Bitcoin startups are beginning to raise sizeable investment capital despite warnings about potential regulation and incidents of hackers abusing the Internet virtual currency for profit.
15th June 2013
Everytime you spend bitcoins to buy a drink at Evr, a bar in Manhattan that accepts the digital currency, you make its co-owner, Charlie Shrem richer. This is because whenever someone new uses bitcoins, its value shoots up. Shrem has bought thousands of bitcoins for about $ 20 each, starting in 2011. Since then, the electronic currency has soared in value to $ 109 as on April 2013. That has turned the fortunes of Shrem, making him a millionaire at 23. The below graph entails the growth of bitcoin since its birth in 2011.
Shrem has founded Bitinstant, a company that makes it possible to buy bitcoins at K-mart and 7-Eleven, and is a member of Bit Angels, an investment group created this year to help Bitcoin startups to take their business forward. Over the past couple of months it has increased its value by more than double against the dollar.
Bitcoin originated back in 2009 as a peer-to-peer currency, to avoid online law enforcement. It means no central authority issues new money and tracks the transactions. The tasks are collectively managed by the network. It uses public key cryptography, peer to peer networking and proof of work to process and verify payments. Bitcoins are sent from one address to another with each user potentially having multiple addresses. Each payment transaction is broadcast to the network and included in the blockchain so that the included bitcoins cannot be spent twice. Bitcoin was created in 2009 by a pseudonymous person or group by name Satoshi Nakomoto. The virtual currency creates trust through a cryptographic system. Like gold, no central bank controls Bitcoin currency. “Bitcoin transaction’s privacy is really complicated”, Gaven Andresen, chief scientist with the Bitcoin foundation says.
The anonymity factor has been the undoing of Bitcoin’s idealism. The currency has been plagued by reports of nefarious transactions involving illegal drugs and gambling. The volatile price fluctuations and lack of resources in the cases of fraud further risks bitcoin users. It has no backing from any government or other large institutions, yet the stock of outstanding bitcoins is now more than $ 1 billion. The conventional response of all Bitcoin critics is to dismiss it as a ‘bubble’, with no intrinsic value at all. However, the virtual currency can be used to make payments over the internet without any transaction fees. Small merchants and others who want to reduce costs associated with accepting credit cards include content aggregation sites such as Reddit.com and okcupid.com. EBay is also exploring ways to integrate Bitcoin into its PayPal payments network.
Coinbase operates an online service that allows user to buy bitcoin, store the virtual currency in a digital wallet and pay merchants for goods or services with it. The company was founded by Fred Ehrsam and Brian Armstrong. In April, the company had about 116,000 members who converted $ 15 million of real money into Bitcoin, up from $1 million in January. Ehrsam, says dollar conversions are increasing by about 15% a week, and its user base growing at a weekly rate of about 12%.