When reports surfaced in mid-February that bitcoin exchange Mt. Gox had closed all transactions amid rumors of hacking and Tomfoolery, there was shock and uncertainty. Financial futures were suddenly in doubt. People were starting to panic.

Others, like me, reacted with one plain question: What?

Bitcoin. If you think it’s just play money that may or may not be related to the online thrills of Farmville, think again. But don’t think too hard, friend, because I’m here to tell you. It will make your brain ache.

Here’s a definition that might work for you: bitcoin is digital currency, managed only through software, that has value only because a collection of people have decided that it does.

Sounds crazy, am I right?

But according to the financial website Marketplace.org, paper money is not very much different.

“Money is a form of shared reality,” Adam Waytz, a professor at Northwestern University’s Kellogg School of Management, told Marketplace.org. “In order for it to have value, that means that everyone has to agree that this is something we’re going to treat as valuable.”

There is no bank keeping track of bitcoin. No government entity is regulating it, although the U.S. Treasury is providing guidance on the currency to banks. Consumers like this hot new currency because it can be used to make purchases anonymously. Small business favors it because there are no credit card fees. You can buy or sell anything with bitcoin. And we mean anything.

It sounds like a free-for-all and some worry that it is.

“In the world of virtual currency, bitcoin is currently king,” says Joyce A. Bilodeau, the former Lewiston city councilor now working as a financial crimes investigator for an out-of-state bank. “It is true capitalism — what are you willing to pay for what I’m willing to sell. The unregulated piece sets that price. At one time last year, that price per bitcoin was over $10,000 per bitcoin. Computers set the rate. They are traded. Certain online marketers accept them. And the virtual currency market is WIDE open to money laundering.”

And not just money laundering. Some worry about the potential link between unregulated bitcoin and the drug trade, terrorist financing, sex trafficking. It’s a hard pill to swallow if you’ve been using it as a quick and easy way to make online payments for anything from video games to real estate.

“I think Homeland Security should be involved,” says Rayne Poussard, a former Maine police officer who remembers the financial crisis of 2007  all too well. “Bitcoins is just another financial fiasco that will explode, too.”

It’s not Monopoly money, friend

Some have suggested that bitcoin represents the future of money, a true borderless, universal currency. Others see it as a Silk Road to trouble.

“Right now, bitcoin has little penetration,” says Bilodeau, “and a few big failures. Silk Road is one of those failures. That was a cyber marketplace that transacted on bitcoin, a place to buy drugs, prostitutes, slaves, and was involved in the international weapons trade. Bitcoin is an absolutely fabulous idea. Who doesn’t want global economic parity? There are just a LOT of concerns with it right now. It’s new. There is time to get the problems ironed out, if world governments – China in particular – can give the technology time to adjust to the security issues.”

Researching the many facets of virtual currency – cryptocurrency, if you like that term better – is fraught with problems. When I began this research, the exchange rate was one bitcoin equal to $557 U.S. dollars. A week later, that rate had risen to $670. Bitcoin news was breaking hour by hour. It’s like trying to track the progress of a high-speed car chase in real time. Rules? What rules?

“If it feels like uncharted territory,” Bilodeau says, “it’s because it is. It’s the wild, wild West out there. You won’t find guidelines for anything or easy answers. The only rules that exist are being made on the fly by people that want bitcoin to succeed and are trying to build a good reputation among other bitcoin users.”

Also in that time, MT Gox completely imploded, thousands of new businesses began accepting bitcoin and at least one death was linked to the volatile nature of the currency. Autumn Ratke a 28-year-old American CEO of bitcoin exchange firm First Meta (a currency exchange that supports bitcoin) was found dead in her Singapore apartment. Her death was ruled a suicide. For now.

Also in that time, there were rumblings that Newsweek had managed to unmask the previously anonymous father of bitcoin. Who dat, you ask?

According to just about everybody, the concept of bitcoin was developed by Satoshi Nakamoto, a shadowy figure who exists in total anonymity. He is said to be from Japan although there were some signs linking him to Germany. He developed the system and the bitcoin software in 2009, then faded into obscurity a year later.

It’s said that Nakamoto invented the bitcoin protocol, publishing a paper through the Cryptography Mailing List in November 2008. He then released the first version of the bitcoin software client in 2009, participating in the project briefly before pulling a disappearing act. Those who inquired about him were told that Nakamoto had moved on to other things.

The phantom nature of the bitcoin creator is sexy. But in early March, Newsweek identified Nakamoto (or claimed to, at least) as a 64-year-old Japanese-American man, twice married with six children. He is said to live in a Los Angeles suburb, like an average Joe instead of the mastermind behind this controversial global currency.

The result of Newsweek’s meddling? Crazy headlines like this one: “Satoshi Nakamoto chased by reporters, denies founding bitcoin.”

It’s just nuts. Of course, if you’re just looking to pay for a new hairstyle or a day at the spa, you probably have no interest in that deep, geeky background. You just want to know where to score some bitcoin and where you can spend it.

Bitcoins come from Al Gore’s rhythm?

Bitcoins are kept in a digital wallet, stored on your computer or online, which will manage and secure your wallet for you. You can get a wallet through bitcoin.org. It looks like a simple download of the bitcoin client, but hold on there, cowboy. The download tops 6 GB of space, which will take time and gobble up real estate on your hard drive. If you’re impatient or you happen to be running Windows 98 for some reason, you can get the software on a DVD.

So, you’ve got the wallet. Now you need some coin and that means finding a dealer.

Bilodeau suggests that you might try going local, starting with a link to some area dealers. From there, Bilodeau sees that one dealer, based in Waterville, was offering the best exchange rate. But that dealer also had no history on the exchange so there was no real way to assess his or her reputation.

“Any of the online sources you found are going to be as trustworthy as that one,” Bilodeau said, “Meaning, good luck. Nothing is guaranteed. But the whole point of bitcoin is to create a regulation-free, global, borderless currency housed on-line. So I could point you to reviews in banker’s publications where they made a test purchase and recommended to buy in person only, but that goes against the intent of bitcoin.”

If you’re looking to enter the weird world of bitcoin for investment and profit, you could also join a pool, a group that combines their computing power to actually make more bitcoins. Because there’s safety in numbers, or something.

“The reason you shouldn’t go it alone,” advises the website startbitcoin.com, “is that bitcoins are awarded in blocks, usually 50 at a time, and unless you get extremely lucky, you will not be getting any of those coins.”

And why do you need extreme luck to make some bitcoins? I wish I could tell you, chum. It appears to have something to do with giant computers, friends, Al Gore and a passion for spending your free time solving complicated calculations. No wonder they’re having trouble getting this thing going.

Says startbitcoin.com: “In a pool, you are given smaller and easier algorithms to solve and all of your combined work will make you more likely to solve the bigger algorithm and earn bitcoins that are spread out throughout the pool based on your contribution. Basically, you will make a more consistent amount of bitcoins and will be more likely to receive a good return on your investment.”

The Kim Kardashian of currency

So, I’m a guy who does perhaps 75 percent of his shopping online and I have yet to come across any real opportunity to use bitcoin in an advantageous way. Nobody in my social circles seems very familiar with it, either, which means either bitcoin has yet to reach ubiquity or I’m six paces behind the times.

Whatever, man. Bitcoin, and cryptocurrency at large, is still evolving, morphing minute by minute as it grows. It’s strange and unwieldy, a concept as hard to grasp, for some, as abstract art. It’s young, it’s hot, and it’s hard to guess how long it will be around. You know just like Kim Kardashian.

Is bitcoin a passing fad or a glimpse of the future? I’m just going to go ahead and let Bilodeau, my bitcoin Sherpa, walk you out of the room.

“Bitcoin, just like every other currency of the world, will continue to be vulnerable to criminals. Because bitcoin is largely unregulated, it’s that much more attractive to scammers, hackers and your average not-so-upstanding citizen who really doesn’t want the federal government to know what he is cooking in his basement.

“The promise of bitcoin,” Bilodeau continues, “and all of the other lesser-known cryptocurrencies, is still worth championing; a decentralized, public, person-to-person currency. It transcends political borders. It is accessible to anyone with a smartphone or computer. To poli-sci wonks, cryptocurrency is a baby-step toward world peace.

“In the near future, especially after the massive theft, bankruptcy and then hacking . . . of Mt. Gox, safety is going to be the biggest hurdle for broad-spectrum bitcoin adoption. Bitcoin exchanges are only as secure as the people participating in them are honest. Caveat emptor. Buyer beware. Unless, and until, the average Joe feels like his purchase or investment is safe, any cryptocurrency will stay in the domain of the early adopters, drug traffickers, techies and conspiracy theorists preparing for a global economic firestorm.”

Yeah. What she said. A ten spot and some coinage in my pocket never felt so good.

Bitcoins by the numbers

3,600: number of new Bitcoins mined each day

20,000: number of computers working to mine new Bitcoins

21 million: the maximum number of Bitcoins that can ever exist

64: percent of Bitcoins sitting in accounts that haven’t been touched since the currency began

31,000: number of computer code lines behind Bitcoin

These and other cool facts can be found at: entrepreneur.com/article/231973


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