When you can buy a round of drinks at the local with something that can’t be seen let alone held, you know bitcoin has made it.
That, or it’s the world’s most elaborate pyramid scheme.
The Old Fitzroy pub in Woolloomooloo, Sydney and the Grumpy’s Green, coincidentally in Fitzroy, Melbourne, many small businesses and big online retailers from Amazon to Zappos accept bitcoins as payment.
Flash your phone with its pre-loaded electronic wallet at the till so the two swap computer codes and the drinks are yours.
Never one to miss a trend, billionaire Sir Richard Branson’s Virgin Galactic accepts bitcoin for your next outer space holiday.
It’s a bigger challenge to paper money than even plastic cards which, come to that, are also threatened.
There’s even an experimental bitcoin debit card from CoinJar that can be used in supermarkets or anywhere that takes eftpos. The “swipe” card converts the bitcoins into your linked bank account.
So how does bitcoin work? Wish you hadn’t asked that, but suffice to say it’s all about mathematical algorithms so fiendishly complicated that they’re impossible to break.
That, as you’ll see, isn’t quite the same as saying bitcoins are hacker proof.
Anyway they only exist in cyber space. They have to be held in an electronic wallet on a computer, phone or tablet which is protected by a password.
Forget it and your electronic wallet is forever lost with your bitcoins in it.
Your bank can’t send you a new password because bitcoins are outside the financial system, probably part of their appeal.
So if there’s no central bank behind them who issues them? Aha, nobody and everybody.
Geek get together
Bitcoins were invented by a Satoshi Nakamoto who probably doesn’t exist. Let’s just say some geeks got together and designed a computer program that would be the closest thing to a central bank for a crypto currency.
The program restricts their number anywhere in the world to 21 million and we’re already halfway.
This is a safeguard to protect their value and prevent inflation. But one bitcoin can be divided into 100 million, um, bits, known as satoshis, named after Mr N.
The weird thing about bitcoins, except for not really existing, is that anybody who’s software savvy can create them. Known as mining, far from being frowned upon – and besides, nobody’s there to frown in the first place – it’s what makes the system work. Miners verify a transaction for a reward of bitcoins which will progressively shrink as more are issued.
Like something out of quantum physics, which perhaps it is, a bitcoin simultaneously doesn’t exist yet can never disappear either. Unless an electronic wallet is misplaced, that is.
So for most the only way to get a bitcoin is by buying it from somebody else. Every bitcoin transaction is recorded on a public register, a sort of digital Domesday Book.
Which brings me to the weak link. To cash in bitcoins you must use special exchanges which like bitcoin aren’t regulated.
The problem is these can be hacked. The biggest one, Mt Gox which was based in Tokyo, recently went belly up after being sabotaged.
At least bitcoin has shrugged off its shady reputation from its early days, which only go as far back as 2009, though a lifetime in the digital world.
Contrary to popular belief, bitcoin is a lousy way to launder money because it leaves an electronic trail which is tamper proof.
Although this doesn’t show names it does publish the unique address of the wallet it’s come from and where it went. When it’s cashed out there’s another trail at the exchange.
“In many regards it’s an auditor’s dream. Anyone with a computer browser can see where a bitcoin came from and where it went,” says Ron Tucker, chairman of the Australian Digital Currency Commerce Association.
Hmm, that seems to rule out the possibility of a digital pyramid scheme.
The next step of putting a name to an address can’t be far off, especially as cyber currencies have attracted the attention of tax departments and central banks.
“Sooner or later it’ll be publicly stated whose wallet’s whose,” Tucker predicts.
The Australian Tax Office, grappling with whether bitcoin is a fair dinkum currency, has issued a draft ruling saying … well, it’s not sure.
On everyday transactions they incur GST that you’d be paying anyway.
But unlike currencies, capital gains tax rules apply if the bitcoins cost more than $10,000. Bitcoin’s value fluctuates wildly, a weakness or strength depending on your point of view.
In the few minutes between ordering a $4 coffee and paying by bitcoin it might have cost you $50.
These price fluctuations almost certainly have a lot to do with its attraction. It’s a form of payment and a flutter on the side all in one.
Wouldn’t you know, one exchange, igot.com, has already set up bitcoin futures so you can lock in a value.
Mind you, it seems to be settling down as it matures. So far this year, at least as we speak, it’s held around $500 to $560. At the end of last year it hit $1300 just before China, the biggest bitcoin user, banned its banks from dealing with it.
It’s just as well bitcoin ATMs have sprung up at Westfield Central in Sydney and Emporium in Melbourne. From vinyl to virtual
The old and the new are as one for Bill McWilliams.
A finance consultant by profession Bill and his wife Chelsea, an accountant, have followed their passion for music by opening Touch Records, so named because you can see and feel vinyl records.
But they’re accepting a crypto currency, bitcoin, which you can neither see nor feel.
They’re also riding an unlikely renaissance in vinyl records with demand doubling in the past year, according to the Australian Recording Industry Association, and that’s not counting booming second-hand sales.
In fact the most visited part of www.touchrecords.com.au is the section selling record players.
It’s not just sentimental baby boomers who are buying, either. Nor for that matter are those paying by bitcoin only Gen Ys and Xs.
But Bill has no doubt that bitcoin, which he started accepting early this year, has pulled in the young.
And not just because they tend to buy online which is bitcoin’s natural habitat as a digital currency. It’s more like a club.
“What I’ve been surprised by is that there appears to be a whole bitcoin community that I was unaware of. Those who own bitcoin keep up to date with the latest news about it and are all very supportive of the merchants who accept it,” Bill says.
The other pleasant surprise has been that since the website started accepting bitcoins, offshore inquiries have more than tripled “even though I’ve never marketed Touch Records overseas,” Bill says.
The downside of the digital currency is the wild swinging in its value. A merchant selling something for $700 which might have been one bitcoin might only get $500 when it’s cashed in.
But it hasn’t been a problem for Touch Records.
“It’s still only a very small percentage of turnover. It’s almost in my marketing budget. And I’m not a massive owner [of bitcoins]. I use CoinJar which converts them to dollars straight away costing 0.5 per cent.”
To use bitcoin you need to find an exchange or go to the special ATM at Westfield Central Sydney or Emporium Melbourne.
- Set up an electronic wallet with a password.
- Keep your wallet’s coded address somewhere safe.
- If you lose your coded address or password, you lose your bitcoins.
- Unless speculating or planning a purchase, cash in a new bitcoin straight away to avoid its price fluctuations.