Hamish Fletcher

Business reporter for the NZ Herald

The rise and rise of Bitcoin

Virtual currency attracting attention of innovators, speculators and regulators — including in NZ
According to CoinDesk's index yesterday, Bitcoin was trading for close to US$850. Photo / AP
According to CoinDesk's index yesterday, Bitcoin was trading for close to US$850. Photo / AP

It can be used to book a trip to space, pay for food from 14,000 US restaurants, or exchanged for a boutique tour of Vietnam but Bitcoin's lead developer says his best purchase with the virtual currency was made right here in New Zealand, on the edge of Lake Wanaka.

Bitcoin Foundation chief scientist Gavin Andresen was whitewater rafting on the Clutha River Mata-Au just after Christmas, when he was surprised to learn his "grey- haired" tour guide, Finn Verduyn-Cassels, had heard of the digital money.

"He was more than happy to accept payment in Bitcoin, and had, in fact, modified his website yesterday to add it as an acceptable payment option," Andresen said in an online post last month during a family holiday in New Zealand. "I'm often asked by journalists, 'What's the best thing you've bought with Bitcoin?', today's rafting trip will be my answer from now on."

Verduyn-Cassels' Pioneer Rafting is one of a handful of New Zealand businesses transacting in Bitcoin, which was created in 2009 and has since attracted the attention of innovators, speculators and regulators.

Some enthusiasts, driven by libertarian philosophy, are drawn to the idea that Bitcoin could emerge as a legitimate alternative to currencies issued by central banks.

While certain countries such as China and US have started to indicate they would regulate the virtual currency, others have taken a hands-off approach to see how Bitcoin develops. The Reserve Bank says it doesn't regulate Bitcoin and the Financial Markets Authority has no control over it.

While organisations like the Bitcoin Foundation seek to standardise and promote its use, the currency is a form of exchange detached from any country, government or physical commodity. Its users are their own bank, with Bitcoins stored in and transferred between encrypted digital wallets.

Bitcoin transactions are recorded on a public ledger, known as the blockchain, which ensures no user can "double-spend" the same bit of the currency and transfer it to two places at once.

The ledger's integrity is maintained by users known as "miners", who run supercomputers performing complex mathematical calculations confirming that the transactions to be added to the chain are legitimate and not an attempt to beat the system. As each block of transactions is "mined", more Bitcoins are created and distributed to the miners responsible.

The difficulty of the mathematics involved in this process is tied to the rate at which blocks are being mined. The faster the blocks are added to the chain, the more complex the maths becomes, increasing the computing power miners need. This means the total amount of Bitcoin in circulation rises at a controlled rate.

With no central bank involved in this system, there is no mechanism for the market to be flooded and the value of Bitcoin already in circulation to be diluted - a virtue treasured by the currency's champions.

Those without the resources to mine Bitcoin can buy them from online exchanges with a credit card, directly from other holders, or in some countries even at purpose-built ATMs. Although it is becoming easier to buy, Bitcoin proved extremely volatile in 2013.

Thought to be driven by Cyprus' banking crisis, Bitcoin surged to a then high of US$266 in April, only to crash to US$105 hours later. In November, the price of Bitcoin reached US$1,250 but the next month - on news of Chinese regulation - this had dropped as low as US$421.

According to CoinDesk's index yesterday, Bitcoin was trading for close to US$850.

If its wild fluctuations in price gained Bitcoin mainstream attention last year, hand-wringing over its use in the illegal drugs trade tarred it with notoriety. Although the digital transactions are not entirely untraceable, because Bitcoin addresses rather than personal information are shared during transfers, the currency is attractive to those who don't want authorities to discover their identities.

Dread Pirate Roberts, the head of illicit website Silk Road, told Forbes in August that Bitcoin was the black market's enabler.

"We've won the State's War on Drugs because of Bitcoin, and this is just the beginning," Roberts said.

It was, in fact, closer to the end for that incarnation of Silk Road - it was shut down in October by the FBI at the same time Roberts was arrested. Slapped with drugs charges and accused of commissioning murders, when the FBI apprehended Roberts - allegedly a 29-year-old from Texas named Ross Ulbricht - the federal agency seized US$28.5 million worth of Bitcoin said to belong to him.

Despite the infamy from these sorts of cases, Richard Branson announced in November that his company, Virgin Galactic, would take Bitcoin in exchange for trips to space.

Tools have also emerged to let people in the United States pay the IRS tax with Bitcoin.

Locally, along with Wanaka's Pioneer Rafting, Fajitas Mexican Bar & Grill in Hastings accepts the currency. The online storage system Mega, founded by Kim Dotcom, also takes it. So does Upper Hutt craft-beer maker Kereru Brewery.

Brewer Chris Mills said Kereru had been accepting Bitcoin for two years.

"Every year, we're probably doing four times the trade (in Bitcoin) we did the year previously," Mills said. "Our business is to make and sell beer and it is just another means to sell it."

The Weekend Herald has also been told of a car dealer who imports vehicles from Japan and wants to start accepting Bitcoin as payment.

Auckland-based Bitcoin enthusiast Paul Salisbury says he expects to see the currency adopted by many, if not most, of New Zealand's tour operators in the next 18 to 24 months. Bitcoin is a way to avoid credit cards or foreign exchange fees and payments could be made wherever an internet connection is available.

"As a global currency, Bitcoin is particularly powerful to ease travel in the same way traveller's cheques did from the 1950s and credit cards have done since," he said.

Last month, Salisbury, with co-director Douglas Wilson, set up XBT Consulting, a startup helping companies integrate Bitcoin into their businesses.

"And making sure they're doing it in the right, secure way. Because it would be quite easy for a (business) to do it in a sort of ad hoc way ... just relying on one computer with no backup," Salisbury said.

As well as this, XBT intends to aid businesses in incorporating Bitcoin services into existing software systems, so companies can, for instance, pay the correct amount of GST on a transaction, he said.

Other challenges XBT can advise on include valuing Bitcoin assets and reconciling Bitcoin payments in company accounts.

Salisbury said Bitcoin had the potential to become the way businesses and people transact worldwide, without brokers being in-between taking fees.

"It essentially opens the floodgates to anybody having that kind of financial payments ability. If you look at say, (online payment service) PayPal, I think there's still some 20 countries where they just can't go ... In those countries, if you're a small business trying to do a web-shop, or sell anything online, you've got no way. Visa won't go near you."

Although Wilson and Salisbury experimented with mining last year, the technology was evolving so rapidly that it was more worthwhile to buy Bitcoin.

"It requires a lot of investment both of time and money in order to be able to compete with other miners around the world. It's not something you can just plug in and forget about any more," Wilson said.

Wilson said it can be risky for investors who don't know what they are doing.

"It's been in the news and people think you can make heaps of money just by buying some. That's not a reality. It's dangerous, it's easy to lose a bunch of Bitcoin. There's no safety net," he said.

Technology commentator Ben Kepes said Bitcoin uptake was low in New Zealand and that it wouldn't necessarily take off in this country.

"But clearly what we're seeing is a disruption to core economic systems and so I think Bitcoin is a useful metaphor for what is going to happen ... (a) move away from centralised currency, a move away from a cash-based economy to something which is decentralised and lives on the internet and is cross-border," he said.

Over 50 virtual currencies have emerged since Bitcoin and popular variants include Megacoin, PrimeCoin and Litecoin.

William Mook, a bitcoin miner from Christchurch.
William Mook, a bitcoin miner from Christchurch.

Maths challenge gets currency miner hooked

Bitcoin "evangelist" William Mook was first drawn in by the complex mathematics of mining the digital currency and has become hooked.

Starting off this time last year with a supercomputer, a mathematics paper and a free software program, the 60-year-old Christchurch resident had stockpiled around 400 Bitcoins by December, worth almost $420,000 at today's prices.

Originally from Ohio, Mook is wary of revealing exactly how much he currently holds and says it is constantly changing as he mines and trades.

Asked if his enterprise - a full-time hobby - was lucrative, Mook said: "Well, it depends how you value my time because I could be doing other things as well ... it has been somewhat profitable, I haven't looked at my taxes so far for 2013, but there are some profits in it."

Mook converts some of his Bitcoins into New Zealand dollars to pay for the power of running his operation but uses the bulk of it to purchase more powerful mining engines.

He says this is the fastest way to amass the currency, which serves as both a rapidly appreciating asset and an "insurance policy" if state-issued currency should collapse.

Despite the currency's volatility, Mook said he has been able to predicate Bitcoin bubbles.

"They've been predictable, and they've always resulted in Bitcoin going higher than before the bubble," he said. "Whenever there's a crash in the market I try to position myself to take advantage of that."

Mook hopes he will have 21,000 bitcoins by the end of this year.

"That number came out as what I figure as an achievable goal, although it's a huge number," he said.

"I do think it's possible but a lot of things have to fall into place."

Bitcoin

• Bitcoin is virtual currency traded between and stored in digital wallets.

• It is not tied to any bank, or controlled by a government or central authority.

• Users, called "miners" solve complex mathematical problems to protect the integrity of the Bitcoin system and, in turn, gain more of the currency.

• Was yesterday trading close to US$850.

- NZ Herald

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