Three years ago, Florida resident Laszlo Henyecz reportedly paid 10,000 bitcoins for some pizza. At the time, the exchange cost him the equivalent of US$25. Today, he’d be eating an $11-million pizza.
Henyecz’s story has since become a thing of legend. People like him — early adopters of the bitcoin — had no idea the world beyond their computers would become so fascinated with the cryptocurrency.
“This used to be worth nothing. Literally. It had no value,” says Eric Spano, the volunteer accountant of Montreal’s Bitcoin Embassy, a non-profit proponent of the digital currency.
But a frantic growth over the past few months has attracted market speculators and ample media attention to bitcoin — a rise in profile local entrepreneur Jean-Marc Jacobson saw as an opportunity.
“While at the Bitcoin Conference in San Jose in 2013, it dawned on me that Canada had a great opportunity to embrace bitcoin and become a worldwide example in the development of digital currencies,” Jacobson says.
He founded the Bitcoin Embassy in August to act as a flagship initiative on Canadian soil, setting it up in a three-storey building on St-Laurent Blvd. he already owned.
The top two floors house conference and office spaces, which also serve as a startup incubator. The street-level space will, come late December, be a for-profit bitcoin store containing a bitcoin ATM, which is poised to be the second of its kind in the country.
The world’s first bitcoin ATM opened in Vancouver a month ago and traded more than $100,000 in its first week of operation.
The beginning of bitcoin
For the uninitiated, bitcoins may seem like a farce: intangible Internet money that can maybe buy you trips into space and some illegal drugs online, but which so far has very few practical, everyday uses.
It’s not regulated by any country or banking authority, its value fluctuates wildly according to good and bad press and it’s been associated with nefarious online activities — particularly the selling of ecstasy and other illicit substances on Silk Road, an online black market.
Still, none of this discounts the fact that a single bitcoin is worth more than 75 times today what it was worth this time last year — around $1,150 in legal American tender at press time.
The bitcoin first appeared in 2008, created by a pseudonymous developer, or group of developers, called Satoshi Nakamoto. It’s a completely decentralized, monetary system that is owned and controlled by its users — meaning there is no one person or institution that benefits from bitcoin’s success. “There’s no one to trust. You trust the network,” Spano of the Bitcoin Embassy says.
A white paper written by Nakamoto laid out the technical guidelines on how to implement bitcoin. As a peer-to-peer economy with no central mint, the paper answered the question of how to create money and who to give it to by creating the role of miners.
Essentially, miners are people with large amounts of computing power who, through competitions, become the temporary keepers of a ledger where all bitcoin transactions are processed. The reward for keeping the ledger in order is, at the moment, 25 newly-minted bitcoins.
Montreal-based cryptographer Jeremy Clark says the reward decreases over time as bitcoin nears a pre-established minting cap of 21 million bitcoins. At that point, he says, no more bitcoins will be produced; that’s projected to happen in 2140. Currently, more than 12 million bitcoins are already in circulation.
MONTREAL A BITCOIN HUB
Clark, who is also an assistant professor in cryptography at Concordia University’s Institute for Information Systems Engineering, has been tracking bitcoin for several years. He also wrote one of the first academic papers on the digital currency, and says Montreal shows a lot of promise in becoming a leader in bitcoin-related innovation.
“Montreal is in a unique position of having the Bitcoin Embassy — I think it’s the only thing of its type in the world. This is very good for education, and to promote the use of bitcoin,” Clark says.
George Mandrik agrees. As the customer relations manager for Blockchain.info, an online hub for the bitcoin ledger and related activity, he attended a meetup at the Bitcoin Embassy last weekend that attracted more than 150 people.
“I have been to a number of different bitcoin meetups but, quite frankly, they pale in comparison to what I saw in Montreal. I hope the world is paying attention to what is going on at the Montreal Bitcoin Embassy,” Mandrik says.
Clark says bitcoin is a subject of curiosity because it responds to a growing online demand for easier payment methods. Using bitcoins to, for example, buy an MP3 means no more filling out online forms that often demand submitting a lot of personal information.
“Basically, if you wanted to design a currency for the Internet, what properties would you need?” he asks. “You need something that’s digital and something that’s global.”
Because bitcoin is an Internet-based currency — “programmable money” as Spano of the Embassy says — it’s designed to transgress borders. One bitcoin in Canada is worth one bitcoin in Germany is worth one bitcoin in China, and that ease of movement holds a lot of potential.
“The Internet doesn’t know boundaries between countries. Why should a currency have to?” Clark says.
Currently, no major North American retailers accept bitcoin, either online or in brick-and-mortar stores — but that doesn’t mean they don’t deal with digital currencies. Released this month, a Bank of Canada working paper called “Some Economics of Private Digital Currency” refers to Amazon, which has Amazon Coins, and Facebook, which had Facebook Credits, as examples of how some businesses created their own private digital currencies.
Bitcoin is just another digital currency, except that it’s public, globally accepted and currently doesn’t demand transaction fees. “Bitcoin seems to have the right combination of properties that make it very viable,” says Clark.
The fact that few North American brick-and-mortar businesses have yet to embrace bitcoin is besides the point, Clark says — “Its real potential is online.”
Still, plenty of stores and restaurants in Europe and China accept bitcoin, says Spano, and with that comes the possibility for travellers to use the smartphone-friendly currency abroad instead of exchanging and carrying around large sums of cash.
“The biggest impact that it’ll have is facilitating international transactions or trade,” Spano says.
LOCAL USE AND THE BITCOIN ECONOMY
What does it all mean for average consumers? Although Spano says bitcoin’s current primary function is as an online payment system, that’s not really all it is: its exponentially growing value means that early adopters who sank a few pizzas’ worth of cash into bitcoins in 2008 may now be real-life millionaires.
This makes it behave more like a high-risk hybrid between stock trading and a bank account — the bitcoins in your account are yours and you can access them at any time to purchase goods and services, but you accept that the currency’s value is volatile.
“I think the reason it’s volatile is because people are speculating what it could be good for,” Spano says, adding that he projects that greater stability will come once bitcoins are more widely embraced.
But bitcoin is in a bit of a bind at the moment.
“The challenge for bitcoin is that right now, a lot of people aren’t accepting it as a payment option,” Clark says, adding that most people are holding onto them as an investment.
He says most bitcoin holders at this point fall into one of two categories: they either believe that everyone will transact in bitcoin in the future, or that they’re speculating and hoping the currency climbs in value.
The problem with that, Clark says, is if no one is spending in the bitcoin economy, the currency’s value will plummet. “If you have people who are hoarding it because it’s increasing in value, it doesn’t help the economy,” he says.
To sustain the bitcoin economy, more practical applications have to be developed so that people will spend them. That’s part of the reason Spano, a 23-year-old graduate of Concordia’s John Molson School of Business, came up with Bylls.com, a soon-to-be-launched website that allows Canadians to pay their bills in bitcoins.
It’s also why Ryan Lazanis, the owner of Montreal’s Xen Accounting firm, decided to accept bitcoins as payment earlier this month. With a client base mostly rooted in the tech industry, Lazanis says it just made sense, even if the currency is risky. “I’m not too concerned (with its volatility) because I’m dealing with smaller payments,” he says.
The positive outlook for bitcoin comes on the heels of recent U.S. hearings that helped legitimize the alternative currency.
Sen. Thomas Carper told the Senate Homeland Security and Governmental Affairs Committee that the federal government and society as a whole needed to figure out how to deal with altcoins.
“Whether or not virtual currencies prove to be a boom or a bust, I think it’s clear that some folks just want a chance to try and play by the rules,” Carper said.
Meanwhile, the Canadian Revenue Agency hasn’t taken a position on it other than to say bitcoins are still subject to taxation, whereas the Bank of Canada is taking a wait-and-see approach.
In a statement to The Gazette, the Bank says bitcoins don’t immediately require oversight and regulation because “they pose much less risk to the Canadian financial system as a whole” than other transaction-processing mechanisms such as the Large Value Transfer System, an electronic wire system which processes over $150-billion in payments a day.
Because it’s strongly supported by an online network, it’s unlikely bitcoin’s bottom is going to fall out anytime soon.
Clark says that even when economic booms go bust, they never seem to devalue completely down to zero. But even if bitcoin does, the popularity of this digital currency has permanently changed the way the world does business. “In some form, these virtual currencies will change the way we do some transactions,” Spano says.
Bitcoin’s volatility will subside at some point, though when — and how — remains a subject of deliberation in the community. Over the course of the week, the value has risen from US$775 to about US$1,150, with peaks and valleys in between.
When asked whether Clark predicts bitcoin’s value will rise much more before it stabilized, he defers from making any speculation.
“It’s a coin toss, as far as I’m concerned,” he says.