coinmap.org. There are more than 60 in the San Francisco Bay Area where I live, but I still struggled to find places worth spending my bitcoin. When I did, paying with bitcoin was usually speedy, but certainly not faster than using a credit card or cash.  Overstock is planning to offer a financial incentive to paying with bitcoin. Since bitcoin payments save the retailer credit-card fees, Overstock will give bitcoin customers 1% back on their purchases (in store credit).

So far, the killer app for bitcoin may be international transfers, a process made costly and slow by traditional banks and services like PayPal. I tried sending $10 worth of bitcoin to my friend Kevin in Hong Kong. In minutes, he was up on Coinbase and zapping the money back to me. I sent it over the Pacific again, impressed at our ability to play ping pong with a financial process that normally takes days.  But when Kevin tried to spend his bitcoin in Hong Kong, opportunities were slim. He found a massage parlor that accepts it, but his wife wasn't impressed with his proposal to sample its services. Eventually Kevin found a florist (wife-approved), but I hadn't sent him enough to buy a bouquet. To buy more bitcoin, a legitimate-seeming Hong Kong wallet company asked for his passport, proof of address—and more time.  Someday, all of this might be easier. Taking a vacation with bitcoin might provide a way to avoid international currency and credit card fees. But that day isn't here yet.  "Some day"—I found myself thinking that a lot while using Bitcoin. It may be a currency of the future, but it's still looking for a reason to be useful in the present.

http://online.wsj.com/news/articles/SB10001424052702303491404579390971115008010





 

Bitcoin’s Enthusiasts Weather Chaotic Week

(By Craig Timberg, The Washington Post, 09 March 2014)

Future generations of Bitcoin billionaires may someday look back on 2014 with knowing smiles. Here was a year when thefts spread, exchanges collapsed, rates gyrated like a teenager’s moods. And yet the buying of bitcoins showed no signs of abating. The past week was particularly extreme. The suicide of an American business executive in Singapore was investigated for possible ties to her Bitcoin investments. A California man fingered as the currency’s mysterious inventor reacted to his sudden fame by asking that journalists buy him lunch. After finishing his meal at a sushi restaurant, he went on to deny any role whatsoever in Bitcoin.  Perhaps the most surprising development was that the virtual currency, despite wild fluctuations in value, continued to weather the mayhem. As the humans involved in the adventure looked increasingly vulnerable, Bitcoin looked comparatively solid, trading nearly 10 percent higher Saturday than a week before. Each bitcoin is worth more than $600 in recent trading. “Bitcoin works really well,” said Matthew Green, a Johns Hopkins University cryptographer who is working to develop a different virtual currency.  “All this craziness around Bitcoin isn’t around Bitcoin itself. It’s around the people.”

Bitcoin, first issued in 2009, has gradually gained acceptance as a digital currency that, unlike dollars or euros, can move through the global trade system with low fees, relative privacy and no regulation. That has helped it flourish among technology enthusiasts and libertarians, as well as on marketplaces for illicit drugs and weapons. “It’s completely Wild West,” said Garth Bruen, a security fellow at the Digital Citizens Alliance, a Washington-based advocacy group that combats online crime. “There are a lot of people getting rich, and there are a lot of people stealing.” Bitcoin enthusiasts like to point out that the currency has proved resistant to tampering. The total number in circulation can never go beyond a set amount, and each bitcoin is protected by a distinct cryptographic code. If that code is lost, as has sometimes happened, the bitcoin disappears forever. But criminals have targeted the computers that store bitcoins in encrypted code, in depositories known as “hot wallets.”

Over the past two weeks, it has become clear they have succeeded spectacularly in breaking those systems. The most famous example is Mt. Gox, the Tokyo-based exchange that filed for bankruptcy Feb. 28. It started as a site to trade cards for a popular game but shifted very profitably to Bitcoin, at one point becoming the biggest site for buying the virtual currency. Mt. Gox relied on technology that experts consider easy to use but hard to secure against hackers. When the exchange declared bankruptcy, it reported having lost more $400 million from theft. “The (Bitcoin) system and protocol itself was and is still sound,” Dustin Trammell, a Bitcoin investor and security expert, said in an email exchange after the Mt. Gox bankruptcy. “The currency exchange rate is holding stable during the fallout, and it really goes to articulate that Mt. Gox was simply a single bad actor, whether it be intentionally or just incompetence, in an otherwise solid fledgling financial industry.”  Flexcoin, a Bitcoin bank based in Canada, followed with its own bankruptcy this past week, again reportedly because of losses to hackers. Criminals apparently relied on an old trick — once popular against ATMs — of trying to withdrawal money faster than a bank can rectify accounts, allowing what amounts to a double-dipping of available funds. Hobbyists and speculators built the first generation of systems for storing and exchanging Bitcoin, despite having little of the expertise need to run financial institutions, Green said. “Look at it like somebody built a skyscraper out of wood,” he said. “That’s what happened.”

Amid the bankruptcies, news reports said that the suicide of a 28-year-old American woman in Singapore may have been related to her job as chief executive of a company that traded virtual currencies, and to her personal investment in bitcoins. The currency was created by a man who called himself Satoshi Nakamoto. Though the name was long thought to be a pseudonym, a Newsweek reporter found the California home of a Japanese American computer engineer who once went by that name before changing it several years ago. Presented with evidence that he was the Bitcoin inventor, the man appeared to confirm the discovery in an article posted online Thursday. But he recanted- after asking for lunch-   when a mob of journalists appeared at his home.  Newsweek has said it is standing by its story, which included other evidence and interviews with several of the man’s relatives.

Rising interest in Bitcoin has brought a flood of investments from venture capitalists, allowing for the development of exchanges that, experts say, are more likely to survive the attacks of hackers and other threats to the currency’s stability. The number of merchants accepting bitcoins, meanwhile, has steadily grown, and several cities now have ATMs that trade in them, making exchanges easier.  Bitcoins are traded directly between individuals, without a bank to act as an intermediary. The transactions are recorded on a Web-based public ledger, called a “block chain,” that provides a measure of transparency but also allows governments and others to potentially analyze transfers to determine who owns bitcoins and how they are being used. The exchanges are required by laws in the countries where they operate to record who buys bitcoins. The block chain is scrutinized so carefully that it may be difficult for those who have stolen bitcoins to trade them without being discovered. Experts say it also would be impossible for Nakamoto, the inventor, to cash in any of his personal trove of bitcoins — rumored to be worth hundreds of millions of dollars — without finally and definitively revealing his identity.

http://columbiadailyherald.com/news/nation/bitcoin-s-enthusiasts-weather-chaotic-week#sthash.zu0wMmog.dpuf

 

The Fierce Battle For The Soul Of Bitcoin

(By Robert McMillan, Wired, 26 March 2014)

Before most people had ever heard of the digital currency bitcoin, Brian Armstrong, a 27-year-old engineer at the home-sharing website Airbnb, thought it could make him a lot of money. At the time—spring 2012—Airbnb was moving a reported $500 million in payments annually in 192 countries through a patchwork of financial networks, and each one claimed a transaction fee. An anonymous, encrypted, government-free online version of money would simplify all that. It would be faster, more secure, and vastly cheaper.  The problem was that the things that made bitcoin attractive also made it bewildering for noncoders. Using it required balky and hard-to-use software called a wallet. Bitcoins were also a challenge to obtain—mostly you had to purchase them from middlemen who operated in the regulatory shadows and who sometimes turned out to be crooks. The money was hard to spend, because few merchants accepted it—the currency was just too new. Armstrong realized that the way to widespread acceptance of bitcoin was a user-friendly wallet.

He wasn’t the only one thinking about bitcoin’s broader potential. On a discussion forum about the currency, Armstrong met Ben Reeves, a British programmer who ran a bitcoin transaction-tracking website called Blockchain. Reeves understood the technology and was well respected within its tight-knit community of enthusiasts. He had been using bitcoin for a year already and had even built a bitcoin wallet that 10,000 people had tried out. Reeves also wanted to see the currency gain more traction. The two men hit it off and started spitballing ideas for a new kind of company: a PayPal for bitcoin. It would serve as a trusted broker of the cryptocurrency, taking a 0.5 percent charge anytime anyone converted dollars to bitcoins or vice versa. But spending money within the bitcoin network would be essentially free. With a digital wallet and payment-processing services, you could, say, pay that cash-only cab driver with bitcoins via your smartphone. They pitched the concept to the prestigious and highly selective tech-company incubator Y Combinator—and within hours had an invitation to join the class of summer 2012.

But the relationship soon ran into trouble. Armstrong felt that in order for bitcoin to gain mass acceptance, users who lost their wallet passwords would need a way of recovering them. That meant their new company would have to retain access to users’ private keys—the 64-character access codes that convey bitcoin ownership. Without that access, users could forever forfeit their entire bitcoin fortune as easily as forgetting their password.  Reeves disagreed completely. The whole point of bitcoin was that it put the person with the bitcoins in control. If you gave some company access to your bitcoins, you were essentially trusting it as you would a bank. It could lose them to hackers or, worse, steal them outright.

These rip-offs were already an all-too-common occurrence in the nascent bitcoin world. If Reeves and Armstrong’s company maintained a backdoor into all of its customers’ wallets, it would be only a matter of time before the government began issuing subpoenas. Yes, the current system meant that users took on more risk, and that would probably turn off some of the more casual ones. But bitcoin wasn’t meant for them anyway. Though Reeves planned to build a currency for everyone, he wanted to start with the geeks. “There simply are not that many reasons why the average person would want to use bitcoin,” he wrote.  The hammer fell just 48 hours before Reeves was supposed to get on a plane to fly to Silicon Valley.  Armstrong’s email was diplomatic, even kind. Still, like all breakups, it hurt. “Cofounding is really like a marriage,” Armstrong wrote, “and even though I think we have mutual respect for each other, we don’t work together extremely well.” Armstrong cut Reeves off from their shared online accounts. “I think we have pretty different aesthetics around what sort of product to build,” Armstrong wrote. He was going to Y Combinator alone. Reeves was out.

A Flash Guide to Bitcoin

The digital currency may have begun as an experiment for techno-libertarians and geeks, but today it’s growing into something much bigger. Still, that doesn’t make it any less complicated than when it was first introduced on a cryptography listserv in 2008. Here’s how bitcoin actually works.

1. Puzzle
Each bitcoin is represented by a string of numbers and letters. To verify that every transaction is legit, a worldwide network of computers constantly checks these cryptographic signatures.

2. Solve
Those computers are also locked in a contest to solve cryptographic puzzles. This is called mining. Many partici­pants join mining pools to combine their computational power for faster solving.

3. Mint
The winner gets a block of 25 new bitcoins. Over time, that bounty is set to decrease in size, limiting the total number of bitcoins in circulation. As more computers join the network, the puzzles get more difficult.

4. Verify
Miners serve a vital role: They add bitcoin transactions onto a public ledger called a block­chain. This database allows anyone to follow bitcoins from transaction to transaction.

5. Exchange
Once mined, new bitcoins go into circulation. People can buy them through online services like Coinbase or directly from another user. (In a few North American cities, bitcoin ATMs dispense them.)

6. Hold
Once acquired, btcoins must be stored. Some users keep their cryptocurrency in digital wallets on their computers or smartphones with apps like Bitcoin-Qt and MultiBit. Others store them in the cloud, relying on services like Coinbase.

7. Shop
The number of individuals and businesses accepting bitcoins is exploding. Today they can be spent everywhere from independent restaurants and hotels to major retailers like Overstock.com.

8. Repeat
Once a transaction has occurred, other computers on the network then validate and record it on the official bitcoin ledger—the blockchain. The network groups several transactions together and assebles a new cryptographic puzzle. Miners then begin attacking the new problems, which for now are designed to be solved in about 10 minutes.

Today the conceptual conflict between Armstrong and Reeves is playing out across the volatile and vibrant fledgling bitcoin economy. Once the domain of hackers, libertarian activists, and drug dealers, bitcoin has been adopted by a growing number of mainstream businesses. You can use it to buy a mattress on Overstock.com or a laptop from electronics seller TigerDirect; Zynga will soon begin accepting it for in-game payments. Last year more than $100 million in bitcoin transactions was processed and the value of bitcoins shot up from $13 to $1,200, despite the fact that regulators in China were cracking down. Even when one of the world’s best-known bitcoin businesses, a Japanese exchange called Mt. Gox, closed after being hacked—customers lost currency worth hundreds of millions of dollars—new exchanges launched, the value climbed back up, and the mainstreaming of bitcoin rolled on. Regulators are taking a hard look at the bitcoin economy, but investors and entrepreneurs keep coming.

All this activity obscures a fundamental rift over what bitcoin should become. Many of the currency’s original proponents—call them crypto-libertarians—see it as a step toward an entirely new economy, one that can’t be influenced by an overweening federal government or rapacious financial industry. Bitcoins aren’t created or controlled by a central organizing body like the Federal Reserve. They’re created—or mined, in bitcoin parlance—by a global network of computers and governed by the cold rationality of mathematics and the laws of supply and demand. Bitcoin’s algorithms dictate that no more than 21 million bitcoins will ever be created; the math even determines how quickly new bitcoins get added—25 every 10 minutes. (That number drops by half every four years.) And crucially, from the crypto-libertarians’ point of view, the currency straddles the line between transparency and privacy. All transactions happen out in the open, recorded on bitcoin’s public ledger. But because bitcoin isn’t necessarily tied to any user’s identity, it can be spent anonymously like cash, meaning there’s a way to keep governments and marketers in the dark about your spending habits.

Meanwhile, some of the new entrants to the bitcoin universe—venture capitalists and entrepreneurs—have a much different vision. They see bitcoin as something more practical: a hyperefficient online transaction system like Visa, but cheaper, faster, and more flexible. It would usher in a world in which we don’t have to trust online vendors to safeguard our credit card numbers, in which merchants don’t have to pay exorbitant handling fees, and in which payments as small as fractions of a cent could unleash a kind of long tail of commerce, making it just as easy and profitable for an Argentine vintner to accept money from a wine connoisseur in Dubai as it is for Amazon to sell diapers in Dubuque.

This doesn’t have to be a zero-sum game, but increasingly it looks as though the two visions of bitcoin are in conflict. With every Mt. Gox–style flameout, consumers and governments press for a more regulated system, even though some regulations threaten to push bitcoin into the deep jungle of international finance. Last year banking regulators shut down a US bitcoin exchange called TradeHill. Today the most popular bitcoin exchanges operate outside the US, in Slovenia, Bulgaria, and Japan. VCs are used to this dynamic—taking a technology nurtured by true believers and massaging it into a broadly acceptable business. But in this instance, they’re up against something new. Thanks to bitcoin’s skyrocketing value, some of its original proponents find themselves sitting atop massive war chests, and they are willing to spend their newly valuable cryptocurrency to realize their vision of the future.

On March 5 of last year, Wences Casares, CEO of the online-payment company Lemon, was eating lunch at the Dove Mountain Ritz-Carlton, a lavish golf retreat north of Tucson, Arizona. He was hobnobbing with other tech executives, VCs, and entrepreneurs at an invitation-only conference sponsored by boutique investment bank Allen & Company. Casares grew up on a sheep ranch in Patagonia, but he’d made a career building online banks and payment systems in Europe and Latin America. Over the previous year, bitcoin had become something of an obsession for Casares. He thought it would change finance, especially in developing countries, and he wanted to show it to anyone who would pay attention. At Dove Mountain, Casares decided to play a little parlor trick. He’d show the high-powered tech guys at the table how easily bitcoin could move a crapload of money. He had each of his tablemates download a bitcoin wallet to their phone. Then he generated a QR code on his own phone’s screen and had the person seated nearest to him take a picture of it. When that person checked their wallet, they had 6,390 bitcoins—worth $250,000.

What followed was perhaps the world’s most high-stakes game of hot potato. From seat to seat, the capitalists squirted 250 grand at each other with nothing more than a button push or screen tap. Once the money was safely transmitted back to Casares’ wallet, everyone at the table had gotten a taste of how cool and dead-simple bitcoin could be. This wasn’t like PayPal, say, which merely lubricates some of the friction between banks and credit card companies. This was money set free.  “It was quite a demo,” says Chris Dixon, a serial entrepreneur who is now a partner at Andreessen Horowitz, the venture capital firm best known for its investments in Facebook and Twitter. As a fee-free transaction system, Dixon saw, bitcoin could be an ecommerce alternative for businesses small and large. And because bitcoin was an open platform like the Internet, software developers were free to build things on top of it that they never could with MasterCard or Visa, which carefully control access to their networks. Here was a way to make mobile payments without giving Apple’s or Google’s app stores a 30 percent cut; here was a way for a college student to write a micropayment app to fund a school newspaper. “The original spec of HTTP was going to have a payment system built into it, but they never got to it,” Dixon says. He thought bitcoin might be it.

Eight months after the demo in Tucson, Dixon invested $25 million of Andreessen Horowitz’s money in Armstrong’s startup, Coinbase.  Just as companies like Facebook and Blogger had made it easy for anyone to set up their own online presence, the bitcoin economy needed a middleman to make it easier for everyone to participate.  But writing the Internet’s payment protocol was a risky proposition. People had tried to build digital currencies, and the results were always the same: Criminals flocked to them, and the government ended up shutting them down. If bitcoin were to succeed, Dixon reasoned, state and federal governments would have to establish a road map. And bitcoin companies would need to show that they were willing and able to follow the rules by putting the kind of strict controls on their businesses that would keep out criminals and money launderers.  Coinbase hopes to do just that. Today it occupies a 1,800-square-foot apartment in San Francisco’s South of Market neighborhood. It’s not a particularly impressive setting for a company attempting to build the future of money. A string of white Christmas lights trails up to the apartment’s loft, a concession to the holiday season that’s just winding down. “For a long time, Coinbase was essentially two desks upstairs,” Armstrong says. “Now we’re looking at a 25,000-square-foot office space.”

Then again, it makes sense that the company might underinvest in real estate. Coinbase is involved in a pricey proposition: obtaining the state licenses and filing the reports necessary to be an official money transmitter. Making bitcoin easy to use, it turns out, isn’t so much a technological problem as a regulatory one. When Coinbase started, the most difficult problem for new bitcoin users was buying and selling bitcoins. Coinbase made this easy. You link your bank account to Coinbase and—presto!—you’ve got bitcoins. But this complicated things for Coinbase. It turned the company into a money-services business, like Western Union. And just like Western Union, if it runs afoul of regulators, they can seize its bank accounts and put it out of business. (As long as the company is in the process of obtaining the proper permits, regulators will not clamp down.) As part of operating an aboveboard money-services firm, Coinbase actively polices its users. It vets customers to make sure they’re not criminals or money launderers, has access to their private keys, and helps startups develop apps to run on the Coinbase platform. Oh, and Coinbase takes a 1 percent fee when people use its system to convert bitcoins to cash and vice versa.

As less-technically-savvy users flood into the bitcoin marketplace, that fee can seem like a bargain. Simplicity, consistency, legality, and reliability are worth money. Just ask the millions of people who prefer to download TV shows from iTunes than to take their chances with BitTorrent. A year ago, when Casares was passing around bitcoins at the Arizona retreat, about 37,000 people had Coinbase wallets. Today that number is more than 1 million. Armstrong sees a future in a whole range of services—integrating the Coinbase wallet with cash registers so you can buy milk with bitcoins at your local grocery store, for example. “It’s a new protocol; it’s difficult to use, but it has incredible potential,” he says. “There’s an opportunity to build the first trusted brand on this new protocol and help make it easy for businesses and consumers to use it.”

If the anarchic id of bitcoin has an analogue to the straitlaced Chris Dixon, it’s Roger Ver. Sometimes called Bitcoin Jesus for the way people mob him after his lectures, Ver is a businessman and onetime Libertarian candidate for the California State Assembly. He left his home state for Japan in 2006 after a 10-month stint in Lompoc federal prison for selling a high-powered firecracker called the Pest Control Report 2000 on eBay.  But Ver is perhaps best known for a billboard. He pays $1,500 a month for it, a giant sign in Silicon Valley that advertises his aftermarket computer parts business. (Its tagline, naturally: “We accept bitcoin.”) Ver started buying the currency in 2011, when it traded at $1, and scooped up enough of it to ride its climb in value to a seven-digit bank account. Now he’s an early-stage investor in a dozen bitcoin companies. But unlike Dixon, the startups he’s funding aren’t necessarily trying to make bitcoin a respected and efficient aboveboard transaction system. They’re trying to develop the currency’s revolutionary potential.

One of these startups is Blockchain, the brainchild of Ben Reeves. After getting Armstrong’s breakup email, Reeves resolved to build Blockchain into more than just a data-gathering site. Like Armstrong, he saw the bitcoin wallet as a platform for financial services. But Reeves didn’t want Blockchain to have access to its customers’ bitcoins. So he hacked an ingenious wallet that can be accessed from a browser or a mobile phone but leaves the critical private key on the user’s computer. Blockchain can never lose your bitcoins. However, if you forget your password, it can’t find them for you either. None of the Valley’s investors wanted anything to do with Reeves.  And then he got an email from Ver. Blockchain was a great site, Ver wrote. Did Reeves need any help? The answer, of course, was yes. Ver invested some money—he won’t say how much—and with it Blockchain added servers and improved its software. Today it’s one of the most reliable sources of information on bitcoin, and Reeves is slowly turning it into a kind of Google for the bitcoin ecosystem—a set of web services that are crucial for bitcoin traders and developers.

The success of the company’s Blockchain.info website has led people in turn to download Blockchain’s wallet software. Today more than 1.3 million customers use it. They can check the latest bitcoin prices, log in to their wallet, and use bitcoins to buy, say, an Amazon gift card. The company’s 16 employees are developing a trading platform that will be able to search out the best deals on various bitcoin exchanges, and they’re building out a mobile news app called ZeroBlock. The company makes several hundred thousand dollars a month from ads, billed in bitcoin. It has no office and no bank account. “It’s a liberating and flexible thing for us,” says Nic Cary, Blockchain’s CEO. “We don’t need a bank.”  Reeves was on his way to building a wallet that was controlled 100 percent by the individual user and out of the hands of corporations and governments. You get to do whatever you want with it, and if you lose your private key, that’s your problem—rugged individualism, rendered as bits. It was an idea that appealed to libertarians like Ver, who once wrote that “nearly everything the government does makes the world a poorer place.” 

So what might a government-free bitcoin world look like? It could resemble Acapulco’s Playa Condesa. One-horse carriages festooned with blue and white balloons and flashing LEDs promenade up and down the busy street as drunken revelers avail themselves of a 100-foot bungee jump. Jeff Berwick, an anarchist millionaire, is drinking Don Julio at Paradise, an outdoor disco, and living tax-free.  Berwick made his first fortune as the founder of the finance news site Stockhouse. His second fortune came from bitcoin. Right now he’s trying to persuade me to go out for one more drink. “I know a place where they have midgets on roller skates,” he says. When Berwick isn’t partying, he and a group of like-minded people are trying to set up a free-trade zone in Honduras; they believe that president Juan Orlando Hernández will approve the deal any day. “There’s already a bunch of bitcoin guys getting ready to move down there as soon as the free zone is set up. They want to do a lot of bitcoin-related businesses, partly because there is not going to be any real regulatory thing,” Berwick says.

For about 45 bitcoins, Berwick will sell you a Paraguayan passport so you can live tax-free as a bitcoin anarchist in Acapulco. He will broker real estate deals for you there too. In fact, he is just about to close a sale on a 30th-floor penthouse with a killer view of the city. A month earlier, a German businessman living in China snatched it up for a 17-bitcoin down payment—he won’t let me use his name, but via email he tells me that with China’s strict monetary controls, it was the easiest way for him to get money out of the country.  American tourists largely avoid Acapulco, in part because of its reputation for drug-cartel violence. But Berwick says he feels safer here than in the US (possibly because he has a bodyguard). “I’ve fallen off my scooter drunk here. The cops just picked me up and helped me on my way,” he says. He can also sell real estate without a license.

That’s not to say that crypto-libertarian purists are above engaging with officialdom when necessary. In 2012, Ver and Mark Karpeles, then CEO of Mt. Gox, ponied up 5,000 bitcoins each to kick-start the Bitcoin Foundation. It was a decent endowment at the time, worth maybe $55,000. But as bitcoin’s value has mushroomed, the Bitcoin Foundation has become a well-funded lobbying organization worth millions. In August 2013, as federal investigators probed bitcoin’s connections to the Silk Road—a free-for-all drug bazaar fueled by anonymous bitcoin transactions—the foundation held a series of meetings with staffers at the US Justice and Treasury departments and the FBI. The months-long lobbying effort culminated in a pair of bitcoin-friendly congressional hearings that The Washington Post described as “lovefests.” The Bitcoin Foundation called it a win—and so did venture capitalists.

he new bitcoin millionaires are a weird breed: government-hating libertarians rich enough to hack the systems that make Washington, DC, function. In that town they even began to sound a little like VCs themselves. “Setting regulatory certainty is very important for bitcoin,” Ver says. “I’m opposed to the regulations, but the bitcoin businesses need to know the rules of the game in order to move ahead.”  Neither venture capitalists nor crypto-libertarians will win the fight for bitcoin’s soul if the currency’s fledgling system implodes. And it could. Companies in the emerging legitimate bitcoin industry—wallet builders, exchanges, payment-processing services—can’t get banking services because bankers still have no clear idea how regulations apply to these companies. On top of that, the bitcoin network itself is struggling to deal with its own rapid growth. It can process only seven transactions per second (Visa can handle 10,000).  But some clarity may be coming. This year the superintendent of the New York State Department of Financial Services, Benjamin Lawsky, expects to spell out a set of guidelines for plugging bitcoin companies into the financial system. These rules are likely to influence states across the US. If they’re too stringent, bitcoin companies will probably close their doors or set up business offshore. This is the risk that playing nice with regulators presents: They might regulate you out of existence. Meanwhile, Mt. Gox represents the risk of the Wild West approach: Without safeguards, a centralized authority, or some way to protect people’s digital holdings, the whole thing may be seen as fundamentally unstable and collapse on itself.

Coinbase, meanwhile, is forging ahead like it’s building the next billion-dollar Silicon Valley company. It has tripled its staff in the past six months, hiring a star compliance officer, Martine Niejadlik. Her job is to sort through all the rules an official financial-transactions business has to follow—and whatever new ones Lawsky comes up with. Its VCs, Andreessen Horowitz, have extended their commitment, investing $50 million in bitcoin businesses.  Other than Christmas lights, Armstrong’s team hasn’t had time to install much in the way of office decorations. But on one wall hangs an 8- by 10-inch picture frame filled with Zimbabwean dollar bills—a currency that went through a period of hyperinflation in the late 2000s. Today most transactions in Zimbabwe are conducted in US dollars or South African rands. Nailed to an office wall, it looks like a shrine to failed currency. I ask Armstrong if I can take a picture of it, and he tells me no. Nobody wants bitcoin linked with funny money.

http://www.wired.com/2014/03/what-is-bitcoin/