Bitcoin: ‘Killer app’ or the currency of the future?

A MAP DISPLAYED on CoinMap.org, a website that charts places you can use Bitcoin, shows that there are now more than 2,000 businesses that accepted the currency. Only one -- The Figure Ground Studio -- is located in Rhode Island. / COURTESY COINMAP.ORG
A MAP DISPLAYED on CoinMap.org, a website that charts places you can use Bitcoin, shows that there are now more than 2,000 businesses that accepted the currency. Only one -- The Figure Ground Studio -- is located in Rhode Island. / COURTESY COINMAP.ORG

On an icy December evening, about a dozen local technology enthusiasts gathered over pizza and beer at the Founders League offices in Providence to discuss Bitcoin, the popular digital currency that’s soared, crashed and soared again in value over the past year.
They were software developers, engineers and entrepreneurs who, by and large, were less interested in the open-source crypto-currency as a source of income or investment, but as the next “killer app” capable of changing how information is stored, shared and verified.
“[Bitcoin] almost certainly will not take over for fiat currency, except maybe in countries with a failing economy,” said Jon Bittner, CEO of bill-sharing startup Splitwise and organizer of the Providence Bitcoin Meetup. “But I think we are going to see it used as a really interesting protocol – like email and the World Wide Web is a protocol – for identity, trust verification and probably for games. It’s basically a new killer app for the Internet, a distributed trust mechanism.”
Bitcoin is defined by The Associated Press as a currency created and exchanged independent of banks or governments that can be converted into cash when deposited into accounts at prices set in online trading.
As bitcoins have risen in value and notoriety this year, there has been little sign of the currency’s impact in Rhode Island, where the digital economy is still relatively young and undeveloped.
According to CoinMap, a website that charts places you can use Bitcoin, there are now over 2,000 businesses (not including the black market) that accept the currency, but only one in Rhode Island: The Figure Ground Studio, an architecture and landscape design firm in Jamestown.
“No one has paid us in bitcoin yet,” said Ethan Timm, principal at the The Figure Ground Studio, which is relocating to Rhode Island from Oregon. “We thought because there is growing interest it would keep us ahead of the curve and be a way to distinguish ourselves in the marketplace for any client interested in paying that way.”
Mainstream investors and the financial industry have largely ignored Bitcoin due to its volatility, while businesses accepting it as payment for goods and services are rare.
“We’re aware of Bitcoin but we regard it as so speculative that we are not using it in our managed portfolios or recommending it to our clients in any way,” said Robert E. Cusack, portfolio manager at Whalerock Point Partners LLC in Providence, about Bitcoin’s investment value. Financial giant Fidelity Investments, with its major presence in Smithfield, briefly allowed clients to invest in Secondmarket’s Bitcoin Investment Trust, a fund of bitcoin assets, through their Individual Retirement Accounts earlier this year.
That option, however, was mysteriously taken away recently, although Fidelity officials would not comment on the specific timing of when the investments were available or when they weren’t.
While it’s unlikely many southern New Englanders are looking to put their retirement savings into crypto-currency, some local residents have gotten the bug for bitcoin mining, the computer work that earns a share of the fixed supply of new bitcoins created.
At the December Meetup, Dave Costantino, a software engineer at Appneta in Boston, was described jokingly as the closest thing Providence has to one of the Winklevoss twins, the entrepreneurs made famous in the movie “The Social Network,” and major Bitcoin advocates.
“I like the concept of alternative currencies, but I never expected it would get like this,” said Costantino, who first started exploring bitcoins two years ago and now mines them.
Costantino said he has about 20 bitcoins, which could be worth anywhere from $10,000 to $20,000 depending on how they are trading, but still considers investing and mining the currency a hobby.
Bitcoin mining bears no relation to physical mining and involves hooking a high-speed processor up to a computer to work on verifying new bitcoin transactions, maintaining the bitcoin ledger and laying down layers of encryption to prevent fraud. The computers work on these complex math problems automatically with virtually no human involvement.
As a reward for this work, those who do the most computation are rewarded with payment in new bitcoins. But as more miners start working, the math problems get harder and take longer to solve, requiring even greater computing power.
Costantino said he bought his current mining rig with bitcoins, but has been hurt by the currency’s rise in value: he would have made more holding his bitcoins than the equipment he purchased can make mining new ones.
Volatility is also an issue.
At the end of November, bitcoins were trading at more than $1,100 apiece, up from about $15 at the beginning of the year.
A crackdown on the currency by the Chinese government last month sent the price tumbling below $600 per bitcoin. David Counts, a Providence Web designer who began bitcoin mining this year, said while deflation pressure may keep bitcoins from ever being accepted at the corner store, the value might stabilize with more certainty about how governments will treat it.
More than perhaps anyone at the Providence Bitcoin Meetup, Counts likes Bitcoin as an alternative investment and hedge against the U.S. government’s loose monetary policy.
“There are more standard investments like mutual funds, but I find Bitcoin to be a fascinating alternative that still has a lot of potential and the idea makes as much sense as investing in a company or other alternative asset,” Counts said. “The fact that the mining value is difficult keeps it valuable.”
Counts bought a used mining machine in early November from someone on Craigslist for $900 and in the first month has made 0.5 bitcoins. At the current mining rate and price, he expects to make his money back and have 1.5 bitcoins by the spring, at which point the machine will probably be too slow to mine effectively. If bitcoin prices go up before that, he will make a profit.
Even if it doesn’t make any money, Counts likes the idea of getting involved with and learning about a technology that could explode in the years ahead.
“What really got me interested was the idea of a decentralized currency, almost a crowd-controlled currency like how Reddit or Slashdot created crowd-sourced news,” Counts said. “As you are writing mining software you are part of the block-chain. I thought that was a fascinating idea and it seemed like it had potential to grow a lot from where it is now.”
Using the same concept of a serial ledger verified by the public, other virtual currencies have popped up, including Litecoin and Feathercoin.
For Bittner, Bitcoin’s greatest advances may come in how we share information.
At the Meetup, he pitched attendees an idea to use Bitcoin’s sequential ledger and public verification as a way to publish important information in a way that cannot be subsequently altered and does not rely on the good intentions of a government or company. While it was designed to record monetary transactions, Bitcoin can also transmit other data, from text to music and video files.
“What I am hoping is it will reduce fraud and spam and we will no longer have these cases where a company shuts down and all the files are lost or the video game they were working on is lost,” Bittner said. •

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