Bit by bit, bitcoin is gaining currency

David Potts
October 1, 2014
The Age

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.
Plastic fantastic: Retailer Bill McWilliams at home in Melbourne. McWilliams has started accepting the digital currency bitcoin as payment for vinyl records.
Retailer Bill McWilliams at home in Melbourne. McWilliams has started accepting the digital currency bitcoin as payment for vinyl records. Photo: Wayne Taylor
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.
Shady reputation
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.
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