The realm of Bitcoin is one of confusion and the dark market.  Bitcoin is a tertiary form of payment that is slowly taking over the backroads of the Internet.  Bitcoins are holograms, Bitcoins are nothing but bits and bytes in the internet ether and, sometimes, Bitcoins are actually made of metal you can hold in your hand.

Bitcoin is certainly confusing to even the tech savvy.  Here’s how the TuboTax blog tried to explain the phenomenon in 2011 in a long and tortuous infographic:

I first learned of Bitcoin in a November 15, 2012 blog post from Automattic employee and WordPress Guruji Andy Skelton:

At WordPress.com, our mission is making publishing democratic — accessible and easy for anyone, anywhere. And while anyone can start a free blog here, not everyone can access upgrades (like going ad-free or enabling custom design) because of limits on traditional payment networks.

Today, that changes: you can now buy WordPress.com upgrades with bitcoins.

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.

I admire Andy Skelton a lot.  He’s been kind and generous to me during my tenure as a WordPress.com customer, so I carefully read his precise instructions and tried to earn some Bitcoins.  I thought Bitcoin was, perhaps, a better and friendlier PayPal.  Alas, I could not figure out how to even get started with Bitcoin.  I installed a Bitcoin wallet on my computer that timed out trying to connect to its server.

I tried to determine out how to “mine” Bitcoins of my own. I finally gave up and wanted to just buy some Bitcoins from somebody else — but the whole purchasing/exchange process seemed shady where my real money was being spent on a Bitcoin that had no, assumable, transferable value in an everyday, real world, exchange of goods.  I was trying to purchase something physical that was invented to be virtual and untraceable.

I gave up on Bitcoins, but I still wonder if Automattic employees can choose to be paid in Bitcoins — and, if not, why not?

How are Bitcoin computed in a cash and direct deposit world?  Do Bitcoin-ers pay taxes?  Can you 1099 a Bitcoin payment?  Does the IRS look kindly upon Bitcoin transactions?  Are Bitcoin similar in that they share a quantifiable exchange rate with other world currencies?  Or is Bitcoin doomed to become the monetary backbone of black market back alleyways?

In fact, it [Bitcoin] has really been relegated to the realm of the uber geeky, or seen as the currency of anarchists or crazy digital libertarians. The black market marketplace known as Silk Road, which allows pretty much anyone to anonymously sell “alternative products” (i.e. large quantities of one’s drug of choice), uses Bitcoin for its currency. Something which hasn’t exactly helped Bitcoin’s “cross over” appeal.

Here’s how The Verge recently described the Bitcoin economy:

The virtual currency Bitcoin isn’t backed by any assets or central authority. It’s only three years old and its exact origin is a mystery. And yet, for some reason, tens of thousands of people have determined that a single Bitcoin — essentially a unique sequence of letters and numbers — hit $105 US dollars earlier today, the most in its short history. At a time when the euro seems increasingly unstable, financial publications like Businessweek are asking if Bitcoin may the world’s last economic safe haven.

In the early days of Bitcoin, the price was decided by a small community of users who traded the currency on forums. Today users use real-world currencies ranging from the US dollar to the Polish zloty to buy Bitcoin on real-time exchanges. These exchanges determine Bitcoin’s price based on what people are willing to pay. The largest of these exchanges, by far, is Mt. Gox.

Bitcoin is on a surge:

It’s probably fair to say that the big rise in Bitcoin this year has caught many by surprise.  Today, the value of one Bitcoin hit $100. In early March, they were trading below $35. In January, they were trading below $15.

Have you ever purchased something with Bitcoin?  Did you do any Bitcoin mining?  What is the future of this transient Bitcoin economy, and would you ever accept payment for real services rendered in a Bitcoin exchange?

59 Comments

  1. never heard of them before ………………. never seen them offered as a payment option either – but then I use WP for free. It feels like a South Sea Bubble – it will go so far then burst.

    1. I read that the Mt. Gox site processes something like over 70% of the worldwide Bitcoin transactions from their HQ in Japan. Last year, they spent $25 million USD to “conform” to U.S. law. That’s a lot of money for nothing — so there must be something there, but I am not yet comprehending it.

  2. If they are paying that much money to “conform” there is more than a little something behind it ………….. I wonder what law/s they had to conform to …………….. that might be a clue as to what there is behiind it .

    1. It’s all legalistic and technical:

      Innovative Silicon Valley Bank stepped up to the plate and agreed to facilitate the U.S. dollar financial flows for individuals and businesses managing trading accounts on bitcoin’s largest floating-rate exchange. For better or worse, this launches the exchange directly into the world of the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) as SVB already adheres to those strict reporting requirements. “Like any new business we are looking at it very carefully and we are willing to entertain the idea while monitoring the industry closely,” says Carrie Merritt, director of public relations at SVB. …

      As nonpolitical cryptographic money, bitcoin is not recognized as legal tender in any jurisdiction so exchanges are technically not considered to be ‘foreign currency dealers’ nor is bitcoin officially recognized as a ‘prepaid access’ device. Nonetheless, CoinLab took the step last week of registering with FinCEN to become a Money Services Business (MSB) and their entity and registration number are available here. Since they are a self-declared seller of prepaid access (MSB code 413), they now must comply with a litany of Bank Secrecy Act requirements, including Suspicious Activity Reporting.

      http://www.forbes.com/sites/jonmatonis/2013/03/02/bitcoin-exchange-deal-repatriates-assets-to-u-s/

  3. I think the kick of bitcoins — and the reason Automattic employees would most likely not want to be paid in them — is that they are supposed to be the digital version of cash, which when paid (like restaurant employees that are paid cash under the table) can be not taxed because it is a way to anonymously transfer money from one source to another without the government being able to track it — for now!

    1. Right! I agree. Bitcoins exist so as not to be traced — which makes them the perfect currency for an underground economy and the Black Market. I can’t imagine any government wanting to allow that sort of untraceable exchange without monitoring it and taxing it.

  4. http://BitPay.com is the WP.com Bitcoin processor:

    ATLANTA — April 2, 2013 — BitPay Inc, the world’s leading payment processor for bitcoin, announces it has processed over $5.2 million in bitcoin transactions for its merchants during the month of March, with over 5,100 completed invoices during the month. The pace accelerated with over $3 million in transactions during the final 8 days. This eCommerce activity from merchants selling computers, consumer electronics, precious metals, and even government services has likely eclipsed the illicit activity widely estimated from sites like Silk Road.

    BitPay has also approved over 1,300 new merchant applications during the month of March, bringing their total number of approved merchants to over 4,500. The explosive growth in BitPay’s business comes after February’s payment processing volume of $687,000 in transactions with 2,300 completed invoices.

    http://blog.bitpay.com/

  5. so this is kinda like the farmville bucks – where you buy fake money to purchase items in game – except this fake money buys you real stuff in the real world that you might not want others to know about .

    1. That’s exactly what it feels like, but I’m not certain how this is legal or if Bitcoins are considered legal tender. Can I buy a house in the USA with Bitcoins? The States are already going after internet retailers over collecting local taxes on every purchase — so how does Bitcoin operate in that environment? The States — and the Fed! — will want their share of the exchange.

        1. It looks like there’s a way to use Bitcoins on Amazon.com:

          “Adding BitPay’s plugin to our webstore, which is based on WordPress, has dramatically improved our logistics,” says Mihai Alisie, Editor-in-Chief of Bitcoin Magazine. “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.”

          BitPay’s integration with Amazon currently works with WordPress.com, the world’s most popular web publishing software, and WooCommerce, a comprehensive eCommerce platform for WordPress. BitPay plans to add the Amazon integration into other shopping cart platforms in the near future.

          http://www.monetizingforum.net/showthread.php?tid=5296

  6. David – looks like they are trying to go legit ……………. think I will stick to euros …………..

    1. Right, Nicola. It will be interesting to watch how Bitcoin continues to evolve and grow. Will they pay to play or will they go their own way?

  8. All good stuff – it was the tie in with go their own wya that set me off – I then had to fight the digital rights thing to find one that would play.

  10. pressumably its like the web traffic generators – you visit x number of sites and get a “bit” of a reward!

    1. That’s what never made sense. You had to do something to create a Bitcoin — nobody would give you one for not doing anything — but what did you have to do, and for how long and why?

  12. UPDATE:

    Uh-oh! Instawallet is a Bitcoin “wallet” service!

    INSTAWALLET SERVICE NOTICE

    The Instawallet service is suspended indefinitely until we are able to develop an alternative architecture.

    Our database was fraudulently accessed, due to the very nature of Instawallet it is impossible to reopen the service as-is.

    In the next few days we are going to open the claim process for Instawallet balance holders to claim the funds they had stored before the service interruption.

    Important information on claims submission:

    For the first 90 days we will accept claims for individual Instawallets. Your wallet’s URL and key will be used to pre-populate a form to file the claim.

    After 90 days, if no other claim has been received for the same url, your Instawallet balance under 50 BTC will be refunded. If several claims have been filed for the same url, we will process those claims on a case by case basis, under the presumption that the claim we received first belongs to the legitimate balance holder.

    Claims for wallets that hold a balance greater than 50 BTC will be processed on a case by case and best efforts basis.

    http://instawallet.org/

  13. oh goodness wonder how much people lost ??

    http://www.economist.com/node/21563752

    “Bitcoin was devised in 2009 by a mysterious figure known as Satoshi Nakomoto. It is the world’s first, and so far only, decentralised online currency. Instead of a central bank, Bitcoins can be issued by anyone with a powerful personal computer: it mints them by solving extremely difficult mathematical problems. The problems are automatically made harder to ensure that the overall supply of Bitcoins cannot grow too fast. They are traded online, with transactions cryptographically authenticated.”

    1. I don’t know how much was lost with Instawallet yet — that was just announced today.

      I do know there was a previous theft of Bitcoins from someone’s account that totalled over $500,000.000USD.

      I remember about the slowing down of the “mining” to not flood the market — but I’m not sure exactly what was being mined or why — was some sort of hive problem solving going on? What was the offer and acceptance of the contract to mine the coins?

  14. Such a big risk with such an insecure system ……………………..

    I think what happens is that when you sign up you are in effect leasing space on your computer to them for them to solve these equations – these equations may or may not earn you a bitcoin. As these equations are getting harder the likelyhod of finding them with a solo computer is next to nothing – which is why the pool idea is popular.

    I have not seen the contract – so I cannot comment on that.

    1. Ah! Well, that’s neat. I like that idea. I wonder if the effort is equal across time? Or would a more powerful computer be able to crunch faster — and rightfully earn more — than someone on an older and slower laptop?

      1. I downloaded the mining software in 2009 and ran it for two months straight on a laptop and got zero bitcoins!

      2. the more powerful your computer is the better you will do . From what I have read bitcoins are mined in units of 50 now – which is why the pools with lots of combined power are the way forward. Should you actually have access to very powerful computers and servers – bitcoins will not cover the cost of electricity that it would take to use them.

        1. It’s a bizarre scheme — but if enough people believe — then you have an economic system based on trust and blind faith. Just like the dollar! SMILE!

  16. That is a good question ………………. I guess religion will give you a rolling income – the virtual coins I suspect are a longer term investment

  18. Very interesting, it is a highly abstract concept for me. Why am I reminded of “The Matirix”? I have a strange feeling about this.

  19. I’ve heard of the bitcoin market, but have yet to even try venturing into it and probably won’t. The untraceable Deep Web creeps me out a bit in general– and so many people don’t know about it at all that I doubt bitcoins could make their way into the “real world” any time soon!

      1. I wonder… who exactly would authorize that protection? I’m already very particular and borderline obsessive about my bank transgressions, and that would stress me out!

        1. Me too. I check my bank and credit cards every single day or any signs of stress that are not from me! I can’t imagine how I’d deal with the uncertainty of Bitcoin wallet.

  20. BURNING!

    To the surprise of very few people, Bitcoin has crashed. That’s not to say it’s a goner, but even those who bought into it just before the craziness of the last two weeks are now looking at losses: from a U.S. dollar exchange rate high of $266 two days ago, the crypto-currency is – at the time of writing – trading at around $70.

    http://goo.gl/tej86

  23. UPDATE:

    Is this the beginning of the end for Bitcoin?

    Last month, the Securities and Exchange Commission accused a Texas man of profiting from a bitcoin Ponzi scheme on the same day it issued a broader warning about the dangers of similar frauds. Earlier this year, the operators of another virtual currency, Liberty Reserve, were accused of running a $6 billion money-laundering ring.

    The Senate committee began looking into virtual currency a few months ago, formally interviewing several regulators and industry participants. The committee recently stepped up its efforts because staff members had heard “real concern” from law enforcement officials, and because it became clear that regulators did not have enough information about the technology, according to the person involved in the investigation.

    “The federal government must make sure that potential threats and risks are dealt with swiftly,” the Senate letter said.

    http://dealbook.nytimes.com/2013/08/13/officials-broaden-inquiries-into-oversight-of-bitcoin-and-other-currencies/

    1. Looks very much like it – it was always going to be a target for the Feds fro the day it was born it was running on borrowed time

      1. The second Bitcoin is regulated — it loses all its anti-social significance and creed — and it looks like that unwanted, but warranted, “legitimate-zation” is going on now.

  24. UPDATE:

    Another nail falls:

    The Internet Archive Federal Credit Union, an experimental financial institution run by the eponymous nonprofit that archives web history, has established itself as a Bitcoin haven. In contrast to traditional banks, which snubbed businesses built around the virtual currency, the IAFCU basically put up a Bitcoin welcome sign. “These are not drug dealers, money launderers, or whatever. These are average folks,” IAFCU CEO Jordan Modell told Wired.

    That all changed yesterday, however, when the credit union announced it will be dumping its Bitcoin clients.

    “Certain operational and regulatory issues came up including some that apply to new credit unions like ours,” IAFCU CEO Jordan Modell wrote in a blog post. “Until we have further clarity, we are unable to service some of our corporate members.”

    http://www.theverge.com/2013/8/30/4675908/internet-archive-credit-union-dumps-bitcoin-accounts-citing-regulatory-issues

    1. I’m not sure if China can kill Bitcoin alone, but that makes everything harder — but we can’t advertise on Facebook in China, so I wonder if the restrictions really hurt anything since they are so isolated anyway.

  26. From what I understood a substantial percentage of the market was in China, in which case it will severely dent the market , although I suspect that traffic will not route through the Philippines.

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