Wild, unregulated hacker currency gains following (Update)

Apr 11, 2013 by Raphael Satter
In this April 3, 2013 photo, Mike Caldwell, a 35-year-old software engineer, holds a 25 Bitcoin token at his shop in Sandy, Utah. Caldwell mints physical versions of bitcoins, cranking out homemade tokens with codes protected by tamper-proof holographic seals, a retro-futuristic kind of prepaid cash. With up to 70,000 transactions each day over the past month, bitcoins have been propelled from the world of Internet oddities to the cusp of mainstream use, a remarkable breakthrough for a currency which made its online debut only four years ago. (AP Photo/Rick Bowmer)

With $600 stuffed in one pocket and a smartphone tucked in the other, Patricio Fink recently struck the kind of deal that's feeding the rise of a new kind of money—a virtual currency whose oscillations have pulled geeks and speculators alike through stomach-churning highs and lows.

The Argentine software developer was dealing in bitcoins—getting an injection of the cybercurrency in exchange for a wad of real greenbacks he handed to a pair of Australian tourists in a Buenos Aires Starbucks. The visitors wanted spending money at black market rates without the risk of getting roughed up in one of the Argentine capital's black market exchanges. Fink wanted to pad his electronic wallet.

In the safety of the coffee shop, the tourists transferred Fink their bitcoins through an app on their smartphone and walked away with the cash.

"It's something that is new," said Fink, 24, who described the deal to The Associated Press over Skype. "And it's working."

It's transactions like these—up to 70,000 of them each day over the past month—that have propelled bitcoins from the world of Internet oddities to the cusp of mainstream use, a remarkable breakthrough for a currency that made its online debut only four years ago.

When they first began pinging across the Internet, bitcoins could buy you almost nothing. Now, there's almost nothing that bitcoins can't buy. From hard drugs to hard currency, songs to survival gear, cars to consumer goods, retailers are rushing to welcome the virtual currency whose unofficial symbol is a dollar-like, double-barred B.

Advocates describe Bitcoin as the foundation stone of a Utopian economy: no borders, no change fees, no closing hours, and no one to tell you what you can and can't do with your money.

Just days ago the total value of bitcoins in circulation hit $2 billion, up from a tiny fraction of that last year. But late Wednesday, Bitcoin crashed, shedding more than 60 percent of its value in the space of a few hours before recouping some of its losses. Critics say the roller coaster currency movements are just another sign that Bitcoin is a bubble waiting to burst.

Amid all the hype, Bitcoin's origins are a question mark.

In this April 3, 2013 photo, Mike Caldwell, a 35-year-old software engineer, looks over bitcoin tokens at his shop in Sandy, Utah. Caldwell mints physical versions of bitcoins, cranking out homemade tokens with codes protected by tamper-proof holographic seals, a retro-futuristic kind of prepaid cash. With up to 70,000 transactions each day over the past month, bitcoins have been propelled from the world of Internet oddities to the cusp of mainstream use, a remarkable breakthrough for a currency which made its online debut only four years ago. (AP Photo/Rick Bowmer)

The mechanics of the virtual currency were first outlined in a research paper signed by Satoshi Nakamoto—likely a pseudonym—and the coins made their online debut in 2009. How the coins are created, how the transactions are authenticated and how the whole system manages to power forward with no central bank, no financial regulator and a user base of wily hackers all comes down to computing power and savoir faire.

Or, as Nicholas Colas, chief market strategist for the ConvergEx Group, describes it: "genius on so many levels."

The linchpin of the system is a network of "miners"—high-end computer users who supply the Bitcoin network with the processing power needed to maintain a transparent, running tally of all transactions. The tally is one of the most important ways in which the system prevents fraud, and the miners are rewarded for supporting the system with an occasional helping of brand-new bitcoins.

Those bitcoins have become a dangerously hot commodity in the past few days.

Rising from roughly $13 at the beginning of the year, the price of a single bitcoin blasted through the $100 barrier last week, according to Mt. Gox, a site where users can swap bitcoins for more traditional currencies.

On Tuesday, the price of a single bitcoin had topped $200. On Wednesday, it hit $266 before a flash crash dragged it back down to just over $100. By Thursday, bitcoins were trading for around $150.

The rebel currency may seem unstable, but then so do some of its more traditional counterparts. Some say Bitcoin got new momentum after the banking crisis in Cyprus pushed depositors there to find creative ways to move money. Fink, the Argentine, favors bitcoins because he believes they will insulate him from his country's high inflation. Others—from Iranian musicians to American auto dealers—use the currency to dodge international sanctions or reach new markets.

But the anything-goes nature of Bitcoin has also made it attractive to denizens of the Internet's dark side.

One of the most prominent destinations for bitcoins remains Silk Road, a black market website where drug dealers advertise their wares in a consumer-friendly atmosphere redolent of Amazon or eBay—complete with a shopping cart icon, a five-point rating system and voluminous user reviews. The site uses Tor, an online anonymity network, to mask the location of its servers, while bitcoin payments ensure there's no paper trail.

One British user told the AP he first got interested in Silk Road while he was working in China, where he used the site to order banned books. After moving to Japan, he turned to the site for an occasional high.

"Buying recreational drugs in Japan is difficult, especially if you don't know people from growing up there," said the user, who asked for anonymity because he did not want his connection to Silk Road to be publicly known.

He warned that one of the site's drawbacks is that the drugs can take weeks to arrive "so there's no spontaneity."

Drug dealers aren't the only ones cashing in on Bitcoin. The hackers behind Lulz Security, whose campaign of online havoc drew worldwide attention back in 2011, received thousands of dollars' worth of bitcoins after promising followers that the money would go toward launching attacks against the FBI.

A report apparently drawn up by the bureau and leaked to the Internet last year said that "since Bitcoin does not have a centralized authority, detecting suspicious activity, identifying users and obtaining transaction records is problematic for law enforcement."

In this April 3, 2013 photo, Mike Caldwell, a 35-year-old software engineer, poses with bitcoin tokens at his shop in Sandy, Utah. Caldwell mints physical versions of bitcoins, cranking out homemade tokens with codes protected by tamper-proof holographic seals, a retro-futuristic kind of prepaid cash. With up to 70,000 transactions each day over the past month, bitcoins have been propelled from the world of Internet oddities to the cusp of mainstream use, a remarkable breakthrough for a currency which made its online debut only four years ago. (AP Photo/Rick Bowmer)

It went on to warn that bitcoins might become "an increasingly useful tool for various illegal activities beyond the cyber realm"—including child pornography, trafficking and terrorism.

The FBI did not immediately respond to an email seeking comment.

Late last month, the U.S. Treasury's Financial Crimes Enforcement Network, or FinCen, announced it was extending its money-laundering rules to U.S. bitcoin dealers and transfer services, meaning that companies that trade in the cybercurrency would have to keep more detailed records and report high-value transactions.

Many in the Bitcoin community are frustrated at the attention paid to the shadier side of the virtual economy.

Atlanta-based entrepreneur Anthony Gallippi said the focus on drugs and hacking misses the "much bigger e-commerce use for this that's growing and that's growing rapidly."

Very few businesses set their prices in bitcoins—the currency swings would be too jarring—but an increasing number are accepting it for payment. Gallippi's company, BitPay, handles Bitcoin transactions for some 4,500 companies, taking payments in bitcoins and forwarding the cash equivalent to the vendor involved, which means that his clients are insulated from the cybercurrency's volatility.

Gallippi said many of the businesses are e-commerce websites, but he said an increasing number of traditional retailers were looking to get into the game as well.

"We just had an auto dealership in Kansas City apply," he said.

In March, BitPay said its vendors had done a record $5.2 million in bitcoin sales—well ahead of the $1.2 million's worth of monthly revenue estimated to have coursed through Silk Road last year.

Even artists accept bitcoins. Tehran-based music producer Mohammad Rafigh said the currency had allowed him to sell his albums "all over the world and not only in Iran."

Gallippi said the cybercurrency's ease of access was its biggest selling point.

With Bitcoin, "I can access my money from any computing device at any time and do whatever the heck I want with it," he said. "Once you move your money into the cloud why would you ever go back to putting your money in the bank?"

Many Wall Street veterans are skeptical—and they may feel vindicated after Bitcoin's latest tumble.

"Trading tulips in real time," is how longtime UBS stockbroker Art Cashin described Bitcoin's vertiginous rise, comparing it to the now-unfathomable craze that saw 17th-century Dutch speculators trade spectacular sums of money for a single flower bulb.

"It is rare that we get to see a bubble-like phenomenon trade tick for tick in real time," he said in a note to clients.

One Bitcoin supporter with a unique perspective on the boom might be Mike Caldwell, a 35-year-old software engineer based in suburban Utah. Caldwell is unusual insofar as he mints physical versions of bitcoins at his residence, cranking out thousands of homemade tokens with codes protected by tamper-proof holographic seals—a retro-futuristic kind of prepaid cash.

Caldwell acknowledges that the physical coins were intended as novelty items, minted for the benefit of people "who had a hard time grasping a virtual coin."

But that hasn't held back business. Caldwell said he'd minted between 16,000 and 17,000 coins in the year and a half that he's been in business. Demand is so intense he recently announced he was accepting clients by invitation only.

Some may wonder whether Caldwell's coins will one day be among the few physical reminders of an expensive fad that evaporated into the ether—perhaps the result of a breakdown in its electronic architecture, or maybe after a crackdown by government regulators.

When asked, Caldwell acknowledged that bitcoin might be in for a bumpy ride. But he drew the analogy between the peer-to-peer currency enthusiasts who hope to shake the finance world in the 2010s with the generation of peer-to-peer movie swappers who challenged the entertainment industry's business model in the 2000s.

"Movie pirates always win the long game against Hollywood," he said. "Bitcoin works the same way."

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VendicarE
2.2 / 5 (10) Apr 11, 2013
Bit Coins lost half their value yesterday.

Libertarians love them because of they are a stable alternative to the American Dollar that they claim has a value that is crashing due to Fed pumping.

Yet BitCoin values are crashing and the American Dollar is stable.

antialias_physorg
5 / 5 (3) Apr 11, 2013
A currency that isn't subject to artificial infaltion by the banks/governments is the nightmare of any nation (or bank owning a nation).

That said: I doubt bitcoin is going to be the one. While a global, digital coinage would be nice to have the potential damage if someone hacking the system to generate false coins or manipulating the validation servers is just too great. It wouldn't just destroy a local economy (which other economies can buffer) but the global one.
ryggesogn2
3 / 5 (11) Apr 11, 2013
e-gold started out in a similar fashion and before long govts cracked down on them for the same reasons stated in this article.
"It went on to warn that bitcoins might become "an increasingly useful tool for various illegal activities beyond the cyber realm"—including child pornography, trafficking, and terrorism."

Control the money, control the people.
Anda
2.3 / 5 (3) Apr 11, 2013
Yesterday I had 266$. Today 100. Tomorrow 150. Next year 0...
Steven_Anderson
Apr 11, 2013
This comment has been removed by a moderator.
kochevnik
2 / 5 (4) Apr 11, 2013
BITCOIN isn't going to go anywhere. I think it will crash. I had suggested this like many people months ago. Regulation is a good thing when it comes to banks. Security is a good thing.

Indeed regulation by the same mafia that blew up your WTC towers. Then you wonder why the world sees Americans as a bit thick. I just compared Putin's eloquent speech live to open questions in public to your president's canned bullshiyte. It's so apparent you're a fish living in a fishbowl it's not even a joke anymore

As for bitcoin, it needs a futures market AND liquidity for stability. All growing markets go through the same phases. And you, sir, need to take econ 101 and stop sucking up to gangsters and your 'too big to fail' sociopaths

If bitcoin is used for transactions the spot price is non sequitur. I would concede that the SPREAD must narrow to 10% of it's value. At the moment there are times to avoid trading bitcoin due to excessive spread. Babies should stick to funny money
kochevnik
2 / 5 (4) Apr 11, 2013
Yesterday I had 266$. Today 100. Tomorrow 150.
You need to employ dollar cost averaging to illiquid markets. Bitcoin is like any small-cap stock it can be manipulated by those who have $trillions to play with. Break your transactions into several pieces as international traders do so you're not hit by price swings so hard. Bitcoin won't hit zero because your fiat currencies are worthless and markets seek value, not the advise of brainwashed fools who are, by definition, only trading RETAIL and on the tail end of significance. You are the CONTROLLED, not the CONTROLLER and you're expected to blahh like a sheep. Nothing more
indio007
1 / 5 (3) Apr 11, 2013
Bitcoin is going nowhere. These attacks on Bitcoin have been going on since 2011. Gavin (the BTC Foundation's Chief Scientist)gave a briefing to the CIA way back then.

You think the CC companies, Paypal (owned by Amazon), and other electronic payment corporations are going to take this lying down?

Spreading FUD is a well known attack. The value of BTC relative to other currencies is IRRELEVANT.
Husky
5 / 5 (2) Apr 11, 2013
a good currency is a STABLE currency mostly free from inflation deflation and speculation, bitcoin might have been born with this purpose but its growing up to be a ponzipenny.
indio007
1 / 5 (3) Apr 11, 2013
a good currency is a STABLE currency mostly free from inflation deflation and speculation, bitcoin might have been born with this purpose but its growing up to be a ponzipenny.


Define stable. People where saying BTC was a ponzi bubble when it was at $10
Husky
not rated yet Apr 11, 2013
stable is 1 like one bitcoin for a can of coke, now and in ten years.
typicalguy
not rated yet Apr 11, 2013
What happens when you try to use bitcoins for all your transactions and the power goes out or the country goes to war and your power plant is destroyed? If you have no electricity for months on end then you have no money. If you have no money then you starve.
TheTruth
1 / 5 (4) Apr 11, 2013
Wrong Tardie Boy.

"Control the money, control the people." - RyggTard

Control the money and you control the money grubbers.

You know who money grubbers are don't you? They are people like you.

You still haven't answered the question put to you days ago.

How many dollars worth of love do you have for your wife and children?

Is it more or less than the price you pay a common street hooker?
TheTruth
1 / 5 (4) Apr 11, 2013
"stable is 1 like one bitcoin for a can of coke, now and in ten years." - husky

Then you have your currency. Can's of coke.

Who are you going to trade them with?

TheTruth
1 / 5 (4) Apr 11, 2013
Who minted the existing bitcoins?

Who sold those new coins, and for how much?

If there aren't billions and billions of them, it can't be a global currency since not everyone can own one as there are less coins than people.

Who is controlling the bit coin supply?

RyggTard is clueless.
indio007
1 / 5 (2) Apr 11, 2013
Just FYI,
BTC are divisible to 8 decimal places. So 1 BTC can be a million units.
gmarster
5 / 5 (1) Apr 11, 2013
I'm not sure people realize that bit coins "leak". Once a code for one is lost, it is *LOST*. Which will be interesting if the currency lasts for an extended period of time.

Every time records are lost due to fires or flood or what ever, those containing the only copies for bit coins means they can never be recovered. Every time someone dies taking the codes with them to their grave, coins will be gone forever.

And presumably the value paid into the system remains creating a kind of slow motion transfer of wealth to the remaining bit coin holders.

And boy are they the ultimate commodity to steal. Because you can transfer them to a different account and their just *gone*, no recourse. Which will fuel encryption or off line storage of bit coin codes, which will increase the chance of their being lost in unexpected disasters or death.
ryggesogn2
1.6 / 5 (5) Apr 12, 2013
One advantage of bit coins is maybe some will begin to really think about money. What it is. How it is controlled by the state. How its value is determined, etc.
Somalia's currency is a paper note with a value of the cost to print it. Anyone can make their own money then and it has the value of the cost to create it.
kochevnik
3.7 / 5 (3) Apr 12, 2013
Who minted the existing bitcoins?
Nobody. They're maths hashes
Who sold those new coins, and for how much?
The miners at market demand price
If there aren't billions and billions of them, it can't be a global currency since not everyone can own one as there are less coins than people.
They're divisible to at least 8 decimal points
Who is controlling the bit coin supply?
Nobody. The algorithm only yields 20 million or so
RyggTard is clueless.
It would appear something woke him up. Will be nice while it lasts
One advantage of bit coins is maybe some will begin to really think about money.
Money is simply any tool employed to triangulate commodity goods and eliminate barter. It's a tool for speed and breaks with priceless objects or illiquid markets like bitcoin. In the latter case simply more participants are needed
ryggesogn2
1.8 / 5 (5) Apr 12, 2013
Money need only be a record of assets and a relative weighting factor.
One cow = 2 pigs = 100 chickens = ...
Trade one cow to a 'bank' and have that much credit (money) in the bank.
The problems begin when the bank gives out more credit than it has in assets. This is called fractional the fractional reserve system when the bank inflates its asset value by loaning more credit than asset value.
Govts print more money or in Roman days would shave off gold from the coins (which is why coins have serrated edges, no need for this today as coins have no intrinsic value).
VendicarE
5 / 5 (1) Apr 12, 2013
E-Gold was very popular among child pornographers. E-Gold was regularly traded with underage girls on Russian websites in exchange for private video's.

"One advantage of bit coins is maybe some will begin to really think about money" - RyggTard

They don't call the Libertarian party the "Pedo Party" for nothing.

Support for child molestation and child prostitution is right in the Libertarian Party Platform.
VendicarE
5 / 5 (1) Apr 12, 2013

"The problems begin when the bank gives out more credit than it has in assets. This is called fractional..." - RyggTard

No it isn't.. Moron. It is called creating money from nothing.

The Fractional is fractional as opposed to infinite only because Government regulation forces banks to only loan a fraction - typically 9/10ths of their "holdings" as loans.

Without that regulation, banks would do what they did before the fractional reserve system was created.

They would mint their own coins, print their own dollars and loan out money that was many times the total value of their assets.

Poor Clueless RyggTard. He spends his days lying about the FED and yet he doesn't even know how his own nations banking system works.

Filth.
ryggesogn2
1 / 5 (3) Apr 13, 2013
Of course there is one important point about banks, trust.
As we see in Cyprus, why should anyone trust the state to control banks or the money when its value is inflated, plundering everyone's wealth.
CapitalismPrevails
1 / 5 (3) Apr 13, 2013
Is the world going to implode b/c it'll be difficult for the state to regulate/control some other aspect of our lives IE Bitcoin? You might get that impression after reading this article. Crypto currencies are the beginning of the end for state coercion of its citizens. It has potential for complete anonymity and it's very difficult to tax. The best way for the state to tax it would be through consumption taxes which automatically means a FLAT TAX! Yes Bitcoin value fluctuates but that's what happens at the pioneer stage when there's low volume. After a crypto currency reaches the volume of the US dollar(world reserve currency) its value will have much less volatility. Yes the government can make crypto currencies completely illegal but it will just go underground while still growing somewhere else in the world. Cryptography has been discovered and it can't be undiscovered. Meantime, i'm just counting my Bitcoins and Litecoins while still in the green! (:
_traw_at
1 / 5 (1) Apr 13, 2013
Local Exchange Trading Systems ('LETS') have been around for decades.

This is just the digital version of it.