Thompson likes bitcoin because it insulates him from employee theft or being robbed, he said on a recent Tuesday afternoon as kids screamed and karate chopped around the gym.
Like serial numbers at the bottom of dollar bills, bitcoins are represented by unique identifiers on a public ledger called the blockchain. Each time a unit of bitcoin moves from one digital wallet to another, its authenticity is verified and the movement is recorded in the ledger for all to see.
That’s a fundamental shift in the basis for transacting business: substituting transparency for trust. We’ll talk more about the implications later, but here’s the headline: The technology behind cryptocurrencies could change our financial dealings as radically as the Internet changed how we communicate.
Practically speaking, for a Karate mom paying at Atlanta Kick, the process is relatively simple. She opens an app, her digital wallet, on her Android smartphone and scans the QR code.
Her wallet stores cryptographic keys that unlock her bitcoins – which she might have acquired through a bitcoin exchange or brokerage. The app transfers ownership of the bitcoins from her wallet to the gym’s wallet, the address of which is stored in the QR code.
Immediately, on a website, such as Blockchain.info, an Atlanta Kick employee can see that an unconfirmed transaction has been recorded. In roughly ten minutes, the gym will own those bitcoins and the block chain will be updated.
Underneath the hood, Bitcoin is basically a decentralized, worldwide, real-time electronic accounting system. Here, things get very geeky, very fast.
The open-source computer code that established bitcoins and many other cryptocurrencies is the work of an anonymous individual or small group. But the system is operated by a decentralized network of computer owners across the globe.
They use cryptography, the branch of math that has to do with codes, to “mine” new bitcoins (the digital currency is created at an ever-slowing rate determined by the original source code). The miners also authenticate and post each transaction involving bitcoins on the blockchain.
Here, in Atlanta, a small trove of companies has built up around the cryptocurrency.
The best known, which deals with the headache of moving bitcoin to U.S. dollars for merchants, is BitPay (think: PayPal, but with bitcoins). It is backed by $2.7 million in funding.
Located in a small office in Atlanta Tech Village, on Lenox Road, 30-plus employees perform that service for the NBA’s Sacramento Kings, Wordpress and hundreds of others. BitPay moves about 2,000 transactions a day for its customers, which mostly sell wares online across international borders, at an average ticket of about $400.
Coinfirma lets people rent computers within a data center that mine new bitcoins by by computing the complicated mathematical formulas required.
CoinX is an Atlanta-based exchange that’s under development. It is acquiring money transmitter licenses across the country to allow it to remit payments.
PlayCoin (which has created a Facebook app that helps nonprofits accept bitcoin), Atlanta Bitcoin (which has its own bitcoin ATM) and CampBX (a bitcoin trading platform) round out the metro area’s busy scene.
Jeff Costa, a technical salesmen for web security outfit Akamai Technologies, started mining bitcoins with a $1,500 starter kit he bought online early this year. He stores his rig in the unfinished basement of his two-story home in Smyrna.
As of the beginning of April, the system has rewarded him with about 1.78 bitcoins — just enough to pay the electric bill and let him trade in the digital currency.
“I think the spark in it, for me, is what it can be,” says Costa, 44. “Just the potential of this, for the secure transfer of assets.”
So, just what is that potential? It’s all about taking trust out of the equation.
Plastic money is 100 percent about trust. First, the card issuers determine that you can be trusted to pay your debts, then they verify that the person using your card is actually you.
With cryptocurrencies, the currency itself is authenticated every time it changes hands, and its movements are tracked and recorded in full public view. The identities and trustworthiness of the individuals involved are wholly irrelevant.
Operationally, there have definitely been kinks in the system – say, the collapse of the Japanese exchange Mt. Gox, which said it lost more than $450 million worth of bitcoins to hackers. But the underlying mathematical principles could fundamentally alter how we do business on every level.
On the horizon
The open-source code could be used to transfer ownership of cars, stocks and bonds from person to person, with little intervention by lawyers or other professionals. It could launch fleets of Uber-like enterprises, where goods and services are exchanged between individuals, without middlemen. It could engender decentralized corporations, with no hierarchy.
Innovators are already building exciting new companies based on Bitcoin, said Marc Hochstein, the executive editor of American Banker.
“I like the idea of removing trust, and removing the need for trust,” he said
He points to an international organization of programmers calling themselves Ethereum, which is creating a programming framework inspired by the concept of the Bitcoin protcol. Already, others are using it to create smart contracts, which, like escrow services, can hold money until both parties agree that a transaction of, say, a house is finalized.
Risk vs. rewards
This all isn’t to say that cryptocurrency, bitcoin especially, doesn’t have its downsides.
Most importantly, if you get robbed, you’re out of luck. There is no federal deposit insurance.
Therefore, banks want nothing to do with bitcoin.
And, recently, the IRS has also said that it plans to tax bitcoins as property – creating an accounting headache that may deter many average users.
“People will stay away from a currency the government says will cost them capital gains tax for buying a shirt online,” tweeted Mike Dudas, a former Google Wallet executive and a current PayPal executive.
As for Thompson of Atlanta Kick, he got into bitcoin after going to a cryptography conference in Tel Aviv two years ago with his girlfriend. She’s studying for her doctorate in computer science and cryptography at Georgia Tech.
So far, he’s amassed about 400 bitcoins, worth roughly $200,000 at present prices.
He knows he’s taking a risk. “It could all go to zero. I’m not foolish enough to think it won’t all collapse tomorrow,” he said.
He doesn’t care. It’s the idea behind bitcoin that excites him, not the monetary value — though that is nice.