Some Alaskans bet on Bitcoin virtual currency

mgokey@adn.comDecember 22, 2013 

A 4-year-old "virtual" currency called Bitcoin is finding investors around the world, including in Alaska. Bitcoin's growth has been fueled largely by a handful of ardent believers who see online money as a staple of future commerce.

On a national stage, Bitcoin has earned itself a starkly divided reputation. Some love it because it's anonymous, Web- based and potentially lucrative. Others hate it for the same reasons. Most don't know enough to weigh in either way.

Bitcoin is in an awkward teenage phase -- not quite elevated from its geek-centric roots as a computer program, and not mainstream enough for commercial acceptance.

D.G., a resident of Anchorage, started bitcoin "mining" two years ago. "Virtual mining" is required to create bitcoins. D.G. says he broke into the alternative currency business at a good time.

D.G. would only speak with the Daily News on the promise of anonymity. Like many bitcoin users, he considers his anonymity of paramount importance. What's at risk, he said, is his mining infrastructure -- the computers he calls his "farm" -- and the safety of his family, several of whom are also bitcoin "miners."

"It wouldn't be any different if I had a gold mine in my backyard," he explained.

D.G. considers himself a regular Alaskan. He's in his 40s. He's a dad. He works as a property manager. A love of entrepreneurship led him to get involved in bitcoin and other e-currencies.

The origin of Bitcoin is murky at best. In 2009, a computer programmer operating under the pseudonym "Satoshi Nakamoto" released a program that some describe as the digital embodiment of a true natural resource boom. About two years ago, Nakamoto disappeared from the Internet, though the program continues to run.

Users "mine" the program for bitcoins. The more powerful the computers, the better their odds of solving the random algorithms generated by the program. If they're successful, they are rewarded with bitcoins.

Like a true natural resource boom, bitcoins become more scarce the longer the mining continues. The program will end in 2140, once 21 million bitcoins have been produced.

Bitcoins aren't coins or anything tangible. They exist only as collection of ones and zeroes in computers.

D.G. started his bitcoin venture by taking a risk. He saw a new company online pre-selling bitcoin mining equipment. He ordered 10 units.

"It was a total gamble. Everyone on the Internet said this was a scam," D.G. recalled. Even his family thought he was throwing money away. When the equipment finally arrived, D.G. put it to work.

"The first month I made $2,500 on my $5,000 investment," he said.

Since then, he has sunk more than $200,000 into his bitcoin mining equipment.

"I sold my bitcoins every day. I ended up using all the proceeds to buy the upgrades (for my mining fleet)," he said.

When he first started mining, the price of a single bitcoin was about $2. In hindsight, he wishes he'd kept his bitcoins.

"I've literally mined 10,000 to 12,000 coins -- so imagine what that would have been worth." Twelve thousand bitcoins would be worth more than $7 million at Friday's price.

That price is still on the lower end of what D.G. believes bitcoins will eventually be worth.

A bitcoin reached a trading high of $1,147.25 in early December, according to The Wall Street Journal. On Wednesday its price plummeted to about $550, prompting several national media outlets to ask if the bitcoin boom had finally gone bust.

UAA economist Kyle Hampton said bitcoins' price fluctuations are a "Wild West situation" that needs to work itself out. "People are speculating on bitcoin -- the price is skyrocketing but it's volatile," he said. "The power of the alternative currency is based in whether or not people will accept it."

The unpredictable price swings in a bitcoin's value make it hard to use as true money.

"That's one of the real limitations right now ... nailing down its value," Hampton said.

buying local

For the most part, D.G. said, he doesn't actually spend his bitcoins unless it's to buy mining equipment. But he said the potential is clear. And contrary to what you might expect for an online currency, D.G. said buying local is the way to start.

"If you want to get into investing in bitcoins, you need to start local," he said. Buying from the big exchanges is difficult. D.G. said he has several customers in Alaska. One regular buyer on the North Slope purchases a little bit of bitcoin every week.

D.G. recently sold $14,000 worth of bitcoins to two 20-somethings planning to buy Internet equipment from China (from a company that only accepts bitcoins as payment).

If you poke around the Internet, you can find bitcoin users in Fairbanks and on the Kenai Peninsula but it's virtually impossible to gauge how many users operate in a particular geographic area.

It's only been in the past couple of months that D.G. has actually met a handful of other bitcoin miners in Anchorage. He described them as similar to himself: mostly in their mid-40s with the financial wherewithal to give bitcoin mining an earnest go.

While D.G. sees a bright future for the bitcoin, others still aren't sure.

Economist Hampton said the bitcoin is hardly the first alternative currency people have tried to create over the years but it's one of the most successful he's seen.

"[Bitcoin] is incredibly innovative -- as an economist it's absolutely stunning to see.

"Bitcoin's history is very much tied up in -- I don't want to say anti-government -- but a libertarian mind-set," Hampton said.

In the U.S., the Federal Reserve influences the economy by manipulating interest rates and inflation.

"Some people say that's too much power for the government to have, to manipulate the sentiments of people in the market" and to manipulate currency, Hampton said. "That's part of the appeal (of Bitcoin) is that there's not an individual you have to trust. The system is what it is; it's not corruptible."

D.G. agrees.

"Do you trust our government and our currency? They're printing it like mad," he said.

"Internet currencies are deflationary instead of inflationary because they have a limit on how much can ever be created," D.G. added. "(Bitcoin) becomes more and more scarce (compared to) currencies created by governments where they can just (print) more."

Hampton said he would bet that Bitcoin will still be around in 10 years. Looking out to 50 years, he isn't sure.

"One of the things that economists like me say is that the best prediction of the price of anything in the future is its price right now. There's as much a chance of (a bitcoin's) price going up as there is the price going down," Hampton said.

In Fairbanks, Jacob Sears is a Bitcoin early adopter and avid supporter. Sears is 19 years old and a political science major at the University of Alaska Fairbanks. He has been involved with Bitcoin for about a year now but it's only during the past semester that he's become active about bringing it to UAF.

Sears has given presentations to other students and hopes to launch a virtual currencies club. Support from UAF faculty has been positive, he said. Sears also contributes to a national Bitcoin blog.

Sitting down for coffee in Anchorage on his way home for the holidays, Sears is dressed in a white collared shirt and a red tie. He isn't shy about admitting that his passion for Bitcoin might seem like just a geeky hobby to some.

At his side are a laptop, a smartphone and a set of keys. One of his keys is a small metal disc with a unique QR code printed on it (a QR code is a modern, square-shaped version of a barcode). When Sears scans his key chain with his smartphone, his digital bitcoin wallet automatically comes up on the screen, ready for a transaction.

tough market

Sears' system is as easy as using a debit card. His only problem is finding Alaska vendors that accept bitcoins.

"I'm hoping to get to the point you can pop in and buy a coffee," Sears said.

In other U.S. cities, bitcoins are an accepted form of payment at sandwich shops and other vendors.

Alaska isn't quite there yet, Sears said. But he's eager to help businesses set up bitcoin payment systems -- "it's pretty business-friendly," he said.

Sears said he spends most of his bitcoins over the Internet. Through an online service called gyft.com, Sears uses bitcoins to shop at a slew of major retailers. Gyft.com lets users pay major vendors like Amazon, Target and the Gap with bitcoins.

And what does Sears buy? College kid stuff. Video games, a Nintendo 3DS and textbooks for the spring semester.

While Sears has dabbled in bitcoin mining, he said his student income doesn't really match the investment most miners need to be successful. He currently mines about 0.02 of a bitcoin every other week -- about enough for a coffee and a bagel.

That's fine by him. As much as he has become infatuated with Bitcoin, Sears knows it's a high-risk environment.

"This is definitely still the early-adopter period," he said.

Sears says his parents still don't quite get the nuts and bolts of Bitcoin, despite his best efforts to explain it to them, but they're excited by his enthusiasm for it nonetheless.

While Bitcoin's niche audience is dedicated to its success, governments across the world are still struggling to come to grips with online currencies.

When an online drug bazaar called Silk Road was busted in early October, the FBI seized more than $28 million in bitcoins that had been used to buy and sell illegal drugs.

The incident raised an uncomfortable question: To what extent is Bitcoin used to hide illegal activities?

Drug Enforcement Administration spokeswoman Jodie Underwood said the agency has seen a link between Bitcoin and drug trafficking in the DEA's Pacific Northwest region, which includes Alaska.

"Our intelligence in the PNW indicates that bitcoins are starting to become another alternative mode for drug traffickers," Underwood said.

Still, most "major drug organizations continue to prefer cash," said Joseph Moses, DEA public affairs spokesman.

The agency has adjusted by hiring more computer specialists and partnering with other agencies, especially the FBI, on drug crimes facilitated by the Internet.

At a November congressional hearing on virtual currencies, several groups testified against Bitcoin, citing its link to nefarious activities like online drug and pornography sales.

UAA economist Hampton said cracking down on Bitcoin would likely have little effect on the overall flow of dark money:

"Cash is anonymous; Bitcoin doesn't do anything that cash doesn't do already."

 

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