Currency for a computer age

CECILE MEIER
Last updated 05:00 09/12/2013
William Mook, with his supercomputers that he has solving complex problems.
JOSEPH JOHNSON

VIRTUAL RICHES: William Mook, with his supercomputers that he has solving complex problems. This earns him bitcoins, which can be exchanged for goods and services in more than 12,000 businesses worldwide.

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Have you heard about bitcoins? Not many seem to understand its details. Even its creator, Satoshi Nakamoto, remains a mystery.

The digital currency was first presented in November 2008 in an academic paper shared with a cryptography mailing list.

It caught the attention of the tech community but took years to be taken seriously elsewhere.

However, the value of a bitcoin rose to over US$1000 (NZ$1190) for the first time ever last week, just months after a single unit of the digital currency was priced at around $10.

This surge in value came after it received recognition from a series of businesses and authorities across the world.

It featured in a US Senate hearing last month to consider placing it under American regulation, and Sir Richard Branson's Virgin Galactic, Walmart through e-gifter and online e-commerce leader, Shopify, are or will accept bitcoins as a form of payment.

No-one controls the digital currency. A network keeps track of all transactions made using bitcoins but it doesn't know what they were used for - just the ID of the digital "wallet" they come from.

The soaring value has triggered a response from financial authorities. France's central bank has warned against the use of the virtual currency bitcoin, noting that it is not only highly volatile but also unregulated by authorities.

China's government has banned financial institutions from trading in bitcoins, and former US Federal Reserve Chairman Alan Greenspan has taken a strong line, saying bitcoin is a "bubble" and that the virtual money isn't currency, according to media reports.

Anyone can buy bitcoins online, or you "mine" them with computers solving complex mathematical problems.

William Mook is doing just that in the garage of his house in Sumner.

The American polymath and entrepreneur invested in supercomputers to mine bitcoins about a year ago. He's made money already and expects to make more.

He believes the digital currency is heading to a value peak and will have to come down by the end of the year.

He says the currency has had consistent growth for three years and people are starting to take it seriously. He says bitcoins are easy to use for retailers and the fees are much lower than credit card fees.

He predicts the next peak in value in July 2014 "when the critical mass of retailers realise they don't have to pay credit card fees and that a lot of people who have bitcoins are very wealthy."

"Two years ago you could buy a bitcoin for a dollar. Today, if you have more than a hundred bitcoins you're a millionaire and retailers are starting to realise that."

Senior lecturer in economics at the University of Canterbury Eric Crampton says we should take bitcoins seriously as a means to transfer money across borders.

He says it is currently the cheapest and most efficient way to transfer money to somebody in another country.

"Money does a lot of different jobs. Bitcoins does one of money's jobs very well. It is a very efficient way of transacting across long distances. You buy bitcoins in one country using the local currency, you send it to somebody else in the other country and they turn it into their currency. You don't have to worry about bank transfer fees or any other nonsense."

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However, Crampton says investing in bitcoin is risky because its price is too volatile.

"Bitcoins will keep fluctuating."

Crampton says local businesses could benefit from allowing payments in bitcoins to avoid paying fees on international transactions and reach new customers.

"It's pretty cheap to set up," he says.

Bitpay, a system that allows retailers to accept payments in bitcoins, states on its website that more than 12,000 businesses use the system worldwide.

For Mook, early adopters show the system will soon be accepted on a bigger scale.

"It's like a day before the movie starts, there's a line outside already. And even though there are only a few people in the line, these people are enthusiastic and eager to jump into it."

A small high-end winery in North Canterbury is one of them. Mook was one of the first to buy a bottle of wine from Waikari-based Pyramid Valley Vineyards with his bitcoins when the company started accepting them last week.

The bottle, priced $47, cost him 0.032 bitcoins a week ago. But the value of a bitcoin has gone down - from $1467 to $1261 in just two days - so it would have cost him 0.036 bitcoins to buy the bottle two days later.

Pyramid Valley managing director Caine Thompson believes the bitcoin movement is gaining "huge international traction".

"We're increasingly getting requests from our international customers to be able to pay with bitcoins.

"They don't want to be worried about exchange rates and costly transaction fees."

Thompson says bitcoins will allow the company to increase its customer base around the world through its website.

According to bitcoin.org, at the end of August 2013 the value of all bitcoins in circulation exceeded US$ 1.5 billion with millions of dollars worth of bitcoins exchanged daily.

The website says bitcoin payments are easier to make than debit or credit card purchases, and can be received without a merchant account.

Payments are made from a wallet application, either on your computer or smartphone. 

- Fairfax Media

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