Most Americans don’t know what Bitcoin is.
In a recent Bloomberg National Poll, only 42 percent of respondents correctly identified the digital currency. The other 58 percent guessed everything from iPhone apps to Xbox games.
At its simplest, Bitcoin is a decentralized peer-to-peer payment network powered by its users with no central authority.
Everything else about Bitcoin is complicated. From its creation, to the way it’s spent, traded and tallied, Bitcoin is a series of complicated mathematical equations performed by computers worldwide at lightning speed.
Actions as simple as determining a Bitcoin wallet balance require a computer to calculate a user’s input and output on the block chain, which traces back to Bitcoin’s 2008 creation. The complex series of equations gives the digital currency a high level of security and provides anonymity, but also breeds a lack of understanding among the average American.
Comparing bitcoin to the U.S. dollar or other forms of government-backed money is tricky – $1 does not equal 1BTC. As of press time, 1BTC was trading for $844, on the Bitstamp exchange, one of a dozen popular sites.
As a new currency, bitcoins have no value. They are simply worth what people are willing to trade for them. In January 2013, bitcoins were trading for less than $20, but prices climbed steadily to a record high of $1,238 on Dec. 4. After regulators in China enacted a crackdown in mid-December, bitcoin prices dropped by 50 percent overnight.
In December 2012, WordPress website developer Jason Dittmer bought some bitcoins for $17 each. Less than a year later, the Neosho resident sold the coins for a hefty profit and made a down payment on a house. However, Dittmer knows the odds could have easily fallen out of his favor.
“I’m very confident in the future of Bitcoin, but I know it’s a volatile market,” he said. “Bitcoin is the future of currency. Even if Bitcoin doesn’t make it, something will. This is the first step in that direction.”
Designing websites for companies such as Springfield’s Schultz & Dooley’s and Fudruckers, Bolivar Family Dental and a mobile site for ANPAC, Dittmer’s company, My Modern Web, accepts bitcoin payment. However, none of his more than 100 clients worldwide have ever paid in bitcoin.
The currency is being recognized by more companies as its profile grows. Online game maker Zynga now accepts bitcoin, as does the popular website Overstock.com. Bitcoin also has been accepted at brick-and-mortar merchants including select Subway restaurants and various specialty boutiques.
The basicsBuying, selling and purchasing items with bitcoin is likened to a traditional credit card transaction for any consumer, with one simple difference. Rather than a merchant scanning the consumer’s card, taking their information and withdrawing the appropriate amount of money, consumers are in control, scanning a merchant’s information and hitting send.
Transactions typically take place via a third-party website or smartphone app such as the popular Coinbase, Bitpay or Bitstamp.
“Bitcoin offers users a lot of privacy,” said Stephen Evans, wealth management adviser and owner of Evans Wealth Planning LLC. “But because it’s so new, because of all the math involved, there is little understanding and people are skeptical.”
Starting in 2008 by pseudononymous creator Satoshi Nakamoto – it is unknown if Nakamoto is a single person or group of people – Bitcoin prevents counterfeiting and double spending through a ledger system that anonymously records each bitcoin transaction, according to Bitcoin.org. The ledger is created through code-breaking work – aka a series of complex mathematical equations – performed by a network of bitcoin miners that validates each transaction. As transactions are confirmed, they form a time-stamped block. These blocks come together to form the block chain, a record of every bitcoin transaction ever made. For their efforts, miners earn a reward of newly created bitcoin. Anybody can be a bitcoin miner, but not all Bitcoin users are miners. Only 21 million BTC will ever be issued, and by the end of 2013, about 11 million BTC were in circulation.
Springfield is home to Bitcoin mining product manufacturer Virtual Mining Corp., 450 S. Union Ave., which sells mining hardware starting around $1,500. VMC did not return requests for comment, but according to Missouri secretary of state records, the company is owned by Kenneth Slaugher. A sign on the door reads, “This property closed to the public. No entry without permission.”
Currency or commodity?“In my experience, users aren’t treating Bitcoin like currency, but rather a commodity to be traded. People are using it as an investment,” Evans said. “I’ve followed it for about a year and a half now and honestly, it’s a scary thing to think about investing in.”
Bitcoin gained credibility after law enforcement and securities agencies said in recent U.S. Senate hearings that it could be a legitimate means of exchange. However, Evans said until more countries and retailers accept the digital currency, Bitcoin will remain in the wings. To his knowledge, no Springfield-area retailers accept the currency.
“Governments like to know what’s going on with their money, mostly so they can tax it,” he said. “If it’s accepted, Bitcoin could take off. Otherwise, it might become the next Dutch tulip.”
The phrase Dutch tulip originates from the tulip bulb bubble in 1600s Holland. According to Investopedia.com, speculation drove the value of rare tulip bulbs to a height of six times the average person’s annual salary. It all came to an end in 1637, when prices dropped and panic selling began, leaving many people in financial ruin.
Banking impactFirst Home Savings Bank Executive Vice President Joe James said Bitcoin isn’t even on the radar of most bankers.
“I don’t understand the attraction and I don’t think it’s understood how Bitcoin applies to most everyday people,” he said. “I can’t think of any situations in which traditional banks would use it.
“In my opinion, trust is a critical factor in any financial transaction and to me, Bitcoin is walking on a gangplank of reality.”
Website developer Dittmer said he’s mined 0.5BTC, but mostly purchases his through Coinbase.
“Just yesterday, I bought half a coin for just over $400,” he said. “Through bitcoin exchanges, you simply log on, set up an account, hit buy and the money is taken out of your bank account.
“The process is reversed if you want to sell it.”
As little as 0.00000001BTC can be used at one time, and Dittmer said for transactions at retailers, users typically use a smartphone app that scans a QR code with the merchant’s address.
James equates Bitcoin to Internet e-commerce site PayPal, but with a twist.
“It’s something nobody understood at first and nobody trusted,” he said. “But it has the potential to take off at any time.”
The flip side of BitcoinBecause of its anonymity, Bitcoin easily lends itself to nefarious trades and the criminal element. In October, U.S. prosecutors indicted the operator of Silk Road, an anything-goes black-market website used to traffic guns, drugs and other illicit goods using bitcoins, making the federal government the largest owner of the currency. But a local attorney says the crime won’t stop there.
“There are so many illegal things Bitcoin can be used for. The biggest I think would be tax evasion,” said Andrea Long, a staff attorney for Legal Services of Southern Missouri. “People could hide money in a divorce, launder money or worse. I think because it’s not government backed, it’s always going to have that appeal.”
Long is unaware of any local cases involving Bitcoin, but she said in November, the U.S. Department of Justice declared Bitcoin a legal means of exchange in the United States.
“Once they solve the criminal activity element, it only takes a few people to accept it and it will take off,” said financial adviser Evans. “It’s amazing to think you can create a new currency with your computer, but it’s happening.
“It’s the future.”
1BTC was trading for $844 as of Jan. 15.[[In-content Ad]]
