05 Aug Virtual Currency Gains Ground in Actual World
Depending on whom you ask, bitcoins are a goofy geek invention with as much long-term value as Monopoly money—or a technology development that could transform currency the way e-mail and texting have transformed correspondence.
A type of digital cash, bitcoins were invented in 2009 and can be sent directly to anyone, anywhere in the world. You don’t have to go through a financial institution, which means no fees and no one tracking your spending habits. With a current market capitalization of $1 billion, bitcoins are beginning to be more widely accepted. You can use them to pay for a pizza or make speculative bets that could end up financing your child’s college education.
But bitcoins, and other digital currencies, have also come under scrutiny. Liberty Reserve, an online payment system, was shuttered in the spring by New York authorities, who said the company used its digital currency, known as LRs, to launder up to $6 billion. And law enforcement officials have voiced concerns that bitcoins could also abet illegal transactions. Bart Chilton, a commissioner on the Commodity Futures Trading Commission, suggested that bitcoins might be ripe for regulation.
Moreover, some critics say the bitcoin infrastructure is insecure, as hackable as any other computer- based system.
“The way the basic bitcoin system works is both incredibly solid and incredibly clever from a technical standpoint,” said Nicholas Weaver, senior staff researcher at the International Computer Science Institute in Berkeley, which studies and advances a range of emerging technologies. “The system’s security is fragile, however, and the economic model behind bitcoin is, well, crazy stupid.”
Nonetheless, paying with bitcoins can be a weirdly fun way to make transactions. Here is a primer on how to do it.
Like gold, bitcoins, which are both a currency and a commodity, are in limited supply (there is a cap of 21 million total) and have to be “mined” before they are put in circulation. Anyone can mine for bitcoins by downloading software, known as the bitcoin client, which algorithmically crunches a bunch of numbers to legitimize or authenticate a sequence or “block” of past bitcoin transactions. So bitcoins are
basically minted as a reward for contributing to the smooth operation of the system. Validating a block yields 25 bitcoins, which are currently worth $2,675.
The fluctuating price of bitcoins, also like gold, is a function of supply and demand, as well as psychology. “Bitcoins have value because people say they have value,” said Andrew White, a former I.T. manager for the Wikipedia Foundation and now a digital currency entrepreneur in San Francisco. Unlike fiat currencies like the United States dollar and virtual currencies like Facebook credits and the one invented by Liberty Reserve, bitcoins are not created or controlled by a central authority. But with
the blistering rate of bitcoin transactions these days, you need a pricey and complex computer rig to effectively run the bitcoin client and procure some bitcoin bounty. An easier way to get bitcoins is to just find someone willing to sell them to you.
Julian Tosh, an I.T. systems administrator in Las Vegas, for example, lets friends and family buy items on his Amazon wish list and pays them back in bitcoins. “This works well as long as I need stuff,” said Mr. Tosh, who also presides over a Wednesday “Bitcoin Lunch Mob” in Las Vegas, which gathers to discuss and trade bitcoins.
But maybe you don’t personally know any bitcoin enthusiasts like Mr. Tosh or the Winklevoss twins, Cameron and Tyler, who own around $11 million worth and have filed papers with the Securities and Exchange Commission to form a bitcoin investment trust. If so, you might try localbitcoins.com, which lists people in your area who are willing to exchange bitcoins for cold hard cash. The market price Tuesday afternoon was $107 for a bitcoin. Be sure to check out sellers’ profiles and reviews to make sure they are reputable. And, of course, it’s always a good idea to meet in a public place to make the
Bitcoins can be easily transferred and stored using a digital wallet app on your Android mobile device. Popular wallet apps include BitcoinSpinner and Bitcoin Wallet. There are no iOS bitcoin wallet apps and Apple did not respond to e-mails seeking an explanation. But Blockchain has an online wallet service that you can access using any Internet-connected desktop, laptop, tablet or smartphone.
You can also get bitcoins through Mt.Gox, the largest bitcoin exchange and where the currency is traded as a commodity. But it’s a cumbersome and lengthy process, requiring wire transfers and scanning identity documents. The company, which is based in Japan, also charges a 0.6 percent fee for all transactions.
Keep in mind that the United States Department of Homeland Security in May seized Mt.Gox’s United States accounts, saying it misrepresented the full extent of its financial operations. The company did not respond to requests for comment but continues to function as before the seizure.
Another option is Coinbase, a bitcoin transaction platform, which recently announced a $5 million infusion of venture capital. While it’s still a nascent venture (not even a year old), the service hasn’t had any major hiccups yet and is relatively simple to use. You just enter your bank account and routing number, how many bitcoins you want and click “buy.” You can also send bitcoins to others through your Coinbase account. Just know you’ll be charged a 1 percent transaction fee.
Once you have your bitcoins, the fun part is spending them. Bitcoin. travel, BitcoinsInVegas.com, Spendbitcoins.com and Reddit have directories of businesses that accept bitcoins as payment. An Bitpremier.com lists high-priced luxury items (cars, jets, yachts, etc.) you can buy with bitcoins.
To make a purchase, all you have to do is type the receiver’s key code or scan their QR code into your bitcoin wallet and you’re done. Like cash transactions, you can’t cancel payment later, so be sure it’s what you want before you click “send.”
Brewster Kahle, a founder of the Internet Archive in San Francisco, said he routinely used bitcoins to pay for lunch at a local sushi restaurant. He’s interested in the technology and appreciates the libertarian aspect of it. “Bitcoin used to be just in the land of computer geeks, but not anymore,” he said.
More businesses are accepting bitcoins lately thanks to Bitpay, which supplies software for processing bitcoin payments. The merchant pays a 0.99 percent fee per transaction versus the 2 to 4 percent fees charged by credit card companies. Bitpay will also immediately convert bitcoins to dollars if the merchant desires.
“Bitcoin users are pretty enthusiastic, so you get instant loyal customers,” said Adam Penn, owner of Veggie Galaxy, a restaurant in Cambridge, Mass., which began accepting bitcoins through Bitpay in May. “So far, it’s been a no-risk revenue generator.”
Also last month, Bitpay announced a partnership with the mobile gift card app Gyft, which will allow people to use bitcoins to purchase gift cards from hundreds of retailers including Brookstone, Lowe’s, Gap, Sephora, GameStop, American Eagle, Nike, Marriott, Burger King and Fandango.
“It’s a huge development,” said Mr. Tosh in Las Vegas, who predicts Gyft’s embrace of bitcoins will lead to widespread use of the alternative currency. “Pandora’s box has been smashed.”
Or maybe not. The legal trouble at Mt.Gox sent a shiver through the market as did S.E.C. charges last week that the founder and operator of the lesser-known Bitcoin Savings and Trust in McKinney, Tex., was running a bitcoin Ponzi scheme.
Still, bitcoin advocates point out that, despite some bad actors, the actual system has not had a major security breach. Nevertheless, even the most ardent bitcoin boosters urge caution. Bitcoins have appreciated more than 700 percent since this time last year — an increase some have compared to a bubble bound to burst.
“It’s supervolatile, so I’d tell people to go slow,” said Peter Vessenes, chairman and executive director of the Bitcoin Foundation, a nonprofit organization that promotes the currency. “Never hold more bitcoins than you’re prepared to lose.”
By Kate Murphy for the New York Times
*As a sidenote: We would like to ask if any of you have had experience with Bitcoins in the past?
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