Area entrepreneurs wade into Bitcoin world
Published in The Argus Leader/Sioux Falls Business Journal on July 2, 2014.
Bitcoin doesn’t exist — not physically, anyway.
That’s because the currency and others like it exist digitally and are completely decentralized, with no government, bank or other authority managing the currencies or the transactions.
“My first thought was, ‘That’s a scam,’ ” said Ian Dixon, a Sioux Falls Bitcoin entrepreneur. “But I don’t let things go just like that, so I read about it for like a good 20 minutes, and it really only took me 20 minutes to be convinced that it was legitimate.”
Dixon calls Bitcoin “money reimagined for the 21st century,” with miniscule fees and almost instant transactions to anywhere in the world.
He started small in 2011 when he and a friend bought equipment for mining, or processing, Bitcoins as a fun experiment.
“When I started mining … Bitcoin’s value was like $4. It wasn’t unusual for Bitcoin to fluctuate 50 percent in the course of an afternoon or the course of an hour, so it wasn’t anything stable,” Dixon said. “It wasn’t something that made sense at the time to make a business model around.”
Then in early 2013, Bitcoin prices began to rise, eventually stabilizing around $100.
“When that happened, I began to realize … I can make an entire business model out of this.”
How it works
Dixon’s business, WeMineCoins, focuses on mining, one of the core operating principles of Bitcoin and digital currency technology.
In some ways, paying a person with Bitcoin is similar to using an online payment service such as PayPal or even sending an email. Bitcoin users have a public key and a private key, similar to an email address and password combination.
“Basically, it’s the equivalent of an email address. It’s just a unique string of letters and numbers,” said Matthew Paulson, president of American Consumer News LLC and a Sioux Falls entrepreneur who did his own experimenting with digital currencies. “You would say, ‘I want to send a Bitcoin at Matt at that address.’ ”
Usually, a third-party payment facilitator keeps track of users’ payments and balances, but Bitcoin payments are made directly to other individuals over the peer-to-peer Bitcoin network. It’s made up of individuals around the world using computers hooked up to the Internet and equipped with expensive, specialized hardware designed for intense computing power.
“Bitcoin, since it’s decentralized, it relies on everyone having a copy of the ledger,” Dixon said.
That ledger is a public log of all transactions made on the Bitcoin network.
“There’s basically a big peer-to-peer network where everyone who has a Bitcoin client is connected to it,” Paulson said. “Everybody in the network has a history of every Bitcoin transaction that has ever occurred.”
That’s where expensive computing power comes into play. In order for a transaction to be confirmed as authentic, all computers on the network race to solve complex math problems that verify the exchange. This is how Bitcoins are created. As a reward for verifying transactions, computers on the network that solve the math problems get a small transaction fee and are rewarded with newly minted Bitcoins. For this reason, the process of verifying transaction is known as mining.
As more people and more powerful computers join the Bitcoin network mining for coins, the difficulty of the math problems increases, and the Bitcoin reward is lowered. Like gold, Bitcoins were designed to be finite. Though not all have been mined yet, only 21 million Bitcoins exist. Because of this use of mathematics and cryptography, Bitcoin and other digital currencies that have been created as a result are called cryptocurrency.
WeMineCoins, now a four-person business, leases the processing power of its specialized computers to customers for an agreed-upon length of time. Any Bitcoins mined during that time belong to the customer.
“The average person doesn’t want to spend $4,000 and wait 12 months for a machine to arrive and then pay for electricity, et cetera, et cetera, so we just take all that out of the equation for them,” Dixon said. “We rent that (computer processor) speed out for a fixed period of time, and they get all the Bitcoins that are generated from that speed over that period of time, and we manage everything.”
The business began operating in December. In February, Dixon quit his full-time job.
“I’m extremely confident that it’s going to work out. Besides the fact I personally believe in it, it’s not like I’m a lone wolf out there, like I’m the only guy. A lot of people that have much more details about what’s going on in the market than I do, like the VCs (venture capitalists) and what not, are investing tens of millions of dollars into Bitcoin companies,” Dixon said. “I generally don’t ignore it when people make moves like that.”
How they’re used
To have value, Bitcoin and other digital currencies must be able to purchase things, according to Daniel Talley, a professor of economics at Dakota State University in Madison.
“The demand and supply for the currency determine its value. If the supply is controlled and regulated through the mathematics in which they’re created, where does the demand come from?” Talley said. “That has to come from its use, its value as a means of exchange, as a store of value, and, of course, as a unit of account — how much it’s worth in dollars, how much it’s worth in Euros and how much it’s worth in other currencies.”
According to The Wall Street Journal, more than 60,000 retailers worldwide accept Bitcoin. Many are small online merchants who have built retail websites selling a variety of products and services that solely do business in Bitcoins.
While it has yet to see mainstream adoption, some major businesses and retailers accept Bitcoin. Satellite television and Internet provider Dish Network announced in May it soon would accept Bitcoin payments. The travel website Expedia recently announced plans to accept Bitcoin.
Online retailer Overstock.com also accepts the currency. So does online dating website OKCupid, online blogging platform and content management system WordPress, the Chicago-Sun Times and the popular link-sharing website Reddit. Even the Federal Election Commission approved Bitcoin donations to political action committees.
Unlike Bitcoin holders, merchants don’t need to worry about Bitcoin’s price fluctuations. Third-party apps, such as Coinbase, calculate the current value of a Bitcoin and convert the payment into the local currency.
“When they take the Bitcoins, it automatically gets converted to real money,” Paulson said. “So there’s no risk to them that the price of Bitcoins is going to go up and down because it’s automatically switched back to U.S. dollars.”
And the fees are small. Coinbase offers merchants their first $1 million in sales with no processing fees. After that, fees are 1 percent.
With a business model dependent on Bitcoins being something people can use, Dixon is trying to educate businesses about the new currency. He manages the Facebook page Bitcoin South Dakota and plans to meet with local retailers.
“Merchants are the first step” to widespread use, he said. “One thing that I focus on in my time is educating people around Sioux Falls about Bitcoin. Education of business owners and individuals is something I will be pushing a lot.”
Long-term potential
Dixon said he doesn’t think Bitcoin is a replacement for the U.S. dollar or any central currency.
“There are obvious reasons for the government to have their own currency. This should co-exist with it,” he said. “It’d be awesome if some country out there issued their own cryptocurrency. That’d be cool, but I don’t see the decentralized digital currencies we see today as one that makes sense to actually replace it (government-backed currency).”
At least one person, however, is trying.
Payu Harris hopes that his Oglala Lakota Nation in South Dakota adopts a cryptocurrency as its official currency, according to several media reports. Harris, a Native American activist, web developer and digital currency trader, is pushing for the tribe to adopt MazaCoin, a cryptocurrency that works similarly to Bitcoin.
“By having our own sovereign cryptocurrency, that helps build on a foundation to enhance the sovereignty we have –and just strengthen it for the future,” Harris said in an interview with National Public Radio.
Though Harris’ push for tribal adoption is unique, MazaCoin is one of several cryptocurrencies to rise from Bitcoin’s innovations. There are other digital currencies like Litecoin, Dogecoin and Blackcoin that have gained traction, but both Paulson and Dixon noted that some digital currencies are money-making schemes.
Dixon said he’s in the business for the long term.
“I’m not looking to get rich overnight. Getting rich overnight would be great, but that’s not my plan. I’m willing to take the time to just educate people on what it (Bitcoin) is,” he said. “I think naturally once they really start to understand and once some awesome software developers make some really useful software for them, that it’ll have a unique place in people’s lives.”
Banks assess threats, opportunities with virtual currencies
Bitcoin and traditional banking don’t exactly mix.
Ian Dixon, who struggled finding a bank for WeMineCoins, said telling banks his business is related to Bitcoin is “like setting off a bomb.”
“We’ve had our account shut down by five different financial institutions. They didn’t want to do business with Bitcoin-related businesses, so they just shut down our account,” he said. “Then there were several banks that refused right off the bat to do business with us. I wasn’t asking to borrow money from them. I just needed an account to simply pay employees and to accept money from customers.”
Other media outlets, including Forbes, have reported similar situations. South Dakota Bankers Association president Curt Everson said banks have many questions about digital currencies, and it’s a complex regulatory environment.
Banking “is highly regulated and it’s really complicated, frankly,” Everson said. “Congress is asking questions of the regulators on these kinds of issues, and you can bet that … it’s only a matter of time before regulators are going to be asking banks those similar kinds of questions.”
In May, U.S. Sen. Tim Johnson, who chairs the Senate Committee on Banking, Housing and Urban Affairs, co-signed a letter to federal financial regulators and institutions raising several question about digital currencies that the committee wants to see addressed.
“We believe it is vital that the financial regulators coordinate when considering virtual currency issues, especially if Bitcoin and other virtual currencies become more widely adopted by consumers and small businesses,” the South Dakota Democrat wrote.
Everson also said banks are concern about Bitcoin’s anonymity.
“There are questions about liability and legality in what Bitcoin may be doing,” Everson said. “There are probably more questions about Bitcoin’s role going forward than there are answers at this point, and not just in the minds of bankers.”
Dixon, however, said concerns about illegal activity stem from a lack of knowledge.
“They don’t understand it. I’m obviously biased, but when it comes to risks of money laundering and illegal activity, cash is king,” he said. “If I ran a cash-based business, it’s easier to do illegal things with it because it’s not digital. With Bitcoin it is digital — hard to track, but not impossible to track. It’s permanently on a ledger out there.”
Banks see Bitcoin as a possible threat, Dixon said.
“When you’re a part of an organization that has a business model that you’re disrupting, there’s just going to be a level of hostility from them,” he said.
A report from Citigroup about cryptocurrencies outlined threats and opportunities of the emerging industry for financial institutions.
In a report titled “Disruptive Innovations II: Ten More Things to Stop and Think About,” Citigroup outlined both the threats and potential opportunities financial institutions face from cryptocurrencies.
“Bitcoin transactions have potential cost advantages over conventional payments and reduce the need for intermediation. The gap between conventional transactions cost and any Bitcoin fees for convenience and increased security will allow Bitcoin to make incursions into this market,” the report said.
“In the near term, the sectors most at risk are credit/debit card and payments services.”
The report also noted that the cryptographic methods and technology behind the transaction process of Bitcoin could be beneficial and called on financial institutions to take action.
“Digitization in general and adoption of digital money solutions in particular, is not a question of ‘if’, but ‘when.’ Doing nothing simply means allowing the system to develop dysfunctionally, in fits and starts,” it said. “It also means delaying the tremendous socioeconomic benefits that adoption can bring. Inaction is not an option. There is too much at stake.”
