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This article was originally part of Bitcoin at Porcfest, Part 1: A Social Experiment, and has been split off because it deals with a separate topic that deserves to be treated on its own

In the past three days, we have seen Porcfest attendees successfully applying Bitcoin in real-world usage, with between a quarter and a half of all transactions taking place using the currency. In a practical sense, Bitcoin and Porcfest go extremely well together; Porcfest needs merchants to feed its attendees, merchants need a currency, and Bitcoin is a currency that desperately needs real-world merchants to test it.

But what is just as interesting is how well Bitcoin fits in to the core Porcfest ideology. Initially, libertarianism (and its more extreme strand, anarcho-capitalism) was a political movement just like social democracy or conservatism, seeking to secure progressively greater freedom for everyone through political advocacy and elections. More recently, however, many in the libertarian movement have become discouraged by its failures in the political sphere, and over the past ten years the primary focus of many libertarians, and anarcho-capitalists especially, has shifted massively. Now, the Free State Project mode of thinking starts by asking a simple question: if we had a society where governments were much weaker than they are today, or even outright nonexistent, what alternative institutions would we need to ensure that such a society can thrive? Then, given the answer, the solution is to start implementing these institutions today.

The result is a holistic anti-authoritarian philosophy that rejects governmental, corporate and even parental authority alike, and seeks to rebuild what it sees as a more peaceful, and ethical, world from the ground up. The contract I had signed with my own temporary landlord in Manchester made clear that it would be enforced by ostracism and public shame, not courts backed by the physical force of law. Because the libertarian and Bitcoin communities are both so tightly linked, even not taking into account basic morality I would not dare ransacking my landlord’s home and running away with as much property as I could even if there was no law enforcing it, simply because I would not risk being publicly shamed and ostracized by both communities at the same time. A political movement which many detractors decry for its extreme individualism proves to be surprisingly communitarian.

In a community featuring such a strong presence of alternative, government-free “law”, government-free (and corporation-free) education, government-free private charity healthcare and government-free common defense in the form of an active gun community, what role can Bitcoin take? The answer is, as the basis of an alternative, government-free economy. Gold and silver had been taking on this role before 2012, but now that Bitcoin has appeared there is a very subtle, but growing, feeling that gold and silver are in some sense impure. The security of gold and silver possession is backed by legal property rights, using gold on the internet requires centralized parties that must constantly, and sometimes unsuccessfully, take steps to placate government authorities. Bitcoin, on the other hand, bases its security on nothing but math.

Sure, Bitcoin is imperfect, and is vastly inferior to currencies based on gold and silver as a stable store of guaranteed value, but as far as internet currencies go it has one advantage that its potential alteratives do not: Bitcoin is here, now. And it doesn’t stop there. The Bitcoin protocol allows for the mathematically secure execution of complex legal relationships such as assurance contracts, and on top of Bitcoin one can potentially build constructs like smart property, which uses Bitcoin to independently enforce property rights on physical objects like cars, houses and smartphones.

All this is not to say that Bitcoin is explicitly a libertarian technology; the fact that Bitcoin would fit well into a libertarian world by no means implies that it benefits nobody else. European Bitcoin activists, for example, often follow what we would term a much more “left-wing” philosophy, although the underlying dislike of some sort of government or corporate establishment often still remains. Liberals, in the American sense of the word, can see a cosmopolitan appeal in Bitcoin from its unrestricted internationality. And, last but not least, ordinary people without any particular ideology at all can benefit from Bitcoin because of its lower transaction fees, near-instant transactions and lack of a chargeback mechanism. For now, Bitcoin can simply be seen as a great social experiment, simultaneously testing the mathematical viability of a decentralized currency, the willingness of the public to adopt an amalgamation of old and new patterns of behavior, and the mainstream financial system’s response to something which has never existed before. The libertarians at Porcfest, having already embarked on a social experiment of their own, are jumping in en masse. Regardless of whether you are a libertarian or not, the time may be just right for you to do the same.

To understand more about what Porcfest is and why Bitcoiners should care, see part 0 of this series.

Today marks the third official day of Porcfest, and already hundreds of people have showed up. In the nine Porcfests before this one, attendance has always trickled up slowly, with only a few people present on Monday and the event ramping up to full force on Friday and Saturday. This year, those who have attended previous Porcfests are saying that as many people have come to this Porcfest already as came to the previous one by Friday, and the number of attendees is expected to continue growing as the week continues to progress. Over 1100 people preregistered for the event by the online registration deadline of June 1, roughly as many as the number of people attending the Bitcoin conference in San Jose. Between the recent leaks regarding NSA wiretaps, the Free State Project breaking 14,000 participants and the continuing economic crisis in general, the Free State Project appears to be rapidly entering the mainstream.

Last year, Bitcoin made a very strong appearance at Porcfest 2012, with what Josh Harvey described as 80% of merchants at the fest accepting it. This year, Bitcoin is taking on an even more central presence than before. Erik Voorhees’ SatoshiDice is the event’s largest sponsor, the main tent used for presentations is called the “BitTent”, and aside from the three presentations that are discussing Bitcoin (the first of which attracted a full tent of listeners today) many other speakers, like Jeff Bush, are actively promoting it as a key part of their larger philosophies of personal and economic liberty.

And, last but not least, there is Agora Valley. Agora Valley is a marketplace located fairly close to the presentation tents where merchants are free to set up stores to sell food and merchandise. This is the main destination where Porcfest attendees can go to get food between the various presentations and events. Just like last year, a majority of merchants accept Bitcoin, although a few (including, unfortunately, two of the only three vegetarian/vegan-friendly restaurants) still do not. On the customer side, those merchants who do accept Bitcoin are reporting that between a quarter and a half of their sales are done with it. In this regard, Porcfest is a true Bitcoin event in a way that even the Bitcoin conference in San Jose was not; here, hundreds of largely non-technical, ordinary, people were actually using Bitcoin to buy and sell food and merchandise in real life, and learning along the way.

In the campground in the forests of northern New Hampshire where this year’s PorcFest is taking place, the main impediment to Bitcoin usage is obvious: internet connectivity. The campground itself provides an internet hotspot for $15 for a week, but the only way to pay for it is by credit card; even buying in person with cash is not possible. And even that connection is shaky; Porcfest veterans report that last year by Wednesday there were so many people that the internet was barely usable, and this year the connection is somewhat better but not by much. To alleviate this, two Porcfest attendees have come up with solutions. Lamassu‘s Matt Whitlock has set up a “Bitcoin-only wifi” hotspot which is free for anyone to connect to, but which only offers access to a few publicly known Bitcoin nodes and Electrum servers and blockchain.info. This internet is accessible throughout the entire campground, and nearly all Bitcoin users at Porcfest are relying on it to make and receive transactions. Another attendee has set up a paid internet hotspot of his own, offering access for the duration of Porcfest for 0.047 BTC or $6 USD. The other major impediment to Bitcoin usage – namely, obtaining bitcoins in the first palce, was solved by Lamassu’s Bitcoin ATM, with which anyone can trade cash for bitcoins at a 1% fee. Lamassu’s Matt Whitlock reports that the ATM has sold over $1600 worth of bitcoin at Porcfest so far.

For those interested in using Bitcoin at farmer’s markets, a Bitcoin-only wifi hotspot seems like the perfect solution; between it and the Lamassu machine, the infrastructural problems with using Bitcoin at Porcfest are largely solved. But the event does show a larger problem with accepting Bitcoin in person: usability. Although Bitcoin does, in theory, allow a customer to pay a merchant in two seconds by simply scanning a QR code and hitting send, in practice there are very many technical glitches that can increase the time it takes to make a payment to over a minute. Sometimes some glitch on the merchant side, whether relating to internet connectivity or simple software lag, causes the merchant to spend an extra few seconds getting the QR code up for the customer to scan. On the customer’s side, sometimes the customer’s application takes a long time to load or send the transaction, and sometimes simply scanning the QR code takes ten seconds longer than usual. Finally, even after the customer scans the transaction it can take as long as fifteen seconds for the merchant to see it on their own device.

For Bitcoin wallet developers, events like Porcfest are essentially mandatory. Seeing real people use Bitcoin in real-life scenarios, often for the first time, shows that there are many steps that Bitcoin wallet developers can take to make the user experience faster and more convenient. At this point, the slighest optimizations can help; even a one-second speedup in an average interaction will go a long way toward making Bitcoin a more pleasant currency to use in person. From my own viewpoint, here are some basic improvements that mobile Bitcoin wallets could make:

1. Make the “Scan QR code” button when sending bitcoins four times larger. One should not have to spend a full second aiming with one’s finger and another two seconds making multiple attemps in order to successfully click it. In fact, all interface elements that need to be clicked on should be twice as large, filling up all available whitespace as much as possible.
2. Once the destination address is entered, do not just move the cursor focus to the textbox showing the amount to pay; also, force the onscreen keyboard on touchscreen phones to open up. Currently, the user must often first touch the textbox with their finger before the onscreen keyboard appears.
3. Readily offer the ability to set the amount to pay in USD or other local fiat currency rather than requiring the customer to determine the BTC value based on the current price themselves (at least in cases where the merchant is not generating all-inclusive QR codes containing both the destination address and the price.
4. When spending a transaction output, return change in many pieces. This allows the user to later make many transactions one after the other without them being dependent on each other in a chain.

However, the largest improvements that could be made are not in software, but rather in etiquette. Cash and credit cards have both been around for decades, and there is a large amount of unspoken knowledge that helps smooth over the inefficiencies of these systems. With cash, one example of such an unspoken custom is the concept of “change”. If you need to pay $7.93 but only have $10, you do not need to spend time explaining to the merchant that you are giving them too much so that they give you the difference back; the merchant already knows this, and even keeps a large number of low-denomination coins and bills on hand to facilitate this tradition. With credit cards in a restaurant, there is the custom of leaving a bill on the table for the customer to take out their card and write in a tip, so as not to require the waiter to waste their time at the table waiting for the customer to do this. The question we now need to answer is: what are some good social norms that can help govern and facilitate in-person Bitcoin transactions? From my own experiences paying with bitcoin in restaurants in Boston and at merchants at Porcfest, here are some suggestions:

1. In a restaurant, ideally the waiter should not awkwardly wait by the customer’s table while the customer tries to make a Bitcoin transaction. Instead, there should be a setup with which the waiter can leave a QR code printed on paper, or on a tablet, on the customer’s table and leave the customer to figure out any technical difficulties in the payment process by themselves. This is equivalent to the similar custom for credit cards.
2. If (1) is not practical, a waiter should look not at their own payment application, but at the customer’s, to see if the payment has been made. Theoretically, a fraudulent customer could create a fake Bitcoin application to pretend to pay, but it is already very easy for dishonest customers to run away from a restaurant without paying, or paying a trivial amount in $1 or $5 bills that looks like a more substantial payment from afar, so this is not a substantial risk.
3. Merchants should consider printing a large QR code on paper, and letting the customer scan it and then enter the payment amount manually. This allows the customer and the merchant to work in parallel, and is used successfully by many merchants at Porcfest as well as the Pao Cafe in Newmarket, New Hampshire. Printing a large QR code is especially important, as it makes scanning much easier.

As merchants continue to experiment with various ways of accepting Bitcoin, the community will likely start to develop more and more precise versions of these rules all on its own. One idea that has been suggested is to make an explicit Bitcoin Fest, an event similar to Porcfest but specifically focused around Bitcoin, not libertarianism. This could happen in 2014 in lieu of, or together with, a more formal Bitcoin convention, or even in 2013 there are not yet any major Bitcoin-related events this year in August or December. Another option is the progressive approach: simply continue working hard on evangelizing Bitcoin and recruiting restaurants within one’s own local area. Set up a meetup group that will meet at a particular time and place every week, and invite anyone from the public to come, learn about Bitcoin and try out using it. Ideally, this would take place inside a Bitcoin-accepting restaurant, so new Bitcoin users could make their first transaction in the presence of a helpful community. Regardless of what direction we want to take, if we want to see Bitcoin truly break out into the real world, actually bringing Bitcoin into the real world and seeing it applied in practice is the only way that we could actually get there.

To see the full-resolution versions of the pictures used here, and a few others, visit our album here.

Bitcoin Magazine had an opportunity to interview Tuur Demeester, author of the financial newsletter MacroTrends which goes to investors in the Netherlands and Belgium.  Tuur pushed the Bitcoin to a higher level of prominence when he added Bitcoin as part of the recommended currency basket in January of 2012.  Tuur views Bitcoin through an international lense, having so far lived in nine cities and traveled to thirty countries.

Prior to his involvement in the Bitcoin currency, Tuur co-founded the Murray Rothbard institute in 2007 and additionally co-founded two private schools, one in Netherlands and one in Belgium.  With a desire to spread free market economic ideas, Tuur translated Jesus Huerta de Soto’s “Money, Bank Credit, and Economic Cycles” into Dutch.  As the current author of MacroTrends, Tuur recommended Bitcoin as an investment, starting from when it was $5 in early 2012.

Bitcoin Magazine: When did you first hear about and get involved in the Bitcoin currency?

Tuur Demeester: I first heard about Bitcoin when traveling in Argentina in the summer of 2011, my friends there couldn’t stop talking to me about it. Seeing the very real way in which Bitcoin changed their daily lives and futures made it a lot easier for me to see its incredible potential.

BM: How did you first get involved in the Bitcoin currency?

TD: I think the current financial system is structurally insolvent and that we’re entering an era of bank defaults, sovereign defaults, and destruction of currencies.  That’s why my initial interest in Bitcoin was from a wealth preservation standpoint. After I did my research, I tried to time the market and started buying bitcoins in February 2012. I recommended my subscribers do the same, and I’ve been researching the space ever since—the opportunities are quasi endless.

BM: Can you elaborate on why Bitcoin is such a great investment?

TD: I think Bitcoin and the crypto currencies are the greatest investment opportunity of our day and age.

First of all because Bitcoin has all the qualities to make for an ideal money, to a greater extent than any digital or tangible commodity on the planet.

Second, in contrast with traditional fiat money, Bitcoin is designed for the internet: it’s open source, it’s mobile, fast, and it allows for personal privacy.

Third, because we are approaching a bankruptcy event in the developed economies, both in banks and governments, I think that Bitcoin, as a discrete and nonconfiscatable currency, will benefit greatly from the capital flight that will ensue.

BM: As you are an international traveler, out of the countries you have either lived in or visited, which holds the greatest potential for Bitcoin development and success?

TD: I think some countries will prove to be excellent ecosystems for Bitcoin centered hard- and software companies, especially those countries with a history of commerce and with a political class that puts little obstacles in the way of ‘cointrepreneurs’. Countries that try to tax or control their local Bitcoin corporations too much will lose it, just like how medieval France’s rising taxes pushed merchants away from the Champagne Fairs to the harbor cities of the Hanseatic League, which could not be reached by the French royalty. I wouldn’t be surprised to see Bitcoin corporate activity blossom in peripheral countries like Thailand, Sweden, or Panama—but what the physical centres will become is hard to say as it is so dependent on political decisions.

As far as Bitcoin adoption goes, it’s clear to me that countries with a large informal economy (cash market) in place, are at an advantage. The same goes for countries with a history of embracing new technologies easily. There is also the fear factor, because economic panic in a specific country will seriously speed up Bitcoin adoption in that place. Taking all that in consideration, I think a place like Argentina, or an Eastern European country may very well end up being the first with cities where you can put gas in your car, buy groceries, and get paid at work, all of it transacted in Bitcoin.

BM: What is the outlook for the Bitcoin communities in the Netherlands and Belgium?

TD: I think the outlook for Bitcoin adoption and innovation in the Benelux is bright, as we [are] a culture of software innovation (it’s no coincidence that 2 of the 6 Bitcoin core developers are from the low lands), a very high internet penetration rate, and an internationally oriented culture. The community here is still small, but every week I talk to new investors and entrepreneurs who show interest in doing something with Bitcoin.

BM: What will it take to get Bitcoin to a higher level of utility and prominence?  

TD: All it takes is for things to continue the way they are. It’s a marvel to witness how the market self-organizes, and how entrepreneurs globally are continuously adapting to new challenges. This process will continue and it will continuously push the Bitcoin economy towards mainstream adoption.

BM: Where do you see the Bitcoin currency in a year?  

TD: From here we could see further consolidation, possibly until late 2013. Early 2014 I think we’ll see a recovery with the old high of $260 as a technical target. If the market is ready and the high is broken, then $500 is feasible. If the old high is not broken in the next twelve months, my base case projection for Bitcoin is $1000 before the end of 2015.

BM: What is your favorite aspect or characteristic of the Bitcoin currency?  

TD: Personally, I love the fact that it is a currency designed to provide privacy. There are really only two functional economical strategies to solving systemic crime and conflict in the world, and those are the removal of scarcity (creation of abundance) and the reasonable restriction of access to an individual’s person and property. Bitcoin makes it possible to easily and effectively draw the line between what’s mine and what’s thine, and that’s why I believe [it] will turn out to be a great force for good in the world.

BM: What advice would you give to individuals who are just learning about Bitcoin and looking for ways to get involved?

TD: Buy some! And try a few of the many services that are available in Bitcoin today to experience for yourself what real financial freedom means. Several people I know only became convinced about the potential when they decided to use bitcoins for an actual transaction, which showed them how efficient the system really is.

BM: What can Bitcoin Magazine readership and staff do to get Bitcoin to become a household name?  

TD: In my experience, something only starts making sense to people when they can connect it to another thing they already care about. So I think a good general strategy is to really be open to people’s goals and values, and to only then see whether Bitcoin might play a role in achieving those goals and in meeting those needs. Since I started paying more attention to that, my Bitcoin pitches have become much more effective.

I also think that many people underestimate the power that lies in just buying some Bitcoins. By that simple act, you help increase liquidity in the market, which allows ever bigger businesses to start accepting the currency. Your purchase also effectively helps raise the value of the currency across the Bitcoin economy, which provides all the cointrepreneurs and their investors with more purchasing power, and that allows them to build better services that make Bitcoin really user friendly—allowing it to become the digital currency also used by grandmothers.

Bitcoin Magazine thanks Tuur for his time and insight and would like you to heed his advice and not only buy bitcoins but to also share about Bitcoin with your family and friends!  You can listen to Tuur’s talk presentation at the 2013 Bitcoin Conference in San Jose here and stay up to date on his role in the Bitcoin community at www.tuur.demeester.com.

Bitcoin continues to grow in popularity for professionals in a wide array of fields. In addition to serving as an attractive method of payment, Bitcoin’s free market, decentralized, cutting edge nature intrigues many professionals. Just last week BitPay, Inc. signed on a new merchant, Cohen Chiropractic Centre. Cohen Chiropractic Centre was founded in 2009 in Atlanta, GA and has grown to a level of prominence. Dr. Austin Cohen became interested in Bitcoin after one of his interns continually shared his excitement about this innovative currency. As Dr. Cohen has been featured on CNN, CBS News and spoken at various conferences for his innovative techniques to foster health and wellbeing for his clients, Bitcoin is just another source of opportunity and innovation he is able to now embrace.

Bitcoin Magazine had the privilege of interviewing and meeting Dr. Cohen and hopes to continue to be an information source for all things Bitcoin for Dr. Cohen.

Bitcoin Magazine: When did you first hear about Bitcoin?

Dr. Austin Cohen: I first heard about it through our intern as he would not stop talking about and every free moment he was reading an article about them. He insisted that I buy a Bitcoin for every person in my family.

BM: What was it about Bitcoin that you found interesting?

Dr. Austin Cohen: There are 2 reasons why I decided to accept bitcoins in the office. First and foremost, the excitement and fun of something new that is developing and being part of it only a few years into it. Every time I google “bitcoin” a new article pops up that is either positive or negative but the fact people are talking about it makes it very fun. Second, is the simplicity of accepting them and making it easier for transactions and lower merchant service fees. Chiropractic is a progressive industry that is fun and exciting and being the first chiropractor in the World to accept them makes it that much more fun.

BM: When did you first enter in the medical field?

Dr. Austin Cohen: I started chiropractic school in 2005 and it was my first year in school that I realized my opinions and statements are affecting the lives of many. I officially graduated in 2009 and opened my own clinic 7 months following graduation.

BM: Were there any pre-existing businesses that inspired you to integrate Bitcoin into your business?

Dr. Austin Cohen: No, I personally do not know of too many businesses that accept Bitcoins.

BM: Where do you see your office going in a year now that you have chosen to accept payment in Bitcoin?

Dr. Austin Cohen: I see us being able to connect more with other tech startups. They have all shared with me how great Bitcoin is and why I should take them and now I am excited to share with them about chiropractic and why it is so valuable for their life.

BM: What makes your chiropractic services stand out in comparison to other chiropractic offices?

Dr. Austin Cohen: There are a few key distinctions but the big is one is we don’t just want to get people out of pain but we want to correct the problem by putting together a plan and help them create their healthiest life. Some chiropractors are symptom based which is a reactive model and similar to medicine by waiting until a problem occurs then treat it. Our goal is to find problems before they become symptomatic and correct it through our specialized corrective techniques. We also do dynamic monthly workshops and have other resources for people to maximize their healthcare.

BM: What are your suggestions for individuals hoping to start a business like yours and hoping to integrate Bitcoin into their businesses?

Dr. Austin Cohen: Do it! We live one life so quit being so status quo and take a risk.

Bitcoin Magazine congratulates Dr. Austin Cohen and his team at Cohen Chiropractic Centre on their embrace of the Bitcoin currency and taking Bitcoin to another level in the medical field. Should you ever be in Atlanta, GA feel free to stop by Cohen Chiropractic Centre!

Bitcoin Magazine is privileged to serve as a media partner to the Inside Bitcoins Conference in NYC on July 30! The conference will draw a crowd from the United States and around the world to learn more about this digital, decentralized currency and also to highlight the opportunities within the Bitcoin community.

The Inside Bitcoin Conference aims to highlight how the Bitcoin community is booming. The conference will seek to answer the question, “now that all of the basic trading platforms and payment processing companies have been created, how does one make money in the space?” Bitcoin Magazine encourages you to explore the future of virtual currency and Bitcoin with industry thought leaders from Bitcoin Foundation, BitPay, and Tradehill at the Inside Bitcoins Conference, July 30 in New York City.

Attendees will discuss what business and investment opportunities, as well as legal issues, exist in this emerging field. Don’t delay– prices increase this Thursday.

You’ll hear from 20 Bitcoin experts on topics including The VC Take on Bitcoin, Bitcoin Boom: The Business Adoption of Bitcoin, Bitcoin and Freedom of Speech, Rethinking Content Monetization with Bitcoin, Legal and Regulatory Issues Facing Virtual Currency Businesses, and more. View the full program here.

The event will also feature AlphaPoint and CoinMKT as exhibitors, and the evening’s drinks reception provides the ideal forum to network with like-minded peers. Developers, entrepreneurs, investors, finance professionals, bankers, consultants, lawyers, security solution providers, data and payment processors, and online retailers will all be present.

Charlie Shrem, Vice Chairman, Bitcoinfoundation.org and Chief Executive Officer of BITINSTANT, will deliver the keynote presentation, while additional speakers include Tony Gallippi, BitPay, Tuur Demeester, Author of MacroTrends, Chris Larsen, CEO & Co-Founder of OpenCoin, Jared Kenna, Founder & CEO of Tradehill, and Manu Sporny, Founder & CEO of Digital Bazaar. View the full speaker list.

Of course, you can pay for your conference pass in Bitcoin! Each registrant will also receive a Bitcoin paper wallet with a 0.01 Bitcoin. Additionally, an exhibition hall will be open throughout the day where you will have an opportunity to interact with leaders in the Bitcoin community.

Bitcoin Magazine has joined this event as a media partner. Enter our discount code: MAG15 to save 15% on your conference pass. For the best rates, register before this Thursday, June 20. We look forward to seeing you on July 30 and will have a table to offer magazines at a discounted price!

The largest Bitcoin exchange, MtGox, has purchased a full-page ad in the official G8 Summit Magazine published on behalf of the host nations and distributed to all attendees. The advertisement features a cartoon drawing shows a boardroom full of people (presumably government diplomats), each representing their respective national currency, with a new member walking in representing Bitcoin, and includes a QR code leading to a special landing page explaining the benefits of Bitcoin as an innovation in banking. The page compares the limited business hours, high merchant fees and security and privacy flaws of traditional banking to the benefits that we all know and love in Bitcoin: 24/7, near-zero fees, and maximum 0.6% fee with MtGox.

The G8 is one of the most important economic forums in the world, comprising eight of the world’s eleven wealthiest economies: the United States, the United Kingdom, Canada, France, Germany, Italy, Japan and Russia. The organization holds annual summits, and this year the 39th is now taking place in Northern Ireland. Although the G8 has recently decreased in importance compared to the more recent, and more inclusive, G20 due to the rise of emerging economies such as China, Brazil and India, the organization nevertheless represents over 50% of the world GDP.

Bitcoin is only recently entering the conversation in the international political sphere, with a global forum on the legal challenges of virtual currencies having taken place at the World Bank and a paper released by the IMF this month. At this critical point in time, when governments are just trying to figure out how and to what extent they should regulate Bitcoin and work to integrate it into existing financial systems, a strong public relations effort from the Bitcoin community is vitally important, and MtGox is doing a service to the community by taking this step to present a government and business-friendly image for the currency. The tide may already be turning in Bitcoin’s favor, as Jennifer Calvery, head of the US regulator FinCEN, has repeated her statement that she is, at least in principle, in favor of innovation in digital currencies (although the merits of her regulatory framework can of course be debated in practice), and so if the Bitcoin community continues to engage in public-relations efforts in government and banking forums Bitcoin may well get past much of the unfavorable treatment that the established financial system has been giving it, encouraging wider business adoption and making Bitcoin stronger for us all.

Bitcoin Magazine is proud to serve as a sponsor for the Bitcoin London Conference. The conference will bring together Bitcoin entrepreneurs, venture investors, and hedge fund professionals who want to learn more about Bitcoin and digital currencies on July, 2 at Level39 in Canary Wharf. 

Speakers will include Nejc Kodric (Bitstamp), Charlie Shrem (Bitstant), Yoni Assia (eToro), Jeremias Kangas (Localbitcoins), Anatoliy Knyazev (Exante), Jared Kenna (Tradehill), Tuur Demeester (Macrotrends) and pitches from promising start-ups including Coinsetter, Bex.io, Ripple, Lamassu, Bitsofproof, and others. The program will also include word from several thought leaders who will present their views on the likely evolution of the Bitcoin economy. Sessions will feature discussions on Bitcoin and money, decentralized finance, regulatory and legal, start-ups, investment opportunities in the Bitcoin space, why Iceland should adopt Bitcoin as its national currency, merchant opportunities in the Bitcoin space, and Bitcoin as an asset class.

For those interested in meeting leaders in the Bitcoin community and investors, the Bitcoin London conference will also include built-in networking time throughout the day and will conclude with a cocktail party. Some of the investors who will be in attendance include Michael Jackson (Mangrove), Martin Mignot (Index Ventures), Roberto Bonanziga (Balderton), Frederic Court (Advent Ventures),  Nic Brisbourne (DFJ), Seth Pierrepont (Accel), Bart Swanson (Horizon Ventures), Nick Shalek (Ribbit Capital), Stefan Glaenzer and Eileen Burbidge (Passion Capital), Mitch Pender (Meridian), and Barend van den Brande (Hummingbird).

Bridging the gap between investment and Bitcoin, the conference has extended invitations to angel investors in the Bitcoin space. Shakil Khal of Spotify and founder of Coindesk and Jimmy Furland will be in attendance. Prominent individuals in the tech sector including Iain Dodsworth (founder of Tweetdeck), Jez San (founder of PKR.com), Neil Hutchinson (founder of Forward Internet Group), Taavet Hinrikus and Kristo Käärmann (Founders of Transferwise) will also attend. The Bitcoin London Conference is expected to gain international media attention. Media professionals from CNBC, Bloomberg, the Guardian and Euromoney are already confirmed to attend.

With an overarching goal of bringing together entrepreneurs and angel and venture capitol investors in the Bitcoin space, Bitcoin London Conference leadership hopes July 2, will serve as a catalyst for greater advancement in the Bitcoin community in Europe and the rest of the world. Bitcoin Magazine staff looks forward to attending the conference to meet with leaders in the Bitcoin community and distribute copies of our print magazine. We hope to see you on July 2, in London, England!

Image credit: Josh Harvey, Porcfest 2012

In 2012, Josh Harvey made a post on the Bitcointalk forum with the following title: “Porcfest 2012: Biggest Bitcoin Event Ever.” Porcfest is one of two annual summits hosted by the Free State Project, a libertarian movement in New Hampshire with over 1,000 active participants, most of whom moved to the state to take part. The event is a week-long gathering on a campsite in northern New Hampshire, and every day is filled with a collection of liberty-themed panel discussions, music and games, and throughout the week there is a marketplace called Agora Valley, where merchants typically accept silver and gold as payment in addition to US dollars (or, as the locals prefer to call them, “federal reserve notes”). In 2012, however, silver and gold were for the first time joined by their new upstart digital companion, with over 80% of merchants accepting Bitcoin as payment. “I talked to some of the ones that didn’t,” Harvey added, “and even they knew exactly what I was talking about. They were interested in doing it, but just hadn’t gotten set up yet.” This year, Bitcoin is expected to take on an even larger role at Porcfest. The Free State Project’s keystone charities, including Antiwar and the medical group Fr33Aid, have started taking Bitcoin donations, and the latter has even converted to being a purely Bitcoin-based organization.

But what is this Free State Project that has let Bitcoin consume it to such a great extent? The underlying objective is simple. In 2001, a number of libertarian activists, disappointed with their failures to get anyone elected inside the United States’ Republican and Democrat-dominated federal government, decided to try a different strategy: find a state that is (i) already very free in both personal and economic matters, and (ii) has a low population, allowing for smaller groups to achieve significant change, and convince 20,000 people to move to that state to actively influence local politics in a libertarian direction. New Hampshire proved to be the perfect candidate; its current population is only 1.3 million, allowing 20,000 movers to have significant control over state politics simply by playing the dominant and evenly matched Republicans and Democrats against each other, and as far as freedom is concerned one must only look as far as the state’s motto: “Live Free or Die”.

The libertarian appeal of New Hampshire can be seen from the moment one drives in; on one highway leading into the state, on the border there is a sign stating that wearing seatbelts is mandatory for those under 18 – that is, unlike every other state, only for those under 18, with the “Live Free or Die” motto written below. The state is quiet and secluded; although the large southern towns like Manchester, Portsmouth and Concord do have bus routes, huge swaths of the state are completely inaccessible by public transportation, making them ideal for those who simply want to live undisturbed and peaceful lives with their families or in small communities far away from the rest of civilization; this sort of idyllic, “down-to-earth”, ideology is especially popular in Graphton, which attracts libertarians with its lack of a building code. For those who enjoy the benefits of civilization, from Manchester Boston is only two hours away by bus. State politics is highly accessible, with 400 representatives in the New Hampshire State House of Representatives (of which about 20 are libertarians) making it easy for anyone to make their voice heard in government. There is no state income and sales tax, although the state makes up the difference via high property taxes – a highly successful partial implementation of a left-libertarian political philosophy known as Georgism.

In my own travels through the state, one common sentiment I have heard is that people here tend to view the local government very favorably; it would be a truly ideal place to live “if only the feds would get out of the way”. And this has a strong ring of truth; from this author’s Canadian point of view, the federal government of the United States, with its bans on drinking alcohol or even entering many bars below age 21, requirements to show identification to board a bus, and constant DHS-funded reminders on TV telling people “if you see something, say something”, feels like a downright police state compared to the “True North Strong and Free”. Incidentally, the high age restriction on alcohol and bars has even led to me personally getting kicked out of a Bitcoin meetup here, although the meetup group was nice (and righteously angry) enough to relocate to a different location. Outside of libertarianism, the other main jarring thing about the United States to a Canadian is the sheer number of advertisements for various private and semi-private health care services.

The Free State Project movement in New Hampshire is essentially centered around two cities: Manchester and Keene. Manchester is important because of its (relatively) large population of 110,000, and by libertarian standards it has its credibility; CNNMoney ranks Manchester as the 13th best city to live and launch a business, and Yahoo ranks it the first in its list of tax-friendly cities. There are no Bitcoin-accepting restaurants yet in Manchester, although Lamassu‘s Josh and Zach Harvey are (at least currently) located in the city and organize a weekly meetup with about seven to ten participants.

Keene is the undisputed “liberty media capital of the world“, with Free Talk Live, LRN.FM (“Liberty Radio Network”) and ten other libertarian shows located there, but is also the home of a much more activist, and controversial, part of the local libertarian movement that focuses heavily on civil disobedience. Marijuana is sometimes involved, and at other times the target is local rules prohibiting filming in courts or distributing pamphlets on school property. A particularly popular (and, in this case, entirely legal) activity is “Robin Hooding”, a deliberate strategy to deprive the Keene government of revenue from parking tickets by following parking inspectors around and filling expired parking meters right before the inspectors come to check any particular spot. Other Free Staters often disagree with the “Keeniacs”‘ actions, seeing them as needlessly provoking the local government even when some of the rules the activists are targeting are downright reasonable. “I think some of the civil disobedience has been constructive and useful—and much of it has not been,” Free State Project founder Jason Sorens has said. If you wish to evaluate the merits of this side of the movement for yourself, consider watching their latest video Derrick J’s Victimless Crime Spree and making your own conclusions.

The one Bitcoin-accepting restaurant currently in New Hampshire is the Pao Cafe in Newmarket, close to Portsmouth. The owner, Matt Corano, is himself part of the Free State Project, and is actively interested in Bitcoin for the ideological reasons. More will soon come; the Free Stater-owned Murphy’s Diner in Manchester may accept it if at least one of its suppliers can be convinced to, and a number of restaurants on Manchester’s Elm Street are potentially interested (although the Harveys are too busy with their Bitcoin ATM to spend too much time promoting Bitcoin adoption locally). But this is not to say that Bitcoin adoption is sparse; in fact, a very large number of people both in the Free State Project and elsewhere accept Bitcoin as payment for various kinds of services. The landlord I personally am staying with during my stay in New Hampshire, Alec Muller, accepts bitcoins for rent at a 20% discount, and Josh and Zach Harvey have managed to get a number of their graphic designers and suppliers to take them.

The other attraction of southern New Hampshire, and Manchester in particular, is its proximity to Boston, a city which has a strong Bitcoin community itself. The main character in Boston is Jay Best, an MIT research affiliate who has put together a weekly Bitcoin meetup group with, just like in Manchester, about seven to ten participants. However, in other ways Best has been more successful. There are now two restaurants accepting Bitcoin, Thelonious Monkfish and Veggie Galaxy.

See a few more pictures of Thelonious Monkfish and Veggie Galaxy here

Thelonious Monkfish appears to be simply an ordinary Asian fusion restaurant, albeit a highly rated one that is fully seated within half an hour of opening its doors at 11:30 on Sunday. Veggie Galaxy is a vegetarian restaurant, featuring veggie burgers, “steaks”, salads, coconut-based cocktails and various kinds of vegan desserts. Both restaurants have plenty of high-quality options on the menu at a reasonable price, although it is possible to get unlucky. More Bitcoin-accepting places are soon to come; first in line are a café and a beer store, and both Best and other Bitcoin users are actively recruiting more. The ideological feel of the Bitcoin community is still largely libertarian, although a significant number are political moderates who like Bitcoin purely for its aspects of reducing transactional friction. The intent of the group is to simply focus on spreading Bitcoin adoption, as well as acting as a hotspot for Bitcoin activity; at the Bitcoin meetup last Friday, two people came to buy bitcoins from Best.

Next week Bitcoin activity in Manchester and Boston will die down somewhat, as all the Bitcoiners will be heading over to Porcfest. The event will be taking place near Lancaster, NH, and tickets will be sold at the door for $75. Accomodations are heavily booked, so if you are not yet prepared to go your best bet may be either renting a room in a hotel 15km away or getting a tent and renting an RV spot. The local hotels and RV spots, unfortunately, do not accept Bitcoin. The first day of the fest will be tomorrow, although the more interesting events will take place later in the week.

See you at Porcfest!

Bitcoin-based investment platforms have had a long and colorful history in the past two years. The idea first started with the Global Bitcoin Stock Exchange, launched in April 2011. The exchange picked up quickly, with mining companies and the in-person Bitcoin exchange Ubitex as the first IPOs, but within months the exchange ran into its downfall: quality control. In December, the GLBSE-based Lambert Investment Funds, a fund which invested in other GLBSE assets, was forced to shut down because many of their investments turned out to be scams, and in August 2012 the GLBSE suffered a further blow as a $5 million Ponzi scheme suddenly disappeared, taking nearly half the GLBSE “economy” with it. Not long after, the GLBSE itself shut down for legal reasons. Since then, however, other platforms with much better quality control have taken the GLBSE’s place, and Bitcoin investments have seen a massive, but quiet, renaissance. The gambling site SatoshiDice and the Bitcoin mining company ASICMiner are listed on trading platforms MPEX and BitFunder with market capitalizations of $25 million and over $130 million, respectively, and BitFunder has over a dozen assets listed on the site, including such mundane businesses as the T-shirt vendor Bitcoin Pride.

Now, an Australian mining company is about to take the Bitcoin stock markets to the next level. At the beginning of June, Kenilworth Exploration, a mineral exploration company located in the Lachlan Fold Belt in New South Wales, Australia, announced that it will be raising its first $925,000 round of funding using BitFunder. This sets a new first in the Bitcoin economy; although there have been many businesses in industries as diverse as Bitcoin exchange, Bitcoin mining, promotional clothing and gambling raising money from Bitcoin investors through such platforms, Kenilworth Exploration is the first business from outside the Bitcoin community to seek investment from Bitcoin users.

The backstory of the company begins at the turn of the century. In 2000, the Prendergast family bought a 96,000-acre farm in New South Wales, Australia, and in 2001 prospectors found a number of unexplored mineral deposits in the area. Kenilworth Exploration was founded in 2006 as a Prendergast family-owned business, and in 2010 the company purchased three exploration licenses. The company also secured a 50% stake in three additional licenses by partnering with Thomson Resources Ltd, an accredited mining company which is also based in Australia, and in 2012 Kenilworth filed to become a public company, although without immediately listing on any actual exchange.

Kenilworth’s founders first found out about Bitcoin in just the same way as so many of the rest of us. “In 2011,” Daniel Prendergast explains, “I was reading an article on Slashdot and was really interested in the emerging technology that is Bitcoin. I was studying for my medical exams and, in a moment of procrastination, I thought that there could be a great link between my dad’s company and Bitcoin. Once Bitcoin spiked above 100, I knew it was going to be a viable option, I found BitFunder, and we made contact.” As for why the company’s board was so eager to go along with the alternative funding method, as Daniel’s father and Kenilworth chairman Patrick Prendergast describes it, there was nowhere else to turn. “Mineral exploration globally is in serious decline because of the economic downturn, and the raw material supply [available in the earth] of copper started declining, so the industry fell down and everyone stayed with the companies that were still above ground.” The result of the consolidation: an oligopoly, with all the standard inefficiencies and pitfalls. “The established companies have such huge overheads, that out of every $1000 they’re spending $600 just to stay afloat.” Other mining companies have tried raising funds on conventional stock exchanges, but as of yet none have succeeded.

The Bitcoin markets, however, are a completely different animal. Traditional stock exchanges have a reputation for being largely dominated by mutual funds, billionaires and institutional investors such as banks, but Bitcoin users tend to be young and middle-aged tech entrepreneurs, a very different demographic. Additionally, the barriers to entry are far lower; there are no complex registration processes, there is only a two-minute signup and a one-hour Bitcoin deposit to get on BitFunder. Even someone with only $25 to invest can participate. The Prendergasts are hoping that this unique advantage of Bitcoin, the ability to serve as an efficient method of crowd funding, will be what allows them to succeed where many other companies have failed.

Kenilworth itself is adopting a strategy that has already become very popular among many in the tech community. “We’re a virtual company,” Prendergast explains. Kenilworth Exploration is responsible for collecting the funds, paying for the exploration licenses and the electromagnetic scans, and for “keeping things together”, but the company itself will do very little internally. Instead, the company has hired contractors to do nearly all of the actual work. The company has already enlisted the services of SRK Consultancy Ltd to conduct an independent geological valuation, which found that “the Kenilworth licences sit in prospective geological addresses similar to that of the world class Peak Gold Mine, hosting shear/structural land formations that cultivate significant gold and copper mineralisation, as well as possible porphyry styles that are conducive towards gold-rich and copper-rich resource findings.” As a result, Kenilworth’s three exploration licenses “have a median valuation of US$ 19.1 million with a minimum valuation of US$ 3.5 million, and a maximum valuation of US$ 264 million.”

Investors have a good deal; the shares on BitFunder are being sold at a market capitalization of only $5.4 million. The next phase will be to use the $925,000 funding that Kenilworth ideally prefers to receive entirely from the Bitcoin community to fund the next phase of exploration: a high-powered electromagnetic helicopter survey. After this scan, the company will once again seek a mineral asset accredited company, perhaps also SRK, to conduct another geological valuation; at this point, it is expected that the valuation will be “many times higher” than the original $19 million; at this point, Prendergast expects $50-$70 million. At this point, there will be two further funding rounds at higher valuations, which will pay for the actual drilling program. For this too Kenilworth intends to use the services of an existing accredited mining company such as Thomson Resources, and the way the company goes from there will depend heavily on the precise nature of the contract. Kenilworth may simply sell off its licenses to its mining partner, delivering a large payoff to investors on the spot, or it may simply end up collecting royalties and paying out dividends over time. Either way, however, BitFunder acts as a fully functional stock exchange, so investors are free to cash out at any time at a potentially massively increased share price.

Of course, Kenilworth may well not get the entire $925,000; the Bitcoin economy is riddled with businesses which, seeing the massive success of companies like ASICMiner and SatoshiDice, sought to get large amounts of funding themselves, but only ended up getting as little as $10 for their trouble. However, there are backup plans. If Kenilworth does not get $925,000, they will simply start the helicopter survey one exploration license at a time; the smallest amount of funding that the company will need to get to start is $250,000. Once the first survey goes successfully, it will be much easier for Kenilworth to acquire additional funding. If Butterfly Labs, a Bitcoin mining company, managed to secure $250,000 worth of pre-orders within 24 hours of their launch in June 2012, it is not hard to imagine the real-world mining company Kenilworth Exploration receiving at least $250,000 within two months in June 2013.

Being the first non-Bitcoin company to seek funding from Bitcoin user “can be a little daunting,” Patrick Prendergast admits. “We have to ensure that the money from BitFunder gets to the various subcontractors, but there is no precedent to follow, so accountants and solicitors get a bit nervous. I think that’s why there is not a crowd of other companies doing this, and so we have to lead the way. If we do this, there are many others who could follow suit.” Legal issues are also an unknown, although there are no obvious reasons to believe the government would attempt to crack down; Kenilworth is a public company, making the situation much simpler as there are no restrictions on who the company can receive money from. Ordinarily, such a step would be very difficult for a public company to take; in Kenilworth’s case, however, the vast majority of the company ownership remains in the Prendergast family’s hands, allowing the family to make the decision unilaterally. Even so, the company’s board is very supportive of the decision regardless.

At this point, what the company needs more than anything else is attention; although there is no reason why they cannot raise $250,000, or even the full $925,000, from the Bitcoin community within two months, they need to make potential investors aware of their existence in order to do so. There are many untapped markets to explore; Bitcoin has been very popular in China recently, with even more Bitcoin-Qt downloads in China than the United States since mid-April this year. “The Chinese love Australia and are very interested in mineral exploration,” Prendergast believes, and so there is no reason why a large portion of the funding cannot come from Chinese Bitcoin users. Anyone looking to expand their investment portfolio beyond just technology should well consider Kenilworth as a unique, and potentially highly lucrative, opportunity. Although, if they succeed, their interest in the Bitcoin markets will hopefully not be nearly so unique two or five years down the line.

Jeremias Kangas is the CEO and founder of localbitcoins.com, as well as several other Bitcoin ventures.  He is a software developer from Finland and one half of the Kangas bros team. He irradiates optimism about Bitcoin and the endless possibilities it brings, he also understands its resilience and expects it to thrive despite the many attacks that it will probably suffer from the old order that it disrupts and will displace.

Bitcoin Magazine: Why, when and how did you become interested in Bitcoin?
Jeremias Kangas: I just spotted an article about it on hacker news, and instantly started thinking how awesome it would be. At first I was mostly excited by the “money as a protocol” thing – startups and small companies can avoid fees and innovate on top of Bitcoin easily. Then slowly I started to get a larger grasp on the socio-economic implications of Bitcoin.

Currently I’m mostly excited about the possibilities for 3rd world countries. The countries without a stable and cost-effective financial infrastructure or lousy national currencies can benefit the most.

BM: Why did you decide to create localbitcoins.com? Why are P2P exchanges important for Bitcoin? Isn’t Localbitcoins.com already a de-facto decentralised exchange?

JK: There were plenty of sites that listed local Bitcoin exchangers, but in my opinion they all sucked. Therefore I started doing my own, and hired my brother to help me. At first it was a really simple location-based list, with no user accounts and URL-based identifying. From there we iterated and improved the concept based on customer feedback, and nowadays localbitcoins.com is vastly different from the initial prototype.

P2P exchanges are more resilient than centralized exchanges, therefore I believe that in long run decentralized exchanges will win over the centralized ones. I also believe that decentralized exchanges can make Bitcoin spread much faster – if done right.

Localbitcoins.com isn’t a real decentralized exchange, as we still rely on central server. However as with anonymity, decentralization is a floating variable, not a boolean. Localbitcoins.com is less centralized than many others, and we have plans to develop our infrastructure to make it even more resilient.

BM: Localbitcoins has an extremely broad and global base; however centralised exchanges still have more depth and volume. Any plans to encourage larger volume ads?

JK: We will have volume-based discounts in the near future. I definitely agree that the depth and liquidity is a problem with de-centralized exchange model. We have some other ideas to overcome those problems in the longer run.

BM: How many users does Localbitcoins have? What BTC volume is currently being offered through your ads? Will you increase the number of statistics publicly available or offer more charts? Would you like prices set by (volume-averaged) localbitcoins transactions to be a market reference like the Mt.Gox price is currently?

JK: We currently have 44k users, and just today about 300 new user accounts were opened. Lately we’ve had around 250 new users/day. Our volume is usually in the 400-900 BTC/day range.

We want to offer the charts and statistics through our website, but we haven’t had yet time and resources to do this yet. Also an API for external developers is on the roadmap.

BM: As long as you run a P2P ad service in which you don’t actually buy and sell bitcoins yourself, you don’t have to register as a MSB or comply with all the burdensome regulations of exchangers. Does that make your life easier?

JK: Yes. Of course we will still have to adhere to any regulation which might be coming for bitcoin services.

BM: Are you planning to add more security, escrow and reputation features?

JK: We will be improving the security issues with multiple methods. We will be improving the reputation system and feedback loop heavily in the coming months, so that it is more useful.

We are also researching different identification methods, which would add credibility to users. Currently we have SMS based identification, which sellers can require from trading partners. We will try to keep these as optional as possible, so that invidual traders can check which kind of identifications or security measurements they require.

Currently traders can specify limits which depend on volumes of trading counterparties. We will add more options which allows different limits for differently reputated traders. Bitcoin-security wise I’m mostly excited about Bitcoin Trezor. If those guys manage to ship it, we could order a localbitcoins.com -branded batch and give them out to our active traders and sell and market to other users.

BM: Users can now price their BTC in XAU (ounces of gold) and XAG (ounces of silver) at Localbitcoins. Do you expect goldbugs to wake up to the fact that they can now easily buy and sell bitcoins for gold?

JK: I’m not a gold-bug myself, so I don’t fully understand the hype around it. However I realize that there exist many goldbugs in the Bitcoin community. Thus,  I have myself bought miniscule amounts of precious metals. At some point I’ll try to trade them on LocalBitcoins.com, and see how we can make metal-trading easier there, or if there exists demand for it.

BM: Localbitcoins.com now has users buying and selling bitcoins in over 140 countries around the world. What are your plans for the future?

JK: We currently have 142 countries and 1700 cities, but that most definitely isn’t enough. We want to expand to at least 170.000 cities, and have LocalBitcoins,com-branded franchise exchange shops popping up here and there. Global world domination is our goal!

BM: Can Bitcoin be shut down by unfriendly regulators or governments? How could the Cuban or North Korean government stop me from buying and selling bitcoins? Are you worried about censorship?

JK: Bitcoin can’t be shut down, and I’m sure that people will continue using it, whatever happens. Services like LocalBitcoins.com can be shut down, but we have plans how to make our infrastructure more resilient in a way that shutting the service down will be more difficult. I guess also other bitocin services are designing their technology in a resilient way.

BM: You are also involved in several other Bitcoin sites, like Easywallet.org and Acceptbit.com. Do you have any new projects in the works?

JK: Currently I believe that we have the most impact with LocalBitcoins.com.  Our team is focusing all of our efforts towards developing it.

There are tons of great ideas around Bitcoin. I won’t be having any free-time from localbitcoins.com in the short-term future. I hope in year or two, I can start some cool hobby sideproject. Meanwhile, localbitcoins.com as a company will try to provide bounties for open source projects in the future, so at least that way we can participate in some cool open source projects.

Earlier this week, Argentinians suffered from another wake up call. Western Union will no longer accept money transfers between USD and Argentinian Pesos. At the end of May, new stricter regulations on Argentina’s currency exchange prevented Google from even paying Android developers. With extreme inflation, a devalued currency, and increased and extreme regulations, Argentinians are looking to invest wisely and find alternative methods for buying and selling goods. The Bitcoin community is constantly growing in Argentina, but this week’s announcement by Western Union will inevitably spark an even greater interest in the Bitcoin currency.

With a devalued Argentinian Peso, Argentinian citizens are looking to invest in a currency with a potential for greater value. Bitcoin permits Argentinians to not only have control over currency apart from a centralized source but also an opportunity to purchase products with ease internationally. Bitcoin opens the door to the global economy and allows for Argentinians to purchase goods from sellers within the country and internationally.

With a crippled national economy, Bitcoin brings life and opportunity to the financial future of many Argentinians. As Forbes Contributor, Jon Matonis highlighted in his article, “Bitcoin’s Promise in Argentina,” the benefits of Bitcoin when compared to paper cash are high. Recently, BitcoinFilm.org produced a short documentary about Bitcoin in Argentina. As Argentinian leadership continues to impose price controls and monetary exchange restrictions, the Bitcoin community continues to grow and thrive.

For most Argentinians, Bitcoin is a more viable source of savings, than pesos in the bank. With inflation nearing 30%, Argentinians are less concerned about the volatility of the Bitcoin currency than the government permitted devaluation of the Argentinian Peso. With the black market as the main means for acquiring the US dollar in Argentina, Bitcoin is not only legal, but a more valuable investment for Argentinians. When faced with the decision to hold onto a devalued currency or take the step to invest in the Bitcoin currency with great potential for growth, Argentinians should have an easy decision to make. La Revista de Bitcoin quiere dar felicitaciones a la communidad de Bitcoin en Argentina por el crecimiento de Bitcoin en este país.

In late March, the cryptic underworld of the Tor hidden service ecosystem added a new service to its midst: TorBroker, a gateway for Bitcoin users to the stock markets of the mainstream world. This is not the first service to do such a thing; ICBit has been doing the same, albeit in a very limited fashion, for over a year by offering futures on oil, gold and the S&P 500. TorBroker on the other hand is, as its name suggests, a fully-fledged broker, allowing users to buy and sell any of nearly a thousand different stocks and exchange traded funds at any time. It is also the first such service to accept customers anonymously, using Tor to protect their anonymity and not asking for any identifying information beyond a username and password.

The service has seen some usage in the months since then, but many people remain highly skeptical. There are two reasons behind this: legality and trust. Operating this kind of pass-through investment service is not itself that legally difficult; although being a stock broker does require a license in the United States, the license requirements consist of having a company sponsor and passing an in-person examination. However, what is difficult is performing such a service without verifying the identity of one’s clients. When asked about the legality of their service, TorBroker’s forum representative explained their legal strategy was that they would not actually be conferring legal ownership of any shares to their customers; rather, they would simply be passing on gains and losses, effectively acting as a sort of betting site specializing in the future value of financial assets. Torbroker wrote, “Our lawyer has been in contact with the financial regulators in our local jurisdiction. He was given the information that at the moment there are no actual laws that explicitly forbid individual or company traders from passing on gains/losses to a third party [ie. including an anonymous third party] that has no legal ownership of the traded securities. Furthermore, there is no regulation regarding deposits in unregulated currencies (bananas, seashells, bitcoins). However, they stated they would look negatively on such a service, but they wouldn’t be able to legally take action against it as is.”

This is where the issues of legality and trust become intertwined. As a further legal safeguard for their service, TorBroker’s representatives have chosen to remain anonymous. Explaining their decision, TorBroker wrote to Bitcoin Magazine: “By going public we would attract the attention of local authorities who would be inclined to work on new regulation – or even just try to find some non-essential technicality that we’re unwittingly violating – to stop our service. By keeping our jurisdiction secret, we avoid attracting such attention.” Howevver, this strategy has its costs. Out of all the major anonymously operated services in the Bitcoin economy, many, including Bitscalper, TorWallet and Bitcoin Savings and Trust, have turned out to be scams, eventually suddenly disappearing with thousands (and in the latter case, over 1 million) of dollars of deposited customer funds. Other anonymous sites, on the other hand, have survived, and Silk Road in particular may well now be the single most trusted cryptographically anonymous entity in the world, so on the balance the question of whether or not one can ever trust an anonymous service remains hotly debated.

The general consensus view is that it depends on the precise nature of the service in question – specifically, the trust to profit ratio. On the Silk Road, an eBay-style marketplace for illegal drugs that, like TorBroker, uses Tor to help ensure both itself and its users anonymity, this ratio is fairly low, both with regard to Silk Road itself and even between buyer and seller. Each individual transaction brings a significant benefit to both the buyer and the seller (laying aside the argument that some users may be addicted and would benefit more from being forced to go cold-turkey; this is a purely conventional economic analysis), especially so because black markets tend to be very inefficient and so have high producer and consumer surplus per transaction, and Silk Road itself earns an average commisssion of about 6.3%. Thus, for both Silk Road and the anonymous merchant, profit is high. As for trust, the buyer only needs to trust the merchant to ship the goods each transaction, and needs to trust Silk Road to the same extent when depositing into their Silk Road account (or perhaps to a slightly greater extent, if the buyer also wants to have cash on hand in their Silk Road account to be able to buy a certain quantity of goods at will). Since profit is high and trust is low, the trust to profit ratio is very low, and so both Silk Road and the merchant have strong incentives to continue acting honestly – the value of the relationships is too high to justify running away at any particular point.

Now, consider Torwallet. Torwallet was essentially an anonymizing mixing service and a Bitcoin wallet all in one. Here, the wallet is usually free, although users can opt to have their coins mixed again at any time for a fee of 3%. Thus, profit is considerably lower than on Silk Road. As for trust, Torwallet is intended to be used as a wallet, encouraging users to deposit significant quantities of money into the wallet and, importantly, store them there for a long time. Thus, compared to Silk Road trust is very high. Thus, predictably, TorWallet eventually ran away. Bitscalper and Bitcoin Savings and Trust have even higher trust to profit ratios, as the service (in both cases, investment returns) requires the user to keep their money deposited for an extended period of time.

Unfortunately, TorBroker falls squarely on the “untrustworthy” side of this analysis. This is not their fault; it is simply a characteristic of the financial industry that trust to profit ratios are high, and this model, combined with an understanding of the more subtle, and legal, ways a business can probabilistically “run away”, even perfectly explains the recent global financial meltdown. However, there is one unique factor that does rest strongly in TorBroker’s favor. BitcoinStore’s Roger Ver made a post in TorBroker’s introductory thread on Bitcointalk, writing:

I don’t know TorBroker or any of the people behind it, but about a month and a half ago they contacted me, and at least one other well known member of the Bitcoin community and asked us to publicly hold 1,000 BTC as a security bond that would be used to refund customers if TorBroker ever disappeared with their customers money.
While I fully support TorBroker’s efforts to bring additional economic freedom to traditional financial markets, legally it didn’t seem safe for me to be the front man for this.

TorBroker has also tried to place this bond with many other prominent Bitcoin community members (who won’t be named to protect privacy), and, if trust proves to be too insurmountable an obstacle, is even willing to consider placing the bond with Silk Road’s own Dread Pirate Roberts. This would change the trust to profit calculus considerably; the extent to which TorBroker would benefit from running away would then be reduced by 1000 BTC, and, presumably, if TorBroker does run away the funds would then be proportionately distributed to depositors. For now, no security bond has been placed, but the fact that they are willing to voluntarily do so does suggest that they are attempting to build a viable and lasting business.

However, there are steps that TorBroker could take to reduce the trust to profit ratio even further. TorBroker charges a commission of 1% per trade (minimum fee $10), specifically encouraging investment strategies that keep money in the service for a long time. The minimum fee also discourages users from trying out small amounts they can afford to lose first before investing more heavily. If the commission was replaced with, for example, a 10% fee on user profits, it would become much more viable to invest for only a few weeks or even day trade, benefitting from the service without trusting TorBroker nearly as much. They could also, instead of having a fixed-size security bond, constantly keep the majority of users’ funds escrowed with a trusted third party. Such a strategy was in fact suggested for Bitscalper, although Bitscalper obviously rejected it because they intended to run away with the money.

More recently, TorBroker has come up with several upgrades to their platform. In early June, they released a better securities list interface, an improved order system, performance and stability enhancements and reducing the minimum fee to $5 until July 11. They also released a promotional video explaining the benefits of their service:

The video begins by highlighting the three main disadvantages of traditional stock brokers: that they are “overregulated and complicated”, leading to bureaucratic inconvenience and a prolonged process in order to set up an account, they require minimum deposits that can be as high as $10,000, and “Big Brother is watching all your transfers.” TorBroker, of course, has none of these flaws. However, it does have weaknesses. Although it bypasses the inefficiencies of government regulation, its anonymous nature also sacrifices the main benefit that government can provide: trust. As discussed above, this is not an easily solvable issue, although there are many ways that TorBroker can mitigate it. Also, its $10 minimum fee itself functions as a de-facto minimum deposit; if one wants to trade only $100, a $10 fee is a whopping 10% off of every transaction. TorBroker would do well to go even further than their promotion and remove the fee outright, replacing it with a more even fee structure. As for privacy, here TorBroker indeed wins by a wide margin. Although the service sees all of your trades, it has no idea who you are, and everyone else knows nothing at all (although perhaps with blockchain analysis it may be possible in certain cases to detect that a given individual is using TorBroker; the Blockchain.info mixer can plug this small potential leak for an additional 0.5% fee.

Should you invest using TorBroker? Well, if you need anonymity, you might. Safety is not guaranteed; TorBroker may still run away with all of their customers’ funds tomorrow, and there would be no way to even start trying to get the money back. If you are already investing in a very high risk portfolio, this additional risk may be manageable; if you are trying to secure 2% returns for grandma’s pension fund, forget it. If it does disappear, it will be added to the list of scams and thefts and soon forgotten. If it survives and continues to grow, it may well be an interesting experiment in the growing field of “crypto-economics”, and an example for more commercial hidden services to come.

Each day, the Bitcoin currency is growing in utility and becoming more of a household name. Yesterday, major newswires including, Business Insider, CNN Money and MSN Money announced the birth of the, “First Bitcoin Baby.” The Bitcoin currency is successfully infiltrating numerous aspects of life.

Dr. C. Terence Lee established Fertility Care of Orange County in 1997. In 2012, while browsing the internet, Dr. Lee learned about the Bitcoin. As Dr. Lee bases his career around providing life-giving services, he is now also investing in a vibrant new digital, decentralized currency with much potential. Nine months ago, Dr. Lee offered a couple a 50% discount should they cover the costs of a frozen embryo transfer cycle with the Bitcoin currency. Dr. Lee’s transaction in BTC is to date the first payment for fertility treatments.

Prior to the birth of the first Bitcoin baby, Dr. Lee presented at the 2013 Bitcoin Conference in San Jose to address, “A Physician’s Experience with Bitcoin.” Dr. Lee touched upon the areas that are still open to the free market in the medical field. Currently, fertility clinics can still be operated in the free market space. Dr. Lee first transacted in Bitcoin in his business after posting an ad on Bitcoin Reddit offering a Male Fertility Test for payment in BTC. Since that first transaction, Dr. Lee has chosen to reach out to patients who normally would not transact in Bitcoin or have not heard about the currency to then encourage them to learn more about Bitcoin and further provide the opportunity for them to even pay for fertility treatments and consulting in BTC.

To the mainstream news media, Dr. Lee has forged the trail to not only accept payments for fertility consultation and treatment in the Bitcoin currency but also counsel individuals as how to use the digital, decentralized, cryptocurrency. Dr. Lee takes steps to guide patients to reliable Bitcoin exchanges and encourages couples to not only plan their future by starting a family but also through investing in Bitcoin. Bitcoin Magazine congratulates Dr. Lee on his accomplishments to date and encourages other medical professionals to follow suit.

The sudden rise of the internet may not be the biggest news story in the past fifteen years, but it was certainly the most entertaining. Over the course of only a year the value of technology stocks has doubled, only to crash right back down within months. Suddenly, it felt as if we were back in the tulip era. But what is this strange technology that is behind all of this unexpected public attention? A cure for cancer? A solution to the problems of poverty and world hunger? No. As it turns out, the underlying technology is basically a clunky, inferior version of a phone, and is primarily used by terrorists and prepubescent children with nothing better to do with their lives than send each other images of cats. However, since this technology has been all the rage in the past few weeks, its supposed “advantages” deserve a thorough debunking, and those who have so far been fortunate enough not to get caught up in the hype deserve a thorough understanding of just how pernicious and evil the underlying ideology of this “invention” is. To that end, I have gathered up the fundamental flaws behind the internet’s design and will summarize them all in the rest of this article.

1. The Internet Provides No Listener Protection – so far, all of the methods that we use to get our information are based on strong, socially recognized hierarchies of trust. If you read a sentence in a magazine, of hear someone speaking on TV, those words have been carefully rehearsed, sent through multiple layers of scrutiny and fact checking, and the speaker knows that if they make any claim that is false they can be sued under a robust framework of defamation law. Decency laws protect you from having to listen to anything containing harmful or psychologically traumatizing words. If you are a crazy libertarian, the presence of this kind of control may horrify you – but, but, that’s authoritarian, you might argue. It’s centralized! What if you want to say something controversial or obscene or outright false to listeners who “voluntarily” turn on their televisions to some channel specifically because they want to receive it? In reality, however, these protections are necessary. They ensure that children get safe programs suited to meet their delicate psychological needs, and protect them from learning about the ravages of reality right up until the moment they are kicked out of their house to go to college and enter the jungle of drugs and sex and independent politics as soon as they hit 18. They make sure that so-called news “sources” spreading misleading and fallacious information are either prevented from doing so entirely or are, at the very least, quickly discovered and made to answer for their lies. Without these protections, anyone could go out and say anything about any person and company and have untold consequences on society and the financial markets as everyone blindly believes what they are saying and retweets the news; with the checks and balances that traditional media provides, such things can never happen.
2. We Already Have Good Communication Solutions – internet advocates often claim that the Internet is somehow massively better than all of the other options that we have available. The reality is, however, that as soon as you ask them how it does this their arguments immediately fall away. You can use the internet to talk to your friends, they argue. Well, of course you can, but we have already had a technology to do that for over a hundred years; they’re called phones. Ah, but the internet is international and universally accessible. Well, phones are too, and with internet penetration at only around ten percent telephones are actually far superior. Can you use the internet to talk to your grocery store? No? Then the internet is not a “communication medium”. The same goes with TV; people are starting to use the internet to stream video to each other, but the result is a horrendously inefficient use of bandwidth that is rapidly using up billions of dollars of infrastructural investment, when if only users were willing to submit to the truly minor inconvenience of having to wait a few hours to watch (or record) the same data can be transmitted simply by broadcasting it all at once. The internet does have some minor advantages, and if it were thoughtfully integrated into a legitimate communications product it might be a good idea. But this is not a good idea, it is a scam, and someone out there is trying to become very rich off of this system until the inevitable collapse.
3. The Internet Circumvents Authority And the Rule of Law – this is where we need to explain one of the more dangerous properties of the internet. In 1977, Rivest, Shamir and Adleman came up with a system for storing data that had some interesting properties. You can create a pair of keys, called a “public key” and a “private key”, such that you can “encrypt” data with the public key but then you would need the private key to decrypt it. Without the private key, encrypted data simply looks like random junk and nothing can be gleamed from it. This has some very positive legitimate military applications, as militaries can now communicate securely without having to securely transfer a common secret key first. However, soon enough so-called “crypto-anarchists” began perverting cryptography to much more destructive ends. PGP, for example, provides a simple interface for anyone in the world to use public key cryptography to accept messages from anyone else in the world, so that no third party has the ability to read them. Read that carefully: no third party. Not “no illegitimate third party”, but “no third party” at all – including legitimate government operations that are conducted for the public good and restrained by robust, democratic checks and balances such as court-ordered warrants. Just how are government investigators supposed to avoid going dark and losing the ability to recover any data for investigative purposes at all? Well, if you are a libertarian and believe that government snooping equals intrusion of privacy, then you don’t care much about this question because the answer you will get is, ‘Well let’s not get snooped on and let’s allow the various intelligence agencies to wither,’ but if on the other hand you believe that intelligence agencies are essential for maintaining civilised behaviour and for having regulation, then it is a problem.
4. The Internet Circumvents Democracy – there are of course even easier ways to use the internet to circumvent the law. Following the tradition of “tax havens”, countries like Iceland are now trying to position themselves as data havens, extending their extremist interpretations of “freedom of speech” to the entire world. Finally, many people simply ignore the law and hope for the best – a strategy that, given law enforcement’s limited resources in these times of austerity, is unfortunately all too effective. Fundamentally, what politicians in Iceland, and internet-bugs in general, fail to realize that censorship is not “damage” that should be “routed around”; it is a basic and necessary part of legislation in a harmonious society. Censorship protects religions from being brutally mocked by insensitive television programs and cartoons, it helps combat extremist ideologies and it helps protect ordinary people, especially children, from obscenity. And what are people using the internet for? As it turns out, it’s mostly child pornography. Some civil-libertarian revolution.
5. The Internet Is Backed By Nothing – when you buy a TV and a cable subscription in order to watch a particular set of broadcasts, how do you know that those shows are going to continue operating at a high standard of quality, or at least if they don’t other equally good shows will take their place? The answer is, there are powerful commercial institutions behind these programs that are guaranteed to continue releasing them, and contracts with actors and crew that provide a strong incentive for them to make a fresh episode week after week. If a station decides to deliver a poor-quality episode, or even skip an episode some particular week, they will lose millions of dollars in profit, and there is a strong central point of attention to which people can direct their complaints. With the internet, none of this exists. On an internet forum, all content is user-generated content, and users have no financial incentive to produce quality content, or even continue producing any content at all. And those users are only on that forum in the first place because other users are on that forum, generating content for them in turn. So what happens if confidence in this network falters? Some users drop out, then because of them more users drop out, and the entire online “community” disappears into thin air. I’ve always said that the dollar is an “I owe you nothing,” and that the euro is a “Who owes you nothing.” On the internet, nobody owes you anything, and so it is inevitable that the scheme will collapse in its present form.

Unfortunately, in the all too extreme and individualistic society that we live in today, it has become popular to think that we should just let everyone speak freely without controls and everything will somehow work itself out. But, as we all know, this is absurd. We cannot delude ourselves that free speech is the privilege of pure citizens in some perfect Enlightenment salon, where all sides of an argument are heard and the most noble view will naturally rise to the top. Speech now takes place in a digital mixing chamber, in which the most outrageous messages are instantly amplified, with sometimes violent effects. We have people spewing out hate speech, inciting riots and practically ordering other people’s deaths. Sites like stormfront.org and “Boycott American Women” are repeatedly hitting front page headlines as their terrible and hateful ideologies are allowed to fester. We have unchecked laissez-faire internet-based social media platforms becoming an existential menace to society as unenlightened youth use them to launch outright revolutions against established authority. We have “crypto-anarchists” writing manifestos about how the internet will bring about the outright demise of the legitimate and democratic nation state, and if the internet does grow to the extent that they imagine, all evidence shows that that is exactly what would come to pass. But fortunately, we do not have much to fear. The growth of the Internet will slow drastically, as the flaw in “Metcalfe’s law”–which states that the number of potential connections in a network is proportional to the square of the number of participants–becomes apparent: most people have nothing to say to each other! By 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s.

As Bitcoin has grown in prominence, so has the number of individuals and organizations concerned about spreading the truth of the value and utility of this digital, decentralized, cryptocurrency. The Bitcoin community is at a crux and education is needed to push Bitcoin to an even higher level of prominence. How could anyone turn down Bitcoin after understanding the convenience and utility of this currency? Beyond facilitating financial transactions, the Bitcoin currency exemplifies free market ideals and limited government principles which prompt economic and societal success in local, state, and national governments.

As some still hold to the misperception that Bitcoin only benefits a select few or is only of interest to those in the software development community, an increased number of Bitcoin Evangelists have emerged to share of the benefits of this innovative currency to all people. One of the main forces in getting the word out is Bitcoin Reddit. Reddit, founded in 2005, touts itself as being, “the front page of the internet.” Bitcoin Reddit provides an open forum for users to post articles of importance and comment to foster a discussion within the Bitcoin community. Along the same lines as Bitcoin Reddit, the Bitcoin Forum creates discussions based around particular areas of significance in the Bitcoin community such as development and technical issues, mining, technical support, economics, trading, politics and society, and international discussion boards.

Individuals are also stepping out to share their thoughts on the validity of the Bitcoin currency through blog sites such as BTC Math. BTC Math was founded by Noah Silverman, doctoral candidate in Statistics at UCLA, to cover Bitcoin related finance topics. Silverman predominantly focuses on the quantitative issues that arise from the nature of Bitcoin markets. Similar to BTC Math, The Standard Bit, serves as a Wall Street Insider’s Guide to Bitcoin and the emerging virtual currency space. Launched by Jonathan Silverman, a former trader on Wall Street, The Standard Bit serves as another specialized blog to provide insight to those considering investing in Bitcoin.

Bitcoin Magazine hopes to continue to foster the spread of knowledge within the Bitcoin community and to help provide tools for individuals who have yet to learn about all the merits of this decentralized and efficient currency. We want to hear from you. Please email me at [email protected] if you would like us to feature your Bitcoin related blog and or business. Let’s continue to foster a dialogue over the numerous benefits and value of Bitcoin.

LibertyBit, the second largest Bitcoin exchange in Canada, has announced that it is suspending its operations and returning all funds to customers. The root cause of the shutdown is the closure of its RBC bank account on May 17 as well as “a surge of fraudulent transactions”. LibertyBit writes:

The effects have been two-fold: 1) Inflicting monetary losses on the company and 2) Damaging our primary banking relationships. These circumstances make it infeasible to continue operating the service without significant changes to our transfer system and identification measures. We feel it is our responsibility to pause operations now rather than risk any customer funds becoming vulnerable. We will be working in the coming weeks with partners and our legal counsel to overcome these obstacles and implement new measures to prevent these types of setbacks in the future.

Fortunately, no user funds have been lost, although withdrawals will be slower than usual; LibertyBit anticipates a waiting time of 1-3 days for BTC withdrawal and 2-10 business days for USD and CAD withdrawal. Additionally, the Interac E-transfer withdrawal option is no longer available, and users with CAD stored in the exchange will need to provide their banking info in order to be able to withdraw by direct deposit.

This is not the first time an exchange has declared a temporary shutdown for security reasons; Bitcoin Central did the same thing in late April following a medium-scale hack which emptied a relatively small, but nevertheless substantial, portion of their stored Bitcoin funds. In both cases, the shutdown was graceful, with users being able to recover their funds. The question is, will Libertybit’s shutdown actually be temporary? Most shutdowns so far have proven to be permanent, and as much as 45% of all Bitcoin exchanges to have ever existed are now defunct, but there is precedent: Bitfloor and TradeHill have both managed to restart themselves after a prolonged and unscheduled downtime; in the latter case, the shutdown lasted for over a year and the exchange restarted with a completely different target market and brand.

In the meantime, Canadian Bitcoin users are encouraged to head over to CaVirtex or buy them in person at the next Toronto Bitcoin meetup. Additionally, BTCTo is currently in its testing phase and will soon be opening its doors.

So far, we have had one major Bitcoin conference this year, and the event proved to be an astounding success. Over a thousand people showed up, panelists discussed issues including financial privacy, alternate cryptocurrencies and even floating cities. Following that success, over the past few weeks a number of other Bitcoin-related events have also announced themselves. You may have already heard of some of the larger ones, but many of these events have been carely noticed by the Bitcoin community.

• Porcfest – Porcfest is not, strictly speaking, a Bitcoin-centric event; it is the main annual gathering of the New Hampshire-based Free State Project, and perhaps the largest libertarian political event in the United States. However, in 2012 Bitcoin all but consumed Porcfest, with 80% of merchants at the event accepting it. This year, Bitcoin will make an even stronger appearance, with three hour-long panel discussions dedicated to it. The event will take place near Lancaster, NH, from June 17-23.
• Bitcoin London – Bitcoin London will be an intivation-only event focusing on entrepreneurs, investors and hedge fund professionals. You can apply for invitations here, although it is expensive – the price will be 250 GDP ($380) for early-bird tickets and 600 GBP ($760) for everyone else. The event will take place in London on July 2.
• Inside Bitcoins Conference – MediaBistro’s Inside Bitcoins conference in London will be a largely business-focused event, including speakers such as First Round Capital partner Phineas Barnes, Foodler founder Christian Dumontet, BitPay’s Tony Gallippi and many other business owners and investors. It is notable that most of the speakers will be individuals from outside the Bitcoin community who are interested in Bitcoin, and so this event will be a great opportunity for much-needed outreach and interaction. The conference will take place in New York City on July 30.
• Bitcoin Convention Europe 2013 – as cordination consultant Matthew N Wright describes it, “This convention is an open, community driven effort with fund-raising aided by 000 Media. Rather than opt for a politically charged display of wealth, we’re here to get back to the basics of what bitcoin really is– a community, decentralized effort. No foundations or agenda driven donors at this convention, just real people who really want the project to succeed.” The speakers’ list is currently still small, although it appears focused on Bitcoin entrepreneurs who are not as immersed the mainstream tech and business scene as the attendees of the Inside Bitcoins conference. The convention will take place in Amsterdam on September 27-29.
• Crypto-Currency Conference – this conference will be more focused on philosophical issues than the others, with speakers like Laissez Faire Books’ Jeffrey Tucker, libertarian legal theorist Stephan Kinsella and the Mises Institute’s Doug French, as well as the Bitcoin economist Peter Surda, Adam Levine and BitPay’s Tony Gallippi. The conference will take place on October 5 in Atlanta.
• unSYSTEM – this conference, organized by Amir Taaki, will be the other major conference of this year. Although originally intended to be a Bitcoin conference, the conference’s range of topics has been expanded to radical activism and social reform in general – hence the name, “unSYSTEM”. Of course, Bitcoin nevertheless remains a central, unifying theme. Speakers include Occupy London, Juice Rap News, Max Keiser, Defense Distributed‘s Cody Wilson, Berlin Bitcoin community organizer and restaurant owner Joerg Platzer and many more technological, artistic and political activists. The conference will taken place in Vienna on November 1-3.

The different themes of the various conferences shows an interesting pattern in the development of the Bitcoin community. Bitcoin advocates have always been split into camps, which can simply be named the idealistic and the pragmatic. Idealists include anti-banking activists, radical libertarians (of both the anti-capitalist and pro-capitalist variety), factions of Occupy Wall Street and others who are in some way dissatisfied with the current “system” in general. Pragmatists are those who seek to present Bitcoin in a business-friendly package, focusing on more universally appealing aspects like low transaction fees and near-instant transactions. Since the 2013 Bitcoin conference, the pragmatist wing has become much more powerful, as its outreach efforts have now managed to attract tens of millions of dollars of investment, and among some there is a sentiment that the idealist wing is being left behind; some are concerned that Bitcoin is “sacrificing its soul to survive”. However, the aspects of Bitcoin that make it palatable to idealists remain stronger than ever, and Porcfest and unSYSTEM represent great chances for the idealist factions to reclaim their lost importance.

Also importantly, this shows how the Bitcoin community is deliberately broadening its reach to beyond just the United States. For all the recent worry about FINCEN, a very large part of the Bitcoin community remains outside the United States, and conferences in various locations in Europe do a great deal to accomodate that. Even inside the United States, the conferences in New York and Atlanta appeal to local entrepreneurs and people in general who do not yet care enough about Bitcoin to have flown across the country to the conference in San Jose. And Bitcoin travellers now have one major event to go to for almost every month in the rest of this year (only August and December currently lack any event).

As Coinsetter CEO Jaron Lukasiewicz pointed out in his letter last week, Bitcoin exchange is rapidly becoming a capital-intensive industry. On a technical level, Bitcoin exchanges are under constant attack by sophisticated hacking attempts and increasingly powerful DDOS attacks to the point that it is becoming impossible to survive without a dedicated, locally hosted server and Cloudflare protection. From a banking standpoint, relatively easy deposit and withdrawal solutions like Liberty Reserve, OKPay and Dwolla have all fallen by the wayside, forcing exchanges to either step up their efforts on banking integration or fall away. And, finally, the worst hit of all is regulatory: since the FINCEN guidance released in March, it has become clear that exchanges operating in the US need to pay a minimum of about $100,000 per year for surety bonds as well as having comprehensive anti-money-laundering policies, and in the last month the US government has struck hard against services like Liberty Reserve and MtGox that it believes are not meeting the requirements. Although the big exchanges, including Coinlab, Coinbase and Tradehill, appear to be well on their way to full compliance, an increasing prevalent worry is, will any future exchange be able to get over the hump?

BTCGlobal has come up with an innovative solution that just might shift the tide significantly back in favor of the little guy. BTCGlobal’s plan, which the company entitles “Massive Parallel Licensing“, is essentially a franchise: BTCGlobal will pool together resources from any upstart exchanges that want to be partners, secure the necessary money transmitter licenses and surety bonds, and allow its partners to operate under its umbrella. In addition to this formal legal relationship, BTCGlobal will also share its expertise on implementing the anti-money laundering programs that money transmitter laws require. The program goes beyond just this; on a technical level, BTCGlobal will make available BTCUy, its powerful trading engine which can handle 300,000 transactions per second (to compare, MtGox crashed in April because its trading engine was limited to 37 transactions per second, and the Bitcoin network itself averages about 0.7 per second). Speed is not the only advantage of having one commonly developed platform; it will also improve security, as BTCUy is much less likely to have a vulnerability due to amateur coding or security setup.

The main question is, just how effective will this franchise be? In theory, the project certainly will massively reduce startup costs from a technical and regulatory standpoint, leaving the individual exchanges to focus on the very thing that Bitcoin exchanges currently need to focus on the most: convenient, easy-to-use deposit and withdrawal options. On the other hand, the legal umbrella concept may turn out to be fragile. The major reason why some banks and established money transmitters are currently scared of dealing with Bitcoin exchanges is that they fear losing their own banking or money transmitter licenses if the partner turns out to have inadequate anti-money-laundering policies; here, similarly the onus is on BTCGlobal to make sure that each and every one of their franchisees remains compliant. Given that the question of just how strict anti-money-laundering policies need to be is still a grey area, this may become a point of contention down the line.

If BTCGlobal succeeds, we can expect to see a diaspora of local Bitcoin exchanges appear targeting very specific banking systems or even individual cities, making buying and selling bitcoins much easier. If it does not, then the Bitcoin exchange industry will still progress, but with Silicon Valley investors as necessary gatekeepers as new exchanges struggle to raise the necessary capital for money transmitter licensing. Alternatively, Bitcoin exchange may increasingly go decentralized, with Bitcoin communities in many major cities gaining the critical mass to support in-person trade on localbitcoins. Finally, it is important to keep in mind that the United States is not the only end goal for Bitcoin. It is certainly important, especially since legacy banking systems in the country tend to be much less efficient than their counterparts in Europe, but entrepreneurs thinking of creating Bitcoin exchanges should well consider serving the markets in Europe and Canada instead; laws in both countries are much less restrictive, with the Canadian FINTRAC even explicitly stating that Bitcoin exchanges in the country do not need a money transmitter license. On the whole, developments like this are increasingly making it clear that the Bitcoin exchange industry in all parts of the world has both the will and the capability to meet the challenges of a regulated financial world; it is up to all of us to help it prosper.

Yesterday, the Bitcoin Currency was featured at yet another prominent venue, the LeWeb London Conference. Martin Bryant (Managing Editor, The Next Web) moderated a panel entitled, “The Pros & Cons of Bitcoin. The Bitcoin Community was successfully represented by Tony Gallippi (CEO, BitPay), Roger Ver (Founder & CEO, MemoryDealers.com), and Shakil Khan (Head of Special Projects, Spotify and Founder, Coindesk). LeWeb London hoped to address some of the questions surrounding this digital, decentralized, cryptocurrency.

As the first panelist to speak, Roger Ver framed Bitcoin in a positive light stating, “if you are using money in your business, you should be using Bitcoin.” Ver explained that Bitcoin has enabled for the first time in the entire history of the world payment from one person to another anywhere around the world. Ver explained that through Bitcoin, individuals have a tool that enables greater control over their finances. Ver made his intentions clear and his support of the Bitcoin currency evident explaining that his goal will be achieved when at least everyone has heard of Bitcoin and at least has the option to use it if they choose. Despite initial steps of government regulation of the Bitcoin currency, Ver explained that even if governments decide they would like to eliminate Bitcoin completely, the only way they can do so would be by shutting down the internet completely. Ver highlighted that millions of dollars a month are being spent on real businesses through the Bitcoin currency.

BitPay Co-Founder and CEO, Tony Gallippi, followed up by explaining the merits of Bitcoin as an open source peer to peer payment network. Gallippi expressed that Bitcoin will continue to become successful and mainstream, and there will be a point in which many will start using Bitcoin and not even realize they are using it. Bitcoin serves as an expedient mechanism to get payment from Point A to Point B.

Shakil Khan discussed his first encounter with the Bitcoin currency and why he has now chosen to invest in Bitcoin startups and run Bitcoin news site, Coindesk. Shakil also emphasized the need to have information available for individuals and businesses seeking to invest in Bitcoin. As Bitcoin continues to grow in prominence, Shakil hopes to facilitate education on the interaction between Bitcoin and financial systems.

Of course, moderator, Martin Bryant, posed the typical, “who is Satoshi,” question. Gallippi responded candidly that no matter who founded Bitcoin, the currency is now having a positive impact and thriving. We can look forward to continuing to see Bitcoin as a topic of conversation and a credible payment mechanism.

Jonathan Silverman unveils the The Standard Bit – a Wall Street insider’s guide to Bitcoin and the emerging virtual currency space.

Here is Jonathan’s Story:

I first learned of Bitcoin in April 2011 – long before it was trading in the triple digits like it does today. I had just begun my career as a trader at one of New York’s prestigious bulge-bracket sell-side firms. There I had the best laboratory in the world to learn how to trade. Equities, currencies, bonds, commodities, futures, options – my mind was a blur that first year as I tried to take my scientifically-trained brain and forge it into one of a trader. One morning, after helping my team fend off an aggressive fast-money seller, I stumbled across a post on Tyler Cowen’s Marginal Revolution on Bitcoin – the virtual currency was entirely new to me. There he questioned if Bitcoin was in a bubble after making new highs as it pushed toward the $2 boundary. Granted that was a 2000% appreciation from a year prior. 2000 percent! I rubbed my eyes and checked my monitor once more. There the hockey-stick of a chart remained unyielding. A return of that size in the world of finance does not make sense. It is outrageous and absurd. It stinks of penny-stock or fraud or both. It screams to any sane investor that they should run in the other direction. Luckily I was not one of those. Trusting my gut – and in the process throwing out the window nearly every piece of investing advice I had ever learned – I bought.

Buying was not as simple a task as I had hoped. On the day I read Tyler’s post, the Bitcoin-US Dollar exchange rate (BTCUSD) closed at the price of $1.7949. Four weeks later, after jumping through half-a-dozen hoops to get cash onto Mt. Gox, Bitcoin’s oldest exchange, the price had more than tripled. I held my nose and bought in for an average price of $6.3308. During that waiting period I learned an invaluable lesson: the majority of speculators had recently discovered Bitcoin and were struggling to move deposits to purchase it. Each day I checked Google Trend data for Bitcoin related search terms and saw the network effect of an infectious idea at work. In a scarce liquidity environment, media attention pushed price and the price in turn drew new eyes to this grand experiment. A week later my roommate at the time – then a trader at another bulge-bracket firm – joined the fray. $8. $10. $15. We were flabbergasted by our good fortune. Convinced we had boarded a rocketship of a bubble, we settled on an exit strategy – . On Friday July 8th, 2011 the market looked grossly overheated as it broke $30 and liquidity had become dangerously one-sided. My roommate called this the top. I on the other hand had let my emotions get the best of me. I was leaving that afternoon for a four-day vacation where I would not have access to the internet or my cell phone. When I returned to land of the internet that next Wednesday, I coolly checked the level of BTCUSD. $21. Not awful. Taking a closer look at the chart, I saw that heavy selling over the weekend had knocked the price down to $10.25. I know a dead cat bounce when I see one. I hit every bid I could find to close out my position and I was gone.

In the aftermath of the bubble of 2011, I resolved to steady my thinking on this newfangled currency. Whether or not Bitcoin would survive, I could not tell, but Satoshi Nakamoto had opened Pandora’s box. There was no putting it back.

Virtual currencies have tremendous potential to reshape our world’s political and economic landscape. To Bitcoin’s naysayers I urge them to take a look at the lessons we can draw from this innovative new stuff. The technology behind the Bitcoin protocol alone could dramatically transform clearing and settlement processes for established financial products. There is much work to be done and the financial community is just beginning to take notice. So too are the regulators. Regulation of virtual currencies in the United States is well underway with FinCEN giving its first guidance on the subject in March of this year. Even under this purview there is room for Bitcoin to survive and thrive. In the long run I welcome this oversight. With the support of venture capital funding, the second generation of Bitcoin start ups are putting down roots. More importantly it appears that many of them will be compliant with US regulation and law by FinCEN’s deadline in mid-September. Wall Street would be wise to pay attention.

In the coming weeks I will be writing about Bitcoin and the broader virtual currency space with the established financial community in mind. Topics will include:

trading strategy and best execution

market structure and exchange topology

asset management and portfolio diversification

the state of regulation within the United States and abroad

new technologies in clearing, settlement, and custodial services

If you have any suggestions or requests, I am all ears. Please drop me a line. In addition to writing, I provide consulting services on the topics listed above. If you think I can help advance your virtual currency related project or investment goals, I would be more than happy to chat with you. I look forward to your readership and the great discussions it will drive.

Happy Trading,

Jonathan Silverman
[email protected]
[email protected]

In an apparent bid to keep pace with the regulatory restrictions surrounding Bitcoin, Mt. Gox released a statement on 30 May announcing their customers must now have their identities verified if they wish to withdraw or deposit “currency,” with the announcement differentiating “currency” from bitcoin. Users of the Tokyo, Japan based exchange may continue to make bitcoin deposits and withdrawals without having their identity linked with their account.

In the same vein, ecommerce payment processor OKPAY announced an end to its vacation from bitcoin and reintroduced the cryptocurrency into its payment ecosystem, albeit with more severe restrictions than had previously been in place. As of this writing, the date stamp on the announcement page had not been updated from their previous release announcing their suspension of bitcoin, leading to potential confusion as to when they had announced what. Citing unspecified “risks and dangers,” and alluding to Anti Money Laundering (AML) laws, OKPAY now disallows transfers from any exchange service dealing in bitcoin. Bitcoin service is now restricted only to verified users who have submitted proof of identity.

Mt. Gox had announced OKPAY’s separation (pdf) from the exchange on 28 May, and OKPAY appears to have finalized a divorce for the two services. Following on the heels of the internationally coordinated shutdown of alternative online currency provider Liberty Reserve for failing to meet AML restrictions related to “Know Your Customer” laws, among other issues, the timing of Mt. Gox’s new rules may indicate an attempt to stay one step ahead of a similar fate. Mt. Gox’s 30 May announcement referenced evolving regulations and AML rules as a background for the new account restrictions. Mt. Gox recently ran afoul of FinCEN requirements through subsidiary company Mutum Sigillum LLC for failing to appropriately register as a money services business, resulting in a court-ordered freeze of Mutum Sigillum’s financial accounts.

OKPAY’s reintroduction statement implies that by specifically excluding any new business from bitcoin exchanges, they may have been worried that any business with Mt. Gox’s unverified customers would subject them to the same legal hammer swung by law enforcement at its counterparts in the financial payment world. These developments indicate an understanding in the ecurrency community that business dealing in cryptocurrency specifically, and online payments in general, will either rapidly adapt to regulatory structure or face grinding legal headaches at best, and potential fines and incarceration at worst.

 

Charlie Shrem is 23 years old and one of the leading Bitcoin entrepreneurs, having founded BitInstant in 2011. One of the early “Bitcoin millionaires” he exemplifies the world of opportunity and adventure that Bitcoin has opened up to anyone willing to knuckle-down and start building the infrastructure that will make Bitcoin accessible to millions. He is also Vice-Chairman and co-founder of the Bitcoin Foundation.

 

Bitcoin Magazine: How and when did you learn about Bitcoin and what caught your eye at first?

Charlie Shrem: I got involved in the Bitcoin community really early on. I was an econ grad in college and obviously interested in the space. The more I learned about Bitcoin the more I had to learn. I had never even heard of the Austrian theory of economics (it was all Keynes this and Keynes that in college). The idea – save money if you want to grow the economy was so foreign, I thought, hey maybe this could work. And from there I just really dove into it.

 

BM: What pushed you into setting up a Bitcoin business?

CS: Gareth Nelson reached out to me in 2011 via the Bitcoin forums. We had never met but respected each other’s reputation. He had a great idea and really saw a pain in the Bitcoin ecosystem – moving money quickly. I recognized the opportunity and given my previous successful startup jumped at the opportunity to be more involved in Bitcoin. He handled the tech and I handled the business, it’s a perfect partnership.

 

BM: What would you say to encourage all those potential Bitcoin entrepreneurs out there?

CS: Bitcoin is such a young experiment, there’s so much opportunity for anyone with a great idea and the ability to execute it. I’d definitely suggest putting your idea to paper, researching the marketplace and really exploring all the challenges you might face. Build a team of people you can really trust who will get things done. If you can put together a prototype, great, do it. Then start reaching out to friends and family for some initial investment. The more money you get from angels, the more of the company you can keep for yourself.

 

BM: What are the online businesses that would benefit most from Bitcoin adoption and what are they waiting for?

CS:  All of them. Bitcoin makes so much sense for online transactions more than anything. Traditional banking infrastructure was never really designed for the online world and it’s fraught with issues, the worst of which are ridiculous fees and security concerns. Bitcoin solves these problems – transactions can be executed and verified for a fraction of the cost of the older payment methods and the security is unbelievable.

 

BM: Beyond being a better payment system, Bitcoin brings financial freedom to the masses. Why is this important? How will it change the world?

CS: There are a lot of people who are politically motivated by Bitcoin and very vocal about how it can solve the world’s problems. The phrase “Bitcoin will bring freedom to money like the Internet brought freedom to information” is really true. Whether or not Bitcoin (or another digital currency) ever replaces fiat is an open question. But even if it doesn’t, it’s disruptive. If it makes even a little impact (and I think it will) it really forces traditional payment systems to become more efficient, reduce friction and fees and increase security. Even these little changes when considered across trillions of dollars worth of transactions start to make a meaningful difference. If Bitcoin’s existence can force online money transfer fees to be reduced by even 2% just think of how much money is saved and can go to improving the world in real ways (instead of losing that $10 to a big bank you could donate it at your local soup kitchen)!

 

BM: Will established players and industries in the payment, banking (and central banking) world resist Bitcoin, or adopt it as an improvement on their current technology? How would you convince to embrace it instead of fighting it?

CS: We’ve already seen some signs that more traditional payment systems are starting to look at Bitcoin. You can be sure they’re talking about it behind closed doors and wishing they had thought to implement something like it themselves. I think we’ll see Bitcoin serving as a catalyst to push existing banking to take a hard look in on itself and really try to reduce the inefficiencies. The market will demand it – if Bitcoin is widely adopted and people understand how low the fees are, they’re going to look at the same types of transactions taking place via banks and wire transfers and ask the hard questions “Why does it take 5 to 10 percent to send my money overseas? Why does it take three days to move money between accounts when it’s an instant digital request?” These questions are going to spark changes to the traditional banking systems – how they choose to address them is anyone’s guess.

 

BM: Why is privacy important online? Is it just for porn, gambling and fraud? Is privacy a human right?

CS: Since its inception, Bitcoin has obviously really struggled with definitions of privacy and anonymity. There’s a big difference between regular, law-abiding people seeking privacy and those who seek to be anonymous for illicit activities. I believe that the right to privacy is fundamental. What exactly does it mean though? You should be able to buy legal items without it being tracked somewhere in a government database. Historically cash has provided this privacy. You could walk into a drugstore and buy medications for health problems that might be embarrassing and pay cash. Now, with credit cards everything is electronic and tracked. Bitcoin gives you some of the privacy back. I like to call it “cash with wings.” This basically means that it has all the conveniences of cash but you can use it over huge distances. People like to say “Oh, you could by drugs with Bitcoin!” You can buy drugs with cash. You’re not stopping people from doing the things they’re going to do but you shouldn’t penalize the people who are legitimately using a tool like Bitcoin to do things more efficiently in our modern world. At BitInstant we understand the need for financial regulations and have gone out of our way to be compliant – we know our customers. We’re working to make government officials and naysayers understand that Bitcoin adopters are just visionaries who understand the need for a fundamental shift in the way we think about money.

 

BM: Having your account blocked is a major problem with some online payment systems, and even bank accounts, as Cypriots learned to their misfortune. How does anyone put up with this now that you can use Bitcoin?

CS: Even though Bitcoin is gaining in popularity it’s still flying under most people’s radar. It’s still in a stage where people don’t understand it and aren’t aware of its benefits. There’s also mistrust that we have to overcome. People are more willing to continue with the status quo than trust a new system. It won’t be until more people are directly hurt by the current banking systems that they start to move away from it and look for alternatives. In the meantime, the early adopters (like me) will be here building the infrastructure and trust that ensures that Bitcoin will be here as an alternative to the pitfalls of the traditional banking structure.

 

BM: If the US-based Bitcoin Foundation is ever co-opted by regulators to undermine the thingsthat make Bitcoin so liberating… will you denounce it? When there is a major Bitcoin fork, what principles will you fight for?

CS: There’s an awful lot of speculation in that question. Right now we’re all (both Foundation members and the general Bitcoin community) doing our best to carve out a place for Bitcoin in the current regulatory climate. There are a lot of us who want to do things the right way and make sure Bitcoin is seen as legitimate. Speculating about the Foundation’s future run-ins with regulators doesn’t really get us anywhere. Right now the best we can do is to use the Foundation to promote Bitcoin, help protect the existing community and put it in front of people for more widespread adoption. As far as a fork goes, I don’t like to say. I’ve made my general opinions pretty clear in presentations and panels. But categorically stating my opinion about a forking situation that hasn’t come up yet is just silly. Things change all the time.

That’s the beauty of Bitcoin. It’s not controlled by a central power and everyone has more of a say in what happens to the technology. My opinion changes based on a lot of things – like regulation, trust, the support of the community, improvements in technology – so I’ll cross bridges as I come to them.

 

BM: Bitinstant has made buying Bitcoin with fiat extremely easy in the US and several other countries. What are your expansion plans? When are you going to partner up with some major airport money changers?

CS: BitInstant is committed to growth and helping more people in more places around the world acquire Bitcoin. But we’re only interested in growth the right way. We could move fast and enter new markets and new countries…but we won’t do it until we’re sure that it’s sustainable and we don’t get shut down. That means having the right partners and making sure we’re within local regulations with what we’re doing.

We’ve heard a lot of interest from people in the UK, Australia, Cyprus, Greece…the list is almost endless. And we’re going to add the countries to our list, do our due diligence and make sure we’re on solid ground in each country we move into.

 

BM: What other part of the Bitcoin infrastructure is in urgent need of building? What major problems need solving for Bitcoin to grow?

CS: One of the challenges that we’re facing at BitInstant is an information problem. Just making more people aware of Bitcoin and separating it from some of its more radical roots and supporters. We believe that Bitcoin has value for everyone, regardless of politics. So making sure that we’re doing our part to make the currency more accessible to the people it can really help the most is huge.

The mainstream media has taken a predictable turn in their treatment of the series of regulatory incidents regarding Bitcoin-related services this month. Technology Review wrote that Bitcoin is now growing “in a manner disappointing to some early enthusiasts” now that Bitcoin exchanges are eager to work hard on achieving regulatory compliance. Laissez Faire Books’ Jeffrey Tucker wrote a long plea arguing against “regulating Bitcoin like dollars”, and on June 2 CNBC followed up with the most alarmist article of all: according to them, Bitcoin is “sacrificing its soul to survive” the regulatory onslaught.

However, what all of these journalists have somehow completely failed to realize is that the talk about whether or not Bitcoin will be “regulated” completely misses the point. First of all, all of the regulation in question is currently completely targeted not on internal Bitcoin businesses, but on Bitcoin exchanges – that is to say, the intersection between Bitcoin and fiat currency, which is heavily regulated already. The closest that any government so far has come to regulating actual Bitcoin services is the half-hearted SEC investigation of pirateat40’s Ponzi scheme in 2012. Second, and much more importantly, Bitcoin is not, and never was intended to be, a clever legal scheme for evading regulations by virtue of not being classified as a fiat currency. The idea that regulators would simply sit back and allow such a loophole to continue to exist and simply nullify their regulatory agendas is highly naive wishful thinking at best.

Rather, the reason why so-called crypto-libertarians are attracted to Bitcoin so much is that much of it is unregulable on a practical level. True, in order to get bitcoins through an exchange you will need to give up identifying information and satisfy exchanges’ KYC policies, but once you’re in the Bitcoin system you’re all clear. Blockchain.info offers a mixing service that lets you trade your bitcoins for “anonymized” bitcoins at a 0.5% fee, deleting all records of the transaction 8 hours after the fact, and one can also take advantage of Silk Road’s mixer by simply depositing and withdrawing into Silk Road. While blockchain.info can be legally compromised, good luck subpoenaing “Dread Pirate Roberts“. One can even use more ordinary Bitcoin services that offer accounts as unintentional mixers by simply depositing and withdrawing from them; between actual mixers and such makeshift constructions one can do as much mixing as one’s paranoia demands. At the Bitcoin conference, two separate ideas were presented for decentralized mixers, allowing users to anonymize their bitcoins without trusting anyone at all. Thus, the potential to preserve one’s anonymity by using Bitcoin remains completely intact, and no regulation short of banning Bitcoin outright will change this. Coinlab’s attempts to create a legitimate front for Bitcoin do not in any way hinder the activities of drug users on Silk Road, and the activities of Silk Road need not interfere with exchanges’ and regulators’ efforts to promote more universally agreeable uses of digital currency.

If you are a regulator reading this article, the question you may be asking is, why shouldn’t I be worried? One answer is, although it can be very hard to detect specific activity within the Bitcoin system, moving large quantities of money out of Bitcoin undetected remains very difficult. If you sell the bitcoins at an exchange, the transaction will get recorded. If you use them directly to buy anything of very high value (eg. a car or house), that will also get recorded. Thus, while Bitcoin certainly does empower the small-time drug user buying $50 worth of marijuana on Silk Road, large-scale financial movements will remain easy to detect, and even anonymizing mixers get less effective the more money you try to put through them. Moving large quantities of money into Bitcoin is similarly difficult.

The second answer is a more pragmatic one. While the Bitcoin economy itself has grown by a factor of ten since last year, Silk Road, judging by the number of posts on its forum, has only doubled in size. This is similar to the growth of the internet; in 1995, scaremongering about the massive growth in online child pornography was all the rage. Now, however, we realize that as technologies mature more mainstream uses naturally take over, and the prosperity that resulted from having a platform for free and open worldwide communication may have done more to fight child pornography than stricter prohibition ever could.

This brings me to the next point: Bitcoin is not like Liberty Reserve. While FinCEN may or may not be correct in its pronouncement that Liberty Reserve was “mostly” used for criminal activity, Bitcoin has a number of positive attributes that Liberty Reserve does not. Liberty Reserve was a truly convoluted system to use, with users needing to go through a system of “exchangers” in order to get in or out, each one of which took up to a 5% fee. LR itself took a further 1% fee for transactions. Aside from its anonymity, the only redeeming trait that Liberty Reserve had was its lack of chargebacks, making it useful for a limited set of industries such as multi-level marketing. Bitcoin is completely different. Aside from its more controversial privacy properties, Bitcoin lets anyone send money from anywhere to anywhere in the world with minimal (often zero) fees. It is nearly instant, and is in many cases much easier to use than more traditional banking systems. It’s also very easy to develop software for, since all of the algorithms are open source and require no registration with any particular third parties (although there are third party services that can help).

Given all of these properties, there is no way to make a digital currency that does NOT offer some way of providing anonymity; if you make a digital payment system that allows users to construct cryptographically signed transactions, it will necessarily be possible for users to anonymously come together over an internet forum and apply the decentralized mixer protocol to it. And even without fancy cryptography, if a currency is international it will necessarily be possible for someone to set up an anonymous mixer in a jurisdiction that has different ideas about the correct balance between privacy and regulatory interests (especially when “taxes” paid directly to particularly malleable government officials are involved).

Government regulators like FinCEN have been notably quiet on Bitcoin itself lately. The FinCEN guidance in March 2013 mentioned decentralized virtual currencies, exchanges and even mining, but took great care never once to utter the word Bitcoin. The government spokesman discussing the Liberty Reserve shutdown similarly avoided mentioning Bitcoin itself, even when asked a question specifically about it. This suggests one likely conclusion: regulators are well-aware of the fundamental impossibility of fully regulating sufficiently advanced digital currency systems that was described in this article, and are treading carefully to take a pragmatic, watchful approach to see just how much information they can gather.

Under this interpretation, FinCEN undersecretary David Cohen, when stating that “exchange providers that comply with the law have nothing to fear from Treasury”, was speaking the truth. At this point, it is highly unlikely that mainstream Bitcoin exchanges will be struck down by state departments because they do not yet have quite all forty eight state money transmitter licenses needed to comply with the guidance; FinCEN knows that Bitcoin exchanges exist, and if they wanted to use this avenue to take Bitcoin exchanges down they could have done so a month ago. Bitcoin-based online stock exchanges and gambling platforms may be a future target; SatoshiDice did feel the need to block US users several weeks ago. As for Silk Road, for all the talk of Bitcoin “losing” its anonymity, every single Silk Road-related arrest to date has involved either buyers reselling drugs to too many people in physical space or searches and seizures within the postal system. The regulators are fine, Bitcoin is fine, and the future of crypto-libertarianism is fine. Stop worrying.

Bitcoin Magazine is proud to announce its new partnership with the Bitcoin Education Project (BEP).  BEP was founded by Charles Hoskinson earlier this year to reduce the knowledge barriers to entry for individuals to enter the world of Bitcoin, and to highlight Bitcoin’s utility in mainstream activities.  BEP holds to six key tenets of objectivity, transparency, accuracy, accountability, inclusion, and honesty.  The project also works to achieve the following three goals: to eliminate misinformation about Bitcoin, generate and vet content made by members of the Bitcoin community, educate to add 1 million additional Bitcoin users to the Bitcoin ecosystem by 2014.

This past month BEP also began a new partnership with Udemy to bridge the information gap and eliminate misinformation about the Bitcoin currency.  While this digital, decentralized, cryptocurrency is growing in prominence, education is still a necessity so those involved in and interested in the currency have an understanding of the fundamental purposes and principles behind Bitcoin.  Udemy, an online learning platform allowing instructors to host courses, is known as “The Academy of You”.  Launched in 2010, Udemy is now mainstream with over 7,000 premium and free courses and the opportunity for instructors to craft their own courses.  Udemy permits instructors to upload videos, PDFs, audio, zip files, PowerPoint presentations, and facilitates online discussions.

Through its partnership with Udemy, BEP now offers 7 introductory lectures on the Bitcoin currency, lectures on Bitcoin wallets, Satoshi Nakamoto, and bonus lectures on cryptography with additional lectures and insight from BEP Senior Fellows such as Jon Matonis.  With many lectures to come and an open forum for Bitcoin community members to request additional insight on issues of significance, BEP has tremendous growth opportunity within the Udemy space.

The Bitcoin Education Project is another step in the right direction for the facilitation of information sharing within the Bitcoin community and the process of educating individuals eager to learn more.  As we continue to expand and will be publishing our 1 year anniversary issue soon, we at the Bitcoin Magazine look forward to working with the Bitcoin Education Project to bridge the information gap and draw practical connections between daily life experiences and the Bitcoin currency.

If you would like to contribute your expertise to Bitcoin Magazine and the Bitcoin Education Project, please let us know!  We need to continually keep the community updated and seek to spread the word on the applicability of Bitcoin to everyday life.

 

 

Tangible Cryptography, LLC announced last night (UTC + 5) on bitcointalk.org that it had suspended operation of its bitcoin sales site, FastCash4Bitcoins.com. In the announcement, which was mirrored on FastCash4Bitcoins, the company cited communication they received from the Commonwealth (State) of Virginia on Friday, 31 May, as cause for the shutdown, which occurred the same day. According to Tangible Cryptography, a complaint had been received by the Commonwealth of Virginia State Corporation Commission alleging that the company had been acting as an “unlicensed money transmitter.”

This comes despite having promoted their service as not engaging in activities requiring a money transmitter license. FC4B allows its customers to sell bitcoins directly to Tangible Cryptography, with no third party involvement. Users had the choice of PayPal, Dwolla, ACH Bank Deposit, or Bank Wire Transfer for sales payment. This allowed FC4B to advertise that since they were a direct buyer of bitcoins, they did not need to meet the same regulatory standards that would be required of an exchange.

However, according to the announcement, a preliminary investigation conducted by the Corporation Commission concluded that FC4B’s business may fall into money transmitter territory. Under the complaint process in Virginia, Tangible Cryptography has 30 days from when notice was given to provide a written response to the commission detailing why their business does not require a money transmitter license. The notice from the state commission specifically alleges that FC4B is “issuing bitcoins,” which it implies may meet the standard for a “stored value.” FinCEN defines a Stored Value as “Funds or monetary value represented in digital electronics format,” which leaves the question of whether or not Bitcoin is a “fund or monetary value” muddled by FinCEN’s recent guidance on virtual currencies, which made a point of contrasting “virtual” currencies with “real” currencies.

The two pertinent points in this case are first, whether the company is indeed “issuing” bitcoins, and second, if Bitcoin can be considered a stored value. Both requirements would need to be met in order for Tangible Cryptography to legally be required to be licensed as a money transmitter. FinCEN’s March guidance fails to specifically deal with the unique situation Tangible Cryptography finds itself in. Under the section dealing with “De-Centralized Virtual Currencies,”  it is noted that businesses providing a third-party intermediary service for customers buying and selling virtual currency must obtain money transmitter licenses. Notably absent is the business model that Tangible Cryptography instituted, that of directly buying a virtual currency with no middleman involvement.

Tangible Cryptography may have been a victim of its own attempts to over-comply with perceived existing and future regulation. Tangible Cryptography, LLC was registered with FinCEN as a Money Services Business on 20 March, 2013. The FinCEN database lists “Money transmitter” as the MSB activity connected with the registration. Thus, it is possible that by registering as an MSB when it may not have needed to, Tangible confused state regulators into thinking that it also needed the state money transmitter license which it did not have, needlessly bringing this regulatory action onto itself. While the announcement indicates that a complaint was the beginning of Tangible’s current woes, the possibility of extraneous compliance with regulation that may not apply to a particular business is another potential pitfall that new Bitcoin-related financial businesses may need to contemplate.

 

The Bitcoin community took a rather heavy beating this month. Our leading exchange, Mt. Gox, was sued by its former partner Coinlab, lost three of its deposit and withdrawal partners, and the company is under federal investigation in the US. Another digital payment network, Liberty Reserve, was shut down by federal investigators, and the government specifically mentioned the service’s anonymity as a major reason behind the shutdown. However, judging by the price the community has proven to be surprisingly resilient. Bitcoin dropped 7.5% during the month, but the entire drop and more took place during the initial days of the month following the Coinlab suit. Since then, it recovered from a low of $79 and now stands at $117. A major piece of positive news driving the comeback was a series of investments from Silicon Valley, and A hugely successful Bitcoin conference, with over a thousand people attending, bolstered the community’s spirits and sent the world a clear message: Bitcoin is here to stay.

For those interested specifically in the Bitcoin conference, you can find our full collection of articles on the topic here.

The Regulators Are Moving In

• Coinlab, a company that had signed an agreement with Mt. Gox in February to take over the exchange’s operations in North America, turned against its former partner with a $75 million lawsuit on May 2. Coinlab claims that Mt. Gox has failed to uphold a single one of its contractual promises to assist the company with the migration, and has violated its agreement to discontinue serving customers in North America itself (whether this was actually part of the agreement as written is one of the questions in dispute).
• Mt. Gox’s Dwolla account in the United States was frozen by the Department of Homeland security, with the DHS claiming that Mt. Gox was acting as a money transmitter without applying for a money services business (MSB) license from FINCEN, the US money transmission regulator. According to the DHS warrant, Mt. Gox (specifically, its US subsidiary Mutum Sigillum LLC) also falsely claimed that they were not going to be involved in money transmission when signing up for their bank account in 2011.
• SatoshiDice started blocking US-based IP addresses, citing legal worries.
• Liberty Reserve was shut down by US regulators and its operators criminally charged, with Liberty Reserve’s anonymity being cited as a major reason behind the investigation and shutdown.
• After some Bitcoin users became worried that Bitcoin would be next, FINCEN followed up with an interview where chief Jennifer Calvery clarified that “that action was against one financial institution and one type of financial service” and “exchange providers that comply with the law [ie. the FINCEN guidance] have nothing to fear from Treasury.”
• In Canada, the regulators are taking a different path. The Canadian money transmission regulator, FINTRAC, sent a letter to Bitcoin exchanges saying that the exchanges are “not, at this time, engaged as a money services business in Canada”, and therefore “do not have to register your entity with us.”
• BitInstant told Bitcoin Magazine that they now have money transmitter licenses in 30 states – suggesting that the task of getting fully licensed is not quite so daunting as was originally thought.
• OKPay reduced the scope of its operations in the Bitcoin community to only processing payments for verified merchants, citing legal concerns to explain the decision

The Silicon Valley’s Embrace

• Coinbase received $5 million of investment mainly from the Silicon Valley venture capital firm Union Square Ventures, with additional support from Ribbit Capital, SV Angel and Founders Club.
• The Boost VC accelerator program announced that it would be investing an additional $50,000 into every Bitcoin company in the next group of startups that they would be working with starting June 24.
• BitPay raised $2 million from the Founders Fund, of which Peter Thiel is one of the two founding members.
• BitInstant announced that it has raised $1.5 million from Cameron and Tyler Winklevoss (best known for their role in founding Facebook). The two brothers also appeared as keynote speakers at the Bitcoin conference in San Jose.
• A new, Bitcoin-specific, venture capital group, BitAngels, was created at the Bitcoin conference, attracting 60 investors and raising a total of $6.7 million in capital.

Business and Charity Adoption

• BitPremier, a marketplace for luxury products and real estate targeting wealthy Bitcoin users, opened its doors on May 2.
• ASICMiner started selling its Block Erupter USB mining products, offering 336 MH/s for 1.99 BTC, and the company is continuing to sell its Block Erupter Blade devices with 10 GH/s for 49.99 BTC. The company’s valuation also crossed $100 million, making it the most highly valued “publicly traded” company in Bitcoin history.
• Gyft, a mobile gift card platform that offers digital gift cards for 50,000 physical retail locations across the United States, started accepting bitcoins.
• The Electronic Frontier Foundation began once again accepting Bitcoin donations. When the EFF stopped accepting Bitcoin in June 2011, the organization donated their 3505 BTC of existing donations to the Bitcoin Faucet run by lead Bitcoin developer Gavin Andresen. Now, Gavin returned the remaining 726 BTC from that fund to the EFF, which are now worth more than the 3505 BTC were when the EFF turned them away in 2011.
• The Free State Project-affiliated medical group Fr33Aid announced that the organization is now using Bitcoin as its main currency.
• The money transfer system WebMoney added a new unit to its repertoire of digital currencies, WMX, representing bitcoins, allowing Bitcoin users to buy WMX which can then be converted to other WebMoney currencies to purchase products at many merchants worldwide.
• Unterkunft.de, a website for renting living accomodations in Germany, started accepting Bitcoin payments.
• The Bitcoin payment processor BitPay passed 7000 merchants.
• Second-tier Bitcoin exchanges like BitStamp saw a considerable increase in volume relative to the dominant exchange Mt. Gox, with BitStamp on some days seeing up to half the volume of its main competitor

.

Bitcoin Wallets Galore

• Bitcoin 0.8.2 was released, reducing the fee needed for small-value transactions to get fast confirmations from 0.0005 BTC to 0.0001 BTC. BitcoinQt and bitcoind clients will now also enforce a minimum transaction output size of 0.0000543 BTC (optionally changeable with a custom setting).
• CarbonWallet, an Electrum-compatible, browser-based Bitcoin wallet saw its first release.
• RushWallet, an improved version of the now-defunct InstaWallet that works without the site’s operators ever finding out their users’ URLs (and therefore private keys), also opened itself up to public use.
• Conformal, a company focused on building open-source software for privacy and security, revealed their latest project: btcd, an alternative Bitcoin implementation written in the Google-developed programming language Go.
• libbitcoin, another alternative Bitcoin implementation in C++ targeting asynchronicity and modularity, released a tutorial.

Financial commerce, the exchange of money and currency, is indistinguishable from speech. Therefore, it deserves the exact same respect and “freedom of speech” protections afforded to the utterances of the street-corner preacher, the independent journalist, the newspaper publisher, the internet blogger and so on. Financial commerce is speech, and should be free.

Despite all of the “freedom of speech” and “free speech” talk we hear, speech today is anything but free. This ranges from what you can and can’t say in public or in print or on television, to “free speech protest zones”, to speech codes on university campuses and all the way up to the towering insanity of “illegal numbers“.

Today I see the tyrant’s sword unsheathed and poised at the throats of everyone, everywhere who dares to do anything contrary to the increasingly oppressive financial status quo. Bitcoin exchanges are being forced out of business, and criminal charges are likely coming. The United States’ FinCEN is writing law — administratively! — restricting innovative, resilient, peer-to-peer virtual currencies — globally! Somebody telephoned someone at MasterCard, and the next day WikiLeaks could no longer take credit card donations. e-gold was crushed out of existence, along with the Liberty Dollar. The SWIFT payments network was strong-armed into a financial blockade of Iran. And, quite recently, the Liberty Reserve payments system was put out of business and the founders arrested on the criminal charge of money laundering, a “financial thoughtcrime” if there ever was one.

Almost everywhere, the laws and regulations governing financial businesses are so voluminous and so burdensome that only the already super-rich can hope to compete legally in the so-called “free market”. Americans with less than a million dollars’ net worth (not including primary residence) are effectively banned from investing in anything other than “safe” US dollar-denominated securities. Financial privacy has almost completely disappeared, except for the very wealthiest. Cash transactions larger than $10,000, €5,000, €2,500, €1,500, €1,000 and now even €500 are being or have been outlawed in some places. And on and on.

The suppression of financial speech is being used as a weapon of war against the people of this planet just as surely as drone strikes, pervasive surveillance and land mines are and have been.

The time has come to begin separating money and currency from state, irrevocably and irretrievably. Free people and a free world deserve currencies that they control directly.

It seems we are far from perfecting and embodying the free speech ideal. Are we going to continue working to improve ourselves and our societies toward that ideal, or shall we just abandon it altogether to avoid complete hypocrisy?

What do you think? Is financial commerce speech? If so, how? If not, why not?

[This day, 30 May 2013, in Bratislava, Slovakia, I, Michael Jude Gogulski, do hereby dedicate this text to the public domain, to the explicit and unlimited detriment of all legal rights (authorial, moral, economic and otherwise) arising or adhering to myself, my successors and my heirs, globally and without limitation, in perpetuity. I pledge that I shall never pursue violence, legal or otherwise, against anyone using this text or any part of it in any way they see fit. I encourage and welcome redistribution of this text in any form or fashion and at any time.]

MtGox has suffered considerably over the past two months. All within the relatively short period of April and May 2013, we have seen the following:

• During the Bitcoin crash of April 10-12, MtGox saw its trading engine lag increase to over 70 minutes, and for over ten hours the exchange was almost entirely inaccessible. MtGox’s response was mixed; at first, they committed what may go down as one of the major public relations disasters in Bitcoin history, telling angry customers that they were “victims of our own success!” and gloating about their high trade volume. Then, however, the exchange did take significant steps to improve its transparency.
• On April 17, MtGox took away the ability to place orders without having the underlying funds already in one’s account. Such a feature may seem counterproductive, but it is very useful for traders who, for example, wish to place a buy order at $120 and a sell order at $140 in order to profit on, and simultaneously help relieve, price volatility. It was also essentially the only advantage that MtGox’s actual trading system had over its major competitors.
• On May 2, MtGox’s partner Coinlab sued them for failing to follow through on their agreement to transfer control over US operations to Coinlab and (whether or not the agreement actually requires this next part is not entirely clear) cease operations in the US themselves. The amount claimed: $75 million.
• On May 16, MtGox lost their Dwolla account due to a failure to take even the simple step of registering as a money services business with FINCEN. It was also uncovered that the company may have knowingly made false statements on their bank application in 2011; most believe that it is as a result of this that MtGox CEO Mark Karpeles was forced to cancel his trip to the Bitcoin Conference in San Jose.
• On May 25, MtGox lost a second deposit and withdrawal partner, Liberty Reserve.
• On May 27, MtGox lost a third partner, OKPay.

Tough luck even for such a juggernaut as MtGox. However, even at the middle of the month it appeared as though MtGox was breezing through its difficulties; by May 16, its share of the past 30 days’ volume nevertheless remained at over 75%. But since that day, MtGox’s fortunes have taken a darker turn.

This chart shows the trade volume of MtGox and BitStamp, now the second most popular exchange in the world:

BitStamp has grown slightly over the period, but what we can clearly see is that volume on MtGox has decreased by a large amount. A large portion of this is undoubtedly market conditions; low volume is characteristic of price stability. However, the increased difficulty of dealing with MtGox following its banking and regulatory debacles also played a part; it is the reason why the Bitcoin price on MtGox is now 2-3% higher than on BitStamp and other exchanges – it’s not that BTC is more expensive in one place than another, it’s that people no longer treat 1 MtGox USD as being actually necessarily worth 1 USD. This is a pretty serious loss of trust; in similar cases in history involving governments and banks, once the ball starts rolling in such a crisis of confidence it is very difficult to get it to stop.

Another, more telling, way of looking at the trend is through the graph of BitStamp trade as a percentage of that on MtGox:

On some days, BitStamp is now as much as half as large as its competitor. Many people have been talking about replacing MtGox since 2011, and for a time there was some hope in 2012, but now, taking together the fact of MtGox’s recent misfortunes and the evidence of Bitcoin’s rapid growth in the past two weeks, it appears that it’s actually happening. The long stalemate of late 2012-2013, where BitStamp, BTC-E and to a lesser extent BTCChina all had about 10% of MtGox’s volume for many months, is finally broken, with BitStamp surging clearly ahead.

From here, things can happen quickly. Much of MtGox’s volume is through a small number of what are essentially resellers; an entire one third, for example, belongs to BitInstant. These companies can switch to using BitStamp, or Tradehill, at a moment’s notice – BitInstant is even close to having the needed money transmitter licenses to become a Bitcoin exchange in their own right (although they may not want to do that for technical reasons). Also, users follow liquidity, and liquidity follows users, creating a vicious (or virtuous) cycle that may reverse the current MtGox near-monopoly far faster than a monopoly can fall almost anywhere else; for many users, switching costs between the various exchanges are essentially zero. My warning to BitStamp: you may now be on the cusp of not just growing to be an equal competitor to MtGox, but taking over first place outright. Get better servers, get better lawyers, and double or triple your support and compliance staff now; do not follow the mistakes of Coinbase and MtGox and let trading outages or month-long verification queues tarnish your path to greatness.

Billing itself as an easy to use, user generated, searchable database of businesses that accept Bitcoin, The Bitcoin Search Engine (TBSE) has launched bitcoinsearchengine.com.

Featuring a crisp site design, and the tag line “Get Listed, Get Indexed, Get Found,” the new service encourages users to list Bitcoin friendly businesses for free after creating an account. Sign up is simple, and includes a refreshingly legible CAPTCHA. The website also provides a discussion forum with sections for The Bitcoin Forum, Bitcoin Ideas, Development & Technical Discussion,  and Project Development.

The database is searchable by keyword (although this feature appears to be only available in the mobile version at this time), as well as country, category and region. While sparse on listings as of this writing, (searches for “food,” “cupcakes,” “alpaca,” and “socks” returned no results)  the service appears to be intuitively designed for ease of use. Like other Bitcoin service listings, The Bitcoin Search Engine appears to be waiting for user generated data to catch on, while distinguishing itself for style and presentation. TBSE has indicated plans to implement a Bitcoin based auction site as well as a rewards system for merchants, taking advantage of its affiliation with the “Billing and Rewards solution” software company CRM New Zealand.

A “Navigate to” menu next to the search box gives a handy list of options, including “New Listings,” and “What’s Popular,” which gives the user a convenient way to access the latest (and the greatest) directory listings. Also in the menu is “Navigate the Directory” which contains an exhaustive list of countries and the number of businesses listed in each country. When a country link is opened, the user is provided with a list of business categories,  again showing the number of businesses in each category. Under categories are specific regions within the country, and finally the businesses in that region.

What is most impressive about this new search engine is the variety of ways that a searcher can find information. From simple keywords, to drop-down menus offering an increasing level of specificity by country, category and region, the “Navigate Database” feature mentioned above (which will appeal to fans of the list format), to filtering by what’s hot, and the option to choose your “Favorite Links,” TBSE provides people with a wide range of search style preferences a way to access the data they want according to how they process information.

As Bitcoin matures and a wider range of talented groups and individuals become involved, more Bitcoin-specific services and tools will become polished and user friendly as is seen in this example.

The currency trading and transfer system WebMoney announced earlier this month that it is adding bitcoin to its ecosystem. It joins a stable of currencies that includes the Russian and Belorussian Rubles, the Euro, and Vietnamese Dong, as well as gold certificates.

By virtue of the currencies it includes, WebMoney’s users are primarily located in Europe and Asia.  Customers use what are termed “purses” to hold each specific currency. Each currency has its own WebMoney-specific moniker based on a combination of the currency, and what payment method is used. WMR is refers to a bearers check in Russian Rubles, WMU for bank account claims in Ukranian Hryvnia, and now WMX for bitcoin.

Retailers and service providers, both online and offline, use WebMoney as a payment processor,  with comparisons drawn to PayPal in the USA. One distinction, however,  is that WebMoney does not provide a chargeback service, making it simpler to accept the notoriously chargeback-allergic Bitcoin into its fold. WebMoney’s services are used by mobile phone companies, internet bookstores, and internet service providers, among others.

WebMoney utilizes different “guarantors” to underwrite its transactions into each currency.  The underwriters are responsible for the deposit and withdrawal of funds for the transfer system. Shell companies are often used for liability purposes (Amstar Holdings Limited, Ukrainian Guarantee Agency, LLC, etc), but the list of underwriters does include the Vietnamese bank VietAbank.

The underwriter for bitcoin in the WebMoney system is the British Virgin Islands based INDX Transactions Ltd, whose director is listed as Marea Jean O’Toole. O’Toole was included in a November 2012 Guardian piece detailing a joint Guardian/ International Consortium of Investigative Journalists(ICIJ) investigation of “nominee” offshore banking directors. The article shows O’Toole as being based in Indian Ocean island nation of Mauritius while heading 37 companies in the British Virgin Islands, 152 in the UK, 10 in Ireland,  and 3 in New Zealand for a total of 202, with the caveat that there are likely more records that their investigation did not uncover.

The Guardian/ICIJ investigation indicated that while the practice of using paying an individual to register as head of a company to protect the privacy of it’s owners is not illegal under UK law, its overuse can be a problem.  It was discovered that 28 individuals, of which O’Toole is one, are connected to more than 21,500 companies worldwide.  The most prolific name on the list, James Grassick, has 4,196 companies attached to his name, the bulk of which are registered in Ireland.

The high numbers displayed in the report may show not only the scale of this phenomenon, but could also be indicative of the reaction by some businesses to both comply with complex regulation while at the same time mitigating some of the intent behind that regulation.

While this raises more questions about the existing financial system and WebMoney than it does about bitcoin, it does show that bitcoin is being integrated into an already well established financial realm.  It also raises curiosity over exactly who is underwriting WebMoney’s WMX bitcoin transactions.

One year and two months after heralding “the ultimate integration of bitcoin” into their system, the ecommerce company OKPAY has announced that it is suspending its “complete Bitcoin integration.” In a statement on okpay.com Monday, OKPAY told its users; “Dear customers, we are currently suspending bitcoin processing” with the headline “Bitcoin processing temporarily suspended.” While no longer listing bitcoin as a payment option for individual users, a statement from the bitcoin exchange service Mt. Gox indicated that OKPAY may be allowing some of its larger customers (including Mt. Gox) time to phase out its bitcoin related service.

Another major bitcoin exchange using OKPAY, BTC-e, had users noting that they were no longer able to make deposits into the exchange using OKPAY’s service beginning the second week of May. BTC-e announced on 11 May that OKPAY deposits would be restored “next week.”  There has been no indication since then that the issued has been resolved, or as to whether the cause of the problem originated from the exchange or the payment service.

Although OKPAY themselves provided no rationale for their decision in their most recently released announcement, a cached version of a previous announcement on their website says that they were temporarily ending their bitcoin related services “due to the exchange rate instability and current market situation.”  It went on to say “We monitor the situation on the market and as soon as it will become possible to resume processing – we will certainly do so.” Dated 12 April, the timing of this earlier announcement seems to indicate that the company was having ongoing problems adding bitcoin alongside its other payment methods. According to the cache, the announcement was taken down sometime after 20 May.

OKPAY’s trust in the viability of bitcoin in their system may have been shaken after an OKPAY user reported on bitcointalk.org that they had successfully double-spent over 211 BTC to OKPAY and a seperate address controlled by the user during the block chain fork of 12 March 2013. The same user also reported that an approximately 65 BTC he had sent separately to OKPAY was not successfully credited to the approriate account. Somewhat of a standoff ensued, but was resolved with OKPAY refunding the 65 BTC only after the customer returned the double-spent 211 BTC. OKPAY support staff confirmed the situation on a bitcointalk.org forum thread started by the double-spender.

With their latest announcement leaving  no indication as to if or when service will be restored, bitcoiners are left wondering whether the stoppage is a temporary measure to provide time for OKPAY to implement solutions to problems that plague the interaction between bitcoin and existing financial networks, or whether the company has decided that the effort required to use bitcoin is beyond their willingness or ability to integrate it into their system.

To meet a growing interest in the decentralized cryptocurrency, Bitcoin Magazine will team with Mediabistro as a media partner for this July’s upcoming Inside Bitcoins Conference in the heart of Manhattan.  With an exhibition, conference sessions and a free Bitcoin wallet with .01 BTC for all attendees, the Inside Bitcoins Conference will attract attendees currently involved in the currency and many from the tri-state area who are interested in learning more.

This first-ever Inside Bitcoins Conference will open in New York on July 30. The conference will explore key issues including the future of virtual currency, FinTech business trends, investment strategies and opportunities, bitcoins, cryptocurrency, freedom of speech, and more. Attendees will be able to pay in bitcoins and will receive a bitcoin paper wallet with a 0.01 bitcoin.

Charlie Shrem, Vice Chairman, Bitcoinfoundation.org and Chief Executive Officer of BITINSTANT, will deliver the keynote presentation entitled “Bitcoin and The Future of Currency.” Shrem will discuss how he runs one of the largest and most well known alternative payment companies.

Additional conference speakers include Anthony Gallippi, Co-Founder & CEO of BitPay, Trevor Timm, Co-Founder and Executive Director of Freedom of the Press Foundation, Jaron Lukasiewicz, CEO of Coinsetter, Marc Hochstein, Executive Editor of American Banker, and Alan Safahi, Founder and CEO of ZipZap, Inc. View the full speaker list.

The program is designed to provide attendees with an overview of where the virtual currency industry is today and what business opportunities are on the horizon. The event’s networking reception also gives attendees an opportunity to meet with like-minded peers, entrepreneurs, and investors and add these valuable contacts to their networks.

PERK: Bitcoin Magazine readers will receive 15% off conference passes with the code: MAG15. For the best rates, register before May 30.

If you are interest in learning more about Bitcoin and live on the east coast or would like to take a trip to the Big Apple, Bitcoin Magazine encourages you check out our promotional rate.  For those who have family and friends who are looking to learn more, this is an opportunity for you to open their eyes to the multifaceted nature of Bitcoin as a vehicle for free speech, as an asset to businesses, as a dream come true for many venture capitalists, and as a wise investment.  To learn more about the conference, visit the Inside Bitcoins Conference’s website.

Over the past day or so, an ongoing arms race between the popular Bitcoin forum Bitcointalk and EasyList, by far the most popular filter list for the ad blocking extension Adblock Plus, appears to have reached a climax. In the recent past, Bitcointalk ads have generally slipped through ad blocking filters because they were relatively unobtrusive, appearing as small blobs of text in between the first post and the rest of a forum thread. On May 20, however, a Bitcointalk member posted that Adblock Plus was now blocking the ads. Within three hours, Bitcointalk operator Theymos posted the following:

Not anymore. Wink

They tried this once before with the same simple blocking method. I have a bunch of obfuscation techniques in mind if they try anything more fancy. It’s much more difficult for them to block the forum’s ads because they’re 100% inline and not images.

Over the next few days, it appears that the EasyList maintainers managed to break through Theymos’ obfuscation multiple times, and each time Theymos found a new way to circumvent their strategies. On May 25, Theymos posted a longer update saying:

Let’s see ’em block this. There’s now a random number of invisible “posts” before and after the ad, and they’re all (I think) indistinguishable from real posts if you’re limited to just CSS selectors. Hopefully the filter maintainers aren’t careless or they’ll end up blocking random posts.

At this point, however, Theymos proved to be very wrong. Theymos made a post on May 26, entitled “Adblock Plus censoring posts”, saying:

The Adblock Plus EasyList maintainers couldn’t block the forum’s ads, so they just blocked the links in the ads everywhere on the forum. So that’s why you might see posts censored like this:

At Private Internet Access, we provide multi-gigabit tier-1 access points to our private global VPN (virtual private network).

Why VPN?
Please visit our website, , at .

We look forward to providing you the highest quality .

There’s nothing I can change in the forum’s HTML to stop this. This isn’t a side-effect of my anti-ABP code. If you don’t want posts censored, you need to disable ABP (or just these filters) on bitcointalk.org. You can complain about it here.

The incident is interesting because it poignantly, and hilariously, shows at just how high a level of abstraction modern commercial cyber-warfare can take place. Here, the battlefield is forum readers’ eyes, the munitions are lines of Javascript code inserted into files are ultimately downloaded and run on users’ browsers, and the civilian casualties are readers and users of the forum. In a normal war, individual battles take place in one of the countries whose government is a combatant; here, users are continuing to voluntarily use Bitcointalk and Adblock Plus, and so all of the “civilian casualties” involved are essentially citizens of both “countries” at the same time – where citizenship is defined as having a habit of asking one’s browser to ask the “country’s” web server to send their browser data representing a web page (or an ad-blocking script) via the hypertext transfer protocol.

It is important to note that Adblock Plus does have a profit motive here; the company maintains a list of “acceptable ads” that they allow to pass through their filters (although there is a setting for users to block them), and although inclusion to the list is “free for websites and small businesses” they have been known to charge for it. However, this may be the “least bad” solution the site’s owners can come up with; it allows them to continue providing a service valuable to millions of people for free, all at the cost of a slight (and even optional!) loss of neutrality. Nevertheless, website owners have good reason to dislike it, and so events like these are only going to increase in the decades to come. The economics and game theory of the internet is proving to be a field that we have only begun to explore.

Liberty Reserve, one of the more popular alternative payment processors for the USD and Euro, has been shut down and its owner, Arthur Budovsky, arrested in Spain as part of a joint money laundering investigation by police in the United States and Costa Rica. Budovsky had been arrested before in 2006, when he and Vladimir Kats were arrested for operating Gold Age, a digital currency exchanger which the US federal government deemed to be a money transmitting business, without a license. However, they received probation, and Budovsky continued to operate Liberty Reserve. This time, the underlying cause of the arrest was money laundering; “Budovsky’s businesses in Costa Rica apparently were financed by using money from child pornography websites and drug trafficking,” BehindMLM writes.

In 2011, Liberty Reserve, together with Dwolla, was one of the main methods of moving money into Bitcoin exchanges to buy bitcoins, and can be credited as being one of the chief enablers of the Bitcoin economy’s early growth at the time. The key feature that LR and Dwolla offered was the lack of chargebacks, meaning that exchanges could use these services safely without fear of a fraudulent customer buying depositing USD, buying and withdrawing bitcoins, and charging the USD back. Dwolla introduced chargebacks without warning in early 2012, suddenly costing one Bitcoin exchange, Tradehill, nearly $100,000 in chargeback fraud. As of May 2013, a lawsuit from Tradehill to recover the money is still underway, with little progress having been made. The loss of this alternative maintained Liberty Reserve’s popularity for some time, but since then it has considerably decreased in importance in the Bitcoin community. MtGox has continued to offer it as a popular deposit option up to this day, but other services, like OKPay, have grown to fill the space, and other Bitcoin exchanges have added more convenient means of buying bitcoins such as cash deposit and bank transfer.

Thus, on the whole, this may help Bitcoin more than hurt it. Many businesses that operate in a high-chargeback-fraud setting have stayed with the USD or Euro by using payment processors that attempt to be chargeback-free, but what the downfall of first Dwolla then Liberty Reserve shows is that, in general, chargeback-free on the internet is a lie; businesses only stay chargeback-free until they are either shut down outright due to the black and grey market activity that chargeback-free services also necessarily attract or a sufficiently large crisis happens that forces them to change their policies. Somehow, something eventually forces everyone’s hand. Except Bitcoin. Because Bitcoin does not depend on any government or corporation, there is no way for anyone to force the system to bend to their will, and so it will remain chargeback-free for as long as it has enough people mining it to defend against attackers. And if that does happen, alternative cryptocurrencies like Ripple will take its place, substituting in a globally distributed network of trust for mining.

BehindMLM’s article on the shutdown mentions how Liberty Reserve is being used by multi-level marketing (MLM) companies. MLM is a marketing strategy in which companies hire, usually on a very informal, “sign up here and start right away” basis, people to market their product and compensate them for not only sales that they themselves make but also a percentage of commissions earned by people they recruit. This is an industry that needs to pay usually very small amounts of money to millions of people around the world, and which is easily susceptible to chargeback fraud – one can simply sell a product to oneself ten times, get the commissions, and then charge the ten sales back. With Liberty Reserve down, they may be forced to move over to Bitcoin instead. Multi-level marketing is only one example; there are many industries that could benefit greatly from a secure chargeback-free method of money transfer like Bitcoin. Perhaps this event will convince them to finally take the plunge and switch to it.

Regulation has been a hot topic in the Bitcoin community since the FINCEN guidance in March, and in the Bitcoin conference that took place this past weekend an entire quarter of the conference was dedicated to economic and regulatory issues. The guidance evoked strong feelings of both relief and uncertainty throughout the Bitcoin community; although ordinary Bitcoin users are now almost certainly clear of regulation, a fact that has allowed the Humble Bundle and the Electronic Frontier Foundation to feel comfortable accepting the currency, Bitcoin exchanges will now likely be required to have money transmitter licenses in all 48 states to operate across the country – an extremely onerous procedure that has repeatedly stymied even businesses outside the Bitcoin space. Many figures have been thrown around as to just how much that process costs; a common understanding was that it takes millions of dollars of legal effort and surety bonds, and Jeff Berwick said in his resignation from the Robocoin Bitcoin ATM project that the main obstacle too US participation was “a $25 million “insurance bond” necessary as being deemed a “money transmitter” in the US.”

However, a deeper examination into the issue at play shows that things are not nearly so bleak. The requirements for becoming a money transmitter largely fall into two separate categories: bureaucratic legal effort and surety bonds. With surety bonds, a common requirement is that you need to be insured for 2% of the total volume that you plan to be processing over the next year. If you go over, you need to buy more surety bonds. The cost is thus less prohibitive for small businesses, although there are usually minimums; the Florida regulations specify a minimum of $50,000. In order to get insured for this amount, most insurers charge about 2%, so a money transmitter in Florida would need to pay at least $1000 per year in order to operate. Other states have similar requirements, and altogether the minimum amounts add up to about $7 million. Of course, one also needs to convince surety bond brokers to deal with Bitcoin exchanges, although some are appearing now specifically to serve the legal industry. The other onerous burden is the legal effort. “The more you spend,” Tradehill’s Ryan Singer explains, “the better lawyers you can get and the faster you get your applications.” You can spend only a medium amount of money (in business terms; for a basement startup, it is still very much prohibitive) and get the licenses in several years, or you can spend more to get them faster. Tradehill currently has two lawyers per engineer hired to work on compliance issues.

Just how far along to 48 are leading businesses? The answer from every major exchange in the US (except perhaps MtGox’s US subsidiary) is, surprisingly, quite far. BitInstant’s Alex Waters has even provided a precise figure: 30 states. BitInstant’s progress in getting these licenses is particularly impressive because, technically, they do not even need them; because the company only acts as an intermediary for other exchanges, they are actually classified as a payment processor, a category for which there is a specific legal exemption. However, BitInstant nevertheless wants to be on top of things. “We’ve been registered as an MSB [money services business, the federal license for money transmission] since 2011,” Waters explains. “We take finance and regulatory issues seriously … we’re doing things the way they should be done.”

This should qualify as another piece of highly positive news for Bitcoin. Although regulators certainly are watching Bitcoin exchanges, as the Department of Homeland Security’s recent seizure of MtGox’s Dwolla account clearly shows, no other major Bitcoin business has yet been caught in government crosshairs. Furthermore, the MtGox seizure was justified solely by federal law, which MtGox was not compliant with but which every other major Bitcoin exchange has been compliant with for a long time – BitInstant, as mentioned above, has been a licensed money services business since 2011. In March, there may have been a public perception that exchanges were suddenly scrambling to meet the new requirements. In reality, however, the exchanges have been working on acquiring these licenses since long before the guidance was out, and the day may not be too far away when at least these legal worries are behind us.

If anyone had any doubts that Bitcoin and cryptocurrencies would ever amount to anything in this world, after the events at Bitcoin 2013 it is safe to say that most of these doubts are now gone. Roughly a thousand people were present, dozens of booths featured businesses with products of such high quality that they may be indistinguishable with something from a mainstream corporation, and the organization of the conference itself was nearly flawless. Presentations and panel discussions featured dozens of speakers who are experts in matters of technology, business and regulation, and the topics were equally interesting; among the discussions were subjects involving cryptocurrency-based stocks, using Bitcoin for digital charity, two implementations of decentralized mixers, regulatory and security challenges and creating whole new nations. For every conceivable application to which cryptocurrencies can be put, there are at least two projects implementing it, and for every problem with Bitcoin that still remains to be solved there are at least three projects working hard on a solution. Altogether, the conference has been almost universally applauded as a huge success. As Sean’s Outpost founder Jason King described it after the fact, the halls of Bitcoin 2013 were filled with a “hopeful energy” and excitement that he had not seen since the first conference of the World Wide Web itself.

Independently filmed videos from the conference are available on Youtube already, and the Bitcoin Foundation’s own videos will soon be available on their website. Summaries of key announcements can be found scattered throughout the internet (some content has been posted and more will be added on our own website). Here are some of the key takeaways that I personally found important:

Bitcoin is being taken seriously

One observation at the conference that could be made right from the first day is just how fully the American liberty movement has embraced Bitcoin. Free State Project-associated charities and businesses are responsible for two of the conference’s booths, and Free Talk Live, a popular radio show, took the opportunity to broadcast directly from the conference’s center stage for three days in a row. At the nonprofit panel on Sunday, Fr33Aid’s Teresa Warmke described how last month her organization had abandoned its application for non-profit status with the IRS to become an essentially Bitcoin-only organization. New Hampshire may well become the Bitcoin Kiez, or even the Israel, of the Americas with its rapid, and rabid, acceptance of the currency.

Sean’s Outpost founder Jason King has now started the Bitcoin Homeless Outreach Center, rapidly expanding its operations using the currency and its associated community as an epicenter. The Electronic Frontier Foundation had agreed to accept Bitcoin days before the conference started, and another panel discussion at the conference featured the EFF’s Rainey Reitman, among others, discussing the topic of regulation and financial privacy. Business attention was also very clearly present. Since the start of the month, three major Bitcoin businesses had received a total of nearly $8 million in investment: Coinbase got $5 million from Y Combinator, BitPay $2 million from Peter Thiel’s Founders Fund, and BitInstant $1.5 million from the Winklevoss twins (who were, incidentally, present on the first day of the conference). At the conference itself, the Bitcoin investment group BitAngels had its first meeting. Altogether, the message is clear: Bitcoin is not a toy, it is a rapidly maturing, $1.3 billion economy that a rapidly increasing number of people are taking the plunge to base their lives around.

Bitcoin is here to stay

Of course, the conference did include a number of discussions on some of the weaknesses of Bitcoin that still remain. Ease of use, security and regulation were three major topics that analysts inside and outside of Bitcoin cite as weaknesses, and with good reason. However, for every problem that Bitcoin panelists in the presentation rooms were discussing, in the exhibition room there were three businesses working hard to solve it. Buying and selling bitcoins too hard? Coinbase’s exchange and Lamassu and RoboCoin’s Bitcoin ATMs are rapidly solving the problem. Bitcoind not user-friendly enough for enterprise use? Bitsofproof is working on that. Security? Butterfly Labs’ BitSafe, Slush’s Trezor and BTChip are all present, and the latter was even handing out free samples. Regulation? BitInstant, Coinbase and Tradehill are all well on their way to full compliance.

The alternate chains, and especially Ripple, also make clear that even if Bitcoin itself, for whatever reason, happens to falter, other cryptocurrencies will quickly take its place. The value of the Ripple currency’s total money supply is already higher than that of Bitcoin, and currencies like Litecoin are seeing their value grow even more rapidly than Bitcoin. Bitcoin alone may have fallen to half of its peak since the crash, but a balanced portfolio of Bitcoin, Litecoin and XRP is now stronger than ever.

Bitcoin is already introducing alternate centers of power into this world

Especially in the United States, from watching mainstream television and media one gets a very particular stereotype of how a wealthy bsiness owner is supposed to look: a 40+ year old white male, with a large body over 180cm tall, and always wearing a suit. For those who have not been steeped in Silicon Valley culture, at first Bitcoin 2013 was even slightly unsettling in terms of how quickly and utterly that stereotype was dispelled. Even the most prominent business owners were surprisingly average in weight and height, more likely under 25 than over, and equipped with a T-shirt as often as anything else.

This observation is mote than a minor detail; more than anything else, it clearly shows how Bitcoin is enabling individuals and businesses to succeed that would never make it elsewhere. In the “real world”, studies repeatedly show that factors like race and height can be even more important than any measure of the objective quality of a candidate in predicting success and failure. In the world of Bitcoin, wealth is generated from behind a computer screen, and many (although certainly not all) of these biases simply disappear. As the saying goes, on the internet nobody knows you’re a dog.

One of the reasons why wealth in the world in general is so centralized is that producing it requires not just talents and ideas, but also contacts – specifically, contact with the organizations that already have it. Being able to offer the lowest prices to one’s customers requires knowing the right people and having the skills to negotiate the best deals, and among those businesses that seek to interface between Bitcoin and the world outside this remains painfully clear. Inside of Bitcoin, at least in this early phase of development, product is all that matters, allowing people who were nobodies before to suddenly enter the limelight through talent, hard work or even simple random luck.

What’s more, this new wealth is physically, and socially, decentralized; although many firms now are located in Silicon Valley, many more are from regions as diverse as Florida, New Hampshire, France, Israel and China, and as these businesses grow local communities around the world will benefit. This may well prove to be a one-off effect, but even still it can be appreciated as part of a larger process of positive disruption through technological change. And in that regard it is very significant; the only other technology that has had a similar effect in the past thirty years is perhaps the internet itself.

It’s more than just Bitcoin

The topics at the conference were not just about Bitcoin itself. Perhaps the most commonly discussed alternate application of the underlying idea of cryptographically secured blockchains was that of smart property and crypto-stocks. There are now actually three distinct ways to implement both of these ideas in the works: OpenTransactions, Ripple and colored coins. OpenTransactions relies on centralized servers, although cheating on the part of servers is detectable, but it offers full anonymity through a construction known as blind signatures. Ripple is an alternative currency system that offers the ability for anyone to issue their own currencies, with features like a decentralized exchange built in. The main targeted use case is currencies representing fiat currencies like the US dollar, but making a currency to act as a stock or even to represent a piece of property is entirely possible. Colored coins provide a way to accomplish the same thing from inside the Bitcoin blockchain itself.

The most radical idea of all, however, has nothing to do with Bitcoin itself – at least not directly. The conference saw two distinct projects seeking to accomplish what can only be described doing for the offline and the political what Bitcoin did to the financial: creating entirely new, politically independent, city-states. The first of these, Blueseed, will work by maintaining a ship close to California just outside the international waters line, and will be particularly targeted to solving the difficulties in US immigration. Both employees and entrepreneurs interested in working in Silicon Valley face an uphill battle getting the visa to do so legally, and the process often takes years. By working on Blueseed, it will become very easy to circumvent the problem, and Blueseed residents will still be able to frequently visit Silicon Valley itself through a half-hour ferry – on a personal or business visa, which is much easier to obtain. The zone will also be particularly attractive to Bitcoin businesses seeking to remain easily accessible to US customers but avoid onerous US money transmitter regulation. The second, yet unnamed, will be a full-scale, Manhattan-sized Hong Kong-like free zone in a yet undisclosed country in the Caribbean, and the promise to the Bitcoin community that the project’s ambassador Edan Yago has brought is that the zone’s legal system will be specifically designed for cryptocurrencies right from the start. Exactly what that entails, well, watch the presentations to find out.

The overarching theme of the conference is this: 2013 is the year of Bitcoin’s coming of age. In 2012, we were still, as Reuters put it, “the city traders’ anarchic new toy”. Now, we have highly skilled and well-equipped teams of not just programmers, but also businessmen, investors and lawyers, ready to take on the challenges of finally pushing out Bitcoin to large-scale, real-world use. Bitcoin is increasingly carving out a role not just as a project in itself, but as part of a larger movement for technological and financial freedom and privacy around the world. Twenty years ago, ideas like those discussed at the conference were the topic of science fiction; today, we are already living them. Welcome to the future.

Yesterday was the first day of Bitcoin 2013, the first major Bitcoin conference of the year. There were no presentations yet, other than an opening address including Cameron and Tyler Winklevoss, but right from the moment businesses started setting up their booths around noon the conference room was teeming with life. Over a dozen booths were present, with nearly every major business – BitInstant, BitPay, BitcoinStore and more, having some representation.

For long-time Bitcoin users, events like this are particularly emotional; here, for the first time, we are able to see fellow Bitcoin users, whom we have loved, worked with and had heated arguments with over forums or skype/IRC chat for many months or years as something more than just a username. Entire companies, existing only “on the cloud” before this day, are finally reunited – I myself had this experience finally meeting Tony Gallippi and Elizabeth Ploshay.

Officially, the main attraction of today was the exhibitions. Many established businesses in the Bitcoin community were present, but there were anso a number of companies that have until now barely had any public attention at all. Here is a listing of some – although certainly not all – of the interesting ones.

• Mycelium – the Bitcoin Card has been around as an idea for a long time; the Internet Archive shows the site existing since as long as March 2012. The basic premise is that the Bitcoin Card will be a standard credit card-sized (including the thickness) Bitcoin hardware wallet, including some mesh networking features to help facilitate in-person Bitcoin payments. Many assumed that the company had simply faded away like so many other idealistic software efforts, but it turns out that it is still going strong – in fact, it is Bitcoin 2013’s premiere sponsor. We’ll have a more in-depth look at what this company really has in store in an upcoming issue of the magazine.
• Bitcoin Armory – the Bitcoin Armory project had two representatives showing its newest features: printer-safe paper backups (you need to write down a small portion of the code by hand so that a corrupted printer could not steal your money) and M-of-N paper backups – just in time after I wrote an article suggesting that people use such a feature.
• Free State Project – one thing that the first day of the conference has made very clear is that the US liberty movement is endorsing Bitcoin like never before. Free Talk Live, one of the movement’s most popular radio shows, broadcast its latest episode live from the conference. Bitcoin Not Bombs, Fr33 Aid and Lamassu’s Bitcoin ATM, all affiliated with the project, were present, and although Open Garden is not affiliated with the FSP directly its representative was seen with many stickers supporting the movement on the back of her laptop.
• BitPay – the company’s CEO Tony Gallippi has become a celebrity in the Bitcoin world for the work that the company has been doing getting Bitcoin merchants signed up (at the conference, Gallippi announced that they now have 7000, and are gaining 100 per day), and especially so after the recent $2 million investment round by Peter Thiel. BitPay’s main competitors, Coinbase and BIPS, were also present.
• Lamassu Bitcoin ATM – this is one of the two Bitcoin ATM projects that we have all been waiting for, run by Josh and Zach Harvey. This one only goes in one direction; you feed in a USD bill, make your phone’s wallet application show the QR code of your receiving address, put the phone against the scanner, click “confirm”, and voilà. The system did not always work; if the machine’s Bitcoin balance was supplied in a single transaction, the first purchase made will work, but the second may not if it occurs too soon afterwards. The reason has to do with Bitcoin’s concept of “change”; one limitation of Bitcoin is that transaction outputs must be spent all at once; if you received 20 BTC but want to send 5 BTC to someone else, you need to send the entire 20 BTC, but simply have a 15 BTC output redirecting back to yourself. However, while the 15 BTC is not yet confirmed, some Bitcoin wallets do not allow you to spend it, so your Bitcoin balance would temporarily reduce to zero. The problem is an inconvenience, but it is not critical; the obvious quick fix is to simply feed the machine with many transactions of 0.1 BTC each rather than a single large transaction.
• Hardware Wallets – there are actually two hardware wallet companies at Bitcoin 2013: Butterfly Labs’ BitSafe snd BTChip. The BitSafe is similar in form to the Trezor that Slush’s Marek Palatinus and Pavol Rusnak have been developing for nearly a year now, offering essentially the same features (although BitSafe does promise a lower price point). BTChip is targeting the same use cases, but is cheaper and more basic in its features. Interestingly, both companies are working hard on supporting online wallets like blockchain.info, even though doing so is inherently a harder task since browser Javascript cannot directly talk to USB ports. The solution both companies are using is creating a downloadable program to run in the background as an intermediary – Javascript would talk to it via HTTP, and it would use various drivers to communicate with the hardware.

Today and tomorrow, the focus of the event will be presentations and panel discussions. Everyone who is at the conference can feel free to talk to me personally or buy issues 7,8 or 9 of the magazine at Bitcoin Magazine’s corner of the BitPay booth. Issue 10 will be going to print very soon as well. Continue to enjoy the conference!

The world’s largest Bitcoin exchange, MtGox, had its account with Dwolla closed down by the order of the Department of Homeland Security. The fact was first discovered on Monday when OKCupid cofounder Chris Coyne posted a screenshot of an email from Dwolla saying that his deposit to MtGox could not be processed because of “recent court orders by the Department of Homeland Security and US District Court for the District of Maryland seizing the account of Mutum Sigillum LLC (Mt. Gox)” The next day, DHS officials provided the warrant used to shut down the account, exposing the reason why the shutdown was made: MtGox was operating an “unlicensed money transmitting business.”

Government attention on Bitcoin exchanges has picked up after the US government’s financial regulator FINCEN released a guidance report expressing its position on digital currencies: in summary, people and organizations that use Bitcoin to buy and sell goods and services are in the clear, but Bitcoin exchanges are regulated as money transmitters. However, the underlying law is more complex than this. Money transmitters are regulated under federal law (specifically 31 USC 5330), which requires them to get a money services business (MSB) license, as well as additional state laws in 48 states, which require a separate money transmitter (MT) license in each state. The state-level regulations are much more onerous; it is estimated that getting all 48 licenses requires millions of dollars in surety bonds. The FINCEN guidance was federal, and so directly affects the state of federal law only; for state governments it is merely a suggestion, and so it is up to individual states to determine exactly how their local money transmitter laws will apply to Bitcoin exchanges. But there is also another federal law prohibiting a money transmitting business from operating without a license, 18 USC 1960, which piggybacks off of both 31 USC 5330 and state law for its definition of money transmission. 18 USD 1960 b1 reads:

the term “unlicensed money transmitting business” means a money transmitting business which affects interstate or foreign commerce in any manner or degree and—
(A) is operated without an appropriate money transmitting license in a State where such operation is punishable as a misdemeanor or a felony under State law …
(B) fails to comply with the money transmitting business registration requirements under section 5330 of title 31, United States Code …

However, it appears that in this case state law did not enter the picture at all. “According to FinCEN records on May 6, 2013,” the warrant reads, “neither Mt. Gox nor the subsidiary, Mutum Sigillum LLC, is registered as a Money Service Business.” Thus, it is under federal law that this seizure warrant is making its case. The warrant also states:

As part of the account opening process, Wells Fargo required Karpeles and Mutum Sigillum LLC to complete a “Money Services Business (MSB) Accounts, Identification of an MSB Customer” form. That document was completed on May 20, 2011 and identified Mutum Sigillum LLC as a business not engaged in money services. The application asks several questions; to include, “Do you deal in or exchange currency for your customer?” and “Does your business accept funds from customers and send the funds based on customers’ instructions (Money Transmitter)?” Karpeles answered these questions “no,” indicating that Mutum Sigillum LLC does not deal in or exchange money, and that it does not send funds based on customer instructions.

The document then proceeds to argue that MtGox’s activity of processing Dwolla withdrawals constitutes “accept[ing] funds from customers and send the funds based on customers’ instructions”, and so MtGox (or rather its subsidiary) is in fact a money transmitter,. At this point, we do not know what Karpeles was thinking when he put those answers on the form; perhaps this was simply an attempt to fly “under the radar”, or perhaps MtGox will have a legal argument up their sleeve as to why the warrant’s claim is incorrect.

The fact that state law did not enter the picture is a very positive sign; other Bitcoin exchanges and intermediaries in the United States, such as Coinbase, Tradehill/Prime and BitInstant, all have MSB licenses, and so are not likely to be immediately targeted by the federal government after this. Until these exchanges come up with the required millions of dollars in capital to get money transmitter licenses in 48 states, or the exact situation of state money transmitter laws with regard to Bitcoin is clarified, no one is entirely free and clear, but with a combination of luck, prudence and willingness to proceed toward resolving the remaining legal issues as quickly as possible the major exchanges may still avoid regulatory trouble entirely. If state regulators do start coming down hard on Bitcoin exchanges very soon, the other option is to do what Justin Oh’s Bitcoin ATM is considering doing and what Bitcoin Central did already: partnering with established institutions that already have the required licenses.

As for MtGox itself, this incident means the loss of one of MtGox’s major funding methods, making the exchange more difficult to buy and sell bitcoins with. BitStamp and BTC-E, the second and third largest exchanges, both do not work with Dwolla, so this removes one of MtGox’s advantages over these platforms. This is in fact the fourth item in a series of bad news for the exchange in the past month; the mishaps during the price crash of April 10-12, MtGox’s recent removal of the ability to place orders without immediately having the funds to fill them on April 17 and the Coinlab lawsuit on May 2 have all struck the exchange’s usefulness and reputation. However, altogether these misfortunes appear to be only further proving MtGox’s resilience; the exchange has been responsible for about 75% of all exchange volume over the past thirty days. Only time will tell whether MtGox will be able to recover its legal situation in the United States (perhaps by resolving its differences with Coinlab and finally executing their customer transfer agreement) and bring Dwolla transfers back up.

Wallet security has always been a primary concern in the Bitcoin development community. Although no other payment system in existence grants you the same level of freedom and control over your money that Bitcoin does, at the same time it can also be its greatest weakness. If you lose your wallet, or the password to your wallet, there is (usually) no one who can help you recover it. If someone else gains access to your wallet (and your password) and steals everything, there is no way to reverse the transaction. This has all been known for the past four years, and great progress in security has been made, but many people do not realize that we still actually have a long way to go. Even if you take all of the standard security precautions, as the examples I am about to give will show, often a single mistake can undo all of your hard work and set you back tens of thousands of dollars. What this article will do is explore some of the more worrying examples of recent (and not-so-recent) losses and thefts, and what users and developers can do to protect themselves.

The Allinvain Theft

Because of the sheer amount of media attention that it received, arguably no list of Bitcoin-related security incidents is complete without this one. In June 2011, the Bitcointalk member “allinvain” lost 25,000 BTC (worth $500,000 at the time) after an unknown intruder somehow gained direct access to his computer. The attacker was able to access allinvain’s wallet.dat file, and quickly empty out the wallet – either by sending a transaction from allinvain’s computer itself, or by simply uploading the wallet.dat file and emptying it on his own machine. The solution to this is obvious: wallet encryption. In allinvain’s time, this was not so simple; one would need to use a generic encryption program (eg. ccrypt) to encrypt the wallet, and then every time one wanted to spend one’s funds one would need to decrypt the wallet, use it, and then encrypt it again. Today, the process is much easier; wallet encryption has been built in to BitcoinQt since version 0.4 in September 2011, and Electrum, Armory and MultiBit all have a similar feature as well.

The Stefan Thomas Loss

This next incident is also fairly ancient in Bitcoin terms, taking place in July 2011, illustrates how wallet security can also fail in the other direction. Bitcoin developer Stefan Thomas had three backups of his wallet – an encrypted USB stick, a Dropbox account and a Virtualbox virtual machine. However, he managed to erase two of them and forget the password to the third, forever losing access to 7,000 BTC (worth $125,000 at the time). Thomas’s reaction: “[I’m] pretty dedicated to creating better clients since then.”

The Evil Java Application

This event, and everything below in this list, is much more recent, taking place in 2013. As the victim himself describes it, “last night around 9PM PDT, I clicked a link to go to CoinChat[.]freetzi[.]com – and I was prompted to run java. I did (thinking this was a legitimate chatoom), and nothing happened. I closed the window and thought nothing of it. I opened my bitcoin-qt wallet approx 14 minutes later, and saw a transaction that I did NOT approve go to wallet 1Es3QVvKN1qA2p6me7jLCVMZpQXVXWPNTC for almost my entire wallet (2.07 BTC)” [~$300 at the time]. This time, the wallet was encrypted, but the attacker was much more clever. The Java application that the victim had opened had also asked for additional permissions, which the victim instinctively granted, unwittingly giving the malicious program the ability to read all of his keystrokes. The application simply waited until he started typing in his wallet password, recorded the password, and then immediately proceeded to decrypt and empty out the wallet.

The Blockchain.info Theft

A blockchain.info user lost 160 BTC (~$20,000) to an unknown attacker. This time, user was not careless in any obvious way; he wrote: “I use the blockchain.info wallet service to manage that address. My password was a random 18 character password with punctuation, upper/lower case etc. I had two-factor authentication with Google Authenticator turned on and a second password on the account that was a random 8 characters.” Rather, the problem lay with the blockchain.info mobile application. On the desktop, blockchain.info encrypts users’ wallets twice; the entire wallet with the main password, and the private keys themselves with an optional second password as well. On the mobile however, for convenience only the second layer of encryption is used. In a stock Android setup, this is not a problem; the sandboxing mechanism ensures that one application’s storage is not accessible by any other application. This user’s phone, however, was roooted. Rooting one’s phone allows the user to use powerful applications that tinker with low-level parts of the Android ecosystem, but it comes at the price of trust: any application to which the user granted root access could have potentially read the wallet file and sent it off, leaving the attacker free to crack the relatively weak 8-character second password on some kind of GPU, FPGA or cloud-based computing cluster.

The Costly Brainwallet Mistake

A Bitcoin user stored 90 BTC (~$10,000) in a brain wallet – an address that, along with its corresponding private key, can be generated from a memorized password. Brainwallets can be a very secure way to store one’s savings, as the information needed to recover the funds only briefly touches a computer once when the address is first generated. The problem with a brainwallet, however, is spending it. Seeking to spend 2 of his 90 BTC, this user generated the private key from his password, loaded it into the MultiBit Bitcoin client, and sent a transaction. He then deleted the MultiBit wallet file (since if the private key remained stored on a computer file it would not be much of a “brain wallet” anymore). However, this proved to be a fatal mistake. MultiBit had sent the 2 BTC to its intended destination, but it also sent the other 88 BTC to a newly generated “change” address. If he had been using MultiBit normally, this would have been fine; sending change to a new address is standard practice and improves privacy. Here, however, deleting the wallet afterward deleted the private key behind the new address, causing the 88 BTC to essentially be lost forever.

The Hidden MtGox API Key

A Bitcoin user had $480 cleared out from their MtGox account even with two-factor authentication installed. It appears that an attacker had managed to somehow get into the account before the two-factor authentication was added, created an API key, and then used that API key to withdraw from the account two weeks later once the sum had been deposited. This is not a security flaw on MtGox’s part; an API (“application programming interface”) key is a password specifically intended to be used by computer programs, and the point of two-factor authentication is for the second factor (eg. a one-time password sent via text message, or a Google Authenticator application on one’s phone) to be completely separate from the computer used to access the site. Thus, API keys must necessarily bypass two-factor authentication to be useful. The one thing MtGox could do is offer to clear all API keys when two-factor authentication is added or the password is changed.

So What Can We Do?

All of these attacks have their own specific countermeasures; to avoid Bitcoin wallet thefts, turn on wallet encryption; to avoid thefts from exchange accounts, use two-factor authentication (look for a “Google Authenticator” option in your exchange account’s security settings) and make sure to check for API keys that were created without your permission; to avoid attackers trivially bypassing both, do not give untrusted applications excessive permissions, even at the cost of convenience, and to avoid loss, create more backups, and check them regularly.

But looking at how even the more responsible Bitcoin users in the above list get hacked, these events clearly show that simply telling people to be more careful is not good enough. It does not seem particularly realistic to ask the average non-technical user, or even the average technical user, to never make a mistake. Thus, what we really need in wallet security, from both users and developers, is a change in paradigm. Rather than trying to continually patch up our digital walls in an effort to make them unbreakable, what need to recognize that any particular strategy used to secure one’s funds can always potentially be circumvented by a mistake on the user’s part, and a mistake is guaranteed to happen eventually. From that viewpoint, the only viable strategy is obvious: defense in depth, using multiple layers of security and granularity to ensure that no single attack can cause all of our funds to get stolen – or lost. Here are some basic tips that can help:

• Basic Online Service Security – here, the multiple layers of defense are already provided, although it is your responsibility to actually use them. If you are using an exchange, make sure to (1) have a secure password, (2) turn on two-factor authentication (look for it in the security settings, and install the Google Authenticator app on your phone here), (3) make sure the email account that your exchange account is registered with has a secure password and two factor authentication, and (4) make sure you have no unauthorized API keys if you are using MtGox, and turn API access off entirely if you are using BitStamp (and do the equivalent for any other exchange).
• Basic Computer Security – do not download or run applications from untrusted sources; the Web of Trust addon for Firefox Chrome is a highly recommanded tool that can warn you if you are entering a shady website. Consider uninstalling Java, or at least if you see a Java application asking for permissions train yourself to click “Deny”. Run antivirus scans frequently, and if you catch anything consider your entire operating system infected beyond repair and reinstall.
• Wallet Separation – keep a separate “spending wallet” and a “savings wallet”. Your spending wallet should be a medium-security, but high-convenience setup with only a small portion of your bitcoins stored inside, and your savings wallet, containing the bulk of your funds, should be optimized for security (against theft and accidental loss) alone. The highest level of security is storing the savings wallet completely separately from your main operating system – a USB Linux distribution, a paper wallet and a brain wallet (provided you are careful with it) are all valid options.
• Two-of-three Schemes – two-of-three schemes are a common way of simultaneously reducing the risk of both loss and theft by adding redundancy. The btckeysplit utility can be used to split up any private key (or potentially password) into N pieces, such that any K of them (but never just K-1) can be recombined to get the original input (you choose K and N; two out of three is the simplest and most popular), and multisignature transactions provide an officially supported, and more versatile, way of doing the same thing. The three pieces or keys should be placed in completely different locations; memorizing one, writing down another and keeping a third on your computer is a good combination, and you could also give a piece to a semi-trusted third party or friend.

Developers can also help – online wallets and exchanges should let customers voluntarily set low daily withdrawal limits, and a better user interface for two-of-three schemes is needed to make them more widely used. One interesting idea for a service would be an online wallet that signs multisignature transactions in exchange for some form of identity verification, essentially taking on the role of the semi-trusted third party described above.

There are also other developments now on the horizon; dedicated hardware USB wallets will soon come out, essentially providing a dedicated, highly secure mini-computer for making Bitcoin transactions that you can carry in your wallet. But just like wallet encryption and two-factor authentication, hardware wallets will only form part of a complete wallet security setup. In an increasingly digitized world, no technology will remove the need to make an effort to protect your digital keys, but users and developers alike can go a long way in making the Bitcoin world a safer place – users by always being mindful of security and taking advantage of the tips described above and developers by making it easier to do so.

Just this morning, BitPay’s press office released an announcement that the lead payment processor for bitcoin has raised an additional $2M in seed round financing led by Founder’s Fund.

Founders fun includes three founders of PayPal. In support of his decision to providing funding for BitPay, Brian Singerman, a Partner at Founders Fund said the following, “ECommerce companies see the tremendous value that frictionless international payments bring to their businesses as they expand into emerging markets. BitPay’s ambitions have been global from the outset, and at Founders Fund we have been impressed with the company’s tremendous growth as they sign up hundreds of new customers a day, turning the potential for opportunity into a reality.”

As BitPay has expanded tremendously just in the month of April alone, the what once started as a team of two has now expanded to 10 employees and counting. BitPay added over 1,900 new merchants during the month of April, and they continue to dominate the bitcoin payments space by signing up over 100 new merchants per day.  Through BitPay’s service, around $5 million per month worth of bitcoins are spent on goods and services with merchants around the world.  Businesses selling electronics, precious metals, and other low-margin products over the internet are seeing a large increase in profitability by accepting bitcoin payments.

As BitPay sets the tone for innovation in the payment processing world, its work has not gone unnoticed, specifically on the international front. Also joining this round of funding is Max Keiser’s fund Heisenberg Capital, a London-based fund focused on bitcoin companies. Having previously interview BitPay Co-Founder and CEO, Tony Gallippi on his show, The Keiser Report, Max has demonstrated a keen interest in the progress and development of bitcoin and the implementation of practical ways to continue to make this digital, decentralized currency flourish.

While the terms of the seed round were not disclosed, although 100% of the existing seed shareholders exercised their pro rata rights to maintain their ownership percentage in BitPay. As we have seen in the past weeks and months, BitPay is worth investing in.

In gratitude, Tony Gallippi, co-founder and CEO of BitPay announced, “We were not looking to raise any capital until later this year, but we could not ignore the opportunity to have Founders Fund involved with BitPay…There’s no single investment firm we would rather have on our team right now than Founders Fund.”
As this is just another step in the right direction for not only BitPay but the future of Bitcoin, Bitcoin Magazine congratulates and commends BitPay and also thanks the Founders Fund for investing in a worthwhile project.

Yesterday, BitPay Inc, the world’s leading payment processor for Bitcoin announced an expansion to now 10 full time employees. BitPay, founded in 2011 by Tony Gallippi and Stephen Pair, has continued to expand in organizational and merchant growth. Through enabling now almost 7,000 merchants to be able to process payments in the Bitcoin currency, BitPay continues to lead the way in promoting the utility of Bitcoin.

BitPay announced the newest additions to the team. Jeff Garzik, Bitcoin core-developer, will join staff to work full-time on Bitcoin and contribute his knowledge on the core Bitcoin protocol. In announcement of hiring Jeff, Tony Gallippi (CEO, BitPay) stated, “BitPay recognizes the need for more resources and developments in the core Bitcoin protocol, especially in the areas of scalability and reliability…We strongly encourage other Bitcoin companies to do the same, either through crowdfunding efforts or direct contracts, grants, or scholarships.”

Jeff Garzik announced his acceptance of BitPay’s offer: “Bitcoin is growing up, no longer a hobby but now a professional payment network used worldwide. BitPay’s contributions to the bitcoin open source software will benefit the entire community. After working on bitcoin open source software for years as a volunteer, I’m excited that BitPay is now sponsoring my work.”

BitPay also expanded to hire Chief Financial Officer, Bryan Krohn. Bryan has previously worked as VP of Finance and Director of Finance for several Atlanta-based companies in the IT and Healthcare spaces. Bryan’s experience with international banking and treasury management will greatly help BitPay’s service meet the needs of larger clients. BitPay increased the size of its Software development team with the addition of Chaz Ferguson. Chaz is a junior at West Georgia College majoring in Computer Science and has begun making improvements to the BitPay workflow to better handle edge conditions.

In addition to increasing in size internally, BitPay is growing in influence in the Bitcoin community. BitPay is a Supporting Sponsor of Bitcoin 2013: The Future of Payments, taking place this weekend in San Jose, California. BitPay executives are also presenting at the conference on Overcoming Challenges to Accepting Bitcoins, Driving Business Adoption of Bitcoin, and Funded Entrepreneurs. Attendees of the Conference can meet the entire BitPay team.

One of the main steps to increase the success of Bitcoin, is easing the payment processing of Bitcoin. BitPay is a Payment Service Provider (PSP) specializing in eCommerce, B2B, and enterprise solutions for virtual currencies. Bitcoin Magazine commends the work of BitPay and wishes continual success and growth opportunities for the company.

The main Bitcoin conference of 2013 will take place in San Jose next weekend from May 17-19. The Bitcoin Foundation-organized event, entitled “The Future of Payments” is likely to be by far the largest gathering of Bitcoin users yet, with well over 500 people already signed up to attend. The conference will focus on three main aspects of Bitcoin: technology and mining, business, and economic and regulatory issues, and presentations throughout the conference will be run in parallel, one from each category at a time. Just like the previous two conferences in 2011 and 2012, alongside the presentations themselves there will be a number of other special events on the side.

This is not the only major Bitcoin-related event to watch out for this year. From June 17 to June 23, the Free State Project in New Hampshire will be hosting PorcFest, an annual event dedicated to various aspects of libertarian philosophy. The event includes a marketplace called Agora Valley, and in 2012 one Bitcoin user noted that over 80% of the merchants were accepting Bitcoin. Given how much Bitcoin has grown since then, we can expect Bitcoin to have an even larger presence in the event this time around. In July, the tech and business side of Bitcoin will get MediaBistro’s Inside Bitcoin conference on July 30 in New York, with BitInstant’s Charlie Shrem as the featured speaker. Important financial entrepreneurs and investors like ZipZap’s Alan Safahi and Knight Capital’s Abelardo Mendez will also be present. In November, the unSYSTEM conference will take place in Vienna, focusing on the ideological side of Bitcoin as well as activism in general. Speakers include Occupy London, Juice Rap News, Max Keiser, Defense Distributed‘s Cody Wilson, Berlin Bitcoin community organizer and restaurant owner Joerg Platzer and many more technological, artistic and political activists. Depending on their interests, Bitcoin enthusiasts may well consider attending one or more of these conferences in addition to (or perhaps in place of, in case of limited time or budget) this one.

The conference costs $300 to register ($350 at the door), a price which may seem steep, but one should bear in mind that most people attending the conference will be coming in by plane and therefore paying much more for airport and hotel expenses anyway. The difference between paying $1030 for a $30 conference and $1300 for a $300 conference is not all that much. The full schedule for the conference can be found here; the following is a list of some of the more interesting parts of the conference to watch out for.

• The Tech and Mining Track – one of the three sets of presentations to take place throughout the conference will focus on Bitcoin mining and technology. This section will largely feature generic discussions on various topics surrounding Bitcoin technology, including a “State of the Union” address by Gavin Andresen, ease of use, security, mining pool rewards and electricity, although it will also have more targeted discussions on the topics of alternate cryptocurrencies, hierarchical deterministic wallets and Trezor, the Bitcoin USB Wallet.
• The Business Track – for those already working with Bitcoin in their businesses or interested in doing so, this is the place to be. Presentations include Roger Ver’s “Bitcoin 101 for Business”, fraud prevention, overcoming the challenges of accepting Bitcoin, driving Bitcoin adoption, investing in Bitcoin businesses, international business and nonprofits, as well as several discussions on the interaction between Bitcoin and the existing financial system from speakers like Bitcoin Central’s Pierre Noizat and BitInstant’s Charlie Shrem.
• The Economic and Regulatory Track – this track is a bit of a strange merger, combining what may be some of the ideological discussion about Bitcoin to formally take place in the conference with the most pragmatic. Half of the topics are about how Bitcoin can radically change aspects of the current “system”, and the other half are about how Bitcoin can interact with it. On the “economics” side, the topics include “Will Bitcoin Change the Payments Landscape?”, “The Role of Bitcoin As Money”, “Economics of Bitcoin”, a presentation by Blueseed and “The Future of Panhandling” by Sean’s Outpost’s Jason King. On the regulatory side, the three presentations are on the legal classification of Bitcoin, issues of regulatory compliance, and financial privacy and law enforcement.
• Exhibitions – throughout the conference, as well as on the Friday before it, Bitcoin businesses will be holding exhibitions, and many will be using the opportunity to make announcements or unveil new products or features. Zach Harvey’s Bitcoin ATM (as opposed to the one connected with Jeff Berwick), for example, will be using the conference to make its first public launch. The full list of exhibitors can be found here.
• The Hackathon – there have been Bitcoin-themed hackathons before, but the one that will take place alongside the Bitcoin conference is particularly interesting since it will be judged by actual Bitcoin business owners and investors: Brian Armstrong, Adam Draper, Alex Ferrera, Jeremy Liew and Tihan Seale.

Above all, the conference gives attendees a chance to meet and interact with fellow Bitcoiners from around the world. This includes many of the key figures in the Bitcoin community, including Bitcoin business owners, developers and investors, as well as ordinary enthusiasts from all around the world. If you are interested in getting involved with a Bitcoin project, whether a business, an open source software project or a charity, this will be a great opportunity to meet and talk to people that might be interested in having you onboard. Those who are unable to attend the conference will be able to watch all of the presentations on video, and Bitcoin Magazine will be releasing exclusive content from the conference in both our web and print editions. If you will be attending, enjoy the conference!

It has been just over two months since the bitcoin block chain was rocked by a near disastrous fork causing the bitcoin price to crash.

The culprit of the crash was found to be a bug that prevented pre version 0.7.1 bitcoin clients accepting large blocks that could be generated by version 0.8 clients.  A temporary fix was put into place by Bitcoin Project lead developer Gavin Andresen that forced version 0.8 clients to generate blocks that version 0.7.1 could understand.

It is important to note though, the fix was a temporary one!  In just under two days on the 15th of May (I have made a countdown timer below for your convenience) the fix will expire and version 0.8 clients will once again be able to make large blocks that older clients will not be able to understand.

This will lead to a hard fork where the newer clients and the older clients will  disagree on the state of the blockchain.

It appears that most miners and pools have upgraded to version 0.8 clients already but it is yet unknown how many users are running older clients so this is the last opportunity for them to upgrade and avoid any issues.

Upgrading is only necessary of you run a pre version 0.8 copy of the official BitcoinQt client from bitcoin.org you can tell if you need to upgrade by opening your client and selecting the options Help => About Bitcoin.  You should then see a window similar to the screen below, if your version number is anything below version 0.8 (the image below is version 0.8.1-beta ) you should immediately go to bitcoin.org and download and install the new client.

Since most (if not all) miners and pools have already upgraded it is unlikely that we will have an extended fork like we did back in March but there is a very real risk that individual users may experience issues.

Author: Neil Fincham, Google+ 
This article is also available at the author’s website, mineforeman.com.

On Tuesday, Coinbase announced receipt of $5M in investment funding led by Union Square Ventures with additional support from Ribbit Capital, SV Angel, and Funders Club.  Coinbase’s Series A funding followed a September 2012 seed fund of $600,000 which provided the company tools to move forward.  Coinbase was founded by Brian Armstrong (former Engineer at Airbnb) and Fred Ehrsam (computer scientist and former currency trader) who shared the common goal of promoting the utility of the Bitcoin currency.

Based in San Francisco, CA, Coinbase provides three main services of providing an online wallet for individuals to store their Bitcoins, services for merchants to process Bitcoin as payment in lieu of USD or other currencies, and an ability for merchants and individuals to buy and sell Bitcoin for various fiat currency options.  Coinbase provides an opportunity for small businesses and individuals to accept Bitcoin in payment and then receive USD and additional fiat currencies in return.

Coinbase currently has 300 merchants including the popular dating site, OKCupid.com and the social news site, reddit.com.  As a Bitcoin payment processing company, Coinbase charges a fee of 1% per transaction from dollars to Bitcoin or visa versa.  Such a fee is approximately 2 percentage points lower than that of typical credit and debit card processing fees.

Fred Wilson (Partner, Union Square Ventures) stated in his blog, “We believe that Bitcoin represents something fundamental and powerful, an open and distributed Internet peer to peer protocol for transferring purchasing power. It reminds us of SMTP, HTTP, RSS, and BitTorrent in its architecture and openness. Like what happened with those other low level protocols, entrepreneurs and developers are now building technology on top of Bitcoin to make it more useful, more accessible, and more secure.”  Fred and his team at Union Square Ventures have high hopes for not just Coinbase but also the Bitcoin currency.

We can recognize Coinbase’s recent funding as another step towards legitimacy and greater utility of the Bitcoin currency.  To date, Coinbase’s new Series A funding represents the largest funding round for a Bitcoin start up.  We can expect additional venture capitalists to take note of the upward success and mobility of the Bitcoin currency.  Coinbase was founded in June of 2012 and has proven to be a force to be reckoned with in the payment processing industry.

Just this morning, BitPay, Inc announced it’s newest merchant, Gyft. Gyft, a mobile gift card platform, added support for Bitcoin purchases of gift cards on the Android platform, through its partnership with BitPay Inc, the world’s leading payment processor for Bitcoin. Gyft offers a mobile gift card app to allow customers to buy, store, send, and redeem gift cards on their phones. In addition to a free phone app, customers can share gift cards via Facebook.

Gyft works with 50,000 physical retail locations across the USA including GAP, Lowes, Sephora, Gamestop, American Eagle, Sports Authority, Nike, Marriott, Burger King, Fandango, Brookstone, and many more. Gyft fits right into the Bitcoin community of ingenuity and convenience as the Gyft phone app eliminates a need for plastic gift cards. Gyft’s platform allows for individuals to use the gift cards in online and in person transactions as the app contains front and back copies of a gift card with a bar code to be scanned at the time of purchase.

Gyft provides new opportunities, not only for consumers but also companies selling gift cards. The use of Bitcoin opens the door for Gyft to expand its user base and also contribute to the Bitcoin community by increasing the utility of Bitcoin.

“The partnership with Gyft and BitPay blows the doors open to major retail for Bitcoin users,” said Tony Gallippi, co-founder and CEO of BitPay. “Any shopper in a participating retail store, with Bitcoins on their Android device, can easily convert Bitcoins into a store gift card and pay for their purchase. The whole process takes less than one minute and can be done on a single mobile device.”

“Gyft is proud to be a pioneer in the Bitcoin universe and we are excited about the possibilities for further innovation on our platform,” said Vinny Lingham, Gyft co-founder and CEO. “By using our existing network of retailers, we are able to offer Bitcoin consumers the ability to instantly spend their Bitcoins at hundreds of merchants.”

Gyft made a wise choice in not only getting involved with the Bitcoin currency but also partnering with BitPay. BitPay currently processes $5M per month in Bitcoin transactions for merchants and is taking on new merchants daily to expand the utility of Bitcoin. BitPay now has over 6,000 merchants and Gyft is a stellar addition to the team! Gyft’s partnership with BitPay and acceptance of Bitcoin for giftcard payments is yet another step in the right direction for the Bitcoin currency.

Conformal, a company focused on building open-source software for privacy and security, has revealed their latest project: btcd, a full Bitcoin reimplementation in Google’s programming language Go. The implementation is not yet entirely done, but most core features such as transaction verification, database interaction and network connectivity are tested as working, and the company has released one component of the system for public review: btcwire, a package that focuses on converting Bitcoin protocol messages between btcd’s internal representation of the message and a serialized form suited for direct network transmission, as well as actually sending and receiving these messages over network connections. Conformal provides a more detailed description of btcwire on their website.

The company has also written a blog post explaining their decision to make this alternative implementation; they write:

A number of us at Conformal Systems had been keeping an eye on Bitcoin as passive observers for the past couple years since Bitcoin combines technologies that are already of interest to us: practical use of cryptography, distributed systems, and electronic payments. In January 2013 I had one of our developers, David Hill, attempt to port bitcoind and its GUI to Bitrig, an OS that several of our developers forked from OpenBSD. David encountered several problems with porting to Bitrig and in the process found issues with unit tests, non-portable functions and seeding of a PRNG. While pushing to get the port complete, it was clear that it would take a lot more effort than usual to complete this port. After seeing these issues with the porting, I felt that the Bitcoin ecosystem could use an alternative to bitcoind.

As for why they chose the programming language Go, they write that Go has a number of advantages over the C++ used by the only full Bitcoin implementation currently in major use, bitcoind. Particularly importantly for financial software, Go offers “integrated test infrastructure, no active memory management, standard formatting, platform independent code, simpler parallelism, built-in profiling and documentation facilities [and is] virtually crash-proof.” Integrated test infrastructure is particularly important; the easier and more natural it is to write tests, the more tests can be written, and the smaller the chance we will see another serious blockchain fork from an unforeseen edge case. Parallelism, profiling and crash-proofness are also particularly useful attributed for Bitcoin exchanges, so given the performance bottlenecks that all exchanges were revealed to have in the Bitcoin market crash in April new exchange developers may well consider using Go as their language of choice.

This is not the first attempt at reimplementing the Bitcoin protocol; Amir Taaki’s libbitcoin (written in C++) and Mike Hearn’s BitcoinJ (Java) have both accomplished the feat, although the former is being used only in some experimental versions of the Electrum server software and the latter in some Android light clients. Importantly, there are no alternative implementations of Bitcoin that are currently being used to any significant degree by miners.

There are reasons to believe that this is unhealthy for the Bitcoin ecosystem. In theory, Bitcoin is an open source protocol in which anyone can participate, and on most levels that is true. Partial implementations of Bitcoin that can make and verify transactions exist already, and are the backbone of alternative Bitcoin clients like Blockchain and Electrum. In practice, the deeper into the protocol one goes the more it becomes a monoculture, but monocultures are dangerous. If there is only one implementation being widely used, then unforeseen bugs appearing (or even disappearing) in upgrades can cause the entire Bitcoin blockchain to essentially fork into two as the two versions of the protocol disagree on which transactions and blocks are valid and which are not. Because the blockchain builds on itself, even one mistake will have consequences that cascade forever into the future.

This was the cause behind the blockchain fork that took place in March – a previously unknown limitation in the database software used by bitcoind 0.7 caused a fork only after bitcoin 0.8, which used a different database which did not have this limitation, was released. The two versions then disagreed on the validity of a single block, and the fork followed from there, sending the price crashing by 23% before enough major mining pools got together on IRC chat to correct the issue. With three or five re-implementations, on the other hand, any single version disagreeing with the others will be highly inconvenient for users of that version, but will not have a grave effect on the entire network.

Multiple implementations is also good for standardization; in a monoculture, the dominant software becomes the standard, giving the developers of the dominant software a higher degree of control over the future development of the protocol than was originally intended. This does not even require the developers to make a conscious decision to start subverting the design process for personal gain to be harmful. Even if, as is almost certainly the case today, developers are acting with the best of intentions, there is a bias in software development toward increasing complexity and confusion that is mitigated if multiple implementations have to work together on every change. If there is only one implementation, errors get uncovered later rather than sooner, and the result is a sort of Talebian “stability breeding its own instability” that ultimately, as in the case of the March blockchain fork, causes disaster. Additionally, developers have no incentive to even document the protocol as long as it works internally. Currently documentation does exist on the Bitcoin wiki, but with multiple implementations we can be much more certain that the page will be updated, and even improve in quality, in the future.

Whether or not btcd will actually be used by miners is hard to say; it is entirely possible that miners will remain comfortable with the existing bitcoind, and the stability through decentralization that a healthy ecosystem of alternative implementations can bring will never come to pass. But even in such a state, this will still be a step forward for Bitcoin if only because it makes it easier for Go users to interact with the protcol. A Bitcoin implementation in Go has already been written, but it has not been updated in nearly a year, and appears to have only ever had a single developer behind it. btcd is backed by a corporation that is clearly well-versed in security and privacy, inspiring much more confidence in its reliability.

For the near future, Conformal writes that “our goal is to continue releasing packages from btcd as we increase test coverage and bring them up to a professional level. The intent is that each piece can then be publicly reviewed for correctness as they become available while we continue work on the remaining packages.” The company intends to continue releasing packages over the next several weeks, pushing out one at a time so that the community can better review the packages as they come out. Their next release will be btcjson, a package the deals with JSON-RPC messages. You can watch out for more releases on the Conformal blog.

Carbon Wallet, a new service seeking to be the next great innovation in secure online wallets, is launching today. Currently, there are two major types of online wallet: server-side controlled wallets and client-side controlled wallets. In a server-side wallet (eg. Coinbase), the actual wallet is controlled by a server which independently maintains all of its’ users like a bank account, and in a client-side wallet there is an actual fully-functional Bitcoin wallet operating inside the user’s browser, and the server only holds encrypted backups of each user’s wallet – to which only the user knows the decryption key. Carbon Wallet is adding a third paradigm to this mix: the server holds no backups at all, and the wallet is instead deterministically regenerated from the user’s password each time the client loads.

Reconstructing an entire Bitcoin wallet from nothing more than a password may seem like a magical feat, but in reality it is quite feasible. Essentially, a wallet is made up of two parts: private keys, and transaction information. Private keys are the secret numbers that let owners of Bitcoin addresses sign transactions to spend money from them, and the transaction information that wallets need is essentially how much money they have, and the content of the individual transactions that sent the money to them. The Bitcoin Wiki describes a number of ways to generate a potentially infinite set of private keys from a single root seed; the simplest one to explain relies on a cryptographic hash function also used elsewhere in Bitcoin called SHA256. Essentially, SHA256 can take anything as an input, and uses a series of highly chaotic transformations to generate a seemingly random 256-bit number as an output – exactly the right format for a Bitcoin private key. The private key generation algorithm is simple: private key 1 = SHA256(password+”1″), private key 2 = SHA256(password+”2″), and so on, and there exists an algorithm to generate the corresponding Bitcoin address given a private key. The mechanism used by Carbon Wallet is more complicated, replicating the one used internally by Electrum, but it shares the same ability to generate as many addresses as the user requires. Transaction information, just like in the popular client-side wallet blockchain.info, is simply downloaded with the help of the Carbon Wallet servers.

Currently, Carbon Wallet does not let users choose their own passwords; it instead relies on twelve-word “passphrases” of the same format as Electrum wallets. If you do not want to create your own twelve-word passphrase from Electrum’s 1700-word dictionary, Carbon Wallet can create new passphrases for you; “naked goose realize except concrete attack strange tightly thorn note memory church” is one example of a passphrase that Carbon Wallet generated.

The question is, will Carbon Wallet be actually more secure than its alternatives? On the one hand, this does significantly reduce the level of involvement that the server has in the Bitcoin wallet’s use. On the other hand, however, the main weakness of blockchain.info – namely, the fact that its operators are theoretically capable of introducing malicious code into the client to, for example, immediately empty a user’s wallet upon launch, is just as present in Carbon Wallet. Blockchain.info has provided a solution to the problem in the form of a Firefox and Chrome extension, and Carbon Wallet will soon implement a similar feature, but in this regard the security of the two models remains exactly the same.

But there are a number of ways in which Carbon Wallet’s model does win out. The first is reliability. Even if the Carbon Wallet servers go down, users can simply convert their Carbon Wallet password into a seed for Electrum, and they will then have an Electrum wallet with all of the same addresses. With blockchain.info, users must either take advantage of blockchain.info’s email or Dropbox wallet backup feature or risk losing access to their wallets if, for whatever reason, the site disappears or all copies of the database are erased. Another advantage is portability; anyone can make their own Carbon Wallet-compatible wallet with superior features or a better interface, and Carbon Wallet users will be free to simply hop between whatever providers they want at a moment’s notice; because the wallet is deterministically generated from nothing but their password, every provider will be able to give the user access to their money in an instant.

There are several features that Carbon Wallet will add in the future. One is the ability to store a long password in local browser storage, and then use a shorter password to decrypt it. This would also help mitigate the brute force guessing issue, and would be necessary when Carbon Wallet expands into mobile applications, as it is very inconvenient to type in a genuinely secure password on a smartphone. The wallet will also soon add at the very least a “validator” extension to protect against someone hacking the Carbon Wallet servers and secretly inserting malicious code into the client that ultimately gets delivered to the user’s browser. Support for mobile devices and QR code support is also a high priority. For those interested in what this new model of wallet storage that Carbon Wallet has to offer, the wallet is now available for use at http://carbonwallet.com.

Clarifications:

1. This is NOT a change to the Bitcoin protocol, it is a change to default transaction inclusion and propagation rules. If you can get your transaction to a miner willing to bend these rules, you will get included in the blockchain (although it will be inconvenient for you).
2. There is another justification given for adding a minimum transaction size: many new users end up receiving very small quantities of bitcoin from free bitcoin sites and are unable to spend them because the total amount is less than the minimum transaction fee for sending small amounts. This patch will eliminate this problem.
3. This is actually a softened version of a previous change that would have the 5430 satoshi minimum hardcoded with no option for individual miners to customize it without editing and recompiling source code, and so is already an improvement. Any expressed or implied criticism was directed at the original introduction of the minimum, not this particular patch.

See criticism of this article and my replies (and so on) at http://www.reddit.com/r/Bitcoin/comments/1drnvp/bitcoin_developers_adding_0007_minimum/, and feel free to make your own judgement.

About a week ago, lead Bitcoin developer Gavin Andresen quietly introduced a patch that would add a fairly significant change to the transaction propagation rules: any transaction with any of its outputs less than 5430 satoshis (0.00005430 BTC) would be classified as non-standard, and will not be included or further propagated across the network by default miners. The minimum is a setting that individual miners are free to change (including to zero), and such transactions will remain valid under the rules of the Bitcoin protocol, but with only non-standard miners and miners that bother to change default settings including them in blocks and even passing them along to other nodes it will take much longer for them to get accepted (ie. “confirmed”) by the Bitcoin blockchain.

The main motivation for the patch is the same as that for many of the other rules restricting transaction propagation and inclusion in default miners: to fight “transaction spam”. One of the more problematic aspects of Bitcoin is that every transaction ever made will need to be stored by every fully participating node in the Bitcoin network forever, and already the size of the Bitcoin blockchain is over 7 gigabytes. Thus. there is an understandable desire to attempt to limit transactions that are deemed to be more trouble to store and verify than they’re worth. Some rules, like one added three months ago to make transactions that are over 100,000 bytes in size non-standard, exist to block single transactions that would cause an excessive amount of computing power to process and hard disk space to store. Others serve to discourage features of the Bitcoin protocol that are not well-tested. This one, however, serves a slightly different purpose: to block transactions that are perfectly ordinary in format and size, but which provide an extremely small benefit to the sender.

A substantial portion of Bitcoin transactions will be affected; a chart linked in Gavin’s pull request shows that about 20% of all recent transactions are under the threshold. By far the main user of such small outputs is the popular Bitcoin gambling site SatoshiDice. All bets on SatoshiDice take place directly over the blockchain; the bettor sends any amount of bitcoins between 0.01 and (usually) 500 to one of SatoshiDice’s addresses, if the bet wins, the original bet multiplied by the prize multiplier is sent back, and if the bet loses the bettor would receive 1 satoshi to let them know that they did, in fact, lose the bet, and their transaction was not lost due to some kind of error on the part of SatoshiDice or the Bitcoin network. SatoshiDice is prepared; the site has already increased the size of their “loss notification” transactions from 1 satoshi to 0.00005 BTC.

Also affected will be the colored coins project. The colored coins project’s core idea is to assign additional value to extremely small amounts of bitcoin; one application would be to “tag” ten thousand specific satoshis and then use them to represent shares of a corporation. One single satoshi can be used to represent smart property. Now, in order to achieve the same granularity what could be done with a single satoshi before would now need to be done with a block of 5430. However, in the discussion on this patch on Github, colored coins developer Alex Mizrahi commented: “I don’t think this change will create significant problems for ‘colored coins’. I mean, it’s strange that you’re doing this, but I guess we can live with it.” Although this will increase the expense of creating shares, it will not overshadow all other expenses; each individual colored coins transaction already required a 10,000 satoshi transaction fee in order to get included into the network without unreasonable delay.

In both cases, however, from both the Github discussion and conversations elsewhere it is clear that many core Bitcoin developers have a dim view of both SatoshiDice’s loss notification mechanism and colored coins being in the Bitcoin network. One poster said, “personally I think that a ‘colored coin’ solution lies in alt-chains and using the main BTC block chain is not appropriate for this application”, echoing a commonly held belief that Bitcoin is meant to be used to send payments and not information. Jeff Garzik added in response to another comment, “It is not breaking fundamentals — bitcoin has never ever been a micro-transaction or micro-payment system”.

Here, however, the developers have already gathered some criticism. Although this patch has been pushed relatively quietly so far, as though the change was simply a routine and uncontroversial optimization, the community’s position on these matters is far from settled; indeed, the two questions of (1) whether or not transmitting information using Bitcoin is legitimate, and if so just how much information is okay, and (2) whether or not Bitcoin should be used for micro-transactions are highly disputed matters. To show this, note that what appears to be an opposing view was held by Satoshi Nakamoto himself:

Completely non-reversible transactions [in pre-Bitcoin payment systems] are not really possible, since financial institutions cannot avoid mediating disputes. The cost of mediation increases transaction costs, limiting the minimum practical transaction size and cutting off the possibility for small casual transactions, and there is a broader cost in the loss of ability to make non-reversible payments for non-reversible services.

One of the original purposes of Bitcoin was thus micro-transactions, as stated by Satoshi himself.

Of course, the issue is somewhat more complicated than this, as there are actually two distinct uses of the term micro-transactions at play. The first can more accurately be termed milli-transactions; these are small payments on the order of $0.01 to $0.99, and transactions of this size are frequently used to pay for songs and mobile applications and to give tips through Bitcointip. It would indeed be a tragedy if these uses were hampered by a minimum size restriction of fee, but these are fortunately not harmed by this scheme. The second is transactions that are even smaller; one might imagine a computer paying a smartphone 100 satoshis per kilobyte in exchange for being able to borrow the smartphone’s cellular internet connection. These are the kinds of transactions that Bitcoin was actually never intended for, and which are better done with either some kind of centralized off-blockchain clearing mechanism or a repreatedly-adjusted transaction mechanism as described in the Bitcoin wiki’s page on contracts.

Where disagreement lies is twofold. First, there is the question of just how small a milli-transaction needs to be before it becomes a micro-transaction. On the one side are Bitcoin developers like Peter Todd, who stated in the Github thread that “We do need better communication of this stuff, and that includes doing things like taking ‘Low or zero processing fees’ off of bitcoin.org and not talking about microtransactions.” The argument in Todd’s favor was already mentioned; restricting as many low-value transactions as possible keeps the size of the Bitcoin blockchain down, mitigating the need for Bitcoin users to move away from “full clients” to “light clients” which do not store the Bitcoin blockchain themselves and instead rely on third-party servers to do much of the legwork. On the other side are those who see low processing fees and smaller minimum transaction sizes as being among Bitcoin’s cardinal features, for which it is even worth it to give up the idea that anyone other than a miner or business will be actually storing the full Bitcoin blockchain. The argument that this group makes is that most users have migrated off the “Satoshi client” maintained by the core developers to “light clients” like Electrum and Blockchain already, and it is a fool’s game to attempt to forestall this trend.

The other question is that of alternative uses of the Bitcoin protocol. The solution used to limit low-value transactions before this move toward an outright ban was transaction fees, and this mechanism had the advantage that, rather than outright banning any particular uses that are deemed “wasteful”, it allows the sender themselves to decide whether or not sending the transaction brings enough benefit to them to be worth the public cost. Here, no such individual judgement is possible, and so in order for a Bitcoin transaction to be deemed “valuable enough” to be allowed into the blockchain it must at least appear to be a substantial transfer of Bitcoin-denominated monetary value. The fact that colored coins users might benefit more from sending single satoshis than some other users benefit by moving around entire bitcoins, while the public storage cost for both types of transactions is the same, is not reflected in this rather blunt style of regulation. The argument used by developers, once again, is that Bitcoin is only intended to be a system for storing and sending money, and other uses belong on alternative blockchains better suited to their individual purposes.

It may well be that a community consensus will emerge that Bitcoin is a network for sending money and nothing but money, and substantial amounts of money too. However, so far no such consensus exists, and these questions remain very much up for debate. Because of its limited scope, and its nature as a modifiable miner setting, this particular patch is not particularly important, but it does highlight the importance of these long-standing issues that still remain unresolved. Exactly what minimum size of transactions should Bitcoin target itself toward, and should it aim for virtually no fees? Is the use of the Bitcoin network to send trivial amounts of information, whether that may be information about ownership in the form of a colored coins transaction or a loss notification from SatoshiDice, something that we want to accept? Exactly what balance we strike with each of these questions is a crucially important decision that will affect the course that Bitcoin will take for decades to come, and it is very important that we as a community have solid communication, and genuine two-way discussion, when these kinds of issues arise.

The partnership between CoinLab and MtGox that had been met with great fanfare when it was first announced at the end of February has now rapidly turned sour, as Coinlab opened a lawsuit against MtGox seeking $75 million in damages. The original plan had been for Coinlab to take over all of MtGox’s operations in Canada and the United States, using its business relationships and marketing experience, as well as a local banking presence, to better provide for North American customers while still using MtGox’s technical infrastructure and leveraging the company’s established brand. The monetary side of the agreement, as we now know, is a revenue sharing arrangement in which revenues from existing MtGox customers in the US and Canada are split 60/40 between MtGox and Coinlab (in MtGox’s favor), and revenues from new customers are split 90/10 in Coinlab’s favor. However, almost right from the start it was obvious that things were not quite going according to plan. Coinlab’s takeover of MtGox’s existing US and Canadian customers was supposed to have concluded by March 22, but the date came and went and nothing appeared to change. Coinlab was quiet about the details of the process, and throughout the rest of March and April progress continued to stagnate, and Coinlab and MtGox were both silent on the matter. Now, it appears as though the delays have pushed Coinlab itself to the breaking point, and now in this way the company’s executives have decided to take action.

There are two main parts to Coinlab’s claim. First, the company claims that MtGox has utterly failed at living up to its side of the bargain in helping the transition go smooothly. Excerpting from the relevant section of the lawsuit:

28) Mt. Gox has failed to cooperate in facilitating the timely and seamless transfer of CoinLab Customers to Coinlab since the Agreement took effect.

30) Defendants have breached their promises to provide necessary technology, software, and know-how to CoinLab and have refused or failed to establish promised connections from CoinLab’s computer network to Mt. Gox’s computer network.

32) Despite repeated requests to do so, Mt. Gox has failed to deliver all passwords,Yubikeys, administrative logins and any other security information required so that CoinLabmay assume operation of the Bitcoin exchange services for customers in the United States and Canada in case of a service interruption.

The list goes on, giving a series of contractual duties that Coinlab claims MtGox has failed to comply with. The other major claim in the suit is more interesting. In the original contract between Coinlab and MtGox there is a clause stating the following:

F. 1 During the Term, MtGox and Tibanne shall not grant anyone the right to use the Licensed Materials to provide the Services, or any part thereof, in the Territory. The exclusivity granted herein shall apply strictly to Services targeting the Territory and the CoinLab Customers (as defined below) and advertised and sold as such. It shall not include the provision of Services to users of the Services who, depending on the interpretation or circumstances, may or may not be considered CoinLab Customers.

The contract also included a similar clause binding Coinlab, preventing Coinlab or its owners from operating another exchange independent of the agreement. These clauses are key; without them, MtGox or Coinlab could both attempt to draw customers from the Coinlab-operated North American MtGox to a separate exchange not bound by the revenue-sharing agreement, and so deprive the other of all revenue. Another clause later in the contract states that that “it may be impossible to determine the monetary harm suffered by the non-breaching Party” if Coinlab or MtGox violate either of these key clauses, and instead sets a specific figure that either party would be liable for in the event that they breach the contract: $50 million USD.

In the lawsuit, Coinlab claims: “Defendants have, in email and other written exchanges, and in public statementsto the press acknowledged that they have directly serviced customers in the United States and Canada since entering the Agreement. This conduct constitutes a breach of the Agreement, including the exclusivity provisions in the Agreement.” Combining this with MtGox’s alleged failure to transfer the necessary technical materials, the total value claimed in the suit is a sky-high $75 million.

MtGox’s defense against this claim will likely come in several parts. First of all, the transfer was never completed, and so there is no reason to believe tha Coinlab suffered actual damages from MtGox continuing to serve customers directly in the meantime. The $50 million figure in the contract does not depend on the transfer actually having taken place, but judges are known to cut down such pre-set damages in certain circumstances. Second, although the clause stating that “MtGox and Tibanne shall not grant anyone the right to use the Licensed Matrials to provide the services” certainly forbids MtGox from acquiring another partner and executing a second Coinlab-like relationship within North America at the same time, it is debatable whether “granting anyone the right” includes providing services to North American customers themselves. MtGox already had the right to use their own “Licensed Materials” to provide their own services, so it is not at all clear that exercising that pre-existing right constitutes granting the right.

There is a distinction between a “sole license” and an “exclusive license” in intellectual property; as described by TransLegal, “a sole license is a type of exclusive license where the licensor remains entitled to use the licensed subject within the territory of exclusivity, i.e., unlike in a typical exclusive license, the licensor generally retains the right to use the intellectual property.” However, this distinction is an esoteric one, and if the word “exclusive” was used in the contract with this definition in mind it is not particularly well supported by the content of section F.1. It is quite likely that there was a genuine misunderstanding between Coinlab and MtGox regarding this matter.

Finally, there is the possibility of other technicalities. For example, the contract includes a clause stating that “CoinLab shall operate the Services in the Territory in compliance with all applicable laws after completion of the Transition Period and MtGox shall cooperate fully with CoinLab in achieving such compliance.” It would be difficult for Coinlab to be literally 100% compliant already; FINCEN’s March 2013 guidance essentially states that all exchanges serving the entire Unites States are required to have money transmitter licenses in all 48 states that require them, a process which requires millions of dollars in surety bonds. However, Peter Vessenes claims in the lawsuit that “CoinLab is registered with FinCEN to provide Bitcoin exchange services in the United States and has fully complied with FinCEN’s March 2013 guidance for digital currency exchanges.”

Coinlab CEO Peter Vessenes has written a personal statement (backup) on the matter, writing the following:

“In the last month, many of you have contacted me directly and asked for more details on our transition, and I would say (charitably) that I’ve been frustratingly vague — I just haven’t been able to talk about it …

What tipped us into filing was our complete inability to get Mt. Gox to deliver on the few simple things left that were needed for customers to move over en-masse; we were often left just apologizing to our alpha customers while their own businesses suffered …

What I hope is that Mt. Gox has this same interest in the good of Bitcoin, and Bitcoiners, and finds a way to work this out.”

Mark Karpeles has only provided a brief comment, writing in an email to Gawker: “We have not been served nor notified of such a lawsuit (except from your email), so it is difficult for us to comment at this point in time. We will review this within the next hours.”

The most harmful part of the ordeal to the Bitcoin community at large, aside from the drop in Bitcoin price and the negative press attention, is that this will prove to be a serious blow to the Bitcoin Foundation. Peter Vessenes is currently also the Executive Director of the foundation, and MtGox CEO Mark Karpeles is himself a board member. The fact that the official head of the Bitcoin Foundation is moving towards a lawsuit first, not even trying to resolve the dispute through any kind of internal arbitration within the Bitcoin community, suggests a striking lack of coherence within the foundation as a whole. The organization has already been relatively passive since the initial fanfare subsided in the later months of 2012, but this incident suggests that, in its present form, it exists nowhere but on paper. What the Bitcoin Foundation now needs the most is strong leadership; it is currently still the organization in the best position to unify the Bitcoin community and push it forward, but without clear direction it only risks falling further into idleness and internal strife. There have been increasing calls for Peter Vessenes to step down in part for this reason, and given the inherent conflict of interest between being a semi-official head of the Bitcoin community and having an active lawsuit against its largest business, the arguments for such a move have only strengthened. The main problem is, however, that there is nothing close to a clear consensus on who can replace him.

Hopefully, as Vessenes says, the two companies will be able to resolve their differences peacefully without resorting to further advances toward legal channels. The most likely explanation for MtGox’s failure to live up to its agreement is simply that the exchange was overwhelmed with a sudden influx of customers in March and massive spikes in usage and multiple denial-of-service attacks in April – the same reason why the exchange was unable to upgrade its servers in time for April 10. This does not fully excuse MtGox’s failures in both the Coinlab affair and their own exchange – it is clear that the company should have quickly taken on more staff in February and March if they were uncertain that they would be able to meet their responsibilities – but it does mean that the root cause of both failures was a simple mistake rather than willful malfeasance. As long as MtGox remains the most powerful exchange in the Bitcoin economy, their ability to serve customers around the world remains crucial to Bitcoin’s continued success, and so no matter what our personal feelings toward MtGox or Vessenes may be we should all wish for the best possible outcome.

Today, BitPremier launched its new business and services with the goal of, “redefining the Bitcoin marketplace like never before.” BitPremier provides an opportunity for merchants to sell upscale products and real estate to the Bitcoin community. On day one, BitPremier is featuring a Bahamas Resort Ocean View Condo, Trump Soho Hotel Condominium, paintings such as LeRoy Neiman Basketball Stars, and designer watches as jewelry such as a Ulysse Nardin GMT Perpetual Watch. One of the best features of the site is the continuously updated BTC price along with the USD price.

The overall imaging of the site is conducive to sale of high quality products: a black and white color scheme, leaving the rest of the space up to each merchant to fill in with a vibrant picture of their real estate, art work, or upscale product. The simple design allows merchants to highlight their luxurious products and sites. As BitPremier’s mission is to provide Bitcoin currency holders access to unique, high-end luxury items, each merchant has a generous feature page to highlight their product. The site also has built-in features to safeguard merchants and customers through keeping both parties anonymous until the transaction is near completion. Due to the higher prices associated with merchandise, BitPremier does offer escrow services to secure payment on items until both parties have fully signed off on the purchase. In addition to ad placement on the BitPremier website, merchants can also be featured on BitPremier’s Twitter and Facebook pages.

Bitcoin Magazine had the opportunity to interview Alan Silbert of BitPremier.

Bitcoin Magazine : When did you first hear about and get involved in the Bitcoin currency?
Alan Silbert: Earlier this year Bitcoins were brought to my attention as something that could have enormous potential.  I started digging in, and became more and more intrigued with the concept.  I now firmly believe that Bitcoins are going to be a game-changer and a big disruptor in finance.

BM: How did you first get involved in the Bitcoin currency?
AS: Outside of schooling myself on Bitcoin 101 day and night, I started as an investor in the currency.  I made a point to test drive the different exchanges to understand the complexities of Bitcoin.

BM: When did you first get the idea for BitPremier and what inspired you to create the site?
AS: The idea has been in the works for a couple months.  There is really nothing out there quite like BitPremier, so we were glad to jump in and fill the void.  We want to open the door to unique items for the Bitcoin community that people don’t have access to today.  There are a lot of Bitcoins out there, and people need somewhere to spend them.  We think BitPremier.com will fill that need by providing a central go-to marketplace for these higher-end goods and services.

BM: Were there any preexisting businesses that inspired you to create BitPremier?
AS: 1stdibs, James Edition, and the Dupont Registry are good models for luxury marketplaces.  Those are great sites for unique purchases.

BM: Where do you see BitPremier’s services going in a year?
AS: We will of course firmly plant ourselves as THE Bitcoin luxury go-to site!  I have a few ideas of where we are going.  Stay tuned . . .

BM: What makes BitPremier stand out in comparison to other sites utilizing the Bitcoin currency?
AS: BitPremier is a one-of-a-kind site, so there is nothing similar in the market right now to compare us to.  It opens up to the Bitcoin community a whole new realm of possibilities of where to spend their Bitcoins, and provides sellers of luxury items with a mostly untapped $1B+ market of buyers to sell to.  We screen listings to provide buyers with the best experience possible, and act as escrow agent to facilitate a safe transaction where everyone is happy.

BM: What are your suggestions for individuals hoping to start a business like BitPremier?
AS: Research Bitcoins inside and out, because there is plenty to learn and a lot of tech-speak.  But there are tons of possibilities.  We are only at the beginning of the curve, so the opportunities out there for entrepreneurs to build out the Bitcoin ecosystem are endless.

BM: If I am a merchant looking to sell through your site, how can I get started?
AS: Sellers can check out the “How it Works” page on BitPremier.com to get acquainted with the site and review our listing criteria.  Sellers can then register through our “Seller Signup” page to submit their listings.  We reach out to the seller, verify the listing, edit it, and post it on the site.  Or if they have questions or multiple listings, they can contact us at [email protected].

BitPremier received support from the NYC-based Bitcoin Opportunity Fund.  The BOF has also invested in CoinLab, BitPay, BitSpend, OpenCoin/Ripple, Coinsetter, Tradehill, and Coinapult. We encourage you to check out BitPremier!

To those of us who have been with Bitcoin long enough to have seen the great bubble of 2011, what is perhaps the most suprising about the aftermath of this crash is just how similar it is to the previous. In the run-up to June 9, it seemed as though everything was going well for Bitcoin. There was some negative media attention regarding Silk Road, but even there many of the articles were positive, detailing the potential of the website rather than fearing governmental attack. Around June 3, prices started rising super-exponentially increasing from $10 to $30 in less than a week. After the crash on June 9, however, everything seemed to go wrong at the same time. Half a dozen major Bitcoin services were hacked all at once, MtGox went down for nearly a week, and media attention quickly turned sour as a result.

This time, the situation is similar. During the three days during which the Bitcoin price fell from $266 to $60, nearly every Bitcoin exchange was subject to heavy stress, with MtGox being inaccessible for ten hours and BitStamp, BitFloor and BTC-E for one to three. Three Bitcoin exchanges saw their bank accounts closed for legal reasons, and Bitcoin Central lost several hundred BTC in a hack. Bitcoin’s critics, who had remained strangely silent while the currency was still going up to its new all-time high, came out of the woodworks to criticize the currency as soon as the price started falling on April 10. Google Trends volume, after seeing a new all-time high, is now once again back to the same levels that it saw in mid-March.

However, there are also signs of hope. Unlike after the previous crash, dozens of new businesses have started accepting Bitcoin, and many columnists even came out to defend Bitcoin, or at the very least the idea of cryptocurrency more generally. News reports of venture capital investors being interested in Bitcoin are only continuing to increase in number. It’s a claim repeated often both here and elsewhere that there is simply no way to tell where Bitcoin will go from here; for now, perhaps it’s best to simply enjoy the ride.

Bubble and Crash

• The Bitcoin price struck a new all-time high of $266.00 on April 10, 2011, before falling back to a low of $54.25 on April 12 and $50.01 on April 16 and recovering to $120-$140 by the end of the month.
• Trade volume hit an all-time high even if denominated in BTC, breaking the November 2011 record of 382,186 BTC with two spikes of 556,289 BTC and 572,185 BTC on April 12 and 16, respectively. The USD-denominated daily volume record was on April 12, at a total of $47.6 million.
• The Google Trends volume set a new high at nearly 4 times June 2011 levels, before quickly falling back down to slightly above the June 2011 peak by the end of the month.
• The number of transactions excluding popular addresses a metric used by blockchain.info to measure Bitcoin transaction activity not including very heavy blockchain-using applications like SatoshiDice, hit a new high of 50,338 on April 11. Other metrics stayed roughly stagnant from March.
• Alternative cryptocurrency Litecoin hit an all-time high of $5.89 USD before falling back to about $4, and Ripple’s internal currency XRP hit a high of 0.72 cents. Note that both of these currencies will have a larger number of currency units in circulation than Bitcoin; Litecoin’s final money supply will be 84 million, and the XRP 100 billion, compared to Bitcoin’s 21 million.

Growth from the Inside

• The popular Bitcoin electronics retailer BitcoinStore sold 2184 BTC (~$300,000) worth of products in the month of April, putting them roughly on target to hit their goal of $850,000 by June 30.
• The popular Bitcoin payment processor BitPay announced that they have passed 5,000 merchants.
• Amagi Metals, a precious metals seller that started accepting Bitcoin at the end of last year, announced that they have sold over $750,000 worth of products between April 1 and April 26, including a record of over $220,000 in a single day.
• For the first time, another country briefly overtook the United States with the largest number of downloads for the Bitcoin-Qt client. The country in question: China. China has also seen trade volume on its exchanges increase by a factor of thirty these past four months, compared to a finally began shipping their long-awaited ASIC mining hardware. Although power consumption turned out to be roughly six times higher than originally planned, and physical weight and volume two times greater, the devices are still somewhat more efficient, and much cheaper, than those offered by Avalon.
• “The Daily Bitcoin“, a new daily podcast discussing issues from all sides of the Bitcoin ecosystem, started releasing episodes.

…And From the Outside

• The popular online dating site OkCupid has started accepting Bitcoin as payment for its premium “A-List” service, offering special features somewhat similar to Reddit Gold. A major Danish dating site, singles.dk, quickly followed suit.
• The popular softcore-porn site MetArt started accepting Bitcoin (link safe) along with its siter sites.
• PayPal’s chief director David Marcus stated on TV that PayPal was considering integrating Bitcoin as a funding option. Western Union and MoneyGram also expressed interest in the currency.
• The Libertarian Party of Canada started accepting Bitcoin donations, and a potential Libertarian Party candidate for the 2016 election in the United States announced that he would only be accepting precious metals, Bitcoin and Litecoin donations.
• Salon Supply Store and IWannaBuy became the first retailers in South Africa and China, respectively, to accept Bitcoin.
• The One Foundation became the first Chinese charity to accept Bitcoin donations, receiving $30,000 within two days. Two local US charities, the homeless outreach group Sean’s Outpost and Bitcoins for Boston, started taking bitcoins as well.
• The Pirate Bay started accepting Bitcoin donations, placing a Bitcoin address on their front page and raising over 14 BTC ($1,800) in the week following the initial announcement. Other torrent sites have quickly followed suit, although with less success due to their comparatively lower popularity.

Scandals And Hacks

• Bitcoin mining malware was detected spreading through Skype, and plain old Bitcoin stealing malware also became increasingly prevalent.
• In the aftermath of the April 10 crash, nearly all major exchanges were overwhelmed by massive spikes in usage combined with multiple denial-of-service attacks. Bitcoin exchanges are still in the process of upgrading their systems to be able to handle the new volume.
• The Bitcoin exchange BitFloor saw its bank account closed down, leading founder Roman Shtylman to close the exchange for good and start returning deposits. Cavirtex and CADBitcoin in Canada also saw their accounts closed down, although the other major Canadian exchange, LibertyBit, remains confident that they are “in full compliance with Canadian laws” and a bank account closure is unlikely to happen to them.
• The European Bitcoin exchange Bitcoin24 saw its Polish bank account closed, and its owner under suspicion by German financial authorities for embezzling clients’ funds for personal use.
• The Bitcoin wallet provider Instawallet, which offered the easy to use but very insecure scheme of using a URL as a sort of “password” to its wallets, saw these URLs leaked in a database breach, and the attackers immediately proceeded to clean out Instawallet users’ funds.
• Bitcoin Central was hacked through its VPS provider OVH, leading to “a few hundred BTC” of losses. The site is shutting down until what its owners expect to be some time this summer to upgrade their security systems.
• The Bitcoin and Tor-based “anonymous market” Silk Road fell under two consecutive DDoS attacks, and was taken offline for a total of roughly four days. However, in both cases administrator Dread Pirate Roberts was able to bring the site back online, declaring a sale to celebrate the first of the two victories.

Roger Ver is an entrepreneur, investor and Bitcoin Pioneer. He has bet a lot of intellectual and monetary capital in the Bitcoin revolution, which he supports not just because it is a technological advance in our financial infrastructure, but also because of the new hope for human liberty that it represents.

 

Bitcoin Magazine: How and when did you first hear about Bitcoin?

Roger Ver: I first heard about Bitcoin in late 2010 on the www.freetalklive.com radio show / podcast.

 

BM:Why is Bitcoin important? Why is it different?

RV: Bitcoin is different from any other payment form in the history of mankind.

For the first time in history, anyone can transact with anyone else, anywhere in the world,  and it is impossible for a 3rd party to interfere in any way.

 

BM:What makes you think that it will catch on?

RV: All throughout history,  people (thieves, kings, tax collectors) not directly involved in a transaction, have forcibly interfered in other people’s transactions.  Bitcoin now gives everyone on the planet the option of removing themselves from the arbitrary control of others.

 

BM:What makes you think that it will last? Is it really that resilient?

RV: The only reason Bitcoin wouldn’t last would be because something even better comes along, so all the proponents of individual liberty still win.   If Bittorrent is any example,  the Bitcoin network really is that resilient.

 

BM:Is Bitcoin really censorship-resistant? Can it thrive in, for example, China? Argentina?

RV: It can thrive anywhere in the world with the internet.  That currently includes China and Argentina. Even non-Bitcoin users would be rioting in the street if a government tried to cut them off from the internet.

 

BM:Can Bitcoin scale? What will it need to support 100 million users?

RV: Bitcoin can scale, but will surely experience some growing pains along the way. As it scales,  there will be more and more people with a vested interest to help fix any issues that arise.

 

BM:How will Bitcoin change the world? Describe your best-case scenario for Bitcoin 10-20 years from now.

RV: Governments currently pay for their actions through theft (taxation), and counterfeiting (inflation).  Bitcoin will make taxation much more difficult,  and inflation impossible. More people were killed in the 20th century by their own governments than by all wars combined. The odds of you being murdered by a government, not including wars, is higher than your chance of dying from diabetes, alcohol, tobacco, traffic accidents, homicides, and just about all other single medical illnesses.

In my ideal world, Bitcoin will bring an end to the nation state, allowing people across the world to deal with each other on a voluntary basis.

 

BM:Do you consider Property a Natural Right (like Free Speech)? Or is it just an artificial legal construct? What about IP?

RV: I believe that property is a natural right that stems from each individual’s ownership of their own body.

People own property when they mix their labor with something that was previously unowned,  or voluntarily trade with others for existing property.   I was persuaded by Murray Rothbard‘s arguments regarding IP.  Patents are an illegitimate grant of monopoly privilege by the state.  Copyright is a perfectly valid contractual agreement.

 

BM:Medium of Exchange or Store of Value? If you had to choose just one of these two functions, which would you rather have Bitcoin be optimized for? 

RV: In most circumstances these have traditionally been two sides of the same coin.  Bitcoin is currently better as a medium of exchange,  but with time, I believe it will also become a store of value.

 

BM:Are you worried about competition? Do you think that Bitcoin will be replaced by something better?

RV: I hope Bitcoin is replaced by something even better for the same reason I hope my computer will be replaced by a better model in the future.  Things being replaced by something better is what makes the world a better place.

 

BM:What do you think will be the first big Bitcoin fork that really divides the community? Which side will you choose?

RV: I don’t know what will cause the first big fork,  but I am sure that I will take the side that supports individual rights.

 

BM:Can Bitcoin be hijacked and mutate into Fedcoin? can it be centrally controlled?

RV: I think this is unlikely since people can now voluntarily chose to use whatever crypto currency they want.

 

BM:What Bitcoin projects are you currently involved in?

RV: I’ve invested over $1M USD of my own money into over a dozen Bitcoin related startups.

The most well known would be Bitcoinstore.com, Bitinstant.com, Bitpay.com, Blockchain.info, Coinlab.com, Bitcoinfoundation.org. If you have a great Bitcoin related idea that needs funding,  please contact me!

The One Foundation, the first officially recognized private charitable fundraising organization operating in China, has now also become the first Chinese organization to start accepting Bitcoin donations. The organization published a donation address on April 23, and received 230 BTC ($30,000) within two days, instantly making it one of the most successful Bitcoin charities to date.

The One Foundation was originally created in 2007 by renowned Chinese film actor Jet Li, who then took a year off film-making in 2008 to promote the foundation. Private fundraising organizations are highly regulated in China – even now most applications to create one are simply rejected, so for the first three years of its operation the One Foundation was not even an independent organization; instead, it operated under the umbrella of the Red Cross Society of China, a government-connected organization operated by the Ministry of Health. However, its partnership with the Chinese Red Cross was a restrictive one. “Jet Li complained that the One Foundation had little say in deciding on the use of money it had raised,” Xinhuanet’s Wu Chen and Wu Caixia write. “According to his plan, his foundation sought to focus more on supporting domestic grass-roots NGOs, which lack both money and professionals, while the Red Cross Society of China is an organization paying more attention to disaster relief.”

In 2009, the Chinese government started a trial project in its “special economic zone” in Shenzhen to streamline the registration process, allowing the local government of Shenzhen to register foundations – a power previously only held by the federal government. Shenzhen authorities were willing to work with the One Foundation, and it was finally able to register as an independent foundation in 2010. In 2011, the Chinese Red Cross’s reputation was damaged by a scandal in which a 20-year-old claiming to be the “commerce general manager” of the organization, Meimei Guo, publicly flaunted artefacts of an extravagant lifestyle that many assumed had been paid for with charity money (it was later discovered that she was the girlfriend of someone involved with the Red Cross; he has since resigned). Concerns over government corruption and extravagance are common in China; the Chinese Red Cross is administered by the Chinese Ministry of Health, and so its employees gain the “iron rice bowl” guaranteed job security and welfare benefits of public servants – benefits that many feel are undeserved when ordinary Chinese working outside government agencies have little of either welfare benefits or job security. The Meimei Guo incident reignited these concerns, and two investigations into the matter was carried out.

When the Ya’an earthquake struck in April 2013, the total lack of confidence in the Chinese Red Cross became painfully clear. “Right after the quake,” Financial Times columnist Julie Zhu writes, the RCSC said on Weibo, China’s answer to Twitter, that it had sent a team to ‘inspect’ the quake-hit region. Tens of thousands of Chinese microbloggers fired comments back. The message from most of them: ‘Get lost'”. “As an ordinary citizen, I will never donate a penny to the Red Cross Society,” one user of Weibo, the Chinese equivalent of Twitter, wrote, and another added “The RCSC is shameless. The earthquake is terrible enough. We don’t need you to ‘inspect’. Get out of our sight.” By the end of the day, the agency had received only $23,000 worth of donations. Because of its past relationship with the Chinese Red Cross, the One Foundation also took some of the reputational damage from the Guo Meimei incident; its staff had to frantically rush to remove an old Red Cross link from their site when a user stumbled upon it. However, at the same time the foundation is quietly gaining credibility as an alternative, although both organizations are careful to avoid outright competing with each other for individuals’ donations.

Soon after the earthquake struck, the One Foundation also decided to try something new: accept donations in bitcoin. The organization released the address on April 21, and within two days it received over 230 BTC – marking what appears to be the first significant Chinese Bitcoin fundraising drive in history. “Welcome geeks and hackers’ bitcoin donations to the One Foundation,” a representative wrote in a brief reply written in Chinese when asked about the donation address by Bitcoin Magazine. The 230 BTC donated are worth about $30,000 today; when compared with the agency’s total receipts of $2.4 million USD, this means that, within the scope of this particular fundraising drive, Bitcoin was responsible for an entire 1% of China’s largest independent charity’s revenue. The amount was not even from a single donor; the three largest donations were 88, 39 and 25 BTC respectively, but all other donations were 10 BTC or lower. Given that the organization had started accepting Bitcoin quietly, with no news of its Bitcoin acceptance or even the earthquake in the English-speaking Bitcoin media, this leads to an important question: where did the donations come from? There seems to be only one logical answer: a growing, and already quite developed, Bitcoin community in China itself.

There are also other signs that point to a massive surge of interest in Bitcoin in the Chinese community. Just like everywhere else, interest in Bitcoin according to standard indicators like Google Trends and exchange trade volume has risen massively over the past four months, but in fact Bitcoin in China is growing even faster than elsewhere. While trade volume at the leading exchange MtGox peaked at about 10 times January volume during the peak two weeks ago, trade volume on BTCChina increased by a factor of 30. April 23 became the first day that any country downloaded the reference Bitcoin client more than the United States; the country in question was China.

There are a number of reasons to believe China has solid potential to take up Bitcoin. The Chinese already have experience with virtual currency in the form of QQ Coin, although that particular attempt at virtual currency was eventually crippled by Chinese regulatory authorities. Bitcoin may enable Chinese users to evade currency controls to a much greater extent than previous centralized systems like QQ Coin ever did. Earning or trading virtual currencies in video games is also a popular occupation; the archetype of a “Chinese gold farmer” collecting in-game assets in massively multiplayer online games to sell for profit is quite real.

The greatest hope, however, lies in bridging the Chinese and Western worlds. Most of North America and Europe are standardized on a number of proprietary platforms for payment: PayPal, Visa and Mastercard come to mind. China has its own equivalents; Alipay is perhaps the best known. Bitcoin will not fix the language barrier between the two worlds, but it can certainly make economic interaction much more seamless; a store catering to Chinese expats called IWannaBuy started accepting bitcoins only a few weeks ago. Bitcoin may even end up being a significant boost for the entire Chinese non-profit sector; charitable donations in China currently only amount to about 0.09% of GDP, so the fact that Bitcoin opens the door for these organizations to receive international donations – from, say, Chinese expatriates living in Canada and the US with families still in China, opens an opportunity for Bitcoin and Chinese charity at the same time. The Bitcoin community has just shown that it alone is willing, and able, to donate as much to the One Foundation as all of China did to the Chinese Red Cross – suggesting that Bitcoin may play a significant role in China’s non-profit, and perhaps even for-profit, sectors in the years to come.

After reaching $20 Billion in mobile transactions, PayPal President appeared on Bloomberg TV’s “The Pulse,” with Guy Johnson to discuss mobile security and share his thoughts on the Bitcoin currency. This morning, PayPal President, David Marcus, expressed his fascination with Bitcoin and opened the door to a potential implementation of the up in coming online currency. As PayPal strives to remain the leader in innovative and convenient ordering and payment processing for individuals and merchants, we are prompted to wonder whether such a hunger for leadership and ingenuity will prompt PayPal’s leadership to take the final jump to accept payments in the Bitcoin currency.

Most recently, PayPal worked with Jamba Juice to develop a PayPal iPhone app to provide advanced order and payment options. In essence, customers, can locate a nearby Jamba Juice on their mobile devices, place an order, pay for their order, and have their juice ready to go upon arrival to the popular smoothy and fruit juice chain. Such a process would be expedited with the use of the Bitcoin currency. Without a need to go through multiple steps, interested customers merely need to use a Bitcoin wallet and scan a QR code to process payments.

What attracts most to mobile payments is the convenience factor for merchants and customers. Additionally, having admitted that lines are blurring between online, mobile and offline payments, Marcus leads us to believe that PayPal may opt into the Bitcoin currency payment system based on digital wallets. Expressing an attentiveness to follow the ever changing lifestyles of customers, Marcus shared a potential interest in considering the Bitcoin currency and new payment techniques to meet customer needs. As convenience and relevancy is key, Bitcoin opens the door to expedite mobile transactions and save merchants and customers time and money.

Furthermore, in light of a push for more convenient payment processing methods, PayPal is still mindful of customer and merchant security in transactions. In an age of growing identity theft, PayPal is working with Google and Lenovo in the FIDO Alliance to develop a technology that provides greater authenticating methods for online and mobile payment devices an option to prevent hackers from accessing accounts by stealing passwords. Marcus expressed that while looking to increase in its competitiveness and speed in processing transactions, PayPal is also working to develop a greater level of trust with merchants and customers.

We already know that Bitcoin is a secure method of payment. Spending with Bitcoins does not subject consumers to the same risk of identity theft as spending with credit cards.  Credit card numbers and billing information can be stolen by identity thieves who assume people’s identities and spend their money. With With bitcoin, people can simply send payment to a merchant’s Bitcoin address without releasing any financial or personal information.

Marcus has cracked open the door to further consideration of the PayPal’s relationship with the Bitcoin currency. Here’s to another step into prominence for the Bitcoin currency.

OzCoin, one of the larger Bitcoin mining pools, has reported that an unknown attacker managed to hack into their server, defacing their website and database and stealing 923 BTC ($135,000) from their Bitcoin wallet. However, in less than a day over half of the money was seized as it was passing through the web wallet StrongCoin, and promptly returned to Ozcoin. 354.06 BTC are still missing, and will likely never be found, but this nevertheless leaves OzCoin with a much softer blow than what anyone expected.

Although most people agree with StrongCoin’s actions, this is nevertheless a very worrying sign for the security and privacy of StrongCoin, and other web wallets by extension. StrongCoin is what is often called a hybrid web wallet, accessible as a website on the internet but doing all of the transaction signing and address management in Javascript on the client side. Essentially, the client is downloading a fresh version of the wallet software from StrongCoin each time, and from that point, in theory, the software becomes just as secure as any other client-side program. The user’s wallet data, including the private keys needed to sign transactions, is backed up on StrongCoin’s servers, but it is encrypted and decrypted client-side using the user’s password so, once again in theory, there should be no way for StrongCoin themselves to get hold of the user’s private keys. StrongCoin heavily advertises this feature; on the website’s front page, they write: “Therefore our servers only hold encrypted private keys and neither we nor anyone else can spend your Bitcoins. Only you.” Except they just did.

Inspections of StrongCoin’s client-side code have confirmed that StrongCoin is in fact operating exactly as a client-side web wallet should. This leaves only one possibility: StrongCoin essentially hacked their own service. By injecting code that would automatically send all of a user’s funds to themselves as soon as the user entered their password, a web wallet provider can easily steal from any of their users provided that they log in with enough frequency. Attacks like these are the reason why security analysts have generally come out against Javascript cryptography; this and other arguments are well-explained in Matasano’s article “Javascript Cryptography Considered Harmful“. This time, StrongCoin used this vulnerability to do good, but at the same time they have critically undermined the trustworthiness of their service; people use hybrid web wallets over centralized services like Coinbase precisely because they do not trust central service providers to always do the right thing.

It should be noted that the other major hybrid web wallet provider, Blockchain.info, has taken steps to protect their users against such an attack. Their web wallet is also offered in the form of a Chrome and Firefox extension, which is essentially equivalent to any other piece of desktop software with the sole difference being that it relies on the user’s browser to interpret its source code. Safari users also have a Wallet Verifier plugin, although its scope is much weaker.

The other issue is privacy. Explaining how they discovered that the thief was using their service, StrongCoin wrote that “Everytime you make a payment from StrongCoin the fee goes to 1STRonGxnFTeJiA7pgyneKknR29AwBM77 so any payments from strongcoin held accounts are easily traced back to the site.” Presumably, bitcoins from the theft were traced through the blockchain until one of the transactions made its way to StrongCoin, at that point establishing a direct link between the StrongCoin account and the thief. This actually marks the first time that a significant amount of money was successfully recovered using the help of blockchain analysis. Although blockchain analyses made by various researchers have been able to draw intricate graphs mapping Bitcoin transactions to a few high-profile users, until now the public transaction log in the Bitcoin blockchain had not managed to track down or stop a single large-scale theft – casting doubt on claims that Bitcoin is not anonymous. This incident does not imply that Bitcoin now has no privacy at all; StrongCoin’s counter-hack was only possible because the transaction came very soon after the original theft and the thief had not yet made any strong attempt at obfuscation, and StrongCoin’s wallet in particular is weak in terms of privacy because add transaction fees are sent to one particular address (1STRonGxnFTeJiA7pgyneKknR29AwBM77). However, it is still a worthy incident to point to when confronted with concerns that Bitcoin facilitates untraceable theft.

Those using StrongCoin should decide for themselves whether staying with StrongCoin is worth it. Those who enjoy StrongCoin for the user interface features should probably stay; StrongCoin has been in the Bitcoin community for a long time, and if users are willing to outright entrust their funds to exchanges it is not a leap to trust StrongCoin to do the right thing as well. Those who like the cryptographic client-side security aspect, on the other hand, should consider switching to Blockchain.info – or, better yet, a client-side wallet like Electrum. As for StrongCoin themselves, if they wish to maintain their status as a secure hybrid web wallet, they should quickly get to work on catching up with Blockchain.info and implement a Firefox and Chrome extension.

The most famous torrent site in the world, The Pirate Bay, has just started accepting Bitcoin donations, placing a donation address on their front page. The initiative quickly proved to be very successful, raising over 10 BTC ($1,300) in little more than a single day, and other major torrent sites have quickly started to do the same thing. EZTV, OpenBitTorrent, PublicBitTorrent and istole.it have all added Bitcoin donation addresses onto their front pages.

In terms of promoting awareness, this is a fairly large step forward for Bitcoin. The Pirate Bay is ranked by Alexa as the 77th most visited site on the internet, placing it above all other Bitcoin-accepting sites to date except WordPress at 21st. However, the Pirate Bay’s use of Bitcoin, and that of the other torrent sites that have rapidly followed suit, is much more prominent. Unlike WordPress, Namecheap and Reddit, which do not make any attempt to advertise their acceptance of Bitcoin beyond an initial press release, the Bitcoin address on The Pirate Bay in particular is immediately visible to everyone who accesses the page. The message that The Pirate Bay is sending is clear: you do not need to be ashamed about supporting Bitcoin. Sure, Bitcoin is controversial, with some mainstream economists coming out outright against it, but what revolution isn’t? As an organization whose very continued existence has come to symbolize an ongoing victory against the pro-copyright establishment, The Pirate Bay understands this better than almost anyone else – except perhaps Wikileaks, although incidentally Wikileaks accepts Bitcoin too, and are actually doing quite well with it.

Of course, businesses like WordPress, Reddit and NameCheap are not charities, and essentially since have already made the bold step of accepting Bitcoin in the first place we should not demand them to more actively promote Bitcoin from the kindness of their hearts if they do not want to. Fortunately, however, at least in spirit The Pirate Bay is a charity, and as members of the Bitcoin community, we should be very grateful that such organizations exist. It is only through people and organizations continually and passively promoting Bitcoin in this way that the currency will reach any kind of significant cultural acceptance – simple news articles primarily lead to transitory interest that, in the case of the latest bubble, has already largely faded away. News promotes Bitcoin as something special; passive promotion promotes Bitcoin as something normal. The answer to which one evokes less hostile attention from regulators, more interest from casual users, and ultimately more willingness on the part of more traditional businesses to accept Bitcoin and show it, is clear.

When donating bitcoins in general, there is one security reminder that is important to repeat: don’t copy a donation address from anything other than the official website, and do not post a donation address without directly linking to the page that confirms the address as being legitimate. Posting fraudulent donation addresses is very easy, and it would be a shame if the Bitcoin community’s charitable nature were to be exploited by the most trivial of scams. Stay secure, stay safe, and feel free to donate a few bitcents today.

After nearly six months of delays, Butterfly Labs has finally released a copy of what appears to be the final version of one of their long-awaited ASIC mining products. Similarly to how Avalon first shipped a sample copy of their mining rig to Bitcoin developer Jeff Garzik, Butterfly Labs shipped their first unit to David Perry of Coding in My Sleep. David received the unit Saturday evening, and uploaded a video of himself unboxing and testing it the same day.

The unit in question is a Bitforce SC Jalapeno, the smallest of the four models that the company is selling, and it appears to be running flawlessly, connecting to mining pools with minimal setup and consistently cranking out 4.5-5.7 GH/s, within fifteen percent of its operating specifications. However, aside from the hash rate the statistics do not nearly live up to what the company had originally promised. The device is roughly 10x10x8 cm in size, about three times higher than the relatively flat design that had originally been conceived for the Jalapeno – the name itself coming from the idea that the machine could be used as a coffee warmer. In fact, the company has now quietly dropped the Jalapeno name from this low-end version of its product, preferring instead to use the more mundane “5 GH/s Bitcoin Miner”. However, the device is still somewhat better than those of its chief competitor: Avalon’s miner offers 65 GH/s for 620 W , or about 10.5 W per GH/s compared to Butterfly Labs’ six, and fits into the space of a desktop computer – a space into which Butterfly Labs can put 120 GH/s worth of its Jalapenos.

The device’s power consumption is 30 watts, giving an efficiency of 6 joules per gigahash (or 6 watts per GH/s; the two units are the same), six times higher than what the company originally promised. However, for those who have been following mining news, this is not surprising. When Avalon first released their miners in January, founder Yifu Guo had said in an interview: “They won’t reach the power consumption they were claiming. Recently they changed it to 1.2w, but they won’t even reach that.” Avalon’s own simulations at the time showed that even with Butterfly Labs’ superior 65-nanometer precision manufacturing process it would only be possible to reach about 3W per GH/s. At the time, many (including myself) criticized Avalon for their inferior figures with regard to both power efficiency and size, but now the truth has become clear: Avalon was simply being realistic.

In February and March, Butterfly Labs staff informed customers on their forums that they were having problems keeping to their power consumption targets, and at the beginning of April Bitcoin developer Luke Dashjr publicly confirmed that Butterfly Labs had a working ASIC, but the machine was consuming 180 W to produce only 25 GH/s. The device was not quite production-quality, and some argued that perhaps it was working so inefficiently because it was defective, but at that point it became clear to everyone that 1.2W would remain a pipe dream for many months to come. With its current efficiency of 6 W per GH/s, the “Jalapeno” remains more efficient, but far from what had been originally promised.

Thirty watts is still not a very high power expenditure; the extra 25 watts gives an expenditure of 0.6 kWh, or about $0.10 per day – a pittance compared to the $29.52 per day (that’s 5 GH/s per miner / 75000 GH/s total network hashrate * 25 BTC per block * 144 blocks per day * $123 per bitcoin) of profit that the device can currently produce. But it is nevertheless a serious inconvenience for two reasons. First of all, contrary to Butterfly Labs’ original intent, the device won’t be running off a USB anytime soon. Second, and more importantly, assuming that larger units will have a similar power to output ratio, people in apartments will have difficulty powering large numbers of Single SCs or a MiniRig (now expected to be 10 kW), meaning that those buyers will need to come up with alternative arrangements to run their machines.

Fortunately, Butterfly Labs has provided just that: in a recent FAQ update, the company wrote: “When ordering equipment from Butterfly Labs, you have the option of hosting your equipment locally with one of our affiliate data centers. Your hosted units will be added to a mining farm and you will be paid out regularly based on their collective output.” What is interesting is that Butterfly Labs and its competitor ASICMiner, taking two completely different paths, have now seen their business models converge to one and the same: Butterfly Labs, initially only selling machines, is now offering what from the buyer’s view is essentially an investment product – although they are careful to maintain that they are still actually selling hardware, giving the buyer the responsibility of configuring their device on the software side, and ASICMiner, originally literally selling shares, is now also selling machines. For those concerned about Bitcoin network centralization, Butterfly Labs’ announcement is unfortunate, as a significant fraction of the Bitcoin network will end up headquartered in one place, although the hosting location will not be administrated by Butterfly Labs themselves, and ASICMiner’s opposite announcement effectively counteracts the added centralization from this program.

So far, only the Jalapeno has been publicly released to anyone, so it still remains to be seen exactly what Butterfly Labs will do with their larger units. Josh Zerlan has said that the medium-size Singles will likely be about twice as large as the original ten-centimeter cube design and slightly wider, and stated in a public update that “obviously the minirig can’t fit 1.5 TH/s in a case the size of what we were planning, but we have some interesting solutions with regards to that,” but more specific answers are not available just yet. Fortunately, it appears that the Bitcoin mining company that we have been waiting on for so long is now in the final stages of working out these problems, so the Bitcoin mining landscape will continue to be interesting to watch for many months to come.

The fourth largest Bitcoin exchange in the world, BitFloor, has announced that it is closing its doors, and will soon be refunding deposits to customers. The announcement has nothing to do with recent technical problems that all exchanges have been facing for the past week to due the sudden massive increase in trade volume; rather, the root cause behind the shutdown is the closure of BitFloor’s US bank account. Founder Roman Shtylman writes:

I am sorry to announce that due to circumstances outside of our control BitFloor must cease all trading operations indefinitely. Unfortunately, our US bank account is scheduled to be closed and we can no longer provide the same level of USD deposits and withdrawals as we have in the past. As such, I have made the decision to halt operations and return all funds. Over the next days we will be working with all clients to ensure that everyone receives their funds. Please be patient as we process your request.

– Roman

founder – bitfloor.com

Trading has been suspended, and BitFloor founder Roman Shtylman assures users that they will get all of their current deposits back over the next few days, including USD holdings which will be refunded directly to depositors’ bank accounts by ACH transfer. International users are asked to await further instructions.

The exchange was a very popular way of buying bitcoins in the United States, so BitFloor customers will now have to look for alternatives. Some BitFloor users will undoubtedly be picked up by the dominant exchange MtGox through its North American partner Coinlab, although other options include Coinbase, CampBX and BTC-e.

Particularly affected by the shutdown are those users who had lost their deposits when the exchange was hacked in September. BitFloor lost $250,000 from the hack, normally a fatal loss for an exchange of its size, but BitFloor soon came back online with the promise that it would eventually pay back its depositors over time. The exchange even started fulfilling its promise, paying back 1.7% of the money owed in November and another 1% in March, but the remainder of the debt remains unpaid, and although most people had already written off the loss in September, there is now no longer any hope at all that the money will ever be recovered.

The announcement is also an unfortunate one because it represents a step backwards in the progress of the exchange industry as a whole. BitFloor is far from the first Bitcoin exchange to fall victim to this kind of shutdown; many Bitcoin exchanges around the world, including several times even MtGox, have had their bank accounts shut down, although in MtGox’s case the exchange’s main bank account in Japan has remained unscathed. The number of shutdowns has waned in recent months, but the risk has remained as risk for every exchange in the industry since exchanges first began to appear en masse in 2011. Now, when the need for more exchanges is clearer than ever, a reinforced precedent of banks shutting down smaller exchanges may instead push more users to larger and generally more resilient exchanges like MtGox out of fear for the safety of their funds. Fortunately, today exchanges do place much more emphasis on maintaining a healthy relationship with their banks and ensuring legality, and new alternatives are constantly appearing. Tradehill intends to launch a new, high-quality Bitcoin exchange soon, the cash-based Bitcoin ATM continues to be under development as a completely fresh alternative, and we can be sure that there are other projects now under development. Although Bitfloor will certainly be missed, hopefully it will soon find an even better replacement.

…then they laugh at you, then they fight you, then you win.

 I’ve always thought that to understand the mindset of a publication you just have to look at the advertising that it carries. Follow the money. That more than anything will tell you not only what hot-button issues a certain editor will care about (and his bias), but also who his readers are and what they might be interested in.

 If this is true, there is no other publication that represents the international mainstream economics establishment better than The Economist. Nowhere else will you find a higher concentration of ads and job listings for and from international institutions, executive MBAs, sovereign wealth funds, development banks and economic think tanks. When Washington’s IMF, Paris’ OECD or the WTO need new staff, you’ll probably see some of these positions advertised in The Economist’s pages.

 Thus it is hardly surprising that their editorial line reflects the Keynesian-monetarist mainstream consensus, with an added dose of central banker and international bureaucrat hero-worship. Their default position is to dismiss and abhor any kind of non-state voluntary money and defend our currently dominant fiat money system like rabid dogs. Their disparagement of gold and their dismissal of Bitcoin over the past few years has rivalled with Paul Krugman’s in bile and viciousness.

 Therefore when The Economist dedicates not one, but two full page pieces to Bitcoin in a day, and when these articles seem to be a little less dismissive than usual, we should really pay attention. The old guard is watching and worried. The fact that they no longer make the usual ignorant “Bitcoin can be hacked” or similar claims, also shows that they have been studying it in earnest.

 In Mining Digital Gold the attack is fairly obvious: Bitcoin is Napster.

 “Just like Napster, Bitcoin may crash but leave a lasting legacy. “

 Savvy investors and users should be looking to the next generation and view Bitcoin as an interesting and enlightening precursor, but not really waste too much time and effort on it. Litecoin and Ripple get a mention. I’m surprised the author didn’t mention Freicoin, after all if they are so scared of “hyperdeflation” they must love Gesell’s demurrage fee.

They fail to fully understand network effects and the first-mover advantage. They also fail to understand the power of open source projects and how they can evolve, especially if there is large and vibrant community of thousands of motivated individuals continually working on it. They also forget that Bitcoin had many failed precursors who could more accurately be called the Napster of voluntary internet currencies: DigiCash, e-gold and a score of other failed digital gold currencies, but also the original idea behind Paypal, before the PayPal Wars turned it into what it is today. Perhaps a proliferation of other cryptocurrencies will even help Bitcoin grow.

Neither is A New Specie much more subtle:

“The Bitcoin tribe is still a small one, and consists mainly of computer geeks, drug-dealers, gold bugs and libertarians. But wild fluctuations in the value of a Bitcoin, from under $20 at the start of the year to over $200 at one point this week.”

 …and of course never forget to add a taste of insult, guilt by association and other assorted smears.

 What I found particularly interesting was this:

 “There is a limit to how far digital currencies like Bitcoin can spread. Long-term demand for the dollar is guaranteed by the fact that American citizens must pay taxes in dollars. Governments will never confer the status of legal tender on a private currency.”

 It is not only historically wrong, as even the US government has recognised as legal tender not only private monies but also foreign money (read Edwin Vieira’s excellent book “Pieces of Eight : The Monetary Powers and Disabilities of the United States Constitution” or George Selgin’s “Good Money”), but it is also irrelevant. The citizens of Argentina and Venezuela care little for their local legal tender laws when they transact in US dollars. The people of Zimbabwe ignored Robert Mugabe’s and Gideon Gono’s ban on the use of dollars, euros, rand and gold as an alternative to the Zimbabwean dollar that they had destroyed. Similarly, the citizens of the World Wide Web will pay very little attention to the lack of a government seal of approval. Bitcoins can’t be used to pay for taxes? That’s a feature, not a bug.

 Finally this made me laugh:

 “Bitcoin might end up like MySpace, the now moribund precursor to Facebook.”

 In a sense the Bitcoin community is still relatively small. My estimate, based on the number of downloads of the original client and the statistics published by some online wallets, is between 1.5-2 million users at present (if someone has more precise numbers, I’d be delighted to see them!).

This is just a small sample (many thanks to blockchain.info for its transparency)

At its peak MySpace claimed 100 million users. If and when we get there, I’ll be happy to buy The Economist Group for a couple of bitcoins.

 The fact that even establishment mouthpieces like The Economist, Paul Krugman (this is just silly Paul, although I like the video game reference) or even this Georgetown clown see the need to comment on, and attack Bitcoin is a good sign. It is also a symptom that money talks, and that Bitcoin’s market cap is pretty loud at this point. Publicists say that all press is good press. However, in my humble opinion, Bitcoin is past the point where it needs much more press. What we need now is critical mass. Once we get to 10 million users growth could become exponential.

 Bitcoin’s ultimate success is far from guaranteed. There are still many dangers, both internal and external. A lot of work needs to be done, on scalability, exchanges and many other weak points. However we have the best odds in a hundred years of returning money to the free markets.

 We are winning.

In the New York Times, columnist Paul Krugman has written a lengthy article criticizing Bitcoin from an economic point of view, entitled “The Antisocial Network”. This is the third article on Bitcoin that Krugman has written so far, following “Golden Cyberfetters” from September 2011 and “Adam Smith Hates Bitcoin” from April 12. Although he is far from the only economist to have a dim view of the currency, unlike the others his writings on the New York times are read by a large number of people, and the article is also a representative sample of what many who share his political ideology are likely to believe, and so it deserves some specific attention.

The first thing that immediately comes out when reading the article is: Krugman has not bothered to do his research. After the introductory paragraphs, he asks the questions “What is bitcoin?”, and starts to answer “It’s sometimes described as a way to make transactions online — but that in itself would be nothing new in a world of online credit-card and PayPal transactions,” and then follows up “So how is bitcoin different? Unlike credit card transactions, which leave a digital trail, bitcoin transactions are designed to be anonymous and untraceable.” And then – that’s it. Krugman expands on the point a few sentences further, repeating the old canard that Bitcoin is “primarily” used for “narcotics and other illegal items”, but then he utterly fails to cite any of Bitcoin’s other advantages. Namely: no chargebacks, reducing costs for some merchants by as much as ten percent, much lower fees – low enough, in fact, that with BitPay’s recent fee cut to 0.99% the roundtrip of buying bitcoins with USD in the United States, giving them to a merchant, and having the merchant convert them back to USD has lower fees than a single credit card swipe (that’s 1.99% vs 2.9% + $0.30). Bitcoin is also international, making is just as easy to send money from Kyrgyzstan to Guatemala as it is to your neighbor. This is the reason why many believe that the next great Bitcoin bull markets will originate in China and Africa.

As for drugs, Krugman’s claim that “the main use of bitcoin so far, other than as a target for speculation, has been for online versions of those dark-alley exchanges” is outright false. Silk Road has actually considerably decreased in relative importance. Privacy has far more uses than just drugs; Target’s algorithms discovering that a girl was pregnant before her own father is one often-cited example. Also, although Bitcoin advocates often try to steer clear of making the point, even if Silk Road was much larger than it is, the majority of Americans now support legalizing marijuana – making Krugman’s mention of the Silk Road serve more as an ad than an actual criticism.

Krugman, however, does not talk about any of the above. Rather, as he frequently does, he examines the Bitcoin through a single lens: that of his particular views on monetary policy. Both in “Golden Cyberfetters” and “The Antisocial Network”, Krugman seems fixated on the fact that there will only ever be 21 million bitcoins in circulation, and the only partical criticisms of Bitcoin that Krugman has made rest on either this or the concept of mining. “The whole concept of having to “mine” Bitcoins by expending real resources amounts to a drastic retrogression,” Krugman writes in the previous piece. Of course, this is a reasonable argument – if a decentralized currency would emerge that has all of Bitcoin’s properties but does not waste energy on electricity, it would be a significant improvement over Bitcoin as it stands today. Ripple‘s consensus is one way that might potentially be done. However, when looking at the energy properties of Bitcoin it is important to realize the very thing that Krugman has failed to: that Bitcoin is much more than just a currency. The fiat currency analogue of Bitcoin miners – that is, the systems that Bitcoin mining has a chance to replace is not just the mint and the Federal Reserve; rather, it’s the mint, the Federal Reserve, Visa, Mastercard, Paypal, Western Union and half of the banking system.

The reason that one can make such a lofty claim is that, unlike fiat currencies, which have only become digital through proprietary addons created by intermediaries such as those listed above, Bitcoin is digital from the start. In the case of fiat currency, you do not need any intermediaries to transmit money offline – you can just hand the counterparty the bill – but you certainly do need them to transmit it online. And in an age when interest rates in the traditional banking system are essentially zero, the reason why most people deal with banks at all is that they have to in order to do anything financial in an increasingly digital age. With Bitcoin, on the other hand, that need disappears. Sending money is as easy as sending an email, and so any intermediaries that do exist either have to do with interfacing with the traditional banking system, or adding genuine value. Of course, I say half of the banking system because banks do, at least in theory serve an important function in the economy, and regardless of who is doing is that function will have to be done somehow. Thus, banks will certainly not disappear entirely in a world where Bitcoin emerges into the mainstream. However, they will actually have to provide depositors with an incentive for storing their money with them, and part of that will necessarily be convincing depositors that they are legitimately engaged in making loans to value-generating businesses rather than martingale-style gambling – and their size and scope will almost certainly considerably reduce as a result.

As for the monetary critique, I personally agree that having an entire world running on nothing but Bitcoin as a medium of exchange and store of value would be a disaster. But that is extremely unlikely to happen. Bitcoin is only the first in the cryptocurrency movement, and we will likely see many more to come. Ripple already stands out as a promising candidate. A cryptocurrency based around a built-in mechanism for trading computer power is something that we may well see in ten years’ time. Bitcoin may well simply serve as an intermediary “glue” currency that will make it easier for all of the world’s other currencies – fiat currencies, other cryptocurrencies, local currencies, not-so-local currencies based around internet communities, gold, and even potentially stocks and bonds, to work together with minimal friction. The Bitcoin network can also serve as the backbone of the decentralized stock exchange, allowing large corporate and perhaps even government bonds to be traded as monetary instruments with a stable value and most of Bitcoin’s advantages.

Now, for the philosophical. Although it is difficult to notice, in the next section Krugman actually contradicts himself. Near the middle of the article, he writes: “Gold’s value comes in part because it has nonmonetary uses, such as filling teeth and making jewelry; paper currencies have value because they’re backed by the power of the state, which defines them as legal tender and accepts them as payment for taxes. Bitcoins, however, derive their value, if any, purely from self-fulfilling prophecy, the belief that other people will accept them as payment.” Near the end, however, he makes the opposite claim: “Even when people relied on gold and silver coins, what made those coins useful wasn’t the precious metals they contained, it was the expectation that other people would accept them as payment.” So which is it, Mr. Krugman, is money something that has always been just a social convention, or is it something that requires the support of physical value or the power of the state to have value?

The answer is, yes, money is just a social convention, Bitcoin, the US dollar, and to the extent of over 90% of its current value even gold included. First of all, the US dollar is not “backed” by the power of the state in the standard sense of the word – there is no ratio at which the state guarantees that a certain number of dollars satisfies this tax obligation. If the value of dollars on the market went down by a factor of ten, the value of each dollar toward paying one’s taxes would do the same. Even if you let this point slide, however, what Krugman ultimately fails to realize is that power is also “just a social convention”. To understand why, consider why people follow laws. Certainly, many of the most important laws on the books are simultaneously points of basic morality – don’t kill, don’t steal, and don’t defraud, and many people follow them for that reason alone. But what about gambling laws, drug laws, the intricate complexities of the tax code, patent laws (why 20 years instead of 21?), and business regulations? The answer is, if you break the law, the government will come at you with guns. But why does each individual police officer with a gun come at people (at least in theory) only when the victims have broken laws? Because if he won’t he’ll get fired, and perhaps even disciplined – by a legal system backed by other people with guns. There are authorities and chiefs at the top, but why do the rank-and-file follow them instead of other chiefs. The chiefs themselves do not have the military power in their hands to coerce their entire bureaucracy. The answer is, it’s just a social convention. This is the world we live in – it’s social conventions all the way down.

Second, the aspects of Bitcoin on which Krugman is fixated are not about avoiding society – indeed, the only possible function of money is as an intermediary for economic association. Rather, they are about avoiding centralized control. Those who hold pro-government beliefs often make the point of conflating society with government – making the argument that if you do not like centralized authority and control then you must be some sort of mountain man opposed to the obviously superior strategy of “doing things together”. A cursory read of libertarian economists like Mises, however, will quickly show that those who generally oppose government intervention do not do so because they despise cooperation – in fact, Mises and Rothbard in their writings essentially regard free-market cooperation as the highest good. The different sides may disagree on the extent to which decentralized cooperation and society is possible, but it is along those lines that this particular philosophical point promoted by some Bitcoin advocates is made – not some hatred of society in general.

The truth is, decentralized protocols are everywhere, and have served us well for thousands of years. Language, and spoken language in particular, is one example; although we have seen linguistic prescriptivists and the institutions like the Académie Française try to enforce some usages as more elevated and “correct” than others, by and large their efforts have failed; “slang” French has developed into a rich and expressive language in its own right without the Académie’s approval. In writing, prescriptivists have had more success, although that is because writing is taught through centralized formal education rather than the more natural style of learning by example through which children learn how to speak, but by and large language remains a construct that is literally “by the people, for the people”. The internet is another example; although it is far from fully decentralized, is far more decentralized than any long-distance communication medium we have seen before.

And finally, although the architecture of mainstream social networks like Facebook is centralized, it does not need to be; the only reason why alternatives like Diaspora have not caught on to date is their failure to overcome the barrier of network effects, not anything inherent in their lack of a centralized authority, and the existence of one in the case of Facebook arguably only harms it – see the concerns about advertising and privacy. Furthermore, although social networks are, for the time being, centralized, the activity that comes out of them is not – the leaderless Arab spring is one example, and even in their more mundance use the very purpose of a social network is facilitating the ultimate decentralized cooperation protocol of all: friendship.

But what is the benefit of decentralization and lack of control in the world of money? Many answers were given above: centralized systems are less responsive, power corrupts, and so on. But there is also another one: stability. This argument may seem ludicrous made in the wake of the largest bubble and crash in nearly two years, but one has to remember that the reason why Bitcoin is currently subject to such fluctuations is its small size, and the fact that so much of its value is dependent on the percentage chance that it will grow much larger than it is today. If Bitcoin becomes mainstream, we can reasonably expect it to be more stable than gold, as the two are somewhat similar in their function as stores of value, but unlike gold there is no uncertainty in Bitcoin’s supply.

Krugman’s argument against moving away from a fiat currency standard is that the US dollar has remained stable, and inflation continues to appear far away, and so there is clearly nothing wrong with the state of central bank money printing. In fact, Krugman says in other articles, since the introduction of fiat currency depressions have actually been much less frequent. But we have already seen that argument elsewhere: nuclear weapons. The “mutually assured destruction” doctrine stated that nuclear weapons would actually bring us peace, because nobody would dare start a war when the consequences could well be the end of the world. And, judging from historical evidence, it looks like it worked. Although we have seen some close calls, with the Cuban Missile Crisis and an accidental false alarm in 1983 almost leading to the annihilation of billions of lives, altogether American nuclear hegemony held through, saving tens of millions from the evils of conventional warfare. And yet a growing number of people are now looking to abolish nuclear weapons entirely. Why? Read over the last two sentences carefully. The lack of medium-scale wars that nuclear hegemony brought saved tens of millions of lives, but it almost killed three billion. This is the effect of illusory stability through centralization: you replace guaranteed small shocks with a small risk of a big one, and until the big shock comes those who express their fear of it are decried as charlatans – and when it does come, their dead bodies are memorialized as heroes.

An argument can be made that centralized fiat currency, in the form of the US dollar/Euro hegemony, is similar; Greece and Cyprus are roughly parallel to the Cuban Missile Crisis and the 1983 incident, although unlike the Soviet incidents both Greece and Cyprus are still very far from safe. For the past three years, we have been a step away from what appears to be total collapse. Given that risk, and the catastrophic consequences of total collapse becoming reality, the more frequent recessions of the 19th century seem preferable by comparison. “The very act of suppressing fluctuations renders systems extremely prone to large-scale disruptions,” the economist Nassim Taleb writes (those interested in complexity and fragility in economics should consider reading his books The Black Swan and Antifragile for a deeper view).

In this context, having even one currency that is free from political control can make a large difference. The purpose of Bitcoin is not simply to replace the fiat currency standard with a pure 21-st century gold standard; rather, the purpose is to add a measure of diversity by giving people a choice. If Bitcoin collapses, there will still be USD, stocks, bonds and gold are a store of wealth. If the “mainstream” economy collapses, Bitcoin’s rise following the Cyprus incident shows well that Bitcoin serves as an effective hedge. The US dollar is not the endgame – history shows that few currency regimes last longer than about fifty years without going through fundamental changes like hose in 1933 and 1971, and neither is Bitcoin. But it is quite likely to be either part of the next solution or a stepping stone that will get us there.

April 10 was perhaps the most eventful day on the Bitcoin markets in nearly two years. The price started the day at roughly $200, briefly spiked up to an all-time high of $266, and then precipitously crashed, dropping down to nearly $100 in a matter of hours, and perhaps signalling the end of the four-month-long rally since the currency first started to rise from its plateau of $13 in January this year. Trade volume on all major exchanges, even if denominated in bitcoins, hit an all-time high, including a total of over $45 million USD (550,000 BTC) traded on MtGox on April 12 alone, and over $30 million on April 12 – altogether earning the exchange significantly over $100,000 in revenue over the three days. Public attention on Bitcoin hit an all-time high, with the Bitcoin subreddit briefly becoming the 14th most viewed Reddit community, even surpassing front-page categories such as “movies” and “technology“. For the next two days, the carnage continued, and the price fell to a low of $54.20 before partially recovering roughly to the April 1 level of $100, as the Bitcoin community is left wondering what is going to happen next.

The major events of the crash are as follows. At 12:00 GMT on Wednesday, March 10, the Bitcoin price struck its new high of $266, and the direction the price was going slowly began to turn down. After collapsing to $240 the price briefly rebounded to $258, but then quickly resumed its downward path, breaking below $225 in four hours, $200 in five hours and striking a low of $105 at 19:20 GMT, before once again temporarily rebounding to a maximum of $203 for several minutes. During the downswing, the trading ending lag on MtGox – that is, the amount of time between a user making an order on the exchange and the order being processed, itself reached a new record high: over seventy minutes.

Seeking an explanation for the crash, many quickly came up with one possible answer: DDoS attacks. A distributed denial-of-service, or DDoS, attack, consists of an individual or organization with a large computer network attempting to deliberately overwhelm a target with requests so that the server is too busy to handle legitimate users. Such attacks had happened to MtGox before in the past few months, the likely intent having been to trigger a price crash which the perpetrators can profit from by shorting or buying at the bottom, and so naturally many were wondering if the same had happened on April 10. But MtGox’s Twitter account, which would become the main outlet for public relations messages from the exchange throughout the entire period, soon confirmed that this was not the case; “it is not DDOSed, it is lag due to high volume trades,” the tweet explained. A few hours later, trading somewhat subsided, and latency decreased, but soon enough another problem appeared: some users were having problems reaching MtGox’s website at all. Fortunately, the issue was not too serious; “Network maintenance, don’t freak out!”, a second tweet explained.

Soon enough, however, the DDoSers did finally join the scene. Access to the site continued to be sluggish, and less than than twenty minutes after the tweet about the maintennance, MtGox released yet another tweet: “Maintenance Over, however we are now under a DDoS attack.” Also, users investigating MtGox’s public order logs soon discovered that another kind of DDoS was taking place at the same time: MtGox’s database was being flooded with thousands of small orders of very low value, which many believe could have no possible purpose other than to slow MtGox down.

A few hours after that, MtGox responded to the situation with a drastic move that had not been done for nearly two years: for two hours, the exchange shut down trades entirely, claiming that its staff needed the time to upgrade its servers to handle the increased load. After the two hour maintennance, however, the exchange had further technical issues, and remained essentially inaccessible for eight hours further. The Bitcoin economy was already in a state of shock, and loss of the largest exchange in the Bitcoin economy, on which roughly 60% of all trades normally take place, put the markets into a state of panic. Other exchanges, many of which were also intermittently down due to the combination of DDOS and trading activity, disagreed on exactly what the price was supposed to be, but a general consensus soon formed: it was going further down. BitStamp dropped down to about $60, and when MtGox finally re-opened it quickly dropped from its pre-shutdown level of $120 to $75, briefly rose back to $130, and then once agan plunged, ultimately hitting about $60 as well. On April 12, MtGox struck a low of $54.25, but the panic finally subsided, and the price has since rebounded to over $100.

What is most interesting about the price crash, however, is not the change to the price itself – rather, it’s what we learned from it. Ultimately, the crash has served as a sudden, massive stress test to all sides of the Bitcoin ecosystem: the infrastructure’s ability to hold together, the market’s ability to withstand and recover from the sudden drop in price, and the Bitcoin community’s ability to retain its confidence. And the test proved to be very revealing. We now know exactly what are the strengths of the Bitcoin economy, where the performance is acceptable and where we seriously need to improve.

The main weakness of the Bitcoin economy is now obvious: the exchanges, and specifically the singular dominant position of MtGox. After MtGox was first created in 2010, it quickly became by far the largest exchange in the Bitcoin economy, at its peak in June 2011 reaching a market share of over 97%. Since then, the relative size of MtGox has decreased somewhat as other exchanges have slowly gained the community’s trust, but the market remains an oligopoly, with MtGox still retaining a market share of about 65%. The sheer volume of bitcoins traded on the exchange, combined with the prime importance of exchanges to the Bitcoin economy, gives MtGox the power to, whether through malice, incompetence or simple human error, significantly manipulate the Bitcoin price in either direction unilaterally.

On April 10, it was MtGox’s poor preparation that proved to be the deciding factor. The trading lag problem that MtGox faced on the first day of the crash was not new; in fact, it had been present during nearly every minor flash crash on the way up to $260 since the price first broke through its 2011 all-time high of $32, with trading engine lag frequently reaching twenty to forty minutes at its peaks. Despite this advance warning, and despite the massive amount of resources that the company had at its disposal following three months of rapidly increasing profits from trade commissions, the exchange did nothing to improve its systems – until it was already too late.

Other exchanges tended to perform better than MtGox throughout the three days of the crash, but they too were not unscathed. BitStamp shut down entirely for about one hour on April 11, but remained relatively responsive for the rest of the duration. Bitfloor had three brief shutdowns lasting one to two hours each, and BTC-E saw about three hours of downtime on April 11.

Thus, the technical issues alone are relatively excusable; other Bitcoin exchanges, including BitFloor, BitStamp and Coinbase, are also struggling to adapt to the Bitcoin community’s rapid growth, although some are managing better than others. MtGox’s main failure, rather, is how it dealt with them. Soon after its tweet confirming that there was no DDoS, the exchange released a longer message (Pastebin) explaining what had happened in more detail. The message started with the following, now infamous, phrase: “we would like to reassure you [that] no we were not last night victim of a DDoS but instead victim of our own success!” It then followed:

Indeed the rather astonishing amount of new account opened in the last few days added to the existing one plus the number of trade made a huge impact on the overall system that started to lag. As expected in such situation people started to panic, started to sell Bitcoin in mass (Panic Sale) resulting in an increase of trade that ultimately froze the trade engine!

“To give you an idea of how impressive things were here are some numbers that we would love to share with you guys:

• The number of trades executed triple in the last 24hrs.
• The number of new account opened went from 60k for March alone to 75k new account created for the first few days of April! We now have roughly 20,000 new accounts created each day.

In th eyes of many Bitcoin users, perhaps grieving at the sudden disappearance at their hope of instant riches, but also legitimately angry at the exchange’s failure to perform up to the Bitcoin community’s expectations, the message amounted to little more than rubbing salt on their wounds, gloating that while the rest of the Bitcoin economy, and even MtGox’s actual service, was in disarray the exchange’s usage volumes and profits were higher than ever.

The second major error that MtGox made was shutting down the exchange. Upgrading one’s systems is a laudable goal, and even if it took a twelve-hour downtime it had to have been done eventually, but MtGox missed completely on timing. At a time when the Bitcoin market was in the middle of its greatest phase of instability in nearly two years, and what Bitcoin users wanted most of all was simply confidence that the infrastructure still worked, almost without warning the exchange responsible for nearly two thirds of all of the world’s Bitcoin trade simply shut down. To be fair, there was some warning; at the end of their message denying a DDoS attack MtGox wrote that they would have to “close the exchange for two hours in the next 12 to 24hrs to add several new servers to [their] system,” but few received the message, and moreover there is a large difference between the two hours that were promised and the ten for which the exchange was down in reality.

Since then MtGox has made an honest effort at damage control, and took two major steps to regain the public trust. The first, unfortuantely, proved to be counterproductive. Seeking to make up for their poor performance in the eyes of the Bitcoin community, MtGox temporarily lifted all trading fees on the exchange. At first glance, this appears to be an act of niceness, but an understanding of basic economics would have quickly revealed the folly of the scheme: once fees were taken off, trade volume spiked up massively, and trading lag once again hit over 45 minutes on April 13, requiring MtGox to shut down once again for five minutes.

The other measure that MtGox took, however, was quite laudable, and undoubtedly had a positive effect on maintaining confidence. MtGox CEO Mark Karpeles opened thread on Reddit saying “We are MtGox. Ask [us] anything.” Some quotes from MtGox’s answers include:

We absolutely understand this. The fact is that we are programmers and engineers, not PR guys, and we are still building out our capabilities beyond technology and into servicing our customers better. So, yes, we’re moving on this now and have secured help … Please keep in mind that we are not native English speakers, and that was a poor choice of words. The “success” is in the quick uptake of bitcoin most of all.

NO. Everything is accounted for (BTC and money). Fractional reserve is absolutely against our principles. In fact 90~95% of BTC are held in cold storage.

No. We have a company policy that forbids employees (contractually) from trading on the exchange

Our system was designed to handle 2~3x our normal load, but now we’re experiencing 10x the amount, which was difficult to prepare for (it takes weeks) with the sudden new accounts. We have two problems: the DDos and volume related to new accounts. The trade engine is capable of accepting much more of a load. Within 2~3 weeks we will completely rewrite the trade engine, in the meantime we shut down the system today and installed a new server with the current trade engine. Of course, if we didn’t have DDos everything would be fine, so now we’re dealing with two issues at once.

MtGox now much more frequently releases updates on Twitter, and posts longer messages on issues like outages and denial of service attacks when needed. As a result, the exchange has arguably shifted from being one of the most closed companies in the Bitcoin community to one of the more open.

Nevertheless, what the events of the past three days have shown is two things. First, the current state of Bitcoin exchanges as a whole is woefully inadequate to handle the kind of load that would come with being a mainstream part of the global financial system. The root of the problem is not the lack of a sufficient number of servers; rather, it’s architecture. Aside from the brief maintennance and DDOS on April 11, MtGox’s network-facing servers generally performed well, and it was clear that processing orders was the bottleneck. From the information that is publicly available, many have concluded that MtGox’s database architecture can currently only handle orders in series (ie. one at a time) – a setup that works decently for small numbers of transactions, but breaks down completely at a large scale.

“A modern stock exchange today really isn’t an application, it a group of systems that pass messages. Stock trading systems are designed that way so that when you place an order it wil be executed in a predictable and constant amount of time,” security expect Andreas Antonoupolos explains on The Daily Bitcoin Show. The exchanges we have today, on the other hand are largely designed more like traditional web applications, an industry in which order of operations is not particularly important because the activity of most accounts is independent. This is understandable; most Bitcoin exchanges were originally designed by web developers, who may be experienced in their own fields but had no experience implementing financial systems before they came to Bitcoin. However, it nevertheless means that the performance of nearly all exchanges is currently highly suboptimal.

Fortunately, Bitcoin is now seeing more and more attention from mainstream financial institutions, and it is quite likely that from this attention much more high-quality exchanges will emerge. There are already specially designed high-volume exchanges appearing specifically to serve the needs of high-volume institutional investors; Tradehill’s Prime and the Malta-based Exante’s Bitcoin hedge fund may well be only the first two of many more to come, and now that the recent FINCEN ruling has established guidelines describing the legal status of Bitcoin exchanges it would not be surprising if a mainstream financial firm was already working on a professionally designed Bitcoin exchange for ordinary users as well.

Second, the Bitcoin economy is now simply too large for one exchange to handle, no matter how efficient and scalable its architecture may be. Both this crash and many previous crashes, large and small, were ultimately caused by some kind of lag or glitch on MtGox, and the fact that the actions of a single company are essentially the deciding factor for whether each individual flash crash turns out to be minor or catastrophic bodes ill for the future stability of the Bitcoin markets. There are alternatives; BitStamp has expanded greatly in the past few months, as have Bitfloor and BTC-e, and very soon they will have the opportunity to expand much further. The reason is this: one of MtGox’s main advantages over exchanges like BitStamp to date has been the fact that it allows users to place orders even if they do not have enough money in the right currency to fill them – a very useful feature, as it allows a trader to, for example, put a buy threshold at $110 and a sell at $140 and set himself to profit from a movement in either direction if he believes that the price will ultimately stabilize in between. Starting April 17, however, this feature will be gone, making MtGox no longer any better than BitStamp or anyone else.

There are also several other options are on the horizon. One developer in San Francisco has started ButterCoin, an open source project to create an exchange platform that can handle a high level of load. Another “exchange” worth watching is Ripple, a new decentralized digital payment network that intends to allow users to store and handle any currency, including fiat currencies, bitcoins and potentially even precious metals, using Bitcoin-like wallets, addresses and transactions. Ripple includes a built-in “decentralized exchange” functionality that allows users to trade one currency in the Ripple network for another directly – that is, without involving any third parties to complete the transaction. The system is not perfect; just like Bitcoin, ultimately every server must verify every transaction, but unlike MtGox the architecture was designed to be highly parallelizable from the start, allowing servers to scale to any number of transactions simply by adding more cores.

But there is also an aspect of Bitcoin that has held its own extremely well the last three days: its reputation. Even after Bitcoin crashed, articles on The Economist, Time and TechCrunch rushed out to look “beyond the bubble” and defend it, the Winklevoss twins, known for their very early involvement in Faceboook, caught the media’s eye for their support of Bitcoin, and the Business Insider ran a piece by Dan Kaminsky positively discussing one of Bitcoin’s greatest strengths: its security. “It is a fairly open secret that almost all systems can be hacked, somehow,” Kaminsky wrote, “… by all extant metrics in security system review, this system should have failed instantaneously, at every possible layer. And, to be fair, it has failed at other layers – BitCoin thefts have occurred, in the meta-code that surrounds the core technology itself. But the core technology actually works, and has continued to work, to a degree not everyone predicted.” After the crash, CNBC added a Bitcoin price ticker to their webpage – an indicator that at least that organization believes that Bitcoin is something worth watching for many months to come. In June 2011, the response was the opposite; media attention quickly turned grim, and over the next five months mainstream websites wrote a number or articles describing Bitcoin’s ignominous fall. This time, the extent to which the usually fickle mainstream media is willing to continue believing in Bitcoin should shock everyone. To an extent that many still do not realize, this is a hugely positive sign for Bitcoin going forward.

From here, it is hard to tell what will happen. The last two major crashes, one in June 2011 and the other in August 2012 had very different aftermaths; after the crash from $32 to about $15 June, the price continued dropping, almost hitting pre-bubble levels with its November low of $1.994. After August, the price recovered quickly, bouncing between $10 and $13 for four months before finally starting its present rise. This time, anything could happen. We could always see further drops, with one capitulation following another and the price perhaps even dropping below $30, we could stabilize at $100 to $180 or we could see $500 within two months; at this point it is simply too hard to tell. Even if Bitcoin’s meteoric rise does not continue, however, all in all in two years’ time we will have gained greatly from the ordeal. Out of the bubble of 2011 came companies such as BitPay, WalletBit (now BIPS), BitStamp and BitInstant, all of which are now mainstays of the Bitcoin economy. We have already seen a number of businesses come out of 2013; the BitcoinStore, Prime and Ripple are three great examples, and there are many other projects brewing behind the scenes, and if Bitcoin continues to grow it will be these that set the stage for the bubble of 2015 – or the bubble of May 2013. Until it comes, we’ll never know.

Using botnets to mine bitcoins is nothing new or interesting, but the latest entry in this wide category seems to be spreading quite rapidly through the Skype network. This iteration in the Bitcoin-mining-as-virus trend is really only unique because of the speed and method with which it’s spreading itself as well as its relative immunity to virus scanners.

While early reports have this malware spreading at 2,000 clicks per hour, the infection rate may be somewhat lower. To the best of our knowledge, this malware can’t magically infect your computer just from clicking a link – like most Skype malware, the link goes to a file which must be downloaded and executed by the user. This means that anyone who doesn’t fall for the old “funnypicture.jpg.exe” trick will register as a click but won’t be infected, though nefarious parties always seem have new tricks up their sleeves to trick even seasoned veterans.

Once infected, this virus begins CPU mining on the infected system. Yes, CPU mining.

Inexplicably, this most modern of Bitcoin malware is using the oldest and least profitable method of Bitcoin mining possible. Even with huge numbers of compromised computers it’s unlikely that CPU mining is earning this particular evil-doer much money at all. This move seems especially foolish when malware already exists that uses the much more profitable GPU of infected systems to mine.

Indeed, this new malware seems to lack most of the features we’ve come to expect from Bitcoin-based malware: It runs at a high priority, so users will notice it quickly as their systems slow to a crawl and it requires manual action on the part of the user to become infected, ensuring it can’t possibly reach peak efficiency. The only thing this seems to have going for it is that it’s not picked up by most of the major virus scanners – yet. Given that most virus scanners use a sort of fingerprint of known malware to do their thing, there’s usually a brief period like this for every piece of malicious code. Assuming the rest of this malware lives up (or down) to its already-established reputation, it’s only a matter of time before every virus scanner in town can find and kill it.

The good news in all of this is that, slow and drama-filled though it may be, the beginning of the ASIC era of Bitcoin mining is likely to raise mining difficulty so high that this sort of thing is unlikely to continue. In the meantime, well, botnets are still evil and all but I suppose I’d rather see them securing the network than sending spam.

The amount of Bitcoin-related media out there has gotten quite large over the past few years. For over a year now we’re had Bitcoin Magazine, but we also have a growing collection of Bitcoin songs, Bitcoin internet memes, a (unfortunately now defunct) Bitcoin video show and hundreds of Bitcoin guides, articles and books.

Now, we have another kind of media to add to the collection: a half-hour daily podcast. The show, founded by Adam Levine, Paul Russo and Eli Sklar, has already aired three episodes, and has plans to continue producing five episodes per week for at least the next six months. It will cover topics from all parts of the Bitcoin ecosystem – “like Forbes covers money,” Adam Levine explains, and include an educational discussion of some aspect of the Bitcoin technology every day. There will also be a variety of different formats, including the daily audio podcast and a weekly video show aired on YouTube. Altogether, the show has the potential to be a great resource for Bitcoin newbies and more frequent Bitcoin users alike.

The three episodes that are already out can be found here:

https://soundcloud.com/mindtomatter/the-daily-bitcoin-episode-1
https://soundcloud.com/mindtomatter/the-daily-bitcoin-episode-2
https://soundcloud.com/mindtomatter/the-daily-bitcoin-episode-3

Happy listening!

Initially, Amagi Metals had joined the Bitcoin community with little fanfare. When four-year-old company first started accepting payments in Bitcoin in December 2012, it made no attempt to advertise the fact; indeed, the first time that the company received any significant attention from the Bitcoin community at all was when a visitor stumbled upon the site and created a Reddit forum thread in January. Even after that, for the first three months the Bitcoin option saw little usage, and after the forum thread came and went most of the Bitcoin world did not know that the company even existed.

However, behind the scenes word soon began to spread as a number of factors turned in Amagi’s favor. First of all, the Bitcoin community has grown massively in the last few months. Public attention on Bitcoin is through the roof, and nearly every business in the Bitcoin economy has seen massive spikes in usage. Second, the precious metals sector of the Bitcoin economy has shown itself to be ripe for competition. For over a year, Coinabul has been by far the dominant precious metals seller in the Bitcoin community, but it has been criticized for relatively high prices, and in the past month in particular the company suffered two major setbacks. At the beginning of March Coinabul’s reputation was shaken by a public relations mishap in which the company refused to refund an insured silver shipment that had failed to deliver because the insurance company failed to refund them, and two weeks later one of its two main employees, Jon Homlquist, left the company to work on BitcoinStore full time. Although Coinabul is still stronger than ever, these three factors together have prompted an increasing number of users to look for alternatives.

Fortunately, Amagi stepped in at just the right time. On March 14, the company announced that its total Bitcoin volume had reached $50,000, and three weeks later that figure was up to $175,000. Since then, volume has increased to an average of about $20,000 to $50,000 per day, and just today Amagi’s Stephen Macaskill reported that Bitcoin sales have exceeded $220,000 in the past 24 hours – transforming Amagi into one of the largest merchants in the Bitcoin community overnight.

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Stephen Macaskill is excited to be a part of the rapidly growing Bitcoin community, and has agreed to give Bitcoin Magazine an interview.

1. Tell us a little about the company. When was Amagi Metals first created, who were the people originally behind it, and why did you decide to start a precious metals company?

Amagi Metals was started by a friend of mine as a hobby to collect and sell coins and base metals. It was started as an eBay store back in 2008. His hobby turned profitable and paid for his college tuition. I saw a lot of potential in the business and he wanted to follow other ventures. So I bought the company from him and rebranded it as Amagi Metals. I chose the name because the 4,000 year old Sumerian cuneiform symbol amagi is the first known human representation of the concept of liberty. I think financial responsibility is important for a free society. Unfortunately the simple lessons that our grandparents taught us to manage our money have been lost. So my goal is to promote financial responsibility and sound money, so that we may live in a freer world.

2. How did you first find out about Bitcoin, and why did you decide to start accepting it?

I first heard about bitcoins from the libertarian community around 2010 when I was still in school. A friend called me one day in late 2012 and suggested that I start taking bitcoins. It didn’t take much convincing after that to accept bitcoins because I was already intrigued with the bitcoin experiment. So we started accepting bitcoins about a week later. It has been an exciting few months for us in the bitcoin community, to say the least.

3. What would you say are some of the important ways in which your company distinguishes itself from other previous metals sellers?

We focus on financial education and the promotion of sound money, free markets, and free minds. Some other precious metals companies may touch on those subjects, however they do not actively engage in the ideas of individual liberty paralleled with owning precious metals.
There are only a few reputable precious metal companies that accept bitcoins. Of those companies, we have the lowest prices and are comparable to the big names such as APMEX.
Our philosophy is also a little different from some of the big companies you may have heard of. We see gold as money, not as an investment, other companies advertise gold as an investment. I am referring to an investment as something you buy, wait for it to go up in value, and sell, for a profit. However we do not see gold and silver like that. Unless used as a currency, we think you should buy and hold gold and silver forever in the hopes that you never have to use it. Precious metals are used as an insurance policy, or hedge against inflation and economic turmoil and to protect your actual investments, such as stocks.

4. Where in the world do you ship to? If you ship outside the United States, what are your shipping fees, for both US and international, and how long does it take for shipments to get through?

We ship worldwide, however we do not ship to every country. USPS does not allow shipping of precious metals to some countries and other countries cannot be insured by insurance provider, so we do not ship to them. Shipping costs vary depending on location, the value, and weight of the metals. Domestic shipments generally run between $2-40, and international shipments run between $5-200.
Domestic shipments take 3-5 business days to arrive after your order has shipped. We mostly ship through USPS, which is a government run organization, so we tell customers that it may take up to 7 business days just to be safe. International shipments can take anywhere between 2-6 weeks to arrive. International shipping times can be very difficult to predict because of customs and shipping distance. The longest shipment we’ve seen has been 8 weeks to Australia, however we have seen shipments to Australia take as little as a week to arrive.

5. Also, you claim that all shipping is insured. How does the insurance work if a shipment is damaged or fails to arrive for whatever reason? Do you refund the customer first and then wait for the insurance yourselves, ask the insurer to pay back the customer, or something else?

For orders under $50, we actually self insure. A transaction is a binding contract, so we honor all orders either by delivering the goods, or refunding the customer, no matter what. If a shipment that is insured (over $50) is lost in transit we must file a claim with our insurance company. The insurance company usually requires us, and our customer, to fill out an affidavit. The affidavit we sign is basically a sworn statement saying that the goods were sent and packaged properly. The customers affidavit is a sworn statement that they did not receive the goods. We do not refund the customer until after they help us fill out this paperwork, so that we can complete the insurance claim. After filling out the affidavit we send either a refund or a reshipment, which is determined on a case by case basis, such as if we still have the item in stock.

6. You mention that you’re now getting nearly $200k per month in revenue through Bitcoin. Exactly how much is that compared to the rest of your business?

In the last few days we have actually been doing between $20,000-40,000 per day in just bitcoin sales. Bitcoin sales are only a part of our business, however it is beginning to become a substantial part. So much so that we have to hire additional employees to help handle the bitcoin orders. I find this astounding because the bitcoin community is creating jobs. We can directly attribute the hiring of our next few employees to the growth of our bitcoin sales. A politician could not say the same thing about job creation.

7. Do you have any plans to more specifically expand towards or target Bitcoin users in the future?

Yes, we have just added a bitcoin currency selector to our website so that customers can see prices of our products in bitcoins. We also have a gold/silver price ticker that updates every 60 seconds and can now be viewed in bitcoins. We are working on a landing page to help users understand bitcoins, where to buy them, and the benefits of alternative competing currencies and sound money. Many other bitcoin accepting companies already have these pages, so hopefully the more companies that make it easier for people to understand bitcoins, the more people can easily start using them. We are also spending bitcoins back into the community through advertising, graphics design, web development, and recently working with an insurance company who accepts bitcoins to see if we can work together.

8. Anything else you would like to tell us?

I am so thrilled be in the midst of this revolutionary phenomenon. It has changed the way we think about money and alternative competing currencies. Bitcoins have generated real wealth, jobs, and the spread of individual liberty around the world. At first I just acknowledged this phenomenon as something pretty cool, but to be a part of it and to see the spontaneous order of the bitcoin community in motion is something spectacular to witness.

Trace Mayer recently appeared on FOX Business and was asked the question by host Melissa Francis: “Bitcoin is just insane and it has really taken off. People are paying attention to it. But is it for real?”

His response, “Yes, it is definitely for real. I remember the first time I encouraged people to buy Bitcoins it was around a nickel per bitcoin and now it is around $133. So those people who would have followed that advice would have been able to participate in one of the largest bull markets in history and this bull market is not even close to being over.”

[youtuber youtube=’NM32O5YqgdY’]

Why is this bull market not even close to being over?

SELLER’S REMORSE

Price discovery is always an interesting phenomenon. There are always bulls and always bears. The scoreboard is kept in profits and is the only opinion that matters.

The next decades, and particularly six months, are going to be extremely exciting with the bitcoin price. You may be tempted to sell but seller’s remorse is a terrible feeling. You have done the analysis, taken the risk but then to sell out before the vast majority of profits just leaves a particularly bitter taste in one’s investing mouth. It is even worse than just missing the opportunity.

After all, who wants to be like the Litecoin trader with seller’s remorse? One guy wrote a sad tale on Reddit about how in January 2013 he bought 80,000 litecoins at $0.068 and sold them at $0.20. Litecoins reached $5 before moving down to around $3.5 today. So he realized a 194% return, or $10,560, but missed out on a 7,250% return, or $394,560 and is feeling seller’s remorse.

Kind of the opposite of David Choe who could have gotten a few thousand dollars for painting a mural at Facebook but instead got stock that turned into $200m. You have to be in it to win it!

WHY THE BITCOIN PRICE IS MELTING UP

In financial terms, a price can ‘melt up’ when it is significantly undervalued. I wrote about this Bitcoin price melt-up starting on 21 March 2013 and predicted ‘I think a fair value price for bitcoins is around 3-7 bitcoins per ounce of gold.’ With the ratio currently at about 10 bitcoins per ounce of gold; that prediction may turn out to be overly conservative and now we are seeing it happen.

Then we have financial fools like Michael Pento, others who have not been around the Bitcoin market very long and still more who have not done very much substantive due diligence except to reference the bitcoin price chart and all of them loudly proclaim there is a Bitcoin bubble.

But they missed out on the previous large gains in the Bitcoin price and they know it by looking at their own balance sheets. Scoreboard! So, why would any rational bitcoin holders lend them any creditability?

Instead, how about we freshly analyze the state of the Bitcoin economy and then apply where the price could go and then come to a conclusion on what long-time members of the Bitcoin community should do to profit the most. Scoreboard!

First, we have little scrappy run of the mill Bitcoin investors like Jeremy Liew making outlandish statements like ‘In all the scenarios that I’ve painted above, Bitcoin prices need to go up by 100x or more.’

So who is Jeremy Liew? Well, he was named to the Forbes’ Midas list in 2011 and 2012, has received an MBA from Stanford and is a Partner and managing director at Lightspeed Venture Partners which has backed over 200 companies and is currently investing out of a $675m fund and recently wrote an article for TechCrunch titled Why VCs Love The Bitcoin Market.

And you think Jeremy Liew is alone among his Silicon Valley VCs and Wall Streeters?

How about Adam Draper, an established VC, who will ‘incubate 5-7 Bitcoin related companies in our next batch‘. Why? The reasons stated earlier are: (1) increased investor confidence in the Bitcoin protocol, (2) reduced legal uncertainty from FinCEN guidelines, (3) Cyprus bank deposit seizures, (4) current adoption by large tech companies like WordPress, Reddit, Expensify and Namecheap and (5) the rising price where he stated ‘My prediction – Bitcoin hits $225 by August.’

And how about Fred Wilson a principal of Union Square Ventures who made a crap-ton of profits backing Zynga, Twitter, SoundCloud, Meetup, Foursquare, Etsy and plenty of others. Over a year ago, when prices were around $5, he wrote, ‘I’ve mentioned Bitcoin a number of times on this blog. It is something our firm is watching closely.’ And what do you think he has been doing over the past year? Right, just twiddling his thumbs watching the Bitcoin juggernaut gain financial mass and transactional momentum.

And how about the recent frontpage article in the Financial Times? The relevant passage: “Some finance industry entrepreneurs have leapt at the opportunity. Exante, a Malta-based asset manager, set up a Bitcoin fund last year that was largely intended as a fun punt. Wealthy investors each put in $1,000 when Bitcoins were trading at $13 on the understanding they could lose the original investment. Exante predicted that public and media interest would take off when Bitcoins were trading at $100. Managing partner Gatis Eglitis claims they are now getting 20 calls a day from large asset managers looking to invest up to $100m.”

Plus, most of the VCs and Wall Streeters including in my opinion Mr. Liew, Mr. Draper, and Mr. Wilson, do not really know what is going on in the Bitcoin economy and are operating on incomplete data. As I explained to one of Mr. Wilson’s associates, all they really see is the tip of the iceberg because of Bitcoin’s increasing role as a settlement currency. If they could see the full iceberg then the feeding frenzy would really get crazy.

But people like Roger Ver, long-time Bitcoin advocate, knows what is going on and is willing to put his money where his mouth is as evident from this 4 Aug 2011 video where offered to make a $10,000 bet that Bitcoin would outperform either gold, silver, the S&P 500 or the USD by 100x over the next two years.

[youtuber youtube=’http://www.youtube.com/watch?v=gfydIbhduu0′]

At the time of his bet gold was trading at $1,664.25, silver at $41.62 the S&P 500 at $1,200 and bitcoins at $9.26. Currently gold is trading at $1,580.70, silver at $27.12, S&P 500 at $1,553 and bitcoins at $160.00. So, only the S&P has outperformed the USD with a 29.4% return compared to bitcoin’s 1,633% return or 55.5x the S&P 500’s return.

It will be interesting to see whether Roger Ver’s prediction comes true within the next four months. Assuming the S&P 500’s return stays the same at 29.4% return then the approximate bitcoin price will need to be around $270. But anyway you analyze it the bottom line is clear: Those who followed Mr. Ver’s advice would have profited greatly!

The bottom line: there are a ton of funds flowing into Bitcoin. And nothing could be more exciting for the bitcoin price than a feeding frenzy of well capitalized financial sharks in a market as tight as Bitcoin who then have a financial incentive to build out the infrastructure that will enable greater adoption, hyper-monetization with Bitcoin ‘going viral’ as a currency (the opposite of hyperinflation) and the accompanying network effects.

Second, the economic characteristics of Bitcoin are like a Giffen good which inverts the traditional supply and demand effects. With Bitcoin the supply is fixed and known to all market participants. However, what is unknown is the float that is available for sale; which I will get to later.

There is only transactional and speculative demand. For transactional demand the price is irrelevant. So that simply leaves speculative demand. And since Bitcoin is a Giffen good that is produced only to be hoarded and not consumed therefore it has a paradoxical effect: As the bitcoin price rises it decreases float supply and increases demand.

The bottom line: You better strap yourself in and make sure your bitcoins are in cold storage because this price discovery is going to be a ‘4G inverted dive’ that may cause you to blackout thinking you are lucid dreaming because the traditional ways of analyzing this Bitcoin market and its players are inverted. I would tell you but the ‘Bitcoin gods’ have deemed it classified.

[youtuber youtube=’http://www.youtube.com/watch?v=wUZxSf_P2r0′]

HOW TO MAXIMIZE YOUR RIDING OF THIS BULL MARKET

A rise in the price of bitcoins represents a wealth transfer from holders of some other assets to holders of bitcoins. Having been involved in Bitcoin for such a long time and having known, worked with and strategized with so many people therefore I really hope the Bitcoin community gets to benefit from this massive upcoming wealth transfer and not sell out early like the Litecoin trader.

[youtuber youtube=’http://www.youtube.com/watch?v=X4d_29vJlB4′]

The long-term trend of Bitcoin is extremely positive. I like to look at the 200 day moving average to filter out the daily noise.

To maximize your profits from this long-term secular crypto-currency bull market you merely need to (1) hold onto your bitcoins, (2) restrict supply as much as you can (this is very important!) and (3) make any of these newcomers, like the VCs and Wall Street sharks, pay extremely dearly for whatever trickle of bitcoins you do choose to spend. Notice I said spend, like buying a new Porsche or one of 500,000+ products from the Bitcoin Store, and not sell as in like USD, EUR, etc.

Currently, there over 14,500 people waiting for MtGox verification of their trading accounts and if they are looking to use Bitcoin as a transactional currency for purchases from BitSpend or Silk Road then the price is irrelevant to them. And then we have a ton of Silicon Valley VCs and Wall Streeters fighting over each other to establish multi-million dollar positions. But that amount of capital is going to look tiny compared to what is scheduled in about six months.

There are only about 80,000 bitcoins of ‘float’ on a daily basis. Remember, prices are set at the margin. Simplistically  and only for an example in aggregate, this means that if there is a positive funds flow into bitcoins of about a mere $4m then it will move the price by about $50. So, obviously, if there are any large blocks of bitcoins, ‘walls’, are gobbled up extremely quickly by this hot money from VCs and Wall Streeters. If that float can be reduced from 80,000 to 40,000 then the same $4m will move the price $100. That means VCs and Wall Streeters will have to pay more dearly to get any bitcoins. Squeeze them for all they are worth!

And if you start acquiring bitcoins on a regular basis, as a service provider or merchant and are using a service like Bitpay then increase the percentage you hold as bitcoins or you can regularly buy bitcoins with a percentage of your paycheck to further dry up any other supply.

Solution: Remove the walls and dry up any other supply of bitcoins.

CONCLUSION

You know what’s cool? A $150 per bitcoin? No, a $1m per bitcoin. It may take a decade to get there but the fiat currency market coupled with fractional reserve banking is the largest bubble in the world and since the Great Credit Contraction has started along with Bitcoin being a censorship-resistant honey badger of a currency it just may eat these bankster cobras.

After all, the Bitcoin market, at current prices, is simply far far too small for these amounts of fund flows and is the key reason why the VCs and Wall Streeters are melting up the price by buying any bitcoins that appear for sale. Plus, saving bitcoins is where the virtuous cycle begins.

And for those who think there is a massive Bitcoin bubble. The last bubble went from $0.05 to about $32 and unlike so many who are calling this a bubble I know what it felt like back then because I was there. For a comparable move the bitcoin price would need to move from about $5 to around $3,200, a 20x rise from current prices, and we are only about 5% up this ‘wall of worry’. And like usual, Scoreboard, because we are playing this game for financial keeps:

[youtuber youtube=’http://www.youtube.com/watch?v=KPxDoFbsvWA’]

TARGET ACQUIRED: TARGET LOCKED

 

In January, Bitcoin saw a flurry of positive news on a scale that had not happened since May 2011. Bitcoin’s gambling websites, including SatoshiDice, BitZino and Seals With Clubs, all reported record volumes. All three major merchant service providers either expanded their offerings in some way or lowered their fees. Bitcoin’s statistics, including number of transactions, market capitalization and trade volume, were higher than they ever were in history, and those that still remained were higher than at any point after the bubble of 2011. Many people, including myself, predicted that the onslaught of increasing media attention would not last. However, in February we were proven wrong. Reddit and Kim Dotcom’s Mega, two of the most widely known names in the internet community, started accepting bitcoins for payment, and popular domain name registrar and webhost Namecheap followed suit in March. The Bitcoin price surged past higher than it ever did before, and positive media attention kept on coming. Even the few security crises that Bitcoin had during this time were either ignored or even treated as positive news, with journalists praising the Bitcoin community’s speed and efficiency at handling the issues as they came up. Here is an overview of all that happened in these past two months.

All Time High!

• The Bitcoin price broke through the all-time high of $31.91 that it had set back in June 2011, and started rising even faster past that point, approaching $100 at the end of the month.
• Soon following Bitcoin’s thrust past $32, a number of popular news sites ran articles strongly in favor of Bitcoin, including The Guardian’s “Bitcoin: More Than Just the Currency of Vice”, Business Insider’s “Bitcoin Just Took a Key Step Toward Being Mainstream” and vice.com’s “Is It Time to Take Bitcoin Seriously?”.
• The weekly Google Trends volume surged past its 2011 all-time high, a rise of over 300% since January. The monthly volume for March did not quite beat that of June 2011, reaching only 98% of the high (a figure that has already been massively overshot in the beginning days of April).
• Bitcoin’s market capitalization broke through $1 billion, and the number of transactions and the growth of the blockchain size continued rising.
• Interest in Bitcoin in Spain increased massively following the crisis in Cyprus, and some download statistics for Bitcoin clients in spain have increased by a factor of ten.
• BitPay announced that it had processed a transaction volume of $5.2 million during the month of March, and now has 4,500 merchants.
• The Bitcoin Reddit community at reddit.com/r/bitcoin became the 65th largest on the site by the average number of subscribers online, surpassing many other communities including “r/relationships“, “r/humor“, “r/seduction“, “r/Drugs“, “r/baseball” and “r/food“.

Just A Little Blockchain Glitch

• The BitLC Bitcoin exchange announced that it would be closing since one of the company’s key shareholders, also the holder of the company’s cold storage wallet, disappeared with a large portion of customers’ funds.
• BitInstant had its VirWoX account hacked through a combination of social engineering and DNS spoofing, costing them $12,000.
• Because of a bug in bitcoind 0.7, the Bitcoin blockchain split into two, with bitcoind and BitcoinQt 0.7 clients on one chain and bitcoind and BitcoinQt 0.8 users, and most others, on the other. The event led to the Bitcoin price temporarily falling from $48.5 to $36.5, but the problem was quickly solved and the price recovered to $45 within a day. A number of news sources reported on the incident, but nearly all were either neutral or even positive, praising the Bitcoin community’s response and the price’s quick recovery.

Business Adoption

• eToro, a site that describes itself as the “world’s largest social investing network”, announced that it will soon accept bitcoin deposits.
• The Malta-based financial broker Exante announced its new Bitcoin hedge fund, allowing institutional investors to easily and safely invest into the Bitcoin market.
• Reddit started accepting bitcoins for its premium Reddit Gold service, becoming the second most popular website after WordPress to accept Bitcoin, and its parent company Advance Publications became the largest company to accept Bitcoin, eclipsing Wuala‘s parent company LaCie (which no longer accepts Bitcoin, likely due to lack of interest).
• Kim Dotcom announced BitVoucher, a Mega reseller which allows users to buy Mega’s premium file sharing services for bitcoins. Although Mega was already purchaseable for BTC through hosting.co.uk, BitVoucher was significant because it carried Kim Dotcom’s personal endorsement.
• Namecheap, a popular domain registrar and seller of web hosting and VPS services, announced that it would accept bitcoins as payment.
• WinPoker, a poker site connected to the iPoker network, the largest collection of online poker sites in the world, started accepting Bitcoin deposits and withdrawals.
• The Internet Archive announced that it would start paying a portion of some of its employees’ salaries with bitcoins, and received over $1000 in donations during the day following the announcement.
• The Finnish software developer SC5 announced that it would start paying employees’ salaried in Bitcoin as well.
• Expensify, the world’s most popular application for submitting expense reports, added an option for users to ask for their expenses to be repaid in Bitcoin.
• E-Gov Link, a suite of services for local governments seeking to interact with their constituents online, announced Bitcoin integration into their products. “Now municipalities can offer their citizens another option in paying for services like permits, utilities, class or event registration, shelter reservations, or even parking tickets,” the press release reads.

Developments from the Inside

• Pizza for Coins, a site that acts as a proxy for users to order pizza at Domino’s, Pizza Hut and Papa John’s, launched in February, receiving widespread media attention.
• Soon after, Bitspend opened its doors, allowing users to buy anything available for credit card payment online for bitcoins. When the site first opened, it was overwhelmed with orders and had to close its doors within hours to keep up with the demans. The site re-launched the following week, and also received its share of media attention, although less than Pizza for Coins.
• Bitcoin Wireless ran its public beta, allowing mobile phone users to top of their phone plans with bitcoins at or in some cases even below cost.
• Coinlab announced a deal with MtGox in which it will take over transactions for US and Canada clients, allowing US and Canadian users to exchange their bitcoins through the service without paying high international banking fees.
• BitPay received another round of venture capital funding, helping to pay for its recent move to Atlanta and hiring an expanded team of new developers.
• OpenCoin made the first major release of Ripple, an alternative cryptocurrency network that would give customers the ability to hold and send any supported currency, including USD, EUR, CHF and in the future possibly even gold and silver, in a decentralized fashion.
• The BitcoinStore, a Bitcoin-only electronics retailer that offers hundreds of thousands of products often cheaper than anywhere else on the internet, sold $500,000 worth of goods in the first quarter of 2011 and managed to renew the contract providing them with top-tier discounting from their distributor, Ingram Micro.
• Tradehill, a popular Bitcoin exchange from 2011 that shut down over a year ago due to legal issues, announced their return to the Bitcoin community, releasing their first new product: Prime, a Bitcoin exchange specifically designed for high-net-worth institutional investors.

Today, Bitcoin is in that same zone of uncertainty that it was in in the late stages of the run-up to the crash in June 2011. Public interest is continuing, although the focus of media attention has, perhaps unfortunately, slowly shifted from focusing on Bitcoin’s properties to its rapidly increasing value. The price appears to be entering a full-on mania phase, so we should all be prepared for a crash; for those who have earned a small fortune from Bitcoin’s increasing balue already, taking at least once or twice one’s initial investment out is likely the right thing to do, if only to preserve one’s sanity. But in the long term, the future for Bitcoin is looking brighter than ever. We have seen venture capital investors increasingly looking into Bitcoin, unprecedented Bitcoin adoption with reports of more adoption soon to come, and public attention is increasing on all fronts. Although few believed that this would happen in the bleak months of October and November 2011, over the past two years the Bitcoin economy has grown by a factor of over a hundred. Just imagine what Bitcoin in the spring of 2015 will be like.

By now, we are all aware of the financial calamity that has befallen Cyprus in the past three weeks. Since the deposit haircut was first announced and banks were shut down, many have lost their jobs as businesses suddenly find themselves without the means to pay anyone, others have seen their plans for retirement ruined, the economy has largely reverted to cash, and the banking sector, one of the two key pillars of Cyprus’ economy together with tourism, will never be the same again.

We at Bitcoin Magazine and the team behind GoldMoney GoldMoney, however, have decided to actually go to Cyprus and see what the locals themselves have to say. The result: our first ever video co-production, “Cyprus – A Wake Up Call: Rethinking Money“, a short 15-minute documentary produced by Mihai Alisie from Bitcoin Magazine, Paul Buitink and Ian Jessep from GoldMoney, and Trace Mayer, who has participated in both organizations.

We are very excited to be able to bring this to the public, as this is our first major foray into both video production and in-depth investigative journalism. And, rest assured, this will not be our last. As Bitcoin Magazine continues to grow we will continue to improve on the quality of both our journalism and our presentation, including growing into other forms of media such as videos and podcasts. For now though, enjoy the video!

The BitcoinStore, a very popular electronics retailer in the Bitcoin community, has announced that has managed to keep its contract with its wholesaler, and so will continue be able to continue selling goods at its current low prices. The store first launched in November 2012 with a simple proposition: hundreds of thousands of electronics products for sale for bitcoin, all cheaper than anywhere else on the internet – major retailers like Amazon and NewEgg included. Because the BitcoinStore is Bitcoin-only, it would not have to pay any of the costs associated with accepting credit cards, including the standard 2.9% fee, PCI compliance, identifying potentially fraudulent purchases and handling chargebacks, and the key attraction of the store is that it would pass these savings on directly to the consumer. On top of this, Bitcoin entrepreneur Roger Ver secured for the BitcoinStore another advantage: a contract with Ingram Micro, which describes itself as “the world’s largest distributor of computer and technology products”, at the highest possible tier of discounting. That is, despite being a less than six month old startup, the BitcoinStore has been able to buy its products from Ingram at the same prices available to the largest eletronics retailers in the world.

However, the contract came with a string attached: the BitcoinStore had to reach a sales volume of $850,000 in the first quarter of 2013 to maintain it. In the first three months of operation from mid-November to February, the store saw some attention, but by Feruary it became clear that they were simply not getting enough – with little over a month left, the BitcoinStore still had over $800,000 to go. At that point, Jon Holmquist and Roger Ver were desperate, and sought to save their business with a bold move. On February 27, the store officially launched, a step that the two were delaying until then due to issues with the website, and offered its customers the ultimate discount: a 0% markup on all purchases. The pair also launched a massive marketing campaign, and pleaded with the Bitcoin community to support them during this critical time. Orders came rolling in; the BitcoinStore earned nearly $300,000 by mid-March, and by the end of the month the figure was up to $500,000.

Thus, the BitcoinStore did not quite live up to the original conditions of the deal, but since, as Jon Homlquist has just announced, the contract has been renewed, Ingram was clearly sufficiently impressed by the last month’s performance – or by the rapid growth of the Bitcoin community as a whole – to give the store another chance. The BitcoinStore now has to earn another $850,000 of revenue by June 30 to keep its contract once again – a goal that is still not that easy to reach, as it must now continue to earn $283,000 per month even though many of its potential customers have already bought everything that they needed in March, but Holmquist is confident that they will succeed. “We’ll be pushing ads heavily and will be launching some new programs to introduce new people to Bitcoin,” Holmquist writes.

The success of the BitcoinStore, together with the success of so many other BitPay merchants in the month of March, makes a strong case for the strength of the Bitcoin economy; although over the past thirty days the currency has been massively deflationary, with its value rising nearly 200% from $31.25 to $93.03 over the month of March, at the same time sales are higher than ever. Of course, this is very far from a solid empirical argument that deflationary economies are superior, or even work, in the context of a full-scale society, but does deliver a strong blow to concerns that the Bitcoin economy will somehow asphyxiate itself as the price goes up due to lack of spending.

The BitcoinStore will, for now, be keeping its 0% markup, and Ver is okay with taking a small loss to keep the store running. To him, the BitcoinStore is not intended so much to be a profit-making business, but rather a proof of concept, a business that shows just what becomes possible in the world of e-commerce once all of the inefficiencies of legacy payment systems are stripped away. The intended audience of Ver’s performance? The very same mainstream electronics retailers that the BitcoinStore’s prices are now crushing. “You all are a huge part of that global marketplace. You all have been approached about accepting Bitcoin and yet not one of you has started accepting Bitcoin payments. Our sales show that there are consumers out there that want to purchase electronics with Bitcoin… And our prices show that Bitcoin can dramatically lower prices.”

With today’s announcement, however, Ver has upgraded the message to a warning: accept Bitcoin, or accept our wrath. “So here’s the deal I want to make with each of you,” Ver writes, “accept Bitcoin payments by the end of 2013 and we’ll gladly close down our website. But if you don’t accept Bitcoin… we’ll keep rolling. We have already made over a half million in sales and we have only been open a month! If you don’t listen to your consumers, we’ll continue taking them from you. I assure you, Bitcoin is geeky enough to appeal to many of your consumers, and the savings we provide is convincing enough for many others. We’re a startup and we’re already regularly beating your prices, imagine what will happen as we grow bigger.”

A week ago, BitPay CEO Tony Gallippi announced that his payment processing service had set a new record: a transaction volume of $2 million in the first twenty five days of March. Now, however, Gallippi has revealed that the popular Bitcoin payment processor has eclipsed that figure yet again, and in a third of the time – leading to a new record high transaction volume of 5.2 million dollars for the month of March.

BitPay’s growth in the past month has been very rapid; in February, Gallippi reports, the company only processed a total of $687,000 from 2,300 completed invoices. In March, the transaction volume of $5.2 million comes from 5,100 completed invoices, and the company also added 1,300 new merchants, raising their total to 4,500 as of the end of the month. Although it cannot be said for certain, the figure also likely places the total aggregate of BitPay merchant sales above those processed by the Silk Road, the notorious online black market for illegal drugs that uses Tor and Bitcoin, combined with a proprietary mixing service, to ensure that both the internet connections and the payments of its users remain anonymous. The site was last estimated to have a volume of $2 million by a researcher at Carnegie Mellon University in August 2012, and since then the one public statistic released by Silk Road – the number of users and posts on its forum, has increased by about 50-100%, suggesting a current volume of around $3 million to $5 million. From a public relations standpoint, this is a positive sign for Bitcoin: the legal Bitcoin economy is now almost certainly larger than the illegal one, especially when one takes other merchant services like WalletBit/BIPS and Coinbase into consideration, and is growing at a much faster rate.

Gallippi suggests several reasons that may be the driving factors behind BitPay’s sudden surge in volume. First of all, on March 25 the company lowered transaction fees for merchants receiving their revenue as bank deposits from 2.69% to 0.99%, making the round-trip process of buying Bitcoin (1.00% flat fee at Coinbase), sending it to a merchant and having the merchant convert the bitcoins back into fiat even cheaper than the 2.90% fee charged by Visa and MasterCard. And some merchants are even passing on the savings; “with our recent reduction in fees, our merchants are using our all-inclusive 0.99% fee to offer discounts to their customers for paying in bitcoin,” Gallippi writes.

The other major factor is two specific businesses; the Bitcoin Store and Avalon. The Bitcoin Store first opened in November with a simple proposition: hundreds of thousands of electronics products for sale, all cheaper than anywhere else on the internet – major retailers like Amazon and NewEgg included. The company would use the advantages of chargeback-free and cheap payment processing offered by Bitcoin and BitPay, together with a contract with the wholesaler Ingram negotiated by Roger Ver, to lower their costs as much as possible, and pass on the savings to consumers. At the end of February, seeking to reach the volume threshold needed to retain its high-discount contract with Ingram the Bitcoin Store launched a promotion: 0% markup on all purchases. The promotion was hugely successful; the site processed nearly $500,000 in sales in March, much of which was in the last week, and although this is below the original volume threshold of $850,000 Bitcoin Store’s Jon Holmquist writes that “even if we don’t get to renew our current contract with Ingram we’ll just get a slightly worse contract.” The deadline has now passed, so the Bitcoin Store will be giving an update on the fate of the contract very soon.

Avalon is the first seller of application-specific integrated circuit (ASIC)-based Bitcoin mining hardware to release a functional product. Because Avalon’s major competitor, Butterfly Labs, has been delayed by several months with a working prototype confirmed only yesterday, and because of the recent meteoric rise in the Bitcoin price Avalon’s hardware has been hugely profitable for those lucky enough to have bought it; Bitcoin developer Jeff Garzik’s Avalon device paid for itself in nine days, and given the current Bitcoin price and network statistics it is producing an even higher USD-denominated revenue today. As a result, Yifu Guo has increased the price on the third batch from $1500 to 75 BTC – over $6500 throughout the last week of March, and yet people are continuing to buy them.

Of course, the Bitcoin economy as a whole, and even “just” the legal Bitcoin economy, is larger than just BitPay, and BitPay’s alternatives are all growing at the same time. Reddit uses Coinbase to process payments, Mega uses Zipbit, Avalon rotates between the various payment processors for its batches and many other businesses use custom platforms developed in-house. Furthermore, sales are not the only economic activity that takes place; an small but increasing number of businesses is now paying its employees in BTC. Thus, the Bitcoin economy as a whole, even not taking into account Silk Road, is likely considerably larger than $5 million per month – yet more evidence that Bitcoin’s recent rise in media attention and popularity is more than just speculation.

Bitcoin developer Luke Dashjr has confirmed that a prototypes Butterfly Labs ASIC is now hashing. The device is still far from full capacity, pushing out only 25 GH/s at a power consumption of 180 watts, but this is nevertheless the first definitive proof that Butterfly Labs is producing a legitimate product, and is not too far from finally releasing its first batch.

Butterfly Labs’ Josh Zerlan also recently provided updates on the state of Butterfly Labs’ production in an IRC channel. The core of the conversation is this:

BFL_Josh: Well guys, I had planned on updating everyone with a video of a board hashing here in KC tonight, but I haven’t been able to get that together yet, so I’m probably going to have to push it off until tomorrow. We are targeting a start of shipment next week, but I’m not quite ready to commit to that at the moment, given our past estimates. It’s imminent, though.
Lab_Rat: It hashes????
BFL_Josh: Yes, it hashes

Further down in the conversation, Zerlan provides the main reasons for the current delay. Zerlan writes: “We may miss our power targets, that’s been part of the hold up… we think there’s a problem with the power consumption and we’re trying to figure out where it’s having an issue … What’s causing even more consternation is the fact that the wafer we burned for tests runs at far less power than a second wafer we mounted on the BGA package… so it may be a wafer by wafer thing, and since we only have two datapoints, it’s hard to nail down the issue.” To many in the field, these difficulties are unsurprising; in mid-January, Avalon founder Yifu Guo wrote on the topic “recently they changed it to 1.2W, but they won’t even reach that. We ran 65nm simulations and they should be around 3W.” But to many of Butterfly Labs’ customers, who have now suffered from six months of delays, power consumption does not even matter; given that every extra day represents a lost opportunity for profit that will never come back, almost any level of power consumption is acceptable if it means that the devices will ship faster.

Butterfly Labs’ shipment has been awaited by the community for nearly ten months; the company was in fact the first to start accepting pre-orders in June 2012. Although the original shipping date was scheduled for October, the company suffered a number of delays that changed their expected shipping date first to late November, then early January, then mid-February and finally where it is today. In the meantime two other major ASIC producers, Avalon and ASICMiner, have also started hashing, and are partially responsible for raising the network hashpower from 20 TH/s to 55 TH/s over the past three months (the other contributing factor being the rapidly increasing BTC price). However, the community is still watching Butterfly Labs intently for one key reason: its potential hashpower. Although the output of Avalon and ASICMiner has been small, with Avalon’s first release being 20 TH/s and ASICMiner’s launch 12 TH/s, Butterfly Labs’ preorders altogether make up over 60 TH/s – more than is currently on the entire Bitcoin network.

For the security of the Bitcoin network, it is arguably quite fortunate that Butterfly Labs has been delayed by so much; if their machines had come any earlier, or even today, the company would have had access to more hashpower than the rest of the entire Bitcoin network put together, fundamentally compromising a key assumption of Bitcoin’s security. This threat was a major reason why Avalon founder Yifu Guo decided to go ahead with his project; “that was our main goal – we wanted to prevent this potential monopoly,” Guo wrote in a recent interview. However, it turned out that the major providers released in just the right order; Avalon started shipping their first, 20 TH/s, batch first on Jan 19, although all but two of their devices were delayed by many weeks after that date. ASICMiner started hashing on Feb 14, starting off with 2 TH/s and slowly ramping up over the past two months, and over these past two months hundreds of anonymous GPU miners turned on their hardware because of the increased mining profitability from Bitcoin’s rapidly growing price.

The rapidly rising Bitcoin price has been a massive boon to the Bitcoin mining industry in general. Since the beginning of the year, the Bitcoin price has risen from $13.3 to over $100, making mining extremely profitable for those lucky enough to have the hardware to do it. The fact that Bitcoin mining is now so heavily focused on specialized hardware compounds the advantage; while in 2010 or 2011 such price increases were quickly met with large numbers of off-the-shelf GPUs joining the network, now the most powerful miners are all specialized devices, and production takes months to compensate for the increased demand. When Jeff Garzik received Avalon’s first ASIC at the end of January, the device paid for itself in nine days, and its profitability since then has only increased. As a result, Avalon has raised the price on their third batch to 75 BTC, or $7,500, and has nevertheless sold a significant number of units. Because ASICMiner is not selling their hardware, instead selling shares and doing mining in-house, they can benefit from the increased value of their revenues directly. Notably, Butterfly Labs has not increased their prices, but even if they continue to keep their prices the same they will still benefit massively from increased sales.

In the next few months, Bitcoin network hashpower will only continue to increase. Avalon’s three shipments altogether will make up a total of 1500 units, or over 75 TH/s, and ASICMiner is planning 50 TH/s by the end of April, and 200 TH/s soon after. By the end of the year, ASICMiner’s friedcat writes on Bitcointalk, ASICMiner’s total hashpower may be as high as 1000 TH/s, and friedcat even adds that “some may say that 1,000TH/s at the end of this year is too conservative.”

Note: there is some disagreement as to whether the term “market capitalization” can legitimately be used to refer to the figure that is the subject of this article. The term is typically used to refer to the total value of all shares in a company, although some Bitcoin users also use it to refer to the total value of all bitcoins in existence, which others believe is incorrect because bitcoins are not “shares” in anything. To avoid confusion, I have decided to avoid using the term entirely.

The night before March 28, the Bitcoin price shot up another six dollars, leading Bitcoin to hit a crucial milestone: the total value of all bitcoins in circulation reaching one billion dollars. The price first reached the barrier at 05:15 GMT, surging past the critical price level of $91.251 with 10,958,700 bitcoins in circulation. The jump followed one and a half weeks of rapid growth that many believe was precipitated by an announcement on March 16 that a Eurozone bailout of Cyprus would be partially funded by a 6-10% levy on all Cypriots’ bank account savings. In other countries troubled by the Euro financial crisis such as Spain, many quickly became concerned that their own savings will be next – a worry that the Spanish government has only heightened, and as a result Spanish interest in Bitcoin is going through the roof. Another reason why the Bitcoin price may have shot up is a recent guidance report released by FINCEN, in which the US regulatory agency wrote that mere users of Bitcoin are not subject to federal money transmission regulation, although exchanges are – a strong step toward resolving legal worries that have acted as a chilling effect on business adoption for the past two years.

Psychologically, the milestone is a hugely important one. If the day that Bitcoin broke past $31.91 can be seen as the day that Bitcoin proved to the world that it did not die in 2011 and is only getting stronger, today is the day that Bitcoin officially joined the big leagues. Joining the so-called billion dollar club places Bitcoin above over 2000 out of 2677 companies trading on the NASDAQ, all but a few dozen non-publicly traded startups in the US, and even the money supply of 20 countries around the world – making claims that all national currencies are somehow legitimate while Bitcoin is not rather specious. Regardless of any comparisons, one billion is the point at which, according to some definitions, a company moves from being considered “small cap” to “mid-cap”, and one billion the mark at which many institutional investors start to see a particular market or investment as something to be taken seriously.

This fundamental shift is happening in more places than just the market charts. In February, Coinlab announced a deal with leading Bitcoin exchange MtGox in which Coinlab would take over MtGox’s US and Canadian customers, and Teri Buhl writes: “there is a hint in their new deal that shows they are working to find a way to get liquidity to Forex broker dealers or private wealth managers to help high net-worth individuals invest long-term in bitcoins.” In March, the Malta-based Exante announced a Bitcoin hedge fund targeted to institutional investors primarily in the EU. Finally, two weeks ago Tradehill, a Bitcoin exchange that operated between June 2011 and February 2012, came back from the shadows to offer a new product: Prime, a Bitcoin exchange specifically suited to high net worth, accredited investors. The exchange already has 75 accredited investors signed up, adding more every day. Tradehill’s Jered Kenna, who has spent the past year cultivating relationships with such individuals to make Prime a reality, said: “Bitcoin has really grown in the past year and a half. There is a lot more institutional money coming in, as well as regulatory attention. In the next year or so, I think you’re going to see a lot of conventional mainstream businesses adopting Bitcoin. You’re going to see a lot more venture capitalists moving in, and a lot of startups. You’re also going see a lot more people endorsing Bitcoin, with many public faces.”

On the non-financial side of the Bitcoin economy, the situation is similar. When Silicon Valey investor Ben Davenport recently invested into BitPay, he wrote: “Bitcoin businesses, until recently, have largely been bootstrapped. The reason is, until recently, when an angel or VC has looked at Bitcoin businesses, they saw a currency with a total market cap of about $150 million. That’s too small a total addressable market to be interesting. And if an investor is savvy enough to see the potential for Bitcoin itself, then they also realize they can capture that upside without the business risk, simply by buying bitcoin. Now though, we’re getting to the size where an investment in an amazing, well-positioned team like the guys at BitPay makes a lot of sense, and will also ultimately help increase the overall Bitcoin adoption rate. I predict we’ll see the VC flood gates open within 12-18 months — I’m just trying to be a little bit ahead of the curve there.”

More and more, institutional investors are becoming interested in Bitcoin from all sides: Bitcoin the financial asset, the Bitcoin community as a customer base and the Bitcoin economy and its startups, and the three feed on each other. As the Bitcoin price goes up, Bitcoin receives more media attention and therefore more new users, as Bitcoin receives more new users existing Bitcoin businesses get larger and new ones appear, and as the Bitcoin economy booms so does its price. Many believe that the current rise in the Bitcoin price is simply a bubble, and certainly at some point, whether now, in three months or in two years, a bubble is bound to come. However, there is also genuine adoption rising rapidly behind the scenes; recently, BitPay announced that the company had processed over $2 million worth of payments over the first twenty five days of March.

From here, it is hard to say just how far Bitcoin will go. In August 2011, Roger Ver made a bet that Bitcoin would outperform gold, silver and the stock market by a factor of 100 – “this means, Ver clarified, “if silver is up by 100% over the next 2 years, I think Bitcoin will go up by 10000%.” Right now, the top performer out of all these investments is the stock market, with the Dow Jones going up by 28% from 11372 to 14559 so far – meaning that Bitcoin would need to go up to $296 by August 4 for Ver to win his bet. Even in August 2012, the thought that Bitcoin could possibly climb so far in only a year was pure fantasy. Now, anything seems possible. But this is also a good time to be cautious. It is often said that past performance in no way guarantees future results, and Bitcoin users who have seen their Bitcoin portfolio grow to over half of their net worth should seriously consider partially cashing out, lest Bitcoin crashes back to $30 and they lose everything they gained. Ultimately, Bitcoin users should well remember that regardless of whether Bitcoin will be at $30 in four months or $300, its underlying value is the same: Bitcoin lets you instantly, securely, and anonymously send digital payments from anywhere in the world to anywhere in the world without any governments, corporations of banks, and for negligible fees. This is the true promise that Satoshi worked so hard to bring to us all, and it is a promise that all of the developers, advocates and businessmen of the Bitcoin community have worked so hard to deliver. Now, with Bitcoin at $1 billion, our job as a community is simple: don’t lose track of what we’re really here for, and keep on going.

Although it was nowhere near the earliest in Bitcoin history, Tradehill was one of the largest exchanges in the Bitcoin economy when the currency had its first brush with public prominence in 2011. When the exchange first launched in June 2011, MtGox was by far the dominant player in the market, with a market share approaching 95%, and Bitcoin users were eager to see some competition. Following a marketing blitz over the next two weeks, attention on Tradehill increased rapidly, and the exchange was further helped along by a security breach at MtGox which caused the Bitcoin price to appear to crash down to less than one cent. Over the next few months, the exchange continued to grow, and it seemed that if anyone would ever displace MtGox it would be them. However, soon Tradehill’s luck turned for the worse. Near the end of 2011, Tradehill’s main payment processing partner, Dwolla, made a sudden change to their policies: they started processing chargebacks. The move was a highly deceptive one; before then, “no chargebacks” had been a key part of Dwolla’s sales pitch, and when the change was made Dwolla made no effort to inform its customers. Instead, Tradehill only found out that anything was wrong when $94,000 worth of transactions were essentially reversed without warning, and Tradehill’s account frozen when they tried to move the remaining $70,000 to a safer location. Because of that loss, as well as increasing worries about the status of Bitcoin exchanges under US regulations, Tradehill shut down on February 15, 2012, and launched a lawsuit against Dwolla to attempt to recover its losses. From the point of view of most Bitcoin users, the exchange was never heard from again.

That is, until now. Two weeks ago, Tradehill’s Jered Kenna announced that the company was back, and would soon be revealing a number of new Bitcoin exchange-related products. “Ever since I shut the original Tradehill down,” Kenna relates, “I was still getting calls on a regular basis from customers. In April 2012 I met a man at the future of money and tech conference, Ryan Singer.” Singer continues, “In July and August we started talking about bringing Tradehill back. The goal was to be regulatorily certain where we stood, as well as from a security and technical perspective. Jered was really proud of his reputation for never losing any customer funds [a reputation that, of all other major exchanges from 2011, only BitStamp still retains]. We hired a new team from Google and Cloudflare, staffed up with designers and built a new product.”

The first product that Tradehill is releasing is called Prime: a Bitcoin exchange specifically designed for the wealthy. So-called accredited investors, a classification open only those with a net worth of at least one million dollars not including their primary residence, are in fact much easier to deal with regulatorily than most other individuals. For example, while companies that would like to offer stock on public stock exchanges such as NASDAQ must go through a lengthy compliance process and have millions of dollars of capital, there are also specialized exchanges like SecondMarket where even lowly startups can register – but only accredited investors can trade. Also, dealing only with a small number of extremely high-value customers allows Prime to provide a much higher quality of customer service. “We can establish deep trust relationships,” Singer adds, “and even offer direct integration with automatic trading bots.”

Prime is not the first business to come up with such an idea; the Malta-based Exante has created a fund with a similar purpose of targeting institutional investors earlier in March. However, thanks to the way international financial regulation is currently set up the two are unlikely to be competitors. The United States government recently passed a law called the Foreign Account Tax Compliance ACT (FATCA), requiring any foreign financial services dealing with US customers to extensively report on their customers’ activities to the US government. The law imposes a 30% withholding tax on any institution that deals with US customers but does not comply, and, furthermore, as Mike Hearn put it, the law is “viral” – institutions outside of the US that comply must also impose the 30% withholding tax themselves on other institutions that do not. “Because the financial system is a fully connected graph,” Hearn explains, “this essentially means that US law spreads through it like an infection and eventually every financial institution will be forced to comply or face crippling sanctions from other financial institutions they interact with.” With this in mind, the majority of foreign financial institutions, including non-US-based Bitcoin businesses like Bitcoin Central, are choosing a much easier way out: stop dealing with US customers at all. This is the path that Exante will most likely take, leaving Prime in the United States, at least for now, all by itself.

Although Prime and Exante’s BitcoinFund are similar in spirit, they are quite different in implementation. Kenna explains: “[Prime] is more of an investment club than a fund – people are trading bitcoins with each other, we just write software to facilitate.” The company intends to offer the highest possible level of customer service, including personalized assistance from a professional accountant for all of their clients, as well as integration with automatic trading bots, instant extremely high value bank deposits and withdrawals, and more. An investor seeking to buy $500,000 of BTC through MtGox would likely have a hard time getting their money in; with Prime, the banking integration systems are designed to do just that. For sellers, Prime has another proposition to make: above-market prices. The demand from institutional investors looking to get into Bitcoin is highly asymmetrical, and so it is quite likely that the market price on Prime will slightly exceed the price everywhere else. Given the rate at which the Bitcoin price has been moving over the last two months even a 5% surcharge is worth less than a single-day delay, so even to buyers Prime’s offer will still be extremely compelling.

Prime has already found 75 customers, each with over $10,000 worth of bitcoin, and is gaining more every day. Kenna says, “people are saying to me, ‘I want to sell $500,000 worth of Bitcoin'” Given recent announcements from Coinlab, Exante and increasing numbers of Silicon Valley investors looking at Bitcoin businesses, institutional investor interest into Bitcoin is at an all-time high, and is only going to become greater over the next year.

For the curious, the old Tradehill is still involved in the dispute with Dwolla, and the new Tradehill was formed as a separate company. But Prime is only the first of many offerings that Tradehill has in store. Kenna is primarily in the business to help Bitcoin grow, and he realizes as well as anyone else that it is ultimately the average users that will drive Bitcoin to success. A traditional Bitcoin exchange for the masses is soon to come, although Tradehill is unwilling to reveal too much just yet. The main delays are regulatory, ensuring that the exchange will not be blindsided by a sudden change in policy from governments or payment processors again. “Tradehill has been dedicated to being fully compliant with US laws,” Singer adds, “and not being murky about it.”

On 26 March 2013 the renowned BBC Newsnight produced a 9:20 segment for about 700,000 viewers on the new decentralized virtual currency Bitcoin. Veteran journalist Jeremy Paxman hosted Daniel Knowles, a writer for The Economist, and Trace Mayer of Run To Gold and How To Vanish.

Being a professional journalist myself, although mostly contained to the written word, I know how difficult it is to research a story, craft an engaging script and then produce a segment all under the extremely tight deadlines imposed by current events. Being a long-time fan of the BBC, it must be the accents!, I jumped at the opportunity to provide the counterweight in the Bitcoin segment and am grateful to the very professional team at the BBC that made this segment a well produced piece of content. And having it follow the hair raising piece on the Cyprus debacle shows they have an open mind towards a potential solution for their viewers.

[youtuber youtube=’UA5_paH__q0′]

BACKGROUND

In this case and under the circumstances, I think the BBC produced a fine piece on Bitcoin. There are some within the Bitcoin community who are constantly impugning the motives of the professional media outfits. But with regards to this piece I hope some background information may be found useful.

With the bank seizures in Cyprus coupled with recent FinCEN guidelines being issued for decentralized virtual currencies there has been a flurry of activity in the Bitcoin price which makes for a very compelling story. But Bitcoin is extremely complicated. And to make matters worse, it seems that many of the knowledgeable voices on the subject have spent too many of their bitcoins on Silk Road instead of saving them.

On 25 March I was freezing in London and headed to Heathrow so I could join some people for an event in the Southwest United States and since I had a few days free in the schedule preferred to spend it in the sun instead of the frigid drizzle. Around 10:30am I received a call from a blocked number, which I normally do not take, but because I had been tipped off that the BBC may call therefore I answered. They were crafting a Bitcoin story, looking for a proponent and after some conversation I was battlefield promoted to backup.

You see they wanted someone in London, where ironically I had just been, to be live in studio. Plus, it would have been a higher quality piece of content, technically more controlled and were working under an extremely tight deadline with this very complicated subject matter. Had I known I would have extended my stay in London a couple days to accomodate them since I am such a fan of the BBC and this would be my first appearance. But we are all played the cards we are dealt and while they searched for someone local I told them I would be as flexible as possible as a backup.

But finding high quality and reliable guests is difficult! So a few hours before airtime I got the call and began making the 45 minute drive to the remote studio. Once there the studio had some technical difficulties so the poor BBC staff had to make several contingency plans and modifications. I am sure the uncertainty was problematic for scheduling. But about three minutes before airtime the technical difficulties got resolved and it was go time. The show must go on.

And it did go on and I think turned out pretty well all things considered.

REBUTTALS TO MR. KNOWLES

It is evident that Mr. Knowles has done significant research on Bitcoin. He raised a few issues that it would have been nice to respond to. However, given the remote studio nature of the appearance and time constraints that made it impossible to do on air without potentially disrupting the show in an unprofessional manner. So, I suppose this will have to do.

First, For money laundering Bitcoin is not a very useful tool, compared to others available, and that activity is largely kept within the fiat currencies like USD and EUR anyway. Even the European Central Bank’s Bitcoin report concluded on page 25, ‘Therefore, the real dimension of all these controversies [money laundering] still needs to be further analyzed.’

Users should keep in mind that Bitcoin is not anonymous by pseudo-anonymous. Additionally, all transactions are permanently stored in the blockchain which anyone can review. This leaves a tremendous amount of digital footprints that a competent forensic accountant can follow.

Consequently, I think Mr. Knowles is attributing to Bitcoin’s censorship-resistant nature a property which it does not have. Just because a payment cannot be stopped does not mean it cannot be traced.

Second, Bitcoin is not deflationary because inflation is an increase in the money supply and deflation is a decrease in the money supply. With Bitcoin there is a predictable amount of new bitcoins issued on a regular basis, currently 25 bitcoins about every six minutes. Therefore, Bitcoin is inflationary.

So, I am not sure what Mr. Knowles criticism is since it is premised on a substantively incorrect premise and misstatement of fact. Perhaps he can rephrase it?

Third, I am not sure I understand his criticism about why it is bad for one’s savings to increase in value. As illustrated in an infographic I put together on potential Bitcoin prices the saving of bitcoins is the starting point of a virtuous cycle for the Bitcoin economy.

Plus, for those of us who have been saving bitcoins, unlike Mr. Knowles who if he is saving at all is doing so in a fiat currency that is constantly losing purchasing power, those in Bitcoinland have a lot more wealth to spend on consumer products and as Bitpay’s recent records show, with $2m of transactions processed in March, those bitcoins are being spent. And that increased wealth is the result of a massive wealth transfer that is benefitting holders of bitcoins.

Fourth, the size of the Bitcoin money supply is starting to get pretty substantive in size and larger than about 40 nation states. It seems Bitcoin nation is growing. For example, the Central Intelligence Agency’s World Factbook would place the Bitcoin money supply around the 150th largest nation.

COUNTRY	M1	BITCOIN PRICE
Rwanda	$673,200,000.00	$61.65
Montenegro	$749,000,000.00	$68.59
Fiji	$794,600,000.00	$72.77
Djibouti	$798,100,000.00	$73.09
Turkmenistan	$828,800,000.00	$75.90
Aruba	$868,500,000.00	$79.54
Togo	$954,500,000.00	$87.41
Bitcoin	$955,000,000.00	$87.50
Maldives	$974,900,000.00	$89.28
Congo, Dem. Rep.	$1,016,000,000.00	$93.05
Niger	$1,064,000,000.00	$97.44
Cambodia	$1,094,000,000.00	$100.19
Spain	$775,200,000,000.00	$70,993.24
United States	$2,318,000,000,000.00	$212,283.70
European Union	$6,205,000,000,000.00	$568,257.27
Japan	$6,735,000,000,000.00	$616,794.96

BitPay, the world’s largest Bitcoin payment processor, has announced that they have processed over $2 million in payments in the first 25 days of March. The company also reports that the rate of transactions is also accelerating, with 3,600 processed this month, and the total number of merchants that the company serves has now increased to over 4,000 – more than triple what it was in November before WordPress’s announcement.

As a sign of Bitcoin’s greater adoption, this news is very significant. As the Bitcoin price has now shot up by a factor of five since it first started its meteoric rise since the beginning of January, many people are becoming increasingly concerned that Bitcoin is entering another bubble, a cycle of self-reinforcing price increases and media attention that is not backed by any underlying adoption. If that is the case, then it means that the price could easily crash back down just as quickly, much like it did in 2011. Now, however, the opposite is clear; although Bitcoin’s price and visibility have increased drastically over the past two months, at least for now adoption seems to be keeping up. Other data corroborates this; Bitcoin transaction counts are also going up, although not as quickly.

It should be noted that BitPay is far from the only payment processor in the Bitcoin economy; Reddit and Mega, two of the largest businesses to accept Bitcoin, use Coinbase and Zipbit, respectively. Thus, the Bitcoin economy is a lot larger than even the $2 million per month that BitPay reports. For a long time, critics of Bitcoin have claimed that the currency’s primary use case is buying illicit goods such as drugs, citing statistics such as Silk Road’s estimated revenue of $2 million per month from August 2012, but the new statistics clearly show that even if those claims were true in 2011 and early 2012, the “legitimate” Bitcoin economy is now much stronger.

Merchants using BitPay also have another reason to rejoice. As a result of the company’s success, CEO Tony Gallippi has announced that fees for all merchants, including those who are converting their earnings to any local currency that BitPay supports, will be reduced to 0.99% across the board. “We chose to celebrate this milestone by rewarding all merchants, large and small, with an across-the-board fee reduction, instead of offering tiered pricing which rewards only the largest merchants,” Gallippi writes, “We want our merchants to use this fee reduction to offer discounts and incentives to their customers for paying with bitcoin.” This price decrease in particular is very significant. With the new fees, if a buyer buys bitcoins through Coinbase, pays the money to a merchant in exchange for a product, and the merchant cashes out through BitPay, the round-trip fees add up to a total of 1.99% – less than the 2.90% + $0.25 charged by Visa and Mastercard. However, from the customer’s point of view at most Bitcoin merchants buying with Bitcoin is still 1% more expensive, and so, at least for now, the buyer has no financial incentive to participate in the currency switch. This is why Bitcoin business advocates are now increasingly calling for Bitcoin businesses to pass on the savings through a discount, and some large players have already done so. The Bitcoin Store, for example, has been successfully offering its customers prices for electronics lower than what can be found almost anywhere else because of their savings from using Bitcoin, and they have already gotten more than $300,000 in purchases.

Of course, fees are not the only savings with Bitcoin that businesses can make. Many merchants, including small businesses in particular, accepting credit cards are often forced to spend a significant portion of their time looking at customers’ personal data to attempt to verify that the purchase is legitimate. With Bitcoin, merchants do not need to worry about fraudulent customers, resulting in savings of both loss to fraud and investigative effort that is potentially much greater than 2-3%. Discounts as high as 5 or even 10 percent may be justified on these grounds.

For businesses selling digital goods such as games and software, there is a strong case to make that the discounts that Bitcoin users should receive are even greater. To see why, it is important to understand that digital goods have a zero marginal cost of production – that is, when someone buys a movie, program, book or song the vendor must only pay a fraction of a cent transmitting the data to the buyer, pocketing the rest as pure profit. However, there is a hidden tax involved: the effort that the buyer needs to make to complete the transaction. In the case of credit cards, this involves filling in a form including credit card number, validation code and a full set of personal information – a process that may take the buyer several minutes to complete. In the case of Bitcoin, all it takes is copying an address or scanning a QR code. Now, imagine that a given song or mobile application is available for sale to two different groups using these two different methods for $1. A credit card user might value the time wasted filling in the form at an additional $1, while for the Bitcoin user the streamlined process of buying through Bitcoin would only “cost” $0.20. Consider what would happen if the price was increased to $1.60 for both groups. To credit card users, the total cost would go up from $2.00 to $2.60 – a 30% increase. To Bitcoin users, however, the cost would go up from $1.20 to $1.80, or 50%. Under normal circumstances, the 50% increase would deter a larger percentage of customers from buying the product than the 30% increase, and so it may well make economic sense to increase the price for credit card users and not Bitcoin users. Applying this effect across the board, it becomes clear that the optimum price for a digital good for Bitcoin users will often be much lower than that for credit card users.

At this point in Bitcoin’s development, encouraging more merchants and customers to start using the currency is crucial for its continued growth. Potential Bitcoin users looking at Bitcoin need to see a reason to start using it to buy products and services, and at the same time merchants looking to start accepting Bitcoin need to see a sufficiently large potential customer base for accepting Bitcoin to be worth it. One of Bitcoin’s major advantages is its low fees, but until now for most users and merchants that advantage has not been realized; merchant processing fees from BitPay were almost as large as those charged by Visa and MasterCard, and combined with Bitcoin exchange fees on the buyer’s side it was Bitcoin that was the more expensive option. Now, merchant savings with Bitcoin have finally become a reality, and if merchants reciprocate by providing discounts, even if only 1% off the original price, both sides will be able to share in the savings. All in all, BitPay has just laid the groundwork for an even greater wave of adoption in the months to come.

Bitcoin Magazine’s Issue 8 is now available for sale on our website, covering most of the exciting news that we’ve seen happen to the Bitcoin world in the past two months including extended coverage of Mega, BitcoinQt 0.8, Ripple, Bitcoin nonprofits such as PositiveMoney and the Internet Archive and more. In addition, we have also brought back our Bitcoin FAQ from issue 4 in a revamped form. Bitcoin has expanded massively in the past few months, growing for a premature child desperate for its first signs of real adoption to a veritable economic and social powerhouse in its own right, and we at the magazine intend to continue improving the quality of our products and service as we go along this great journey with it.

Since issue 6, Bitcoin Magazine has drastically improved the speed and reliability of its shipping through integration with Amazon services, and with this latest release we are continuing the trend. Issue 8 is now available for purchase on Amazon shipping from the US, UK and Germany, ensuring much faster and more reliable shipping to all of our customers around the world. As usual, the issue will be available in Barnes and Noble starting April 2.

We would also like to give special thanks to BitcoinStore for joining us starting from this issue as an advertiser.

Government regulation has for a long time been a gray area for Bitcoin, both in the United States and elsewhere. Although we have seen a number of disparate government reports either simply talking about Bitcoin or providing a regulatory opinion on some aspect of Bitcoin exchange, to date we have not seen anything close to a conclusive statement on digital currencies from any government organization in any country in the world. The problem is a difficult one; nearly all laws to date that attempted to regulate online payments of any form have all assumed a central issuer, and in the case of Bitcoin it could be just as easily argued that everyone is an issuer or that no one is. Today, however, we have gained a much clearer picture of what regulation for Bitcoin will look like, as FINCEN just released a paper clarifying their position on virtual currencies, touching on the concept of “decentralized digital currency” in detail with Bitcoin clearly in mind.

The paper starts off delineating a clear definition of what virtual currency is: “FinCEN’s regulations define currency (also referred to as “real” currency) as “the coin and paper money of the United States or of any other country that [i] is designated as legal tender and that [ii] circulates and [iii] is customarily used and accepted as a medium of exchange in the country of issuance. ” In contrast to real currency, “virtual” currency is a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency. In particular, virtual currency does not have legal tender status in any jurisdiction.” It then breaks digital currencies down into three forms: e-currencies and e-precious metals, centralized digital currencies and decentralized digital currencies. Although the document does not explicity define an e-currency and what differentiates it from any other virtual currency, a footnote makes the likely intended meaning clear: “Typically, this involves the broker or dealer electronically distributing digital certificates of ownership of real currencies or precious metals, with the digital certificate being the virtual currency.” That is, e-currencies are essentially certificates for what FINCEN calls “real” currencies – that is, currencies that are, somewhere in the world, legal tender. Centralized virtual currencies are digital currencies that have a “centralized repository”; this is likely intended as a catch-all term for any virtual currencies which are not simply tokens for “real” currency or precious metals but rather a currency in their own right, Second Life’s Linden dollars is perhaps the existing canonical example, although a hypothetical Bitcoin-like unbacked currency backed by a central repository would also fall into the scope. Finally, there are decentralized digital currencies. A decentralized digital currency is one “(1) that has no central repository and no single administrator , and (2) that persons may obtain by their own computing or manufacturing effort” – Bitcoin being right in the crosshairs. Interestingly, Ripple fits one half of the definition but not the other – although Ripple itself is decentralized, or at least will be once the server is released, all 100 billion XRP that will ever exist have already been created. If Ripple succeeds, perhaps FINCEN will be forced to release yet another clarifying guidance paper in two years’ time.

The paper also describes three roles that virtual currency users can have: user, exchanger and administrator. The concept of administrator is very narrow; the document states: “An administrator is a person engaged as a business in issuing (putting into circulation) a virtual currency , and who has the authority to redeem (to withdraw from circulation) such virtual currency” – the latter condition specifically excluding anyone in the Bitcoin economy, as Bitcoin has no concept of redeeming bitcoins in any meaningful way; even transaction fees are instantly transferred over to a miner in the next block. The definition of exchangers is simple: “An exchanger is a person engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency.” Finally, a user is simply someone who uses virtual currencies to buy and sell goods and services.

The major boon from the document for Bitcoin is this: users get off lightly. In fact, FINCEN does not intend to touch mere users of virtual currency at all; the document states, “a user who obtains convertible virtual currency and uses it to purchase real or virtual goods or services is not an MSB under FinCEN’s regulations. Such activity, in and of itself, does not fit within the definition of “money transmission services” and therefore is not subject to FinCEN’s registration, reporting, and recordkeeping regulations for MSBs.” The document also offers protection from “prepaid access” laws that regulate gift cards and the like, saying that “a person’s acceptance and/or transmission of convertible virtual currency cannot be characterized as providing or selling prepaid access because prepaid access is limited to real currencies.” Finally, even exchanges are safe from “foreign exchange” regulation, the set of rules governing businesses that offer exchange between two or more national currencies.

The document continues:

A person that creates units of this convertible virtual currency and uses it to purchase real or virtual goods and services is a user of the convertible virtual currency and not subject to regulation as a money transmitter. By contrast, a person that creates units of convertible virtual currency and sells those units to another person for real currency or its equivalent is engaged in transmission to another location and is a money transmitter. In addition, a person is an exchanger and a money transmitter if the person accepts such de – centralized convertible virtual currency from one person and transmits it to another person as part of the acceptance and transfer of currency, funds, or other value that substitutes for currency.

The first two sentences clearly have to do with miners. What they state is simple: miners that use their bitcoins to buy goods and services are not regulated. However, miners that sell their bitcoins are. That is to say, interpreting these words literally, miners have to register as money transmitters if they are selling their bitcoins. But there is also another interpretation, hinging on the phrase “to another person”. Bitcoin developer Jeff Garzik writes on Reddit, In my non-legal opinion, it seems like miners are ok if they (a) exchange for fiat via a licensed bitcoin exchange, or (b) buy goods and services for bitcoins, staying inside the bitcoin economy. That is, “to another person” may simply refer to selling bitcoins over the counter directly, and if they are selling through a licensed Bitcoin exchange then that Bitcoin exchange’s license carries over to both sides of the transaction. But even if the first interpretation is the one FINCEN intends, it is trivial to bypass; miners can simply spend their earnings instead, using Bitspend to purchase goods in the USD economy with Bitcoin if the Bitcoin economy proper does not satisfy their needs.

The last sentence, however, is quite troubling. Although seemingly tautological, the sentence includes two key words: “money transmitter”. Money transmitter is in fact a technical term used by FINCEN that has a very specific regulatory meaning – a money transmitter needs to get a money transmitted license. These licenses require tens of thousands dollars of capital to acquire in each state, and a money transmitter must get a license in each state whose residents they intend to provide services to; all in all, a very serious roadblock to the United States’ big four exchanges: BitInstant, Coinlab, Coinbase and now Tradehill. The recent Bitcoin ATM project may also fall under the radar. So far, it is not clear what the owners of these services intend to do, and the rate of Bitcoin’s growth in the United States in the months to come will very significantly depend on just how both the exchanges and FINCEN itself will proceed.

Fortunately, payment processors such as BitPay are exempt. BitPay is legally classified as a payment processor, not a money transmitter. Gallippi points to 31 CFR § 1010.100(ff)(5)(ii)(A)–F, a set of FINCEN rules which clarify that “the term money transmitter does not include a person who only … (ii) Acts as a payment processor to facilitate the purchase of, or payment of a bill for, a good or service through a clearance and settlement system by agreement with the creditor or seller.” Becuase BitPay deals financially only with sellers, CEO Tony Gallippi explains, and not with customers, BitPay is in the clear.

Although the requirement for exchanges to get a money transmitter license is highly problematic, for the most part this guidance paper is a positive sign for Bitcoin for one simple reason: Bitcoin itself is now unambiguously legal, and that will not change any time soon. Even though the document does place Bitcoin exchanges under a very significant burden of regulation, what it also means is that nothing worse is going to come. Many organizations, including the popular independent video game collection Humble Indie Bundle, have been hesitant to accept Bitcoin over legal uncertainty, but now that the matter is settled they have no reason to fear; as long as they are not acting as money transmitters for BTC as well, under the new rules they are now fully protected. Although the document does not specifically mention the act of paying salaries in Bitcoin, the words that are there strongly imply that that is nothing more than mere usage as well. On the whole, FINCEN has just cleared the way for previously hesitant businesses and organizations to start experimenting with Bitcoin on a much larger scale.

Yesterday, the Bitcoin network experienced one of the most serious hiccups that we have seen in the past four years. Starting from block 225430, the blockchain literally split into two, with one half of the network adding blocks to one version of the chain, and the other half adding to the other. For the next six hours, there were effectively two Bitcoin networks operating at the same time, each with its own version of the transaction history. The split lasted for 24 blocks or 6 hours, finally resolving itself when one version of the chain conclusively pulled ahead of the other at block 225454, leaving the other chain largely abandoned, with only a small number of miners that are incapable of recognizing what has now become the main chain still mining it, while the bulk of the network quickly returned to normal.

The fork was first noticed at about 23:30 GMT on Monday, March 11, when “thermoman” on the bitcoin-dev IRC channel mentioned that “some client told my client it (the other host) had 225431 blocks, but blockexplorer says that currently the block count is at 225430”. Some other blockchain resources also showed 225430 blocks. Over the course of the next thirty minutes, other users started reporting more strange reports from Bitcoin client logs. Bitcoin developer Peter Wuille (“sipa” on IRC) claimed that he was on block 225435, and then soon 225439, while other sources were still reporting 225431. At 00:00 GMT March 12, sipa posted “I wonder if there’s something that triggered it on the network, a large reorganization or so”. It turned out that a blockchain reorganization, an event that happens when a client discovers a new blockchain longer (and therefore more likely to be valid) than the one it was working with before, and switches to it, was indeed what happened, and over the next few minutes everyone realized what was going on: a blockchain fork.

What had happened was the following. The latest version 0.8 release of bitcoind, by far the most popular implementation of Bitcoin used by miners, switched the database that it used to store blocks and transactions from BerkeleyDB to the more efficient LevelDB as part of an effort to reduce blockchain synchronization time. However, what the developers did not realize at the time was that by doing so they also accidentally introduced a change to the rules of the Bitcoin protocol. In order to make an update to the database, the database process must make a “lock” on the part of the database which stores that particular item of information, a mechanism implemented to prevent two changes from occurring simultaneously and accidentally corrupting the database. In a b-tree, the data structure used by BerkeleyDB to store objects, two locks are required per update. However, BerkeleyDB requires its users to set a limit to the number of locks that can be made at the same time; “If the values are too small,” the FAQ page warns, “requests for locks in an application will fail. If the values are too large, the locking subsystem will consume more resources than is necessary.” In the case of Bitcoin, the limit was 10,000. What happened in block 225430 was that a single block simultaneously affected the status of over 5,000 transactions, requiring more than 10,000 locks on the b-tree to be made at the same time. As a result, the BerkeleyDB failed, and so the older bitcoind 0.7 (and earlier versions) could not read the block. In the case of bitcoind 0.8, LevelDB has no such restrictions, so it could accept such blocks just fine. Because the Bitcoin protocol builds up the transaction history, used primarily to calculate and agree on everyone’s account balances, by creating new blocks representing roughly ten-minute time intervals’ worth of transactions on top of existing valid blocks in a chain (hence, “blockchain”), miners using bitcoind 0.8 started building up a version of the blockchain that included the offending block, while miners using bitcoind 0.7 rejected it and started working on a another blockchain of their own. Ordinary users using BitcoinQt 0.7 or platforms that rely on bitcoind 0.7 as a server saw the 0.7 fork, and everyone else saw the 0.8 fork.

With the fork in progress, the Bitcoin developers had a choice: do they support the 0.8 fork or the 0.7 fork? Ultimately, there could only be one; a monetary system cannot function if there are two different databases of how much money each person has. The 0.8 fork had much more computing power behind it, and was already eight blocks ahead by the time the community could muster any effort toward fixing the problem, and upgrading to 0.8 is something that will have to be done eventually. On the other hand, if the 0.8 fork took over, thousands of users on 0.7 would be forced to upgrade in order to use Bitcoin at all, something which would not happen if the 0.7 fork took over since both versions of bitcoind can read it. The developers quickly settled on 0.7, and the community set to work on the next task: notifying major miners and mining pool operators of what they need to do.

Over the next few hours, nearly every major Bitcoin developer and mining pool operator joined the bitcoin-dev IRC channel. Major mining pools that were using bitcoind 0.8 shut down, downgraded to 0.7, and switched back on. Merchants were also notified; most large businesses, including BitcoinStore, BitPay, SatoshiDice and MtGox, shut down deposits to protect themselves from double spend attacks. BitPay quickly turned themselves back on once their servers were on the 0.7 fork; “safe mode alerted us there’s a problem,” BitPay’s Tony Gallippi writes. “That’s when Steve jumped on IRC to see where the consensus was going, and we were back in business very quickly.” Progress on switching hash power to 0.8 appeared to be slow at first, and at block 225451, the 0.8 chain was 13 blocks longer than 0.7. But that was the furthest that the 0.8 chain would get ahead. By then, the two chains were growing roughly in lockstep, and at about 03:30 the tipping point came. The 0.7 chain quickly caught up to being only 10 blocks behind, then 8 blocks, and at 06:19 both chains converged to the same length at block 225454, leading to nearly all remaining miners abandoning the other.

This incident will go down in history as one of the closest moments that we have come to the underlying Bitcoin protocol actually failing. But it is not the most serious breach ever made. In August 2010, a transaction in block 74638 contained two outputs summing to over 184 billion – just over 2^64 satoshis. The result was an integer overflow bug, the digital equivalent of a mechanical odometer wrapping around to zero after the car drives 999,999 kilometers. The overflow caused the software to think that the transaction contained only a small amount of BTC while in reality the outputs together had thousands of times more than the 21 million that should ever exist. A new version of the Bitcoin software had to be published, the blockchain was forked, and a new, valid, chain overtook the old one at block 74691 – 53 blocks after the original fork. This time, it only took 24 blocks, and it was not even a life-critical threat to the system – if the developers had done nothing, then Bitcoin would have carried on nonetheless, only causing inconvenience to those bitcoind and BitcoinQt users who were on 0.7 and would have had to upgrade. The economic damage was significant, but fairly small; the only monetary losses that have been reported are the $26,000 USD worth of mining block rewards from the 24 mined blocks of 25 BTC that are now forever lost in the now abandoned chain, as well as a $10,000 double spend against OKPay. Aside from the lost mining revenue and this double spend, transactions were not affected and no bitcoins were “lost”; any transaction that was included in the now abandoneded chain was included in the new chain as well, so any bitcoins that were spent during the fork are now at their proper destinations.

In a way, this was the best possible time for such a thing to happen. The Bitcoin price was on a steady uptrend, and so the 24% drop in price that occurred at the time of the incident was quickly reversed, and as of the time of this writing Bitcoin stands at $44-$46, down from $48 the day earlier but up from $36 one week before. Public media attention on Bitcoin is very much positive, and rather than attacking Bitcoin as they would have in 2011 many journalists actually praised the Bitcoin development team on their rapid response. Ars Technica’s Timothy B Lee wrote a neutral piece on the event, writing that “the incident will be an important test of the cryptocurrency’s decentralized governance structure”, and an article at ecurrency.ec on the subject was entitled “Bitcoin software bug has been rapidly resolved”.

However, the incident opens up serious questions about the nature of the Bitcoin protocol, and puts into the spotlight some uncomfortable facts about Bitcoin’s notion of “decentralization”. Most security protocols, including encryption algorithms, hash algorithms and full-scale protocols, have dozens of implementations in many different programming languages, and the protocol specification is determined by a clear standard against which any individual implementation can be checked for compliance. In the case of Bitcoin, however, things are different. Although there is technically a standard on the Bitcoin wiki pages, it has at times been poorly updates, and the reality is that the bitcoind implementation is the standard, and nearly all miners on the Bitcoin network are using some version of it. There are a few alternative implementations, the most complete one being Amir Taaki’s libbitcoin, with Mike Hearn’s BitcoinJ (written in Java) close behind, but so far they have gained very little traction in use with mining, and, what’s more, there is a small portion of the Bitcoin development community which is actively against the idea of using multiple codebases.

Fortunately, most Bitcoin developers do not support this viewpoint, although many have come out in favor of keeping a healthy level of prudence. Mike Hearn wrote the following on the Bitcointalk forums in June 2011:

Gavin wrote to me only days after the BitCoinJ release to tell me how happy he was to see an alternative implementation. Satoshi expressed very similar sentiments. Nobody is against alternative implementations.
What some people, especially Satoshi, have said is that there’s an unusual amount of risk involved with reimplementing the full system and using that reimplementation to mine. Bitcoin is very complex and if you aren’t skilled and very thorough you are likely to diverge from its behavior in small, hard to detect ways. This can fork the chain and split the economy. It’s one of the few things that could instantly kill Bitcoin beyond legal harassment of its users.

Lead Bitcoin developer Gavin Andresen replied to another poster in the same thread: “Really? I’ve been encouraging alternative implementations, who is the power-hungry core developer?”, and in November 2012 he wrote in a Bitcoin Foundation update that “part of the solution is to encourage alternative implementations that make different trust/convenience tradeoffs than the reference implementation. There has been a lot of behind-the-scenes work on cross-implementation testing (the “testnet3″ blockchain contains hundreds of transaction validation test cases, for example), and new features are being added to the protocol to support alternative implementations”

But alternative implementations are not just useful for supporting different trust/convenience tradeoffs. They are also crucial in making Bitcoin’s claim of decentralization a reality. If there had instead been five distinct Bitcoin implementation in use at the time of the fork, what would have happened is that one of the five would have recognized the wrong blockchain and forked off, leading to a loss of revenue for a small number of miners and requiring the users of clients using that implementation to upgrade. The aberrant implementation’s fork of the blockchain would end up much weaker than the others right from the start, so the risk of double spend attacks would be minimal. One can argue that there will be a greater number of forking incidents with more implementations, but each one will be smaller in effect, and testing all implementations together on the testnet before release would reduce the number of bugs that slip into production software to about the same frequency as we see today.

The other aspect of Bitcoin’s decentralization that this incident calls into question is that of mining pools. The reason why the controlled switch to the 0.7 fork was even possible was that over 70% of the Bitcoin network’s hash power was controlled by a small number of mining pools and ASIC miners, and so the miners could all be individually contacted and convinced to immediately downgrade. Another article on the fork reads [Russian]: “the real problem is not even in the code supporting the Bitcoin network; bugs are everywhere. Rather, it’s the matter of who controls it. This event clearly showed that even such a well thought-out system is controlled by the will of a very small number of people – particularly, the operators of mining pools. Over 70% of new blocks right now are being found on pools, and not on individual solo miners. The underlying idea of the system was that the benevolent majority can stop a small number of attackers, but in the present time it is simply not working. The winner in a possible takeover will be the one with greater computing power, and no one else.” Bitcoin is clearly not at all the direct democracy that many of its early adherents imagined, and, some worry, if a centralized core of the Bitcoin community is powerful enough to successfully undertake these emergency measures to set right the Bitcoin blockchain, what else is it powerful enough to do? Force double spends to reverse million-dollar thefts? Block or even redirect transactions known to originate from Silk Road? Perhaps even modify Bitcoin’s sacred 21 million currency supply limit?

However, a strong argument can be made that such fears are very unlikely to materialize. The reason why has nothing to do with the specific identities of the Bitcoin mining pool operators or the cohesiveness of the Bitcoin mining community; rather, it’s the fact that Bitcoin mining is still in fact quite decentralized; it simply is decentralized in a different way. Taking a political analogy, the closest equivalent would be a liquid democracy: a hybrid of direct and representative democracy where people can either vote for individual bills by themselves or assign politicians – with the proviso that if they do not like what a given politician is doing they can switch to assigning their voting power to someone else at any time. Back in the world of Bitcoin, although much of the Bitcoin network’s hash power is concentrated with mining pool operators in practice, every individual miner can switch from one pool to another almost instantly, so if a coalition of mining pool operators decides to start violating the Bitcoin protocol miners can simply switch to any pool that remains honest, instantly depriving the miscreants of their power. Although no mining pool has attempted to actively subvert the Bitcoin protocol so far, this kind of “voting” has been done before; in 2011, there were several incidents where the mining pool Deepbit pushed above 50% of the total network hash power, and in each case there was a mass exodus of miners toward other pools to balance things out. Although the nominal power may rest with the mining pool operators, the feedback of the community is always only one step away.

Altogether, the incident was handled very well, and all parts of the Bitcoin community should congratulate themselves for their speedy resolution of the problem and their unconditional cooperation. The Bitcoin community is not always in perfect harmony; Bitcoin gambling site SatoshiDice and a number of Bitcoin developers, notably Luke Dashjr, are usually at odds over concerns that SatoshiDice’s large transaction count is bloating the Bitcoin blockchain, but yesterday differences were laid aside as the community worked together to solve the problem. We also learned a lot, and merchants are likely to be much more prepared for such incidents in the future, perhaps implementing techniques like automatic fork detection to handle forks and avoid double spends without immediate manual intervention. Before today, many people knew that some test for the Bitcoin network would come, whether at the 1 MB block size limit or else where, but just how the community would handle such a thing was an unknown. Now, the test has come and gone, and how the Bitcoin community handled the test is known to everyone: we passed with flying colors.

One of the greatest technical challenges in working with Bitcoin has always been finding an effective way to secure it. Although financial security is a serious and complex issue regardless of the underlying financial system that is being used, warranting billions of dollars of spending on the part of major banks every year, in the case of Bitcoin the scale is tipped in favor of the attacker even more than it normally is. There are two key factors that contribute to this: irreversibility and anonymity. Irreversibility means that transactions, once completed, cannot be reversed, so if a Bitcoin exchange is hacked there is no way to force the money back automatically as might be possible under a centrally controlled banking system. Anonymity means that there is no way to tell who or where the thief is physically through the financial system, leaving investigators with very little evidence to work with (although on one prominent occasion a $310,000 thief was caught through other means). Although Bitcoin is technically far more secure than most other financial systems available, in practice its digitally slippery nature means that even the tiniest security flaw in implementation is magnified greatly, and so it is only with services that are quite secure by themselves do Bitcoin’s advantages truly shine through And, over the past two years, we have seen a number of very painful reminders that we are simply not there yet. A list of top 20 Bitcoin heists exists on the Bitcointalk forums, showing a number of incidents in which tens or even hundreds of thousands of dollars were suddenly whisked away, leaving entire companies nearly, or totally, bankrupt in an instant.

Even more so than black market activity, such security breaches have arguably been the largest stain on Bitcoin’s reputation. A MtGox hack in June 2011, in which the currency’s price appeared to drop from $17.50 to $0.01 within a day (although it is highly misleading to say that it actually did drop to $0.01), is one of the most often cited incidents by journalists attacking Bitcoin, and for many the various security incidents of 2012 have only strengthened the negative impression originally set by the series of security breaches that the summer of 2011 brought. Even Bitcoin’s core developers admit that the currency won’t be truly ready for the masses until the security problem is solved.

In the past two weeks, however, three incidents took place which provide a convincing argument that we are well on the way to getting there. The first is, perhaps counterintuitively, another theft. On March 4, BitInstant announced that an unknown intruder had gained access to their VirWox account and made a series of withdrawals to three unknown addresses, presumably their own. The total amount lost: $12,480. Not $1.1 million, like the MyBitcoin scam of 2012, not $90,000 to $310,000 like the four major 2012 thefts from Bitcoinica and BitFloor, and not even the $15,000 that was the size of the February 2012 Bitcoinica theft that almost no one has even heard of, but simply $12,000 – only a rounding error for a corporation of BitInstant’s size. But it wasn’t just the fact that the incident was small that is surprising, but rather what the attacker did to get the money.

BitInstant writes on their blog:

The attacker contacted our domain registrar at Site5 posing as me and using a very similar email address as mine, they did so by proxying through a network owned by a haulage company in the UK whom I suspect are innocent victims the same as ourselves. Armed with knowledge of my place of birth and mother’s maiden name alone (both facts easy to locate on the public record) they convinced Site5 staff to add their email address to the account and make it the primary login (this prevented us from deleting it from the account). We immediately realized what was going on, and logged in to change the information back. After changing this info and locking the attacker out, overnight he was able to revert my changes and point our website somewhere else. Site5 is denying any damages, but we suspect this was partly their fault.
After gaining access, they redirected DNS by pointing the nameservers to hetzner.de in germany, they used hetzner’s nameservers to redirect traffic to a hosting provider in ukraine. By doing this, he locked out both my login and Gareths’s login and they used this to hijack our emails and reset the login for one exchange (VirWox), enabling them to gain access and steal $12,480 USD worth of BTC. No other exchanges were affected due to either Mult Factor Authentication, OTP, Yubikey’s and auto lockdowns.

BitInstant have since learned their lesson, and are now using multifactor authentication for their VirWoX account as well.

Now, compare what it took to steal $310,000 from Bitcoinica last July:

Unbeknownst to us, Tihan was using the mtgox api key as the password for a website called LastPass … Whoever is responsible for the latest theft used the MtGox API key as a password in LastPass hoping that simple security measures were not followed in the setting up of the LastPass. They gained access to MtGox. They transferred a third of the refund money, presumably to themselves.

The MtGox API key was made public in a source code leak a few days before the hack, an enterprising digital hacker decided to try the key as a password on LastPass, and, voilà, the thief earned himself a small fortune. In the case of BitInstant, on the other hand, it took a complex procedure including a form of domain spoofing and social engineering to get anywhere, and the profits were over twenty times smaller. The flaws that the attacker used were not unique to Bitcoin; these are attacks that can be used against businesses no matter what industry they happen to be in, and in the case of social engineering even those that have nothing to do with the internet are not secure. If BitInstant’s defenses after this hack represent anything less than top-notch security, then it is safe to say that pretty much no one is secure.

The second development in Bitcoin security comes from Exante’s recently announced Bitcoin Fund, a Malta-based hedge fund that intends to open the door for institutional investors to enter the Bitcoin markets. The fund will also be the first professionally developed way for investors to trade bitcoins on margin, long and short, and the shorting functionality in particular may turn out to be a significant boon for Bitcoin’s stability.

But the maintennance of such a fund poses a significant security challenge. Exante is in possession of $3 million worth of bitcoins, and if the bitcoins are lost or stolen the fund will have no choice but to shut down in an instant. Exante, however, has risen up to the challenge, and the security measures that they describe are impressive. First of all, the private keys themselves, stored in a BitcoinQt wallet.dat, are encrypted with AES256. The data is then stored in a TrueCrypt container on three flash drives. The container password is then split into three parts using a mechanism known as Shamir’s Secret Sharing. The way basic 2-of-3 sharing works is this: suppose you are trying to hide a secret value, x. Pick a random y, on about the same scale as x. Write down three numbers in three separate places: x-y, y and x+y. Obviously, no single piece by itself will help you find x. However, if you have any two of them, it’s very easy to combine them in order to get x back, either directly by adding or subtracting y or indirectly by taking (x-y)+(x+y)=2x and then dividing by 2 to find x. Shamir’s Secret Sharing is a clever mathematical generalization of this; for example, you can “split” a number into 15 pieces such that any 9 of them (but no 8 of them) are enough to get the original number back. This provides security against theft and redundancy of loss at the same time. Strictly speaking, SSS is unnecessary; multisignature transactions accomplish the same thing using the scripting power of the Bitcoin protocol directly. However, it is effective, and is used to store critical data like root SSL certificate authority private keys, which can cause millions of dollars of damage if leaked. Finally, each flash drive is duplicated several times and the pieces are stored in three separate jurisdictions.

This is the security setup that the team at Exante has deemed strong enough to store millions of dollars of bitcoins securely. This is the gold standard that all major Bitcoin businesses that handle such large quantities of customer funds can aspire to, and it provides a level of security comparable to that used to store data or physical objects tens or even hundreds of times greater in value. Most businesses will, of course, not need nearly so much protection; this level of security is reserved for high-level financial services, but what is important is that, for the first time, a group of professional, internationally trusted and established hedge fund managers has decided that Bitcoin can be made secure enough to be taken seriously.

BIPS tape archival unit

Finally, we also have another development in Bitcoin security, this time coming from within the existing Bitcoin community: BIPS. The new merchant platform from WalletBit includes a number of upgrades, including significant improvements in usability and, in some cases, lower fees than BitPay, but where BIPS truly stands out is in its security. Like all other major merchant services and exchanges, BIPS keeps most of its funds in cold storage. Its cold storage platform, however, is one of the most advanced that have ever been implemented for use with BTC. BIPS’ Kris Henriksen writes, “without revealing to much of our infrastructure, we backup to 1 SAN (12 WD Red harddrives), 2 NAS (5 WD RED drives) all running raid 6, and then from there to the robotic tape library”, and director of marketing Adam Harding adds “BIPS follows the same security practices as WalletBit and even more so. This includes regular tape backups of every server stored in a fire proof faraday cage under lock and key. This is the same feature we offer for our cold storage with an additional password only the user knows but in the event of a global EMP, the bitcoind is backed up every hour.” Tape backups are a method of data archival that, Harding adds, “is the most reliable backup method out there and still used by every major organization.” The tapes themselves are stored in a datacenter in Denmark, although the hard drive backups ensure that there is no single point of failure against loss. BIPS’ security scheme is not quite as impressive as that created by Exante; a form of secret sharing is technically used in the RAID 6 implementation, but multi-jurisdiction or even multi-location storage is not yet something that BIPS have implemented. However, for the tiny startup that BIPS is, the setup is quite impressive.

What all of this shows is that Bitcoin security is now being taken very seriously, and established Bitcoin businesses have developed comprehensive security policies and physical systems that are proving increasingly effective against attack. There are still details to be ironed out; two months ago, another Bitcoin exchange lost its funds primarily due to a disappeared shareholder with sole access to the cold storage USB, and mechanisms for Bitcoin exchanges to demonstrate solvency and possession of full reserves to their customers are another improvement that may be needed in the future. However, what Bitcoin users, detractors and journalists need to realize is that we are no longer living in 2011 or 2012. Most of the businesses that were insecure have now been weeded out by natural selection and, as for those that remain, the greater attention to Bitcoin paid by established players like Exante and the Silicon Valley investors in Coinbase and BitPay is ensuring that services run by trustworthy individuals with established reputations on the line are available. Over the course of this past year, although the size of the Bitcoin economy has grown by a factor of ten the total volume of hacks and thefts has actually considerably gone down. Although security will never be a solved problem either in the world of Bitcoin or anywhere else, the crippling hurdle that turned so many away from Bitcoin in 2011 and 2012 is now well past us.

Adam Harding and Kris Henriksen, the two people currently in charge of the popular Bitcoin payment processing platform WalletBit, have come up with a new and improved merchant platform: BIPS. BIPS brings a number of improvements over WalletBit including a new user interface, an easy-to-use REST API for interacting with the service automatically and, most importantly, no fees for the basic Bitcoin service. Instead, BIPS will make its money on a variety of complementary services, including user-encrypted cold storage, having fees automatically deposited to one’s bank account, and having one’s funds automatically converted to USD on MtGox to insure against sudden drops in the Bitcoin price.

BIPS is not the first service to make such an offer; basic Bitcoin payment processing with MtGox or Coinbase has been free for months, and using MtGox directly will be cheaper than doing so through BIPS and paying its 0.89% fee. BIPS will be cheaper than BitPay for merchants [NOTE: On 25 March 2013 BitPay lowered their fees to 0.99% for both processing bitcoins and if the funds are converted into fiat currencies] converting to fiat currency, with a conversion fee of 2.50% internationally (although not cheaper than Coinbase’s 1% in the US), but for merchants who intend to receive Bitcoin directly it may be difficult to see why merchants should use BIPS instead of Coinbase or MtGox. But where BIPS intends to make up for the costs that it does have is ease of use. Its API services are very easy to work with; BIPS shows on their front page how to construct a URL to create an invoice, and in the merchant section it features a simple form in which you enter a callback URL and an optional “secret” parameter, and any payments that a customer makes will automatically lead to a notification being sent to the URL. Actually handling callback URLs and knowing when to make invoices is still the responsibility of the merchant, but BIPS makes the merchant integration side as easy as possible. More features will soon be added, including API calls to send money to a Bitcoin address, phone or email address, and aside from the planned API upgrades there will also soon be options like exporting transactions to an Excel spreadsheet. Like WalletBit, BIPS also provides an e-wallet, and there too it intends to make the experience as easy as possible. Users can sign in using Google, Twitter or Facebook and be logged into their wallet already as they browse the internet. For merchants, BIPS has a mobile checkout application available already. “We hope to provide the best checkout experience for customers using bitcoin to pay,” Henriksen writes, “and the best experience for merchant as a merchant bitcoin gateway.”

BIPS brings the same level of security as WalletBit, and in many cases even greater. Multifactor authentication is available in the form of Google Authenticator and WalletBit’s SecureCard, a matrix of letters and numbers that can be printed out on a piece of paper that the login process asks for a specific cell from. On Monday, BIPS will also add IP guard, limiting account access to specific IP addresses. On the server side, BIPS will store the majority of merchants’ funds in cold storage, backing it up to over a dozen hard drives running RAID 6 as well as archival tape, and the rest on a hot wallet to handle withdrawals. The exact percentage of funds placed into cold storage is based on an algorithm first used at WalletBit, which attempts to predict how much money merchants are likely to withdraw. Currently, Henriksen is unable to give an exact number for the percentage of merchants’ bitcoins that will be placed in cold storage, although the more merchants BIPS can sign up the closer to 100% this value will be. There is also another option of 100% user-encrypted cold storage, at a cost of 0.89%, in which you supply a password with which your wallet is encrypted client-side, and then stored by BIPS in the same cold-storage facility as that used by regular cold storage with the added protection that even they cannot access your funds. Starting Monday, merchants will also be able to have your merchant revenue sent directly to this cold storage.

WalletBit is not disappearing; the old service is still available at walletbit.com for those who want to use it. However, for new merchants there is no reason to use it instead of BIPS and Henriksen hopes that users will see the benefit in switching to BIPS. WalletBit’s eWallet, however, will soon be removed, although it will not be missed by many; the 0.89% fee on the wallet unfortunately turned most potential users away. BIPS’s wallet service is free, so it will hopefully find much more usage. BIPS already has several merchants in the works, and further announcements from BIPS on the topic are soon to come.

Bitcoin’s largest payment processor, BitPay, has announced that they have added a new feature to their array of merchant services: integration with Fulfillment by Amazon. Fulfillment by Amazon is a service which allows any business with inventory in Amazon’s warehouses the ability to sell the products on their own website, and then have Amazon automatically ship them to the buyer’s address. The service is available to merchants in the USA, UK, Germany, France, Italy, and Spain, although it can be used to ship worldwide.

Services like FBA are rapidly closing the gap between small businesses and large ones, giving even merchants with only a few thousand dollars of annual revenue access to world-class shipping services of the same quality as that available to major retailers. FBA merchants’ customers even benefit from programs like Super Saver Shipping. Amazon also handles customer support, freeing small business owners to work on their product, and not their logistics. The program is quite expensive, but FBA users argue that without FBA they would be paying high costs on shipping and customer service anyway, and doing a poorer job at the same time.

What BitPay is now offering is direct integration with the platform – that is, whenever an order is paid through BitPay, BitPay automatically notifies Amazon of the order. Thus, Bitcoin businesses no longer need to deal with Amazon integration themselves. Bitcoin Magazine itself has been using the service for weeks, and has been very satisfied. “Adding BitPay’s plugin to our webstore, which is based on WordPress, has dramatically improved our logistics,” Bitcoin Magazine’s Mihai Alisie reports. “When orders get paid through BitPay, Amazon’s servers are automatically notified, and our admin screen is updated with the correct status. PayPal does not offer the same service that BitPay can, so we have to manually process any orders which are paid through PayPal.”

PayPal may well add FBA to their offerings soon, but what this shows is that Bitcoin businesses like BitPay are now advanced enough to be competitive with their non-Bitcoin offerings. BitPay is not the first business to have come this far; Bitcoin precious metals seller Coinabul has been known industry-wide for months for its speed and reliability. “Conventional gold dealers are terrible at building websites,” Coinabul’s Jon Holmquist explains. The Bitcoin community’s technical skill has proven to be a very valuable asset, and for both Coinabul and BitPay it appears to be paying off. Thanks to its latest two rounds of venture capital funding, BitPay has been able to considerably expand its staff, and will be expanding its range of offerings quickly in the months to come. For now, this is yet another small step toward making Bitcoin possibly even the preferred payment method for e-commerce businesses to start accepting payment.

Today, Namecheap has announced that they, like WordPress, Reddit and Mega before them, are now accepting Bitcoin as payment for their services. Namecheap is most well-known as a domain name registrar, offering domain registration services for as low as $3.99 per year (compared to GoDaddy’s $10-$15 per year), but they also sell a number of other web services, including web hosting, virtual private servers and SSL certificates, and are ranked by Alexa as the 927th most visited site in the world, making them the fifth most popular website after WordPress, Reddit, the Internet Archive and 4Chan to accept Bitcoin.

Just like WordPress, Namecheap’s reasons for accepting Bitcoin are primarily political in nature. As Namecheap community manager Tamar Weinberg wrote, “We’re a freedom loving registrar. We donated over $100,000 to the Electronic Frontier Foundation to help keep the fight for internet freedom alive with the introduction of SOPA and CISPA. Our pride is our customers, and we are completely focused on doing what it takes to make you happy That’s why we’re integrating Bitcoin: you’ve asked, and we’ve answered.” The domain registration business may appear to be too low-level and utility-like to support such ideological preferences, but the industry took a decidedly political turn in December 2011 when the US government attempted to pass the Stop Online Piracy Act (SOPA), a law which, detractors argue, would have effectively made sites hosting user-generated content like Reddit and YouTube illegal. GoDaddy was discovered to be one of the supporters of the law, and so a grass-roots, large-scale internet-organized boycott ensued. GoDaddy was quickly forced to backpedal on its support of the law, with CEO Warren Adleman expressing the non-committal position that “fighting online piracy is of the utmost importance, which is why GoDaddy has been working to help craft revisions to this legislation – but we can clearly do better.” However, the damage to GoDaddy’s reputation was irreversible. At the same time, the potential for domain takedowns to be used as a mechanism for governments like that of the United States to enforce laws outside of its own borders quickly became clear, and “freedom-friendly” businesses in a number of internet-related industries have either emerged or gained considerable publicity since then – Namecheap included.

Namecheap is not the first company to offer domain registration services or web hosting and virtual private servers for Bitcoin; Zhou Tong’s NameTerrific and the VPS provider VPS6 have been providing those two services, respectively, for nearly a year. However, the fact that existing businesses that already have a significant foothold in their respective industries are now starting to accept Bitcoin is something completely different. In a small, but rapidly growing number of fields, Bitcoin is already a force to be reckoned with. Several days ago, TorrentFreak released an article that showed that over half of all major VPN providers are now accepting Bitcoin. Although market-leading domain registrar GoDaddy will likely be one of the last companies to accept the “currency of online freedom”, Namecheap is an official reseller of the second largest registrar, eNom, and so through Namecheap Bitcoin is now accepted by the second largest registrar in the market. Far from a scattered collection of hobby businesses, this represents serious market penetration in industries that matter. If WordPress was Bitcoin’s first foothold in the mainstream, the web services industry may well become its first fully conquered territory.

Bitcoin’s largest payment processor, BitPay, has announced that they have received another round of funding from a group of angel investors. The investors include Trace Mayer, well known in the Bitcoin community for his reporting on economics and finance, as well as his privacy guide and ebook How to Vanish, Ben Davenport, co-founder of Beluga Inc and angel investor, and A-Grade Investments, a venture capital firm co-founded by Ashton Kutcher. This latest investment will bolster another round of funding made two months previously, in which private venture capital investors Barry Silbert, Shakil Khan, Jimmy Furland and Roger Ver brought a total of $510,000 into the company. BitPay has chosen not to disclose the size of this latest round, although CEO Tony Gallippi has stated that the money will be used to expand the company’s hiring in Atlanta.

This is only the latest in a series of investments into businesses in the Bitcoin community, continuing a trend that started roughly one year ago with a $500,000 investment into Coinlab in April 2012, soon followed by $600,000 for Coinbase in September. As Ben Davenport explains, this is not a coincidence.

“Bitcoin businesses,” Davenport writes, “until recently, have largely been bootstrapped. The reason is, until recently, when an angel or VC has looked at Bitcoin businesses, they saw a currency with a total market cap of about $150 million. That’s too small a total addressable market to be interesting. And if an investor is savvy enough to see the potential for Bitcoin itself, then they also realize they can capture that upside without the business risk, simply by buying bitcoin. Now though, we’re getting to the size where an investment in an amazing, well-positioned team like the guys at BitPay makes a lot of sense, and will also ultimately help increase the overall Bitcoin adoption rate. I predict we’ll see the VC flood gates open within 12-18 months — I’m just trying to be a little bit ahead of the curve there.”

Late 2012 has been a pivotal period for Bitcoin. Although the main indicator of the “financial” size of Bitcoin, the Bitcoin price, is now barely higher than it was at its peak in the beginning of June 2011, the key difference between Bitcoin’s rise in price now and its bubble then is that in 2011 the Bitcoin markets’ trade volume was backed almost entirely by speculation. The rise to $31.9 in June was triggered by a massive spike in public attention following a series of news articles in the mainstream media introducing many thousands of people to Bitcoin for the first time, and genuine adoption was slow to catch up. The June 2011 bubble quickly popped, but at the same time a number of Bitcoin businesses, BitPay included, began to emerge, and about one year later many of them finally started to come to fruition. In parallel, grassroots adoption of Bitcoin continued to grow, and now, slowly but surely, investors are starting to notice. Davenport’s words are thus a very positive sign for Bitcoin; investors interested in Bitcoin are starting to look beyond the Bitcoin markets, and are instead increasingly focusing their eyes on the underlying Bitcoin economy – substituting mere speculation with increasing investment into the businesses that make both Bitcoin adoption and the Bitcoin price go up in the first place.

BitPay themselves now have over 3,000 merchants, and the company is continuing to develop both their core product and a number of peripheral offerings, including plugins, applications for specific industries and a platform to help businesses and organizations pay employees in Bitcoin. The company’s new office in Atlanta is located at the heart of one of the major financial capitals in the United States, allowing them to hire developers experienced in dealing with online payments, and with a larger staff the company will be able to recruit merchants as an even higher rate than they are currently. The company appears to have a very bright future ahead.

The Bitcoin price has just broken the all-time high of $31.9099 that it set on June 9, 2011 on MtGox. After a persistent, one-and-a-half month rally from $13 to $28, followed by nearly two weeks of bumping up against $30 and then hovering around the $28-$31.5 range, the bulls have finally won, and the currency struck a new high of $31.94 at 14:40 GMT on February 27 before quickly breaking past $32. The final rise was precipitated by a single buy order of over $100,000 USD, quickly reversing a temporary drop from $31.5 to $30.9 and leading to the price bumping against $31.89 for half an hour before finally breaking through.

The event is a historic one for Bitcoin. When the initial Bitcoin bubble of summer 2011 collapsed, a number of media sources quickly spread the message that Bitcoin was a foolish crypto-anarchist dream and a fad that failed, and it was time to move on to more “legitimate” products backed by the full support of the banking establishment. Forbes’ Tim Worstall wrote as early as late June that “that’s the end of Bitcoin, then” Technology writer Timothy B Lee (not to be confused with Tim Berners-Lee, inventor of the World Wide Web) wrote an article on the Bitcoin crash in August, ending with the words “I suspect it’s terminal.” Wired ran an article in November which, although not as bleak, was nevertheless entitled “The Rise And Fall of Bitcoin“. Doug Casey, a celebrated libertarian precious metals guru, released a lengthy interview in which he described Bitcoin as “probably a dead duck” that was bound to collapse because of its lack of physical backing, and offered GoldMoney as an alternative.

After hitting bottom at $1.994 in November, however, Bitcoin simply refused to die. The price bounced back to a high of $7.22 in January 2012 before settling down at $4.90, and news slowly began to once again turn positive. In January Bitcoin was featured in an episode of The Good Wife, and in April Reuters came out with an article entitled “Bitcoin, the City Trader’s Anarchic New Toy”. In June came a number of further articles, although the collapse of Bitcoin Savings and Trust and the shutdown of the Global Bitcoin Stock Exchange led to a new period of pessimism in the fall. However, that period turned out to be a brief one, as the announcement of WordPress accepting Bitcoin in early November broke the downward trend, and Bitcoin Central’s banking partnership deal in December cemented the new paradigm. Finally, in January Bitcoin truly started to take off. A series of positive announcements, including unprecendented profits by Bitcoin gambling site SatoshiDice, large-scale underlying adoption and the arrival of ASIC mining hardware chips, sent the price on a sudden course upward, and in February Reddit and Mega accepting Bitcoin cemented the new paradigm.

What happened? The answer is simple: the Gartner Hype Cycle. In 1995, the IT research firm Gartner noticed that many new technologies tend to follow a specific five-stage patten in their adoption: (1) the initial technology trigger, (2) a “peak of inflated expectations” as people get excited about all of the possibilities that the new technology could potentially offer, (3) a “trough of disillusionment” as the technology fails to live up to its original expectations and its more fickle supporters abandon it to move on to the next great idea, (4) a “slope of enlightenment” as the community realizes that the trough of disillusionment was just as overblown as the initial peak, and (5) a “plateau of productivity” where people discover what the uses are where the technology can truly shine and apply it to maximum benefit. The graph of the Hype Cycle, as shown by Wikipedia, looks like this:

Looking at Bitcoin’s price between March 2011 and December 2012, one can see an almost perfect overlap with the cycle, albeit with a slower, two-stage slope of enlightenment.

Now, however, Bitcoin is rising for a second time, and it is quite possible that a new hype cycle will begin as Bitcoin truly breaks into the mainstream, and new groups of more professional speculators and investors seize upon the currency as a stock.

For those who dismissed Bitcoin as a pump-and-dump, a fad or a quack, now is the time to repent. Timothy B Lee already has, and we in the cryptocurrency community gladly welcome him. To Doug Casey, Tim Worstall and the others who have disparaged Bitcoin in the past, this moment is as good a time as any to re-evaluate your opinions. As for the future, at this point Bitcoin is a wild card. The original major bubble in April 2011 started when Bitcoin broke past its previous February high of $1.12; now that Bitcoin has broken past $32 it can go anywhere. Some have predicted $45; others $100, and still others believe that the bubble is only starting, and we may see a meteoric as great in magnitude as the one in 2011 – that is, by June 2013 we will hit $1000. Unlikely, perhaps, but in April 2011 no one was predicting $30. On the other hand, the price may well simply continue its current linear trend, or even stabilize or drop. Regardless of what happens, according to almost every single indicator (with Google Trends volume being the exception) Bitcoin is far stronger now than it was in 2011, and is poised to only get stronger. Now is the time for Bitcoin to truly shine.

The Bitcoin community’s largest electronics retailer, the Bitcoin Store, has announced that it is exiting beta and formally launching its business. The Bitcoin Store offers hundreds of thousands of different electronics products for sale, and since the site’s first beta launch in November its main attraction has been low prices; in fact, the Bitcoin Store’s prices were even cheaper than those available at major retailers like Amazon and NewEgg. Roger Ver’s announcement in November provided some examples: a 60-inch TV which can be found on Amazon for $1,397.99, NewEgg for $1,437.99 but on the Bitcoin Store costs only $1,367.48, a laptop whose Amazon price of $2,266.66 and NewEgg price of $2,317.00 is beaten considerably by the Bitcoin Store’s price of $1985.51, and a laser printer which costs $202.01 on Amazon, $204.99 on NewEgg but $175.66 on the Bitcoin Store. Additionally, within the US, on all products above $100, shipping is always free.

The Bitcoin Store’s low prices are made possible by Bitcoin’s unique properties of no chargebacks and minimal fees; businesses accepting Bitcoin as payment can avoid paying the 2.9% credit card and Paypal fees that merchants using more traditional methods of online payment incur, and credit card chargebacks, which cost some businesses as much as 2-10% of revenue. By not accepting credit cards and Paypal at all, the Bitcoin Store passes on its savings from using Bitcoin to its customers. Also, thanks to the efforts of Bitcoin Store founder Roger Ver, the Bitcoin Store has secured a deal with wholesalers that allows the store to buy electronics at the lowest possible prices. However, the deal requires the store to maintain a high volume in order to be able to maintain these discounts – specifically, $800,000 in the next month. An audacious target, the Bitcoin Store’s Jon Holmquist admits, but they hope that with the Bitcoin community’s support, and with the 0% markup offer for the next month, Holmquist and Ver just might be able to achieve it. Additionally, large-scale marketing for the Bitcoin Store will finally begin, hopefully bringing in a large volume of new customers to both the store and to Bitcoin itself.

If the Bitcoin Store succeeds in securing enough volume to keep its discounts, it will serve as a prime example showing merchants across industry boundaries all around the world the possibilities that Bitcoin offers. Bitcoin’s microtransaction, instant payment and privacy features are already well exhibited by services such as Coindl, Bitcointip, SatoshiDice and anonymous VPN provider Private Internet Access, but so far, aside from perhaps Bitcoin Wireless, there is no major business effectively showing off how Bitcoin can be used to save money on chargebacks and fees. Now, with the Bitcoin Store, there will be one. “With the big news of WordPress and Reddit accepting Bitcoin,” the Bitcoin Store’s press release reads, “a question arises. Will the headlines soon read of Bitcoin adoption at Amazon and Newegg?”

Photo: Wallstreet Charging Bull, CC BY 2.0 herval, Flickr

A venture capitalist backed Bitcoin company wants to make it safe for U.S. and Canadian investors to do large block trades of Bitcoins and keep them ultra-secure from loss. Coinlab has worked for a year to sign an exclusive long term deal with Bitcoin exchange Mt.Gox. The Silicon Valley-based company will take over exchange transactions for all U.S. and Canada clients meaning your money will get moved to a U.S. bank and Coinlab will now be the clearing pool for all peer-to-peer transaction on the Mt.Gox exchange. The safeguards they have set up is a move to drive more U.S. volume in Bitcoins along with paving a way for institutional investors and high net-worth individuals to buy and hold large amounts of the digital currency.

“80 percent of Mt.Gox traffic already comes from this area. We are essentially buying their book of traffic,” Peter Vessenes told Bitcoin Magazine in an interview.  The goal is to move customers’ money from overseas to Silicon Valley Bank by March 22nd. This should cut down on the fees, currently around $60, that clients pay Mt.Gox for international wire transfers to their U.S. bank.

Coinlab was the first Bitcoin company to get venture capital money, over $500,000, last year. They were known as providing games paid for with Bitcoins but this move into mass retail transaction service takes the firm into a whole new sphere.

Right now an average Mt.Gox customer pays .6% per transaction, volume over 10,000 pays only .3%. These tier two customers will now get live phone help via Coinlab experts. Vessenes says large transactions will still have to get reported to FinCEN as Coinlab wants to be observant of U.S. money laundering rules.  There could be a know-your-customer (KYC) process to opening an account but Coinlab is still working on protecting anonymity.

Vessenes told Bitcoin Magazine in previous interviews last year that whoever can figure out how to store Bitcoins – in 250,000 to 500,000 blocks – and make the client feel like they are safely in a bank vault will really help make the digital currency accessible to big money investors.

The process Coinlab came up with for safety feels like a James Bond transaction with private and public keys, and they’ve gone old school storing a Rubik’s cube set of private key data in hard safes. The private keys will be split into three parts with only two needed to unlock your transaction. They won’t be stored in a computer database but printed and placed in a vault. Who can open the vault will be divided up; meaning a red team vault opener won’t be able to open the blue team’s vault.

The folks at Coinlab are also working to get your data insured for loss. Lloyds of London does these kinds of transactions but Coinlab has yet to finalize an insurance agreement. Of course they’d likely have to make sure there is a plan to make sure that the vault openers don’t get kidnapped. If they can get storage insurance they’ve just jumped the fence into Main Street’s arms.

If you want to want to buy large amounts of bitcoins without using your own cash you’ll still have to find a lender to give you leverage though — Coinlab isn’t a bank – or regulated by any US or Canadian securities or banking regulators.  But there is a hint in their new deal that shows they are working to find a way to get liquidity to Forex broker dealers or private wealth managers to help high net-worth individuals invest long-term in bitcoins.

Vessenes told Bitcoin Magazine, “Our deal with Mt.Gox means we just picked a retail customer but I care very much about the needs of the institutional investors.”
Coinlab’s strategy page has a nifty live action chart of Bitcoin liquidity which will feature a buy and sell button. The company will also work on alerts to their customers about big price swings.

“Coinlab’s deal with Mt.Gox is great for Bitcoin liquidity in the US and Canada.  It’s nice to see more formalized channels emerging here for Bitcoin FX.  This is the start of many terrific things for Coinlab and the global FX market is $4 trillion but we still have a long way to go,” Joel Yarmon of Draper Associates, who invested in Coinlab, told Bitcoin Magazine.

Jay Walker, a forex prop trader, said he’d jump to any forex broker deal that would allow him to do currency pair trades and get paid out in bitcoins. This is something the Bitcoin exchanges could do by signing deals with forex broker deals – assuming they get through each country’s regulatory process. Walker also said he’d love the opportunity to short Bitcoins. Of course to short Bitcoins some smart entrepreneur would have to come up with a credit or Bitcoin borrow system to make that happen but it’s clear the players in this field are thinking about the market demand for it.

Up until now Bitcoin has been, by far, the most powerful contender in the cryptocurrency market. Other alternative coins, such as Namecoin, Solidcoin and Litecoin, have arisen to offer various modifications on the core Bitcoin concept but, despite over a year’s worth of development and dozens of attempts, none have achieved anything close to Bitcoin’s level of success. Litecoin is perhaps the most prominent out of all the alternatives, its price hovering around $0.07 USD and even slowly increasing over the past six months, but so far the overwhelming majority of merchants – and merchant platforms, for that matter – have seen no reason to pay attention to them. Now, that may finally change with decentralized cryptocurrency’s new kid on the block: Ripple.

The Ripple project is actually older than Bitcoin itself. The original implementation was created by Ryan Fugger in 2004, the intent being to create a monetary system that was decentralized and could effectively empower individuals and communities to create their own money. All money in Ripple is explicitly represented as debt, with transactions simply consisting of balances being shifted on a series of imaginary credit lines from the payer to the receiver. In order to explain how this works in practice, consider a simple example. Suppose there are two friends, B and C, taking a road trip, and they both decided to bring along a friend of their own; B brought his friend A and C brought his friend D. A knows B, but has never met C and D before and they may well never meet again, and similarly D has never met A and B. Now, suppose that A and D are out getting a coffee, but D does not have money to pay. So A pays for both coffees, $3 each, and D agrees to pay A back through Ripple. Because it would make no sense to have D owe $3 to A, as he may well never have an opportunity to pay back, he instead agrees to owe $3 to C, C agrees to owe $3 to B and B agrees to owe $3 to A.

Perhaps B already owed $2 to C beforehand – in that case, the debt would be cancelled and C would only owe $1 to B after the transaction. The key point is that all debts are between people who have an established trust relationship (in conventional financial parlance, “credit line”), and so can trust each other to pay each other back as needed. By using such a chain of trust, money can change hands even between people who do not know each other at all. It has often been stated that any two individuals in the world are at a distance of, at most, six degrees of separation – that is, given any two people in the world, one can always connect them together with a chain of people who know each other, with at most five links in between.

On some level, this is quite similar to the way the banking system already works today. International wire transfers to and from countries around the world are gathered together by banks, transfers between banks are canceled out as much as possible, and at the end of the day, if one bank gives out more money than it takes in, the banks sort things out through various systems specifically designed for the purpose. In Middle Eastern countries, there exists a somewhat more decentralized version of the concept in the form of hawala networks. What the original Ripple project sought to accomplish is effectively the democratization of this idea: everyone can be their own bank, issuing, accepting and acting as a conduit for loans all at the same time.

The project saw some success; the largest current implementations of the idea, maintained by Ryan Fugger himself, can be found at classic.ripplpay.com and villages.cc, and the former has over four thousand users signed up. In September 2010, Sepp Hasslberger wrote that “Ripple is alive and well.” However, the Ripple communities that have formed over the years were without exception small and disparate, never extending beyond the isolated communities that originally formed them. The reason why is simple: in order to participate, you have to already have a friend in the network. Otherwise, there would be no way to form a chain of credit lines between you and any other user, and so you would not be able to make any transactions. There was also another flaw: the software was centralized. Although Fugger envisioned a monetary system that was distributed and where anyone could equally participate, the system keeping track of all the credit lines and balances still had to be centrally controlled.

Now, the Ripple project is finally ready to solve these problems, and has gathered a highly competent team of businessmen and developers to help them do so. The CEO, Chris Larsen, is a new face in the cryptocurrency community, but Bitcoin users are likely to recognize two familiar names: Jed McCaleb, founder of MtGox, by far the largest Bitcoin exchange in the Bitcoin community, and Stefan Thomas, a Bitcoin developer responsible for BitcoinJS. Ripple’s parent company, OpenCoin, is not willing to disclose its exact number of employees, but does claim that it is already one of the largest companies in the cryptocurrency community.

The level of influence that OpenCoin has over the Ripple network is expected to decrease over time. Currently, the Ripple client and a sample gateway implementation are already available, so the tools are there for alternative Ripple implementations to start to be developed. The server is still closed, but that is a matter of practicality more than control; “Changes are still flying around at a rapid pace,” a Ripple developer writes; “We want to [open source the server] as soon as we can so people can have more confidence in the system. Right now all we can publicly say is: Soonish, As soon as practical. We recognize that in order to succeed Ripple must be open source.” Once the server is release, in theory OpenCoin will have as little power over the Ripple network as the Bitcoin Foundation has over Bitcoin.

The new version of Ripple fixes both of the major issues that the old one faced. The problem of disparate communities is solved in two ways: a specialized Ripple-specific currency, and a system of “gateways”. Unlike everything else stored in the network, the special currency, “ripples” (or “ripple credits” or XRP), is not debt-based – it can be sent from one Ripple address to another over the Ripple network just like bitcoins are sent over the Bitcoin network. Thus, if you wanted to send money to someone who was not part of your local trust network, all you would need to do is convert it into XRP, send over the XRP, and have them convert it back. Currency conversion can even be done “atomically” through the built-in decentralized exchange process – that is, there is no way for A or B to renege on their side of the deal, as the exchange is encoded into the ledger all at the same time.

Gateways are the other major development in the new Ripple’s solution to the sparse user problem. A gateway is essentially a commercial service that plays the role of being a credit intermediary for those who do not already know anyone already using Ripple to connect through – or perhaps those who do not want to connect through someone that they already know, preferring the professionalism of a commercial service. The gateway would serve as the first link in the trust chain between the user and the recipient whenever the user wants to make a payment, and the last link whenever the user wants to receive one. A user can trust many gateways at the same time, so the system still preserves a measure of decentralization comparable to mining pools.

There is nothing special about the status of a gateway; anyone can become one, and so a continuum of network topologies ranging from a replica of modern centralized banking to a full peer-to-peer system can function under the Ripple protocol. For the first few years, the Ripple developers believe, gateways are likely to be the norm, but if Ripple succeeds and grows, it may well happen that as the system gains enough market share to support it, a friend-to-friend architecture, as envisioned by the original Ripple project, will gradually emerge.

The gateway system is not perfect. There is no inherent mechanism to ensure that gateways will not default on their loans, and long-time Bitcoin users familiar with the debacles of MyBitcoin, Bitcoinica, Pirate and Bitfloor are, rightfully, wary of a system that requires trust in third-party organizations in order to function. So far, Ripple developers have not come up with a clean and satisfying response to the problem, and it may well be that no such response exists. Ultimately, Ripple does not provide a cryptographic solution to the trust problem, and keeping fraudulent gateways under control will have to be done by more traditional mechanisms instead – clear, industry standard, expectations on gateways’ security, in a similar spirit to all major Bitcoin exchanges’ policy of keeping over 80% of customer funds stored in an offline location where there is no way to access them without manual assistance, and outright fraud will have to be met with the help of the good old-fashioned legal system.

The other main aspect of Ripple is its decentralization. At the core, Ripple’s mechanism for keeping track of balances is similar to Bitcoin; there is a concept of addresses, public and private keys, and modifications to the database are done through a system of digitally signed transactions. In fact, Ripple uses precisely the same elliptic curve specifications as Bitcoin, with the exception of a different leading byte in the address format (hence addresses starting with “r” and not “1”), so one can use the same private and public keys to sign transactions and messages in the Bitcoin, BitMessage and Ripple networks. However, that is where the similarities end. Ripple has no proof of work and no concept of mining; instead, transactions are simply propagated through the network, and given a set of contradictory transactions – for example, a dishonest customer writing transactions to send the same $100 to ten different merchants with the hope of getting $1000 worth of goods, clients determine which one came first, and which ones should therefore be thrown out as illegitimate, through a process that the Ripple developers call consensus.

Consensus is essentially an improved version of the process that already takes place in the Bitcoin network for zero-confirmation transactions. Individual nodes decide which version of a new ledger to accept by polling the nodes around them to see what the majority opinion is, allowing the network to quickly settle on a single choice. The process is much faster than Bitcoin block confirmation; a new ledger state is created roughly every 5-10 seconds, allowing for nearly instant confirmations.

The Bitcoin developers had the option of implementing such a strategy themselves, but they did not do so for two reasons. First, if applied to Bitcoin, the approach would have a significant risk of causing chain fragmentation, where two parts of the network settle on irreconcilable transaction histories, and so Bitcoin essentially splits in half. Second, the approach, at least as described above, is vulnerable to something called a Sybil attack – an attacker can employ various forms of proxying and IP address spoofing techniques to pretend to be a million separate nodes, and so overwhelm the opinion of the rest of the network through sheer numbers.

Ripple fixes both of these problems by introducing a concept of trust. Every user in Ripple has a “unique node list” (UNL), a list of nodes that they know are not likely to collude against them – the operative word being “collude”. Each individual node may well be owned by a shady character who is trying to pull off double spending frauds themselves, and the system would still likely work just fine. What matters is that the nodes are not likely to work together to push a single fraudulent transaction history that could compete against, and potentially overcome, the majority consensus of the network. Competing major businesses, a diverse set of trusted community members, gateways and nonprofit organizations are all likely to be part of individual node lists.

The UNL system also ensures that the network is tightly linked. Every node is connected to every other node in millions of ways, and so all nodes are only at most a few hops away from each other. Thus, any fragmentation would rapidly resolve itself. “As long as there is some degree of inter-connectivity between UNLs,” the Ripple wiki article states, “consensus will rapidly be reached. UNLs will at least be what is called a small world network (similar to the networks of friends on Facebook) though we suspect in practice there will be much more overlap than that.” For those who are unsatisfied with this explanation, “A more rigorous mathematical proof is coming soon.”

Ripple does have a “ledger chain”, similar to Bitcoin’s blockchain, but with one major difference. Unlike the Bitcoin blockchain, every Ripple ledger state consists of a “transaction tree”, showing the transactions that have taken place since the last ledger, and the “state tree”, containing all of the information needed to know all of the account balances and credit limits in the Ripple system, reducing the information that a node needs to store to serve as a fully functioning member of the Ripple network to just the last ledger state. Additionally, there is a minimum balance of 200 XRP for creating an address and an additional 50 XRP for creating a credit line, creating a strong disincentive against bloating the ledger state with many addresses. As a result, it is expected that the majority of Ripple clients will, in fact, be fully participating nodes, as the cost of full participation is small enough to be negligible for most computers.

The lack of mining introduces an aspect to Ripple which can be thought of as both a strength and a weakness. Because there is no mining, there can be no fair mechanism to automatically distribute XRP to users, and so the Ripple developers went with the simplest solution: starting off with all 100 billion XRP that will ever exist in their own wallets. OpenCoin intends to give XRP away to people around the world as widely as they can, targeting Bitcoin users first as an initial userbase, and then moving on to offering XRP to anyone who wants it, limiting abuse by requiring authentication mechanisms like Facebook accounts and cell phone numbers to hand out the credits. The handout process seems awkward, but given the circumstances it is the best that the Ripple developers can do; “if we could immediately distribute all the Ripple credits that we want to distribute equally to everyone in the world, we would,” Ripple CEO Chris Larsen says in a phone interview. OpenCoin intends to give away over 55 billion XRP through their various giveaways, and the rest of the Ripple credits the company will use to fund development and promotion of the Ripple system.

However, because of the monetary distribution, OpenCoin may well face an uphill battle convincing the community that they can be trusted. The developer of another alternative cryptocurrency, Tenebrix, tried the strategy of creating an initial number of coins for himself in 2011, ostensibly (and, quite likely, genuinely) for the purpose of funding development, but the community widely decried the move as unfair and moved on to Litecoin as an alternative. Perhaps Ripple will be different; unlike Tenebrix, Ripple introduces a substantial number of features beyond those that Bitcoin itself already offers, to the point of being an innovation in digital currency almost as significant as Bitcoin itself. “Ripple will be a great thing for the world,” an OpenCoin employee who wishes to remain anonymous reminds us, “but unfortunately, in order to make it work, we have to have funding. If the community has any ideas on how we can handle this fairly, we’re open.”

Another consequence of the lack of mining is the rapidly deflationary nature of XRP. Unlike BTC, where the total number of currency units in existence increases more and more slowly with every passing year until eventually stabilizing at a permanent 21 million in 2140, the number of XRP starts off at an all-time maximum of 100 billion and then immediately starts permanently decreasing as transaction fees are paid.

For those who want to try Ripple now, there are already two gateways working with Ripple: BitStamp and WeExchange, both of which offer the ability to deposit a number of different currencies into your Ripple account. There is already one merchant accepting Ripple, the VPN provider Private Internet Access. For more details on how to use Ripple, see our howto article here.

Altogether, what Ripple has accomplished is impressive. With Ripple, we have a way of sending, receiving, and holding any currency – not just one specific cryptocurrency – in a decentralized way. The currency can be anything; one can imagine storing USD, CAD, gold or even airplane miles in the Ripple network, as long as there are enough people, or at least one gateway, willing to deal with them. For those who want the advantages that cryptocurrency offers, such as the increased financial freedom and privacy, cryptographically guaranteed security, minimal fees, irrelevance of national borders, and advanced features such as cryptographically enforced contracts and brainwallets, but do not want to deal with Bitcoin’s volatile value, Ripple is the solution. Ripple also has the potential for much greater integration with the existing banking system, as its currency exchange is a service that even existing financial businesses will quickly be able to benefit from. For those who are afraid of the prospect of gateways defaulting or disappearing, or who wish the greater privacy that Bitcoin’s trust-free anonymity offers, Bitcoin continues to be the best bet. Regardless, the fact that Bitcoin now has a strong and compelling alternative makes it clearer than ever that the idea of cryptocurrency as a whole is here to stay.

An expanded version of this article will appear in Bitcoin Magazine print edition, issue 8. The issue will soon be available for purchase at http://bitcoinmagazine.com/shop

By now, you may have already heard of Ripple, the new decentralized cryptocurrency project that has been making waves (pun intended) in the Bitcoin community. While Bitcoin allows anyone to hold, send and receive bitcoins over a decentralized network to and from anywhere in the world with extremely low fees, Ripple seeks to allow anyone to do the same thing with any other currency as well.

In order to get started with Ripple, you will first need to open a Ripple wallet. Just like Bitcoin in 2009, there is currently only one Ripple client available, the official one at ripple.com, although it is much more powerful and much easier to use than BitcoinQt – the client is a web interface, no software downloads required. The process is as simple as creating an account at any other website; simply click “Start ripple” followed by “Create an account” and go from there.

Once you have an account, the next step is to activate it. Unlike in Bitcoin, you cannot simply create as many Ripple accounts as you want simply by generating new private keys; you also need to make an initial deposit of 50 XRP, Ripple’s internal currency, in order for the account to become usable. At this point, there are two ways to get this initial deposit. First, OpenCoin sometimes makes free XRP giveaways, handing out generous quantities of XRP to as many people as it can reach. For now, the company is targeting the Bitcoin community, and so its first major giveaway required users to post in a forum thread on [Bitcointalk](http://bitcointalk.org), a popular Bitcoin forum. Later on, giveaways based on Facebook accounts and cell phone numbers are both likely to take place. If you are not lucky enough to spot a giveaway, or too impatient to wait for one, you can find someone else to buy XRP from. The largest Ripple communities right now are at https://ripple.com/forum/ and http://reddit.com/r/ripplers; if you have BTC to trade, you can easily find someone to give XRP in exchange. If you want to buy more XRP later there is also a “decentralized exchange” inside of Ripple that allows you to exchange any other currency within the Ripple system for XRP, but it requires you to already have 50 XRP in your account to use.

The process for sending and receiving in Ripple is the same as with Bitcoin; in the “Receive” tab of the Ripple wallet, the interface provides you with a Ripple address, which looks exactly like a Bitcoin address with the exception of starting with an “r” instead of a “1”. To send a payment to someone, you simply enter their address, the currency and the amount you wish to send in the “Send” tab. The process can be used to send any currency that you have in your Ripple account, although if you and the recipient are not linked through a chain of trust the only currency that you will be able to convert is XRP.

Once your account is loaded with at least 50 XRP, you will likely want to get some money in other currencies (eg. BTC or USD) into your account. In order to do this, you will need to open an account at a gateway. There are two options for gateways so far: WeExchange and BitStamp. The process with WeExchange works as follows. First, sign up and create a WeExchange account. Login to WeExchange and go to Funds -> Add Funds -> BTC to get a Bitcoin address that you can deposit your bitcoin to (fiat currencies can be deposited too but, as usual, Bitcoin is by far the easiest). Once WeExchange confirms your deposit, go to Funds -> Withdraw Funds -> Ripple. At the bottom of the page, you will see a list of addresses you can trust. Open your Ripple wallet and go to the “Advanced” tab. Click “Trust”, and add the BTC address to your trust list, entering a trust amount at least as large as what you are depositing. This creates a credit line between you and WeExchange that allows WeExchange to send you BTC – or, more precisely, an IOU for BTC, through the Ripple network. Then go to the “Receive” tab and copy your Ripple address. Back in WeExchange, select “BTC” as the withdraw currency, enter the deposit amount and paste in your Ripple address. And, there you go, you have BTC in your Ripple account.

In order to convert the BTC into another currency, once again in Ripple go to the “Advanced” tab and click “Trade”. At the top of the trade interface, select the “BTC/XRP” option if it is not selected already, and click on “change issuer”. Copy in the same Ripple address that you entered into your trust list to set WeExchange as the currency issuer for BTC. Then, through the trade interface, sell your BTC for the other currency just like you would trade BTC for fiat currency at an exchange like MtGox or BitStamp. Unless you decided to make an offer above the current “bid” price in an attempt to secure for yourself a better deal, the trade should process quickly and, voila, you have the currency of your choice.

As for where you can spend your Ripple funds, so far there is only one merchant accepting Ripple for payment: Private Internet Access. Private Internet Access currently only takes XRP – no Ripple USD or BTC transfers yet, and the XRP payment option is, for now, fairly expensive compared to the USD or BTC price of $39.95 per year since XRP does not yet have a clear market price. Note that when Private Internet Access provides the address for you to send the XRP, the address that it gives includes a numerical token at the end – something like r9EUYx41zx3audeARUwpkDF7VuwcmbwYTU?dt=2399767994. Make sure to include the full address, with the token, when making your payment – the token is included in the Ripple transaction, and tells Private Internet Access which order the payment is for.

Hopefully, soon more merchants will start accepting Ripple for payment, and even before that happens there is always the option of buying goods or labor over-the-counter on https://ripple.com/forum/ or http://reddit.com/r/ripplers. For now, good luck exploring the latest and greatest that cryptocurrency has to offer!

The Internet Archive, one of the most widely known nonprofit organizations in the internet community, has just announced that they intend to start paying a portion of their employees’ salaries in Bitcoin. The Archive describes itself as “a non-profit digital library offering free universal access to books, movies & music, as well as 267 billion archived web pages”, and is most well-known for two key projects. First, the Archive maintains the Wayback Machine, a service that allows anyone to access old versions of web pages, including potentially web pages that have since disappeared from the internet, from as far back as 1996. Second, the organization’s website features a collection of millions of works in video, music, audio and text. The Archive is also actively attempting to preserve older works of literature by converting them into a digital form, with 23 scanning centers in 5 countries uploading 1,000 new books to its collection every year, and maintains a number of smaller projects including its collection of NASA images.

The Archive is not the only “open-source” digital library out there – the Gutenberg project also comes to mind, but it is one of the largest, and projects like it play an important role in keeping public domain books accessible as we rapidly transition to a digital age. Although companies like Google have also stepped in to fill the role with projects like Google Cache and Google Books, many are worried about what would happen if the only records of a large number of important cultural artifacts were left in the hands of a single large corporation, and to those concerned about such issues the Internet Archive’s Wayback Machine and Open Library projects provide a compelling alternative.

The organization first started accepting Bitcoin for donations in December 2012. “At the end of 2011,” Brewster Kahle relates, “we did a fundraiser, we were trying to raise money at the Internet Archive by putting up a banner, and we got a lot of emails saying we should take Bitcoin. I thought, I’m going to try a test. I took our head of administration – she’s a capable woman but not technical at all – and said, if you can figure out how to take Bitcoin, we’ll take Bitcoin. She downloaded BitcoinQt, and it was slow but it worked.” The Archive has received over $5,600 in Bitcoin donations since then.

Archive.org is listed by Alexa as the 233rd most popular site in the world, placing it only behind Reddit and WordPress in terms of organizations that accept Bitcoin. As far as organizations paying employees in Bitcoin go, however, the Archive is by far the largest. The only other nonprofit known to do such a thing is the P2P foundation, which announced its plans to pay employees in bitcoin in March 2012, although many Bitcoin-specific nonprofits businesses are likely already paying their employees in bitcoin without feeling the need to explicitly mention it – Bitcoin Magazine itself being one example.

When asked why he is so interested in accepting and promoting Bitcoin, Kahle’s response is one that many people in the Bitcoin community can related to. “I think that at the Internet Archive,” Kahle said in a phone interview, “we see ourselves as coming from the net. As an organization we exist because of the internet, and I think of Bitcoin as a creature of the net. It’s a fantastically interesting idea, and to the extent that we’re all trying to build a new future, a better future, let’s try and round it out.”

However, Kahle reminds us, the Internet Archive is a nonprofit organization, and relies heavily on donations to keep its services running. Those who support what the Internet Archive is doing and wish to see it continue to preserve and digitize even more content, as well as those who simply wish to help Bitcoin-accepting organizations grow and succeed, are encouraged to donate to its public address, which can be found here on its website (although other methods of payment are also always welcome). If the Internet Archive continues to receive enough funding to maintain this initiative, it will provide yet another boost to Bitcoin’s legitimacy, and perhaps even encourage other organizations and even businesses to follow suit. With bitcoins flowing around in a closed loop, passing from average Bitcoin users to businesses and organizations like the Internet Archive, and from there directly to their employees who then spend it at other Bitcoin businesses without being converted to and from USD along the way, it looks like Bitcoin is well on its way to becoming a true, self-sustaining currency.

Roughly one year ago the FBI forcibly closed Megaupload and proceeded with criminal cases against its owners. They accused Megaupload owner Kim Dotcom of a number of criminal indictments and begun a legal case.

Mega (previously Megaupload) is now accepting Bitcoin through two resellers. They are immune to economic censorship through the power of cryptocurrency.

The Megaupload case followed on from a few months of increasingly aggressive posturing and sharp words from US law enforcement towards internet services, in particular file sharing services that allow people to share files amongst each other. Seeking to make an example out of one of the biggest, they started a large scale operation to take down Megaupload.

This happened once before. Here in the UK, the IWF (Internet Watch Foundation) is a censoring system for the internet. In 1996, the Metropolitan Police started requesting the banning of illegal content by ISPs in the UK. With veiled sly threats they asked that ISPs engage in ‘self-enforcement’ rather than forcing them to enforce the law on them.

Most of the ISPs complied except Demon internet. Demon was a British ISP that contributed to the Open Source community, ran several IRC servers and were pioneers of their time. They objected on the grounds of it being “unacceptable censorship”. A few days later, a tabloid expose appeared in the Observer newspaper alleging that the director of Demon was supplying paedophiles with photographs of children being sexually abused.

Then the police let it be known that during that summer, they were planning a crack-down on an unspecified ISP as a test-case (translation: making an example of them). Between the threats and pressure, the IWF was formed- a supposedly voluntary organisation but in fact a fake-charity and a quango. The IWF is a disgraceful secretive group with an awful corrupt history and no public oversight.

We saw the same tactic used against Megaupload. Using the threat of violence to coerce companies, the British police created their own laws. The SOPA legislation did not go their way, so they resulted to immoral tactics of repression.

Government agencies typically create laws through a three pronged attack of creating new legislation, setting court case precedents and putting pressure through regulatory agencies and their state department. A favourite tool of states to repress services is through applied pressure to their payment services. This was the tactic used on Megaupload, Wikileaks and other services.

Payment services are monopolised in the hands of a few companies. When these companies fail to service someone, it is an effective form of censorship. This censorship becomes particularly odious when it comes to political services like Megaupload or Wikileaks.

From ACTA which is decided behind closed European chambers, the UK’s DEA which was pushed through undemocratically at alarming speed before elections, evil La Hadopi and the failed SOPA/PIPA in the US, there is nowhere to run. The nepotists are determined to push through these legislation. At all costs. This is not about piracy- it never was and will not do a thing. It is about control.

Mega no longer sells accounts directly through their website. To protect themselves you must use one of their 12 resellers (a tactic used by gambling websites). If 11 resellers are attacked, they have one to fall back on; BitVoucher, the Bitcoin reseller. hosting.co.uk started accepting Bitcoin at the end of January but their main form of payment is credit cards and PayPal.

BitVoucher is a Mega themed site using a newly established payment services company called Zipbit. Zipbit was founded by Bitcoin investor Brian Cartmell in New Zealand, and currently only services New Zealand and Bermuda merchants.

WordPress wrote:

 

“PayPal alone blocks access from over 60 countries, and many credit card companies have similar restrictions. Some are blocked for political reasons, some because of higher fraud rates, and some for other financial reasons. Whatever the reason, we don’t think an individual blogger from Haiti, Ethiopia, or Kenya should have diminished access to the blogosphere because of payment issues they can’t control. Our goal is to enable people, not block them.”

 

Bitcoin is more than drugs, sex and criminal gangsters. It is a tool for freedom and speech. To empower good citizens to participate in the economy as equals without censorship and unfair constraints that do more harm than good. Mega’s acceptance is a small but important step towards the free monetary future.
TEST

Reddit has just announced that they are now accepting Bitcoin as payment for their premium Reddit Gold service. As Reddit describes it, “reddit gold adds shiny extra features to your account that are made possible thanks to support from people like you,” including filtering specific subreddits, the ability to see more subreddits and comments per page, new comment highlighting, the ability to save comments, turn off ads, exclusive access to a “super-secret members-only community that may or may not exist” and, last but not least, a trophy. There is also an option to “gift” Reddit Gold to someone else, which is often used as a way of rewarding particularly good posts – sort of like a more official version of Bitcointip.

The payment processor that Reddit has chosen to use is Coinbase, a service which also recently made headlines for passing a 30-day volume of $1 million with its trademark Bitcoin exchange service which allows users to buy and sell bitcoins directly from their bank account. Coinbase has now also introduced an array of merchant tools which allow anyone to easily integrate Bitcoin acceptance into their site at no charge (although Coinbase’s standard 1% fee does apply if the merchant wishes to have the bitcoins automatically converted into USD).

The news came unexpectedly, as although the Bitcoin community did make repeated requests for Reddit to accept Bitcoin for their paid service in 2012, since December it seemed as though the cause was, at least for the time being, hopeless and the community’s requests have since died down. Now, it turns out that Reddit was in fact listening to the Bitcoin community’s requests all along, and their Bitcoin acceptance platform has now finally been unveiled. According to Alexa, Reddit is the 135th most visited site in the world, putting it as the second most prominent Bitcoin acceptor after WordPress, which comes in 22nd, and ahead of the Internet Archive, which places 232nd. This also introduces the new largest company to have dealings with Bitcoin through its subsidiaries: Advance Publications, with a revenue of $7.63 billion, taking over from Wuala‘s parent company LaCie, with a revenue of $500 billion. For Bitcoin, this comes as yet another great step forward. In 2011, nearly all serious businesses stayed away from Bitcoin, particularly wary of the reputation that the currency had during its fledgling days. Now, with every passing month larger and larger businesses are becoming willing to accept it. In November, WordPress. Now, Reddit. Given how secretive Reddit has been with their Bitcoin acceptance plans until today, the next company to step forward may come from a place where we least expect it.

Today, ASICMiner, one of the three major developers of ASIC (application-specific integrated circuit)-based Bitcoin mining hardware, has announced that they have turned on their chips, and are outputting 1.7 TH/s of hashing power in a testing run. The event makes them the second company after Avalon to have working ASIC hardware, leaving the last remaining competitor, Butterfly Labs, behind. The 1.7 TH/s testing run represents only a small portion of the company’s full hashing power; ASICMiner has reported that their full first batch will have over 12 TH/s of hashing power, or slightly over half that shipped by Avalon, and intends to start the remaining batch running very soon; “the real update will be given in a few hours,” ASICMiner reports.

ASICMiner differs from its two competitors in one key way: it is not actually selling any mining rigs to consumers. Rather, the company is keeping all of its hardware in house, and financed its development through 2012 by issuing company shares. The shares were originally released in August on the (now-defunct) Global Bitcoin Stock Exchange, opening up 7.5% of the company’s future profits to investors at a valuation of 40,000 BTC for the entire company. The offering was a success, selling out within days. The setup proved to be problematic when the GLBSE unexpectedly shut down, causing the company to lose contact with many of its investors, but the company finally received the shareholder database from the GLBSE in December, and shares will once again start trading and paying dividends on a yet-unspecified alternate platform soon.

Network hash power is currently at around 25 TH/s, suggesting that many Avalon customers still have not received their rigs. Once most of Avalon’s customers turn their hardware on and ASICMiner starts hashing, network hash power is expected to increase to about 40-50 TH/s – with some old GPU miners dropping out because of the increased difficulty. February is proving to be a great month for Bitcoin miners so far; the sudden rise in price has allowed Jeff Garzik’s Avalon machine to pay for itself in nine days, and ensured that miners’ operating margins are now higher than they were before the mining reward drop in December. Butterfly Labs reports that their chips have been delivered to the bumping facility, suggesting that while they are not shipping just yet production is finally nearing completion; unfortunately, in a market where timing is everything, their customers will not be able to benefit from the same window of opportunity that Avalon and ASICMiner have. However, some Butterfly Labs consumers will be able to enjoy a 10-25% discount from their next purchase if they ordered early. Meanwhile, Avalon and ASICMiner are already working on second batches, with ASICMiner reporting that their next batch, which is “ordered and being produced in the fab already,” [will be 50 TH/s](https://bitcointalk.org/index.php?topic=99497.msg1529563#msg1529563). Although the ASIC mining market is unfolding much more slowly than many of us had predicted, it looks like the next two months will be the time that the new machines finally start to come online en masse.

Over the past month or so, we have seen Bitcoin’s price leave the comfortable range of $10 to $14 that they had been at for nearly four months and embark on a steady course upward that has almost precisely doubled its value since then. The long road up first started on January 6 when, several days after striking the January 1 low of $13.16, the currency began a slow and steady rise of about $0.15 per day. But it did not really pick up until January 16, a point a few days after the currency broke through $14 for the first time since August where Bitcoin’s value spiked up suddenly to about $14.7. From there, $15 fell quickly and a stream of steady, progressive growth ensued.

The first shock came on January 25, just after the price first broke 19:

Bitcoin precipitously fell to $18, then $16, then finally, after a brief but temporary recovery to $17.3, hit a low of $15.6, erasing all of the progress of the past… four days. From there, however, the price simply picked back up on its course, and kept going. The next run down happened from $20, after the price struck against $21.5, failed to get further, and struggled for two days before suddenly collapsing the moment it went below the $20 threshold.

But from there, the recovery was rapid. There was no double-dip, and the price spiked back up to pre-drop levels within twelve hours. It fell back to $19.5 for a few hours and then stayed at $20 for a day, but then Bitcoin’s growth simply resumed, almost as if nothing had happened.

The third leg, however, has been different. Unlike the first two legs, which were helped along by a background of constant positive news involving Bitcoin’s merchant service providers, positive media attention, and the gambling sector, since then attention on Bitcoin has quieted down somewhat. The Google Trends volume, which hit its highest levels since November on Feb 2, has since receded somewhat, albeit at a higher level than before the rally first started:

The price continued soaring, climbing an average of fifty cents per day, but signs slowly began to change. The “ask” (selling) side of MtGox’s order book, which was thin enough that a buyer with $600,000 could have brought the currency past the holy grail of $31.91 at $19, has since thickened to the point of such a jump requiring over $1 million to create, despite the current price being twice as close. Bitcoin exchanges’ trade volume decreased – a common sign that a trend may be nearing completion. For ten days the price kept climbing, touching $26.3 on February 13, but then finally the market changed. The price began to slide down – slowly at first, but then more quickly once it broke below its two-day trendline, and the market entered panic mode once the price lost its key psychological threshold of $25:

However, although the fall was deep, it was also brief, and once the drop encountered serious resistance in the $21.8-$22.8 range it quickly spiked back up again. Even more rapidly than it fell, it rose back to $25.48, and after a brief slump back to $24 went on to hit $26.65, even higher than the $26.3 peak that the price had reached the day before.

What are the lessons that we can extract from this whole ordeal?

1. At least for now, it seems like the market does not even want a correction. Traditional technical analysis theory introduces a concept of Fibonacci retracements, where a price correction backtracks 38% or 62% (three eights and five eighths, both ratios between small Fibonacci numbers) of the rally’s gains, and a correction within a correction – the spike back up that inevitably follows a fall – itself tends to follow the same patterns. Here, the conventional wisdom has been broken. Bitcoin fell down, but within hours it came back even stronger.
2. Psychological thresholds matter. In the last two price charts above, one can clearly see how the price began to drop quickly once it broke below a key psychological threshold that Bitcoin had gained only a few days earlier. A trading strategy that Bitcoin traders may wish to consider is setting up an automated sell order that would trigger whenever the price breaks below a round number (eg. $25, $30, $40) that it had not gone below for at least a day prior.
3. Trendlines matter. Although with Bitcoin’s ups and downs it may seem hard to believe, over the past two years the currency has in fact been following a single, consistent trendline of gentle exponential growth:

So what factors are there to show that this recent doubling is backed up by genuine adoption, and not merely a bubble? There is not as much news as in January, but there are a few items to keep in mind:

1. Yesterday, the Bitcoin Reddit community and the Bitcoin poker site Seals with Clubs both saw a large volume of users. Reddit broke past 300, over three times its usual volume of 100. Seals with Clubs saw over 200 users online at the same time.
2. Coinbase reached its maximum level of purchases. The Bitcoin exchange intermediary had also reported their volume exceeding $1 million per month just a few days earlier, and the more recent news suggests that Coinbase will only keep getting more popular as time goes on. Coinbase’s popularity is not without good reason; its service allows users to buy Bitcoin straight from their bank accounts, paying only a 1% fee for the exchange – market spread included. The fact that it is gaining popularity suggests that a growing number of people are becoming aware of this convenient way to buy bitcoins, and is a positive sign for Bitcoin’s future in a number of ways.
3. Bitcoin fundamental statistics are continuing to improve, although not as quickly. We have already seen how Google Trends volume has gone up by 50% since the start of the rally. The number of transactions hit a new high of 68,000 in a day a few days ago, although the number of transactions excluding popular addresses has gone down somewhat. The graph of the blockchain size has turned slightly upward in slope, and the Blockchain wallet’s number of users, although no longer growing as rapidly as it did in December and January, is continuing to increase.

Thus, we are at an interesting point in Bitcoin’s growth. Some technical indicators point to Bitcoin only getting stronger, as every drop is met with more resistance and sees a quicker comeback than the last, although some other evidence suggests that the rally may soon cool down to some extent. Many are predicting a rise above the $31.91 all-time high in June 2011, an event that may well itself drive even further increases because of the resulting media attention that it would trigger, while others are predicting that we will soon see the top of this leg. Market prediction is a difficult thing; if it were easy, Bitcoin would have immediately jumped all the way to some final price back in 2009. Perhaps the best strategy for most of us is to simply wait and see.

Disclaimer: BitStamp has previously run ads in an edition of the Bitcoin Magazine print edition. This article was written independently of this fact, and the author was not aware of the fact at the time of the article’s writing

Bitcoin exchanges are one of the most important parts of the Bitcoin ecosystem. For those of us who are not lucky enough to have wealthy Bitcoin-owning friends or jobs paying in BTC, they provide a valuable service by making it possible for Bitcoin users to buy and sell bitcoins without finding someone to trade with on their own. For those who use Bitcoin as a way to buy ordinary products, such as electronics at the Bitcoin Store or prepaid cell phone topups at Bitcoin Wireless, cheaper than they can be found elsewhere, Bitcoin exchanges are what provide the necessary liquidity to make their savings possible.

There are a wide variety of Bitcoin exchanges available today, with a wide array of payment methods to choose from. However, many beginning Bitcoin users still find exchanges hard to use. Their concerns are justified; the two most popular online payment methods today, credit cards and PayPal, still cannot be used to buy bitcoins. There is a good reason for this; the chargeback mechanism inherent in these methods of payment makes it trivial to defraud a Bitcoin exchange that accepts them, but nevertheless the relative difficulty of alternative methods of payment remains a significant roadblock to many.

One of the largest Bitcoin exchanges today is called BitStamp. The exchange has been around for one and a half years, and has a trade volume of over $2 million USD per month – a far cry from leading exchange MtGox’s $30 million per month, but larger than any other of its competitors. The exchange is particularly entrenched in its core European market, where MtGox is currently less prominent than it is in the US and elsewhere, although it allows bank deposits from anywhere around the world. Fees are relatively low, with a trade fee of 0.20-0.50%, compared to MtGox’s trade fees of 0.25%-0.60%. The main deposit method is bank transfer, and deposits usually process within 24 hours.

BitStamp’s owner, Nejc Kodric, was first introduced to the Bitcoin community in March 2011, in the same way that so many others were: through mining. Kodric writes: “Back then I owned a computer company – we sold components, laptops, etc. Damijan (a current business partner at Bitstamp) came to me and wanted to buy a mining rig. I knew he was an excellent programmer but I knew he didn’t play that many videogames…so I was curious why would he buy a PC with 2x 2core GPUs – I believe he got 6990s. So he briefly explained what Bitcoin is an what mining is, and about a day later I was already hooked. Not long after Damijan and I started planing on idea of an exchange.” And so, in August 2011, BitStamp was born. The exchange started out small, not picking up any significant volume for its first eight months of operation, but in June 2012 Kodric met with two large buyers who started buying through the exchange – giving the exchange enough of a boost to start to get noticed and truly take off. Since then, growth has been massive.

Although the exchange trades USD-BTC, its primary target is European users. When asked why he made such a counterintuitive choice, Kodric explains: “The simple answer would be, to concentrate liquidity. Back when we started operating, buying bitcoins in EU for USD was a hassle… you would have to wire to MtGox and pay large fees for a wire transfer, and EUR/BTC markets were way underdeveloped. So we figured it would be nice to provide a USD market for Europeans and to accept money at low fees. Many wanted to trade in USD and not EUR, so we introduced our free SEPA deposits with low conversion rates.” BitStamp’s conversion rates are indeed quite favorable, amounting to an effective fee of only about 0.3% in each direction. BitStamp is also planning on soon adding multi-currency support, allowing users to hold funds in USD, GBP, EUR and CHF (Swiss francs), which may further increase the exchange’s efficiency.

SEPA bank deposits are by far the most popular deposit mechanism for European users, and buying BTC with BitStamp through SEPA is a fairly simple process. The full process is as follows:

1. Log in (or if needed create an account) at BitStamp, and click on the “Deposit” tab. Click on the EU Bank (SEPA) option on the left, and fill in the form containing your name, how much you want to deposit, and an optional comment.

2. Click DEPOSIT. At that point you are given BitStamp’s banking details, as well as an 11-digit “message” number which you must include with your bank deposit as a message in order to get credited.

3. Copy down the bank information and make a bank transfer to that account for the amount that you entered in the BitStamp deposit form and containing the 11-digit number that you received in the message. Different banks have different instructions for this step; here are two examples of how the process works for particular banks.

4. Wait up to 24 hours for the funds to get credited to your BitStamp account.

5. Click on the “Buy/Sell” tab, and click “Buy Bitcoins”. Fill in the amount of USD you want to spend (which is probably your entire USD balance with BitStamp), and click the “BUY BITCOINS” button that appears at the bottom of the mini-form.

6. Click on the “Withdrawal” tab, then the “Bitcoin” option on the left, and paste in your Bitcoin address from your Bitcoin wallet, as well as the amount of BTC you want to withdraw (once again, probably all the BTC that you have available). Click “WITHDRAW”, and wait until your Bitcoin client confirms that you have received the transaction (you should get some kind of notification of an unconfirmed transaction within a minute).

And that’s it, enjoy your freshly bought bitcoins, and perhaps take a look at the various places you can spend them. The process for converting BTC to EUR is similar, although the SEPA step is somewhat different as it is now BitStamp that is making the transfer to your account. For international users, there is a minimum deposit fee of $15 per transfer and a 2-5 day waiting period, but the bulk of the process is essentially the same.

BitStamp also prides itself on its security. Over 90% of client funds are stored in offline cold storage, rendering the exchange invulnerable to hacks of the sort that brought Bitcoinica down in 2012. BitStamp internally uses CentOS, an operating system closely based on the RedHat Enterprise Linux distribution which is also known for being used by the US military for its security. To protect users, BitStamp offers a two-factor authentication option with Google Authenticator, an iPhone and Android application that generates one-time passwords that need to be entered alongside your main password whenever BitStamp detects that you are not logging in from your usual computer.

The exchange has a number of future developments coming up for the next few months, although Kodric is not willing to reveal just what most of these upgrades are going to be until they are formally released. For now, BitStamp remains an exchange with one of the more spotless, even if not the most prominent, reputations in the Bitcoin community, with very few complaints about the sorts of deposit and withdrawal delays and anti-fraud and anti-money-laundering compliance hassles that are occasionally reported by users of MtGox and even Coinbase. As the European market for Bitcoin continues to grow, BitStamp looks like it has a very bright future ahead.

Update, Feb 14: many users have been reporting orders not fully processing or being unable to add their top-up credits to their account. Users are recommended to try the smallest possible denomination first, and then make the full order if the smaller transaction works

Today a service which many have been awaiting for months has finally rolled out its soft launch, and is inviting members of the public to come and test it as the site enters its final stages of launch. BitcoinWireless is a service that allows anyone to purchase top-up credits for their phone for bitcoins, and currently works with over 280 carriers in 112 countries. Anyone with a phone using any of the carriers can simply go to the site, enter their country, carrier, email address and phone number, pay the bitcoins to a receiving address generated by the site, and receive an email containing their carrier’s standard instructions for adding the credit to their plan within hours – quite often, within thirty minutes.

Many Bitcoin entrepreneurs have attempted to create similar intermediary services for various industries in the past; you can already buy gift cards for BTC, Reddit gold for BTC and, recently, even order Domino’s pizza for bitcoins with the help of third-party resellers. Bitcoin Wireless, however, is different, and for one simple reason: the prices at which they are selling are, in many countries, either at cost or even below cost, beating out even the prices set by carriers themselves. In the US, for example, buying a top-up credit with any phone plan will cost exactly $20 worth of BTC, no transaction fees attached. “We buy it at a discount,” founder of BitcoinWireless’ parent company, BitInstant, explains, “and sell it at 1:1 for BTC”. In Canada, the situation is especially favorable. For example, consider the $20 Wind Mobile topup. If one buys the topup directly from a local Wind Mobile store, or by credit card, once local sales taxes are added one pays a total price of $22.60. With Bitcoin Wireless? Converting the 0.89 BTC payment into CAD, $18.88. All of the other phone plans in Canada work similarly. That’s right: if you have a mobile phone plan in Canada, you can buy a $20 topup credit for less than $20.

Bitcoin Wireless is not the first retail business to make such an offer; that honor, at least if one restricts attention to retail businesses, and excludes companies selling products that they create themselves, goes to the Bitcoin Store, which sells electronics for Bitcoin cheaper than Amazon and NewEgg. However, it is the second, and in Canada the price difference is large enough that it may well entice at least a small number of people to go through the process of buying BTC through Cavirtex or canadianbitcoins.com just to take advantage of the savings. In the US, Bitcoin Wireless is just as expensive as its alternatives in terms of money, but for those who already have BTC lying around Bitcoin payments are far more convenient in terms of time; all it takes is to scan the QR code with a smartphone app and hit “send”.

Unfortunately, a lot of countries are still missing from the list. Nearly every country in Europe, for example, is nowhere to be found, and notably elsewhere in the world Argentina, China, South Korea, Australia and New Zealand are also missing, among others. Many other countries are available, but only at a high markup; in Russia, for example, Bitcoin Wireless sells at an exchange rate of 100 RUB for $4.5 USD, a 35% markup over the actual cost. “We’re adding more countries,” Shrem writes, “but, right now, Europe is hard.” BitcoinWireless is adding more carriers every day, and so Europe will likely be added in the months to come. The web page itself is still under last-minute testing, although it is expected that everything will be finalized within a few days. Even while plans for Europe are still in the works, though, Bitcoin Wireless offers a great way for customers in the US especially to top up their phone plan, and in Canada Bitcoin Wireless can join the ranks of Bitcoin Store as a service that is actually cheaper in bitcoins.

January has been an exciting month for Bitcoin. We have seen a number of news articles about Bitcoin from various mainstream media sources, nearly all of which have been positive, as well as reports of record-breaking revenues from Bitcoin businesses, increasing adoption and, last but not least, a rapid growth in the Bitcoin price. Over the past three months since WordPress started accepting Bitcoin for its premium services, the mood within the Bitcoin community has turned much more optimistic, and with good reason; many of the scams and scandals that had been holding Bitcoin back in 2012 are now well past us, and the currency’s positive fundamentals are showing through ever more clearly. Many have predicted that 2013 would be a landmark year for Bitcoin, and so far, reports from all sides of the Bitcoin community show that these predictions have been spot on.

Bitcoin And Gambling

• The popular Bitcoin dice game SatoshiDice announced record-breaking profits in the months of December and January, earning 17000 BTC and 20000 BTC ($340,000 and $400,000) in the past two months, respectively. S.DICE share prices on MPEX are now more than double the original IPO price.
• BitZino reported that in 2012, users cashed out a total of 28,986 BTC, bet a total of 664,192 BTC and earned the company 10,137 BTC in profits.
• An established name in the rapidly growing Bitcoin poker industry, Seals with Clubs, has reported total withdrawals of 110,587 BTC over the past sixteen months, and over 1,000 unique players in the months of December.
• Infiniti Poker announced that it is set to go live in February, offering Bitcoin as a deposit and withdrawal option.

Rise Of The ASICs

• After months of setbacks and delays on the part of all three of their major competitors, the Bitcoin ASIC manufacturing company Avalon became the first to ship the long-awaited hyper-efficient mining rigs on January 19.
• On January 31, Bitcoin developer Jeff Garzik was the first to receive his shipment, and reported statistics that were every bit as impressive as Avalon promised: the desktop computer-sized, $1300, 400-watt machine achieved a hashrate of 67 GH/s, earning its owner over $200 per day until the remaining Avalon devices and later, those of their competitors, are turned on and the Bitcoin network difficulty adjusts to compensate.
• Butterfly Labs has announced what appears to be a final shipping schedule, with the last update showing a plan to ship them around February 18.
• BTCFPGA’s bASIC project ran into further delays, exacerbated by the upcoming Chinese New Year celebrations, and internal organizational issues nearly collapsed the company, leading to a 90% refund rate and the project being sold to an obscure Canadian company known as “CAN-ELECTRIC”, under which the bASIC has now been rebranded as the “Ehasher”

Merchants And Business

• BitPay announced that it has reached a mileseone of 10,000 transactions since the company’s inception, with over 2,400 merchants as of mid-January.
• BitPay also announced that it raised a sum of $510,000 from a number of Silicon Valley and Bitcoin investors, and will use the funds to hire more developers and move its operations to Atlanta, a city known for its burgeoning financial industry.
• Multiple major merchant service providers and Bitcoin exchanges announced incremental improvements to fees and availability. BitPay lowered its fee for international bank deposits to 2.99%, WalletBit expanded its bank deposit option to 42 countries, and Coinbase increased its buy and sell limits to 100 BTC and 1,000 BTC ($2,000 and $20,000) per day, respectively.

Welcome To Bitcoin!

• Blink, a German magazine dedicated to libertarian politics, released a special issue dedicated to Bitcoin, and began accepting Bitcoin for both the special issue and its previous releases (releases 1-3 German only).
• The Gold Anti-Trust Action committee (GATA), a group dedicated to providing support for gold and silver investors and exposing market manipulation in the precious metals industry, announced that it began accepting donations in Bitcoin.
• The Icelandic Modern Media Initiative, an organization dedicated to digital democracy and freedoms of speech and information in Iceland, began accepting donations in Bitcoin.
• WrapBootstrap, a marketplace for premium themes based around the Twitter Bootstrap web development framework, began allowing customers to make purchases with Bitcoin, becoming the tenth most popular website in the world to accept Bitcoin.
• Open Source Ecology, a group dedicated to developing the Global Village Construction Set described as “an open source, low-cost, high performance technological platform that allows for the easy, DIY fabrication of the 50 different Industrial Machines that it takes to build a sustainable civilization with modern comforts.”, also began accepting Bitcoin.

Off The Charts

• Bitcoin’s price broke through the $15.4 high that the currency set in August 2012 and then surged past $20, leaving only about a single week in June 2011 during which the currency’s price was ever higher than it is now.
• Bitcoin’s market capitalization reached a new all-time high of about $235 million, surpassing the peak of the currency’s June 2011 spike by about four percent.
• The Google Trends volume spiked up suddenly to roughly the same level as its brief January and August 2012 peaks.
• The Blockchain.info wallet surpassed 100,000 users, and its daily transaction volume hit a massive new all-time high of 978,000 BTC.
• If expressed in USD, January 30 saw the highest MtGox USD trading volume in all of Bitcoin history.
• The number of transactions per day hit a new all-time high, as did the number of transactions excluding popular addresses, reaching 58834 and 23619, respectively.

Miscellaneous

• Exactly one year after MegaUpload was shut down with the cooperation of US and New Zealand authorities, Kim Dotcom released his new file hosting platform Mega to the public. However, pro-copyright group StopFileLockers quickly began a campaign working with PayPal to shut down Mega resellers’ ability to receive payments through PayPal, successfully doing so to four out of ten resellers. Soon, one of the affected resellers, hosting.co.uk, began reselling Mega services through Bitcoin.
• Online Bitcoin information site Blockchain.info released a version of its popular online wallet service in the form of Firefox and Chrome extensions, making the wallet’s security close to that provided by desktop applications.
• Emirates Airlines‘ Open Skies magazine published an article about Bitcoin in their January print edition.
• Bloomberg.com ran an article about Bitcoin on their website, entitled “Bitcoin’s Gains May Fuel Central Bank Concerns“

Following two straight months of significant breakthroughs in November and December, the events that happened in January could hardly have been better. Now, more and more people are reporting that Bitcoin is entering the mainstream consciousness once again, and the conception that Bitcoin is a fad well past its time, so popular at the end of 2011 following the currency’s steep 93% drop in price, is being beaten further and further back with every passing week. Now that what may well have been turn out to be the toughest period in Bitcoin’s history is past, there is more and more reason to be optimistic and look to an ever brighter path onward.

Photo taken by Jeff Garzik

Jeff Garzik has just received the first ASIC mining computer to hit the consumer market, and has confirmed on Bitcoin IRC that the machine functions as expected. Even after Avalon announced that they had shipped their ASICs out to customers one and a half weeks ago, many continued to doubt Avalon’s claims, but now the Bitcoin community can finally rest easy knowing that the long-awaited ASICs are indeed real.

Word from Garzik first came out a few hours ago, when he wrote a blog post confirming that he received the package and showing off a few pictures of the device and its packaging. An hour later Garzik followed up with another post, detailing the hardware’s modularity and providing a brief three sentence hardware review: “No wifi antenna included. No paperwork or instructions. Power cable is for Chinese “I-SHENG” power outlets, not American. Easy oversights if someone is rushing to ship it, I suppose :)” Fortunately, Avalon founder Yifu Guo confirms, the rest of Avalon’s customers will get a standard US power cable as expected.

Now, only several minutes ago, Garzik followed up with a message on Bitcoin IRC announcing the news that Bitcoin enthusiasts everywhere have all been waiting for: “mining!”, soon followed by a statistic: the machine’s average hashrate is 68252.65 MH/s. This is about thirteen percent higher than the 60 GH/s that Avalon had originally promised, and with the state of the Bitcoin network as it currently is is no small sum; given the current total network hashrate of 22000 GH/s, Garzik will be able to earn an average of about $240 per day. Avalon’s remaining customers will also be able to enjoy highly lucrative rewards, although not quite as extreme; once all of Avalon’s 20 TH/s are added into the picture, each individual ASIC will earn about $120 per day (paying for itself in slightly under two weeks), although revenues will decrease further when Butterfly Labs’ customers get their hands on their own ASICs – an event which, given Butterfly Labs’ current shipping projections is likely to occur around the beginning of March.

Garzik has also made additional comments on the machine’s functionality; “once mining started it was very loud,” Garzik writes, “fans full blast, when initially powered on. The the fans flow down, and the noise cuts way down.” He also spoke positively about the web interface, and for mining aficionados posted a detailed cgminer output log at http://pastebin.com/g4BhvCXK.

ASIC mining will likely take months to reach its full potential; Avalon is not releasing its next batch until early March, and Avalon and Butterfly Labs may well be working nonstop for the foreseeable future as more and more customers line up to buy their own. The Bitcoin ASIC revolution, far from nearing its finish line, is now only beginning.

TruthLoader, a UK-based daily YouTube show which describes its mission as “bringing investigative and citizen journalism together,” has announced that tomorrow’s episode will be on a topic that is bound to interest many Bitcoin users: can we govern ourselves with digital technology and collaboration? The show, which will air at 7:00 PM GMT (that’s 2:00 on the US East Coast or 11:00 on the West Coast), will feature a live Google+ hangout including two guest speakers, both of whom are known in the Bitcoin community: lead developer Gavin Andresen, and Icelandic parliamentarian and Wikileaks supporter Birgitta Jonsdottir. Gavin Andresen is well-known for his role as lead developer of the Satoshi client and the Bitcoin protocol, and Birgitta Jonsdottir appeared in the London Bitcoin conference in 2012, where she gave a talk entitled “No Privacy – No Freedom“.

Although the message of Occupy Wall Street was difficult to define,” Truthloader host Phil Harper states in the introductory video. “It seemed clear that it was a repsonse to people feeling left out of the political decision-making process.” Harper then continues “the internet gave us a glimpse of a world with out the old systems of power. It’s a place of creativity, engagment, and inclusion where people can feel like they are having an impact. Is it possible to use the open access principles to build a system thorugh which we can govern ourselves?” It’s a question which has been the focus of much discussion in the last few years; internet protests in 2012 were instrumental in blocking the Stop Online Piracy Act in the USA and the ACTA copyright treaty in Europe, and in 2010-2011 social media played a significant, and some even say crucial, role in the uprisings of the Arab Spring. Anonymous and the Pirate Party provide two more examples of political movements that have arisen entirely out of internet principles and culture. Bitcoin provides another way that a group of people can organize themselves online; here, a community hundreds of thousands of people strong has created, and enforced, an agreement on a common currency and a common monetary policy, all through bottom-up, decentralized cooperation.

Although most of the time YouTube shows are too obscure to warrant mention, TruthLoader is somewhat of an exception. TruthLoader is operated by the British news service ITN (Indepdenent Television News), which is also responsible for ITV, Channel 4 and Channel 5 in the UK. TruthLoader’s videos have been seen a total of about two million times; far from mainstream, but nevertheless significant. TruthLoader is als accepting questions from the community which it will ask the guest speakers; those who have something to ask can simply post their question on either #opengov on Google+ or Truthloader’s Youtube channel. The event will be a unique opportunity to see Gavin Andresen speaking live, and another chance for Bitcoin users to interact wiht the larger internet activism community. For those who will not be able to watch it live, TruthLoader always posts its episodes on its Youtube channel. Either way, the event is important enough not to be missed.

Under the terms of a $7.2 billion class action settlement that a US federal judge approved in November, starting this Sunday, merchants will gain the legal right to charge credit card-paying customers extra to make up for their processing fees. Currently, every time a customer makes a payment with a credit card, merchants are charged about $0.25 + 2.9% for the transaction, and for many years, major credit card companies have included a term in their merchant agreements forbidding merchants from using surcharges or discounts to encourage their customers to pay with cash instead. The result has been what antitrust theorists would call a market failure: credit card companies encourage their customers to use credit cards through appeals to convenience, a consumer-biased chargeback system, and, in many cases, credit card companies bribe users directly with a 1% rebate on all purchases, while merchants are forced to cover the cost – or, more precisely, pass on the cost to all their customers, cash, debit and credit card users alike.

Powerful retail business organizations have been bringing antitrust lawsuits against Visa and Mastercard for this practice since 2005, and a settlement on the matter was finally reached last year in June. The deal includes monetary compensation of $6.05 billion to a wide array of large and small businesses, an agreement to cut transaction fees by 10 basis points (ie. to 2.8%) for eight months (an estimated further $1.1 billion in savings for merchants), and, most importantly, the nullification of the clause preventing merchants from providing incentives for using alternative means of payment. Some merchants are unhappy with the deal, believing they could have gotten much more in a trial, but in November, the settlement received initial approval by a federal judge, and tomorrow the main part of the deal will kick in.

If merchants succeed in convincing consumers to pay more often with cash, the benefits in the retail industry will be significant. Although 2.9% may not sound like much, in many industries, businesses’ profit margins are not even three times that, so having more customers use a more efficient method of payment will be a significant boon. Restaurants in particular may benefit, as profit margins for them are often as low as 4%.

In the case of online businesses, this significantly widens the door for Bitcoin adoption. Online businesses have to deal with not just fees, but also a significant amount of chargeback fraud. The issue is not a problem in all industries; according to a 2012 report by Cybersource, the average online merchant currently loses about 1% of their revenue to fraud, about 40% of which consists of fraudulent chargebacks. In the case of international payments, however, the loss rate is 2%, and some specific industries report loss rates that are even higher; one study in the manufacturing industry showed loss rates of 2-10%. If it becomes accepted for online merchants in these industries to accept Bitcoin as well, and, importantly, offer half of their savings to the customer as a discount, momentum for the currency may build up quickly. The Bitcoin Store already manages to offer customers electronics at prices significantly cheaper than major retailers like Amazon and NewEgg, largely due to the increased efficiency of Bitcoin with regard to fees, chargebacks and convenience, and with this settlement, passing on one’s savings by using Bitcoin will no longer be an either-or proposition; established merchants who would benefit from their customers paying with Bitcoin will be free to offer both methods of payment, with the advantages and disadvantages of each properly factored into the price, at the same time.

The outcome of the settlement is not going to transform the payments industry overnight; merchant agreements of the type Visa and Mastercard were requiring were already illegal in ten states, and the experience there has shown that antitrust rules alone are not enough to significantly disrupt the credit card oligopoly – the responsibility ultimately falls on the competition to present something significantly better. Payments technology may well continue to advance slowly for years to come, and Bitcoin exchanges still have a long way to go to before the currency can realize its potential in the mainstream retail industry. However, both for Bitcoin and for any other startups seeking to displace Visa and MasterCard, this decision is nevertheless a significant step forward.

For the past seven months, application-specific integrated circuits (ASICs) have been the central focus of Bitcoin mining development. Ever since Butterfly Labs became the first company to publicly announce its upcoming ASIC technology in June 2012, four startup companies have been in a race to be the first to release the technology. Now, it looks like the race finally has a winner: Avalon. On January 19, the countdown timer which the company had boldly placed on its website weeks before has reached zero, and within hours, the company sent off its first batch of 300 mining rigs to its customers. The units are currently being shipped from China, and, Avalon founder Yifu Guo believes, units should start arriving at customers’ doorsteps at the beginning of February.

The specifications of the devices are somewhat less impressive than what Butterfly Labs has been promising. The most basic statistics, price and hashrate, are the same, with both companies offering 60 GH/s for $1,299. Going deeper into the features, though, there are significant differences. While Butterfly Labs’ line of SC devices, with the exception of its 1500 GH/s “Mini Rig”, is able to fit inside a ten-centimeter cube, one of Avalon’s machines is as large as a typical desktop computer – a space inefficiency that the company was forced to pay dearly for with shipping costs of $150 per device. Compared to Butterfly Labs’ promised power efficiency of 1.2 watts per GH/s, Avalon is offering 6W per GH/s – still nearly an order of magnitude of improvement over existing FPGA hardware, but nevertheless not nearly as efficient as what Butterfly Labs customers are expecting. Avalon’s technical specifications are also generally inferior; Guo admits, for example, that Butterfly Labs’ manufacturing process used a wavelength (a measure roughly comparable to the size of chip features) of 65nm, but Avalon used the relatively coarser 110nm.

However, Avalon easily makes up for all of these deficiencies with one overwhelming advantage: so far, they are the only ones to have actually shipped a product. Avalon’s main three competitors, ASICMiner, Butterfly Labs and bASIC, all originally promised shipping dates in October or November, but as of today, none of them have even demonstrated a functional product. ASICMiner is perhaps the closest to getting its machines working, but there is reason to believe that even it may be in worse shape than it appears. “There are some oddities with their announcements,” Guo explains. Normally, computer chip manufacturing facilities produce a “yield” of 95% – that is, less than 5% of the chips that come out of the foundry are imperfect in some way. For ASICMiner’s chip production, the company’s customer service representative reported, the number of failed chips is as high as 30%. In theory, all this means is that the manufacturer will need to make 43% more chips to compensate, but the abnormality hints at the possibility of other problems to come.

ASICMiner has been relatively quiet about the reasons for most of their delays, although the latest – from mid-January to late March – was caused by a combination of internal business difficulties and Chinese New Year celebrations ensuring that work could not be completed in the weeks leading up to, and immediately after, the actual holiday that falls this year on February 10. Butterfly Labs has announced multiple significant delays, and is currently sticking to a timeline that will have it shipping the week of February 10. The most recent delay was caused by a decision to change the technology that it uses to connect its integrated circuits to the rest of the processor. Its original plan had been to use the Quad Flat No-leads package (QFN) technology, but heat management issues forced them to reconsider and switch to the Flip Chip Ball Grid Array (FCBGA), a change which is difficult to make at such a late stage in development.

Avalon, on the other hand, has seen its development process go extremely smoothly, and has even come out far ahead of schedule compared to their original scheduled release date of late February 2013. Since then, they have mostly pushed their deadline forward, rather than back, with two small exceptions: a single one-week delay that the company were able to predict over a month in advance, and a largely unnoticed, one-hour, delay after the countdown timer expired on January 19. Ironically, the latter delay was caused by the exact opposite problem to what Butterfly Labs is facing: Avalon needed to remove some fans from its hardware because its cooling system was doing its job too well.

Aside from basic statistics, Avalon has also made a number of other features of its devices public. The machines will run on openWRT, an open source Linux operating system, and the mining software itself is simply cgminer combined with an Avalon-specific driver. This also means that the Avalon code is entirely open source; openWRT is available under the General Public License version 2, and cgminer is released under GPL version 3. The machine uses a standard ATX power supply, the same as that used by ordinary computers, and internet connectivity is provided via Ethernet and Wi-Fi.

Configuring the machine will be possible either through SSH or a dedicated web interface, allowing users to easily set it up to mine with their preferred mining pool. Solo mining, however, is harder. Unlike pooled mining, where the miner receives the block headers needed by the mining algorithm directly, a solo miner needs to have an instance of bitcoind running locally or connected to the machine, which also requires storing the entire 6 GB Bitcoin blockchain. There are two ways to get around the issue. First, one can run an instance of bitcoind on a separate PC and configure the Avalon machine to work with it just as easily as one would a mining pool. Alternatively, there is also the option of running bitcoind on the machine directly, but that would require a USB flash drive to store the blockchain, as well as some special configuration to make bitcoind available on openWRT. This second option, while attractive, is thus much more difficult to implement and not supported “out of the box”. Mining with P2Pool presents a similar problem, although in that case there is a third workaround: connect to a public P2Pool node rather than running a node yourself.

Altogether, Avalon’s first batch is expected to contribute a total of 18 TH/s to the Bitcoin network – about eighty percent of the network’s entire hash power at the time of Avalon’s shipping. The network hash power is expected to ramp up slowly over the coming weeks, giving at least some Avalon customers a small window of opportunity to quickly earn back a significant portion of their investment before the network difficulty adjusts – and before Avalon’s competitors catch up. The company’s next batch is expected to come with 500 units on March 1, although with prices increased to $1,499 per machine, and yet undisclosed future upgrades are already in the works.

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Avalon founder Yifu Guo has agreed to share his thoughts on the ASIC mining industry, and what enabled him to succeed where others have failed.

Vitalik: So when did you get into the ASIC business?

Yifu Guo: It was March, 2012. Some hardware people, e.g. ngzhang, and I spoke about it, since it was technologically the next progression. We never stopped talking about it, but I’d say the serious work didn’t begin until BFL announced their ASIC lineup. We didn’t want a company obtaining monopoly, thus serious work began.

Vitalik Buterin: well, now you have a monopoly – you’re shipping almost as much as the current network, how do you feel about that?

Yifu Guo: I don’t like it frankly speaking. Technically the reality was supposed to be fairly different. BFL and bASIC were suppose to ship before me, and I was not expecting large demand due to their delays. Originally I was supposed to make this batch and sell chips, and provide the technology to more people, rather than making this a business. But alas, I’ve became what I’ve tried to prevent. With power comes responsibilities.

Vitalik Buterin: Why do you think the other three major ASIC producers have been delayed so much?

Yifu Guo: They don’t have existing relationships with IC companies, is the short version.

Vitalik Buterin: And you did right from the start?

Yifu Guo: Yes, this is correct. I am involved heavily with the development process, as indicated by all the paperwork and stuff I’ve released, as are most people who are involved with Avalon but not on the IC team. Close communication made us. We never had a “fuzzy” date. I’ve known what was going on, when things are happening, what parts are coming in, what’s being bought and etc. Hence I was able to give good promise on dates, knowing we would be a few days late a month earlier. This is our biggest advantage.

Vitalik Buterin: Yeah, I saw that. Very precise of you. So what does your corporate structure look like?

Yifu Guo: There isn’t a clear “company” structure involved with it, but we are not new to product development, and we knew what skillset we needed, so we brought who and what we needed on board, and worked together do this project. There are parts we “contracted” it out, if you will; for example, we didn’t CNC our cases ourselves, nor we had laser cutters, but we 3d modeled it, and somebody else converted it to a machine drawing for example. They were mostly friends, as you know that’s how things work in Asia. Essentially the whole design is made by us, including the chip, it’s the back-end and 110nm actualization that is done by the IC company, considering the actualization tools are expensive.

Vitalik Buterin: So it’s basically that they don’t have close communication that’s been causing BFL and bASIC to fall behind so much? Are there any other factors, in your opinion?

Yifu Guo: I think a lot of the problems that came out were caused by a lack of communication. Remember how Inaba comes out and says something like, the chip is flawed, then the engineer Nasser comes out and says it’s “clock buffer problem”. Whether that’s true or not, let’s not talk about that, but the gap in communication indicated by this event is apparent. Or how Inaba is saying they are waiting on dates, or how bASIC is saying how they are waiting on dates. And in the case of bASIC, I really think they got scammed by whatever company they were working with, because I don’t think Tom is technical at all, nor is Inaba. But I also don’t think that’s the point. How does it not raise a flag, as a person involved with a project to accept things like something being due today, but only to have a third party tell you that the new deadline is “30 days later”. That was Inaba addressing when the chips are coming out in December, and now they released a new timeline on how their chips are coming at the end of January. If it was me I wouldn’t have accepted that kind of delay without getting some SERIOUS answers.

Personally I’m often the one to press for explanation and answers in the development process because 1. I have the weakest knowledge in hardware compare to everyone else involved and 2. I handle public relations. So, back to the original problem, they were at the mercy of quoting dates from third parties, while we were always in control. That is, aside from Chinese New Year and some customs issue that delayed us, but we announced CNY issue the same day we announced the project, and the customs issue a month ahead.

Vitalik Buterin: How did the shipping process go? When do you expect customers to receive the boxes?

Yifu Guo: We underestimated the shipping cost by like $80 per unit and ran into some issues with customs, so we are already in the red from shipping costs this round and later than we planned. As for when they will arrive, depends on where the customers are, but I think 2 weeks or so.

Vitalik Buterin: Alright then, thanks a lot for your answers. That was a really interesting conversation.

Yifu Guo: Anytime.

The Bitcoin price has just broken through the $15.4 high that it last set in August, making today’s maximum of $15.68 at the time of this writing the highest that the Bitcoin price has been since July 6, 2011. The spike follows a roughly two-week-long rise that has been bringing the price up by an average of about 10 cents per day since roughly January 7, turning the rally into an all-out buying rush as the price battered for two hours, and finally broke through, the psychological barrier of $15. The near-term cause of the sudden increase was the Coming of Age Day, a banking holiday in Japan which caused deposits in the Japan-based MtGox to get delayed until today. Once the deposits processed on Tuesday, Fred Ehrsam argues, all those who deposited fiat into MtGox to buy bitcoins over the weekend were finally able to do so all at once, breaking the steady trendline at $14.2 and causing the price to shoot up precipitously over the next two days.

Unlike some of the previous spikes that the Bitcoin price has seen over the years, this rally appears to be well supported by the underlying fundamentals. Google Trends volume, a commonly used statistic to gauge public interest in Bitcoin, is roughly stable, but over the past few months one can notice a distinct trend toward Bitcoin’s score increasing. However, it should be noted that the Google Trends volume, although it used to be extremely well-correlated with the Bitcoin price, has diverged considerably in recent months, to the point of only slightly tracking Bitcoin price movements since August. Thus, there is reason to believe that the slow and unpredictable rate at which this statistic is rising should not be taken as an argument against Bitcoin’s short-term and medium-term future.

Other statistics weigh even more heavily in Bitcoin’s favor. Here are some charts from blockchain.info showing the number of unique addresses and the number of transactions per day:

These figures, which attempt to measure Bitcoin’s actual usage rather than public opinion or interest in the currency as search volume and all market statistics inevitably do, show the same pattern: the values rose during summer 2012, dropped off in the fall, but then began to quickly pick up again in November after WordPress started accepting the currency. Now, the values are all roughly at the same levels as their August 2012 highs, and are likely to go even higher.

Even more positive are the statistics for the online wallet service operated by blockchain.info itself. The site’s transaction volume and number of transactions per day have been consistently going up throughout 2012, even remaining roughly horizontal while the Bitcoin network statistics and price were going down in September and October. The number of users, however, is especially surprising:

For most of the year it was the simple, roughly quadratic curve that one might expect from a steadily growing service. In December, however, shortly after Bitcoin Centralannounced its deal with a payment services provider in France, a sudden and fundamental shift happened. For a few days, Blockchain’s number of users very nearly went vertical, and it has since continued to grow at over twice the rate that it did previously.

The reasons for the rise are plenty. The price started to move up from a low of $10-$11 after WordPress, ranked by Alexa as the 21st most popular site in the world, started to accept Bitcoin for payment in November. Soon after that, we saw the Bitcoin Central deal take place, which significantly changed Bitcoin’s reputation for the better in an instant. A flood of online articles on the subject arose, all with the same message: Bitcoin is now going mainstream. Since then, we have seen Bitcoin gambling hit the mainstream media, and articles continuing to report on Bitcoin as a whole, including an article by Canada’s MacLeans which wrote in its headline that “the cold, hard cash of the Internet has seen dramatic growth recently, and shows no signs of slowing down.” Bitcoin business is continuing to grow; BitPay’s Tony Gallippi reports that since WordPress started to accept Bitcoin the company has increased its number of merchants by over 50% and now stands at over 2100. Very recently, the company also raised a sum of $510,000 from a number of moderately well-known Silicon Valley investors. The negative attention that Bitcoin had been receiving in the fall following the collapse of Pirateat40’s Ponzi scheme and the Global Bitcoin Stock Exchange has since subsided, and Bitcoin has seen no significant troubles since. The currency is now in a better position to start truly hitting mainstream adoption that it ever was.

From here, it is still a long road until Bitcoin breaks the all-time high of $31.91 that its price reached in June 2011. However, logarithmically speaking, Bitcoin has already covered nearly three quarters of the distance since its post-peak low of $1.994 in November 2011. The 14-day average is also now as high as it ever was, and may well go even higher. In the next few days, a return to the more steady trendline that is now in the $14-$15 range is likely, but if all goes well in the medium term that price is well poised to go even higher.