You can spend bitcoins at your local mall
NEW YORK (CNNMoney)
You can now spend bitcoins at your local mall. But is anyone actually doing that?
Last week, bitcoin payment processor BitPay announced a deal with Gyft. a seven-month-old Google Ventures-backed software app that lets users buy and upload retail gift cards to Android-based smartphones.
The partnership will allow customers to use bitcoins to buy gift cards for stores such as Gap ( GPS. Fortune 500 ). Lowe's ( LOW. Fortune 500 ). Sephora, GameStop ( GME. Fortune 500 ). Burger King ( BKW ) and over 200 other retailers.
While those stores won't handle the bitcoin transactions themselves -- that's done by Gyft and BitPay -- it brings the number of locations where customers can effectively pay with bitcoins from around 8,000 nationwide to over 50,000, according to BitPay co-founder and CEO Tony Gallippi.
"This really does open the door to retail use of Bitcoin," said Gallippi. "I think it will drive adoption."
There's no doubt that four-year-old cyber currency Bitcoin is attracting more mainstream attention. For evidence of that, just look at Bitcoin's soaring -- and volatile -- valuation. The worth of 1 bitcoin zoomed from $20 at the start of the year to $266 in April. It's now worth about $117.
What's harder to say is if people area actually using bitcoins to buy stuff.
One of the more prominent merchants to start taking bitcoins, blog hosting site Wordpress, is keeping mum on the matter.
Wordpress' move to accept bitcoins "was fueled more by curiosity than by profit," a company spokeswoman told CNNMoney. She wouldn't say how many customers had used them, but she did confirm that at least a few people had paid with bitcoins.
Online community Reddit, another high-profile acceptor of bitcoins, said about 5% of its premium membership sales are now paid via Bitcoin.
At Stomp Romp. a New Hampshire-based online guitar retailer, owner Zach Harvey said that a growing number of people are paying with bitcoins, but he estimated that it's still less than 1% of his businesses. He began accepting bitcoins in 2011.
Harvey -- a die-hard libertarian -- remains bullish on the currency. Another company he's involved with is working to help roll out Bitcoin ATMs. He attributes his lackluster Bitcoin sales at Stomp Romp to the fact that "guitar fans aren't really tech geeks."
Bitcoins have been a giant hit for at least one merchant: New York City bar EVR has logged more than $26,000 in Bitcoin sales since it started taking the currency just over a month ago. That's about 10% of the bar's overall revenue.
Bitcoins for beer
"I've been pleasantly surprised," said EVR co-owner Alex Likhtenstein.
Likhtenstein said paying with bitcoins is easy. The servers present the customer with a bill on a tablet that has a bar code attached. The customer scans the bar code with a smartphone, and the amount in bitcoins is subtracted from their account.
How do I buy bitcoins?
As bitcoins become more widely recognized and used, would-be bitcoin users have a growing number of ways in which they can acquire the digital currency.
In the earliest days, An Introduction to Bitcoins notes, converting a local currency into bitcoins often required a face-to-face encounter with other fans in the same area. Mining new bitcoins into existence was also easier back then, and was possible to do without today’s advanced, energy-intensive (and expensive) mining rigs.
In “The Rise and Fall of Bitcoin,” Wired describes how early adopter Gavin Andresen gave away bitcoins “for the hell of it” via his Bitcoin Faucet (now closed). The same article also credits Florida programmer Laszlo Hanyecz with completing the first virtual-currency-for-real-world-stuff transaction: he sent 10,000 bitcoins (around $14 million worth (!) at exchange rates as of April 30, 2013) to someone in England, who then called in Hanyecz’s order for two pizzas and paid for them by credit card.
The exchange route
Nowadays, the most common way for someone to buy their first bitcoins is to go through a bitcoin exchange .
While many bitcoin exchanges handle transactions online, the methods of payment they accept for bitcoin purchases can vary from country to country. This can necessitate the use of an intermediary or two to complete the exchange of a local fiat currency into bitcoins.
This approach can make it difficult to buy bitcoins quickly, as completing a two-, three- or four-step process can take many minutes, hours or even days depending upon the exchange infrastructure accessible to an individual buyer.
For example, Mt. Gox, the most active bitcoin exchange, requires a would-be trader to first deposit bitcoins or a fiat currency into a Mt. Gox account. Because credit cards and PayPal don’t currently use bitcoins, this means using a third-party service such as OKPAY or Dwolla (US only), or initiating an international wire transfer or direct transfer from a verified bank account. Such bank and wire transfers can take anywhere from two to five days to complete. Outside of the US and SEPA (Single Euro Payments Area) zone, transfers can take even longer.
All this is likely to change rapidly, however, as the bitcoin economy continues to expand. Mt. Gox, for instance, expects to be able to offer Visa and MasterCard transfers by late summer 2013. Instant bank transfers from some European countries could also be possible by mid-September 2013.
Here’s how …
For now, the bitcoin purchasing process can look something like this:
Lily, a first-time bitcoiner in the US, wants to buy $150 worth of bitcoins. She sets up an account at Bitstamp and – because she doesn’t want to use her bank account information – arranges to transfer funds to her Bitstamp account using the bitcoin payment processor BitInstant .
Choosing BitInstant’s cash deposit option, Lily arranges to transfer her $150 using a local Moneygram station. The BitInstant site directs her to its cash payment partner, ZipZap Inc. /CashPayment.com. which sends her to an area retailer from which she can transfer her cash.
Using the Moneygram phone system in the store, Lily provides the customer service representative on the line with the account information she received from BitInstant. Once her details are confirmed, she pays her cash to the store’s cashier and receives a paper receipt that shows her funds have been transferred via Moneygram to ZipZap Inc./CashPayment.com, which then sends the money via BitInstant to her Bitstamp account.
After returning home, Lily checks Bitstamp and sees that she now has $150 (US) in her account. She goes to the “buy” section, selects how much she wants to spend (counting a 0.5 percent Bitstamp fee) and clicks the “Buy bitcoins” link. Within moments, her account shows she is now the proud owner of x number of bitcoins, depending upon the prevailing BTC-USD exchange rate at the time she hit “buy”.
Buying bitcoins in this way is undoubtedly convoluted, time-consuming and inconvenient, making it hard to take advantage in the minute-to-minute ups and downs of the bitcoin market. With the fast changes currently taking place, though, the process is certain to become both quicker and easier over days and weeks, rather than months and years.
More ways to buy … or earn bitcoins
That’s likely to mean not just online, but off. Buying bitcoins face-to-face right now can also be a challenge … not only because there might not be many traders or physical exchanges in your area, but because of the uncertainty of who/what you might be dealing with. One resource to help you locate and research your options is LocalBitcoins.com .
Of course, there’s one more way to acquire bitcoins, and that’s to offer goods or services for sale and accept bitcoins as payment. Sites like CoinWorker.com and Bitquestion (a kind-of ask.com or ehow.com for bitcoins) let users take on small tasks in return for payments via bitcoin, and small-business owners can also arrange to take bitcoin payments via online marketplaces like Etsy or through payment service providers like BitPay .
For more information, visit the CoinDesk information center article ‘How can I Buy Bitcoins? ‘.
How to buy and sell Bitcoins -- Part 1: Theory
Curiosity got the better of me. I've seen so many articles talking about Bitcoins lately that I wanted to get a better handle on how it worked. So I bought some, sold some, and bought some stuff with it.
Bitcoin 102 - communities and selling stuff
And so, in this two part series:
How it works
The easiest part to understand is that the Bitcoin system operates as a peer-to-peer network without centralised servers. The obvious advantage of peer-to-peer is that it's difficult to shut down.
Supply and demand creates a market for Bitcoins as per a traditional financial system. There is no central authority issuing money, and there are no financial regulations offering any sort of protection to those using or trading Bitcoins. The system is designed to "drip in" new currency on regular intervals to mimic the normal action of economic growth within a traditional monetary system.
Most articles about Bitcoins talk about the process of "mining". The Bitcoin network does is indeed made up of a peer-to-peer network of "mining" servers, but what this "mining" software is doing is actually running the network itself.
Each Bitcoin transaction gets recorded in a decentralised transaction log. For example, if I give you 1 BTC ("BTC" being a non-official, but commonly used quasi-ISO 4217 code) that transaction gets recorded in this log file.
This recording process is not like a giant distributed SQL database. There is no "INSERT INTO TRANSACTIONS" and "UPDATE ACCOUNT SET BALANCE=. " in this arrangement.
The decentralised transaction log -- and this is the part I'm going to gloss over -- is a massive hashed and mashed together lump of data. Putting stuff into the log is very computationally expensive. However, unlike a SQL server database where you can make transactions disappear with a quick "DELETE FROM", because everything is so tangled in the Bitcoin log you can't do this.
The distributed Bitcoin log is known as the "blockchain".
Thus the design of the Bitcoin system is to represent in a "superdistributed" fashion every transaction that's ever occurred ever. If you have a wallet on your computer containing Bitcoins (which I'll show in Part 2 ), you yourself have a copy of this log file. (Your computer doesn't partake in the maintenance and distribution of the log -- it just holds a copy. Also, the log file has superfluous information trimmed out -- i.e. work is done to make the size managable from a systems architecture perspective.)
The actual cryptographic process that goes into the maintenance of this log is not important. The two things to remember that are is that a) putting things in the log requires considerable computing horsepower, and b) once a transaction is there, you can't modify or remove it because all the transactions are tied into a chain of dependencies.
Two things conspire to make the system globally reliable. Firstly, "considerable computing horsepower" means that it's not possible to go back and create a new, fake blockchain with any improper transactions that you so desire. (It would simply take too long to do this.) Secondly, the superdistributed nature of the blockchain means that you cannot attack one part of the system without having to attack the entire system, including all of the end users.
All of this is, in fact, pretty cool.
Anyway, the log keeping/blockchaining process is so computationally expensive that a reward for partaking in this work (and making the whole system work), the mining servers are given some Bitcoins for participating in this work. In this sense, "mining" is a bit of a misnomer -- it's actually commission given for work done, although there is an element of luck to it.
Using the USD-BTC exchange rate as of the time of writing, about $4,650 of value is added every ten minutes into the system.
Mining is now not regarded as being a decent way of getting into the Bitcoin system -- it requires considerable effort and specialist hardware to get started. Plus, you will likely spend more on electricity than you would extract from the process.
The easiest thing to do -- which I did, and I'll cover in Part 2 -- is transfer some "proper" currency to a Bitcoin exchange and buy them.
Moving Bitcoins
Once you have some Bitcoins, you can send them anywhere in the system using an address.
This requires a "wallet" -- this being a piece of software that runs on your desktop or smartphone that connects into the peer-to-peer Bitcoin network. (And as such it's similar to how the various BitTorrent clients work.)
So if you wanted to transfer some money to me, I would give you an address to send them to. To help increase my anonymity, I would likely create an address just for that one single transaction. You would instruct your wallet to transfer money to that address.
That transaction is broadcast into the Bitcoin system. Eventually that distinct transaction gets written into the entire blockchain. Because the whole arrangement is based on the assumption that "the more computationally expensive the better", that process actually takes a long time. There is little immediacy in this system.
Eventually that transaction will come down to the receivers wallet, along with the transaction log. The wallet is then able to report an up-to-date balance, together with a list of transactions that built up the balance.
Anonymity
How about anonymity? The system is designed to be secure, not necessarily anonymous. It is in theory possible to trace back any transaction to an actual person. The "problem" with the design is that all the transactions get mashed up into the entire decentralised blockchain which is copied everywhere. This stops is being a properly anonymous system -- there is nowhere to hide anything.
Be careful of this point as I've seen a good number of articles talk about how Bitcoin is anonymous. It's not.
Conclusion
You can buy things with Bitcoins. If you're somewhat naughty, Bitcoins are the preferred currency on the infamous Silk Road website, a website you can supposedly buy things like drugs and firearms.
There is a wiki listing merchants where you can buy normal, socially-acceptable goods and services. But, these are essentially entirely "meh". Chances of an online merchant that you actually want to use accepting them are slim to none.
But that isn't really the point. Bitcoins aren't about buying and selling -- the system is about moving money around outside of the purview of authorities. This comes back to the idea that it's about cash -- it's the digital equivalent of a fat envelope stuffed with dollar bills.
Of course, to turn Bitcoins to and from actual cash in an untraceable way puts me in mind of the Office Space scene where Peter, Samir, and Michael are looking up what "money laundering" means in the dictionary. Standard Nerds like you and I aren't going to be partaking in that sort of shenanigans, I'm sure.
Perhaps another way to look at it for those of us amongst us who aren't quite so "Breaking Bad" is that it's a good way of sending money around electronically without having to use PayPal et al. (Of course, there is no consumer protection of any kind with Bitcoins.)
For me, I emerged with a feeling that Bitcoins are an interesting social and technical experiment -- immensely clever and gloriously geeky -- but in its current incarnation little more than that.
A large part of the problem is that the attention that it's receiving is now actively detracting from the principle of it. The more attention the system is receiving, the more out of control the prices are getting. I decided to write this piece seven days ago. In that single week, the price went from about USD 100 to USD 180.
It's turning into a bubble of monumental size.
If the prices were more stable, I would actually use it.
In the end, I bought and sold some Bitcoins for the sole reason I could write a ZDNet article on it. Owning Bitcoins just so you can blog about is likely in the top two or three reasons for bothering. Until the prices settle down at least.
Continue reading: How to buy and sell Bitcoins -- Part 2: Practical
What do you think? Post a comment, or talk to me on Twitter: @mbrit .
About Matt Baxter-Reynolds
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