Rise of the bitcoin

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Despite a reputation plagued by drugs, guns and the underground, Bitcoins are making some people a fortune. And you could be next. Allison Tierney Elkin and Badri Murali report

Spurred by an insatiable curiosity he developed from surfing Internet forums, Towayne Brown started mining last March.

But unlike traditional mining operations, the then-high school student from Etobicoke was not digging into the depths of the earth. Instead, he used a standard graphics card in his home computer to run a complex algorithm in the hopes of finding his treasure.

The product of this venture is very different than natural resources, but it’s still making some people millions – all from the comforts of their homes. Brown was mining for Bitcoins (BTC) from his bedroom.

Bitcoins aren’t a tangible resource – you can’t hold them in your hands or put them in your pockets. They are a type of cryptocurrency, meaning they allow anonymous purchases and transfers between users online through specialized third-party websites.

For university students and 20-somethings, Bitcoins are like the money tree they’ve always fantasized about. Now money can actually grow on trees, or rather, on graphics cards. Bitcoins were introduced in 2009, but some young investors have already made outrageous profi ts. Their value shot up this winter reaching a record-breaking high of about $1,250 CDN per BTC on Dec. 4.

When the media buzz exploded, Brown, now a first-year electrical engineering student at Ryerson, remembered that he still had some of the virtual cash from mining.

He quickly sold the 0.05 BTC he had mined for about $35 CDN to an anonymous buyer.

Brown made the trade using two components – a public and a private key, which are a series of randomly generated numbers from Bitcoin servers. Each of these keys acts as a unique signature, but only the public one is visible to the world as a virtual record.

Unlike public keys, private keys are only visible to owners and stored in a virtual wallet.

Each person who owns Bitcoins has a virtual wallet with a QR scan code, just like the black-and-white barcodes commonly seen in ads.

Mugino Saeki, the information systems security officer at Ryerson, studied cryptography as part of her Master’s degree thesis.

“The purpose of signatures is for authenticity,” Saeki says. “The signature is the public key that makes the transaction authentic.”

The virtual wallets that contain these signatures can be scanned at Bitcoin ATMs to make transactions quick and painless. Toronto is one of the only cities in the world so far with this banking machine – a Bitcoin ATM opened in January at the intersection of King Street and Spadina Avenue.

Funds can be deposited into the machine and transferred to BTC – or withdrawn – using a 4-digit code sent to the user’s cell. There is a maximum daily purchase of $2,000 CDN.

Before a Bitcoin can be purchased, it must fi rst be mined. In the early days of the Bitcoin, people were able to use average graphics cards in their personal computers to mine but today, the equipment needed to mine is becoming increasingly complex, specialized and more energy intensive.

The graphics cards run a network designed to scale in difficulty after each 10-minute mining cycle to avoid the chance of one individual owning too much of the currency.

The increasing amount of cash necessary for setting up and running a Bitcoin miner also creates a barrier for those trying to get into the game today – and it’s not going to get cheaper.

Sammy Shaar, an electrical engineer and Columbia University graduate based in New York City, started mining in December.

Today, his share of 0.256 BTC is worth $258 CDN.

“I wanted to invest but I didn’t want to invest a lot of money,” Shaar says.

He bought a USB-powered Bitcoin miner for $18. He managed to make this purchase from a private seller just before the price of the equipment spiked.

While he’s already made a profit, mining Bitcoins will continue to get harder and he’ll need to invest in new provisions if he wants to keep up.

“You’ll have to run a nuclear power plant in your basement just to do this [mining] eventually,” Shaar says. The creator of Bitcoins, known under the pseudonym Satoshi Nakamoto, intentionally designed this system to allow for a finite number of Bitcoins.

Just as there is only a certain amount of gold in the world, there will only ever be a certain number of Bitcoins – 21.3 million. Because mining becomes more difficult, it slows down the process so that they can’t be created all at once.

Currently, it’s estimated that there are about 12.3 million Bitcoins in the market.

At some point, however, the last coin will be mined. At the present rate of mining, the last Bitcoin will be produced in 2140. When this happens, the market and stability could completely change. Spencer*, a 23-year-old Toronto based software engineer and Bitcoin investor, says the market’s instability won’t scare him away.

He keeps logs and closely follows trends to ensure he is making the most profitable decisions.

“You have to keep emotions out of it… this is high-risk investment,” Spencer says. “You don’t have a stock broker, it’s just you.”

The value of Bitcoins is a volatile figure that is constantly changing.

They were worth just tiny fractions of a dollar when they were introduced in 2009, but now the value has been hovering around $800-1,000 CDN. While the highest Bitcoin value ever was recorded in early December (around $1,200 CDN) it dropped down to just over $600 CDN by mid-month.

The Bitcoin economy is inherently prone to extreme dips and spikes like this and public interest can impact the already-rocky trends.

Basically, if people see a surge in news about Bitcoins in media, they might decide to make moves.

Bitcoins aren’t attached to any country’s economy though, and their rate fluctuates independently.

This renders their value unpredictable and subject to rapid change unrelated to global market trends.

Kam Chari, an associate advisor at WSC Insurance Group in Oakville, Ont., says that the risk behind digital currencies is the lack of standardization.

“When people invest money, they want to know that it is stable and they can have some sort of protection if something doesn’t work out,” Chari says. “But this Bitcoin is still new, and isn’t tied to any central institution and its [value] is too volatile.”

Chari’s concerns are common amongst economists and others involved in fi nancial sectors. Since there is no middle-man (like a bank or government institution) this increases the risk for those who use Bitcoins and mine for them.

Each transaction that takes place is also irreversible, so once a purchase has been made there is no going back. The websites that coordinate trade between Bitcoin users have no responsibility to facilitate refunds and there can be a risk of getting scammed.

“I think the bubble and many bubbles will burst,” Shaar says.

“At some point you might be left with nothing.” The bubble hasn’t burst yet though. Those who got into the game early and played it to their advantage have seen outrageous profits. When Spencer was attending an Ontario university for network security, he started reading up about Bitcoins on tech websites from his dorm room and began to purchase them.

“I’d heard about them in 2009 from a friend who said he was mining, creating this currency,” Spencer says. “He said one day it would be worth a lot of money.”

He didn’t have much cash to invest in them at the time, but he did what he could.

When he graduated and started working as a software engineer in Toronto, he was able to put more money towards purchasing Bitcoins.

Now Spencer has a group of tech-savvy friends he follows the market with and attends Bitcoin society meet-ups.

“When I was first interested in Bitcoins, the value was about $7 CDN,” Spencer says. “In the last year I’ve turned about $1,500 into $30-40,000.”

Spencer’s annual profit is higher than what someone working full time at a minimum-wage job makes per year and nearly the average wage of working Canadians.

Profits can be even higher – one of Spencer’s investor friends has made $2 million CDN from playing the Bitcoin market.

Despite their value to investors like Spencer, Bitcoins are plagued by a reputation connecting them to the Internet’s black market.

Initially, the release of this cryptocurrency in 2009 enabled a seamless, anonymous method of trafficking to develop online. In 2013, the website Silk Road was shut down by the FBI for providing users with a way to purchase illicit drugs – the only currency the site accepted was Bitcoins.

Over the summer of 2013, Marcus*, a recent Ryerson graduate, was one of many customers who used Silk Road to buy drugs using Bitcoins. He first invested in Bitcoins by purchasing them from a Japanese website called MtGox and later decided to use some to buy narcotics. He made five purchases in total which included marijuana, LSD and psychedelic mushrooms. He was able to do all of this with complete anonymity.

“[People who are] into Bitcoins are either fascinated about getting rich or getting drugs,” Marcus says.

In addition to the discreetness this system allows, it’s possible to convert almost any currency into Bitcoins. The untraceable arrangement makes Bitcoins lucrative to criminals looking for a way to launder cash, which has damaged the currency’s reputation.

“International criminal establishments are going to launder money [anyway],” Marcus says. “You can’t say it’s because of Bitcoins.”

This aspect appealed to Charlie Shrem, the CEO of the major Bitcoin exchange site, BitInstant.

Shrem was arrested on Jan. 27 in New York City and is being charged with money laundering. He allegedly was involved in selling over $1 million USD worth of Bitcoins to customers of the Silk Road and purchasing drugs on the site as well.

Despite economic concerns and the murky reputation surrounding Bitcoins, both brick-and-mortar and online businesses across Canada are starting to accept Bitcoins as currency. According to the Canadian Bitcoin Business Directory, there are 169 merchants who accept this cryptocurrency as a form of payment. On Friday, Jan. 24, a cold, windy winter day on Queen Street West, Brown meets with a man, about his age, to purchase an Application-specifi c Integrated Circuit (ASIC). He’d met the man on Kijiji and agreed to pay $70 for the circuit. He slips the USB into his pocket, ready to get back to mining, despite speculations on the future and viability of Bitcoins. “It’s already plugged into my computer,” he says.

Brown understands the risks behind Bitcoins, but that’s precisely why he only mines minimally. “It can either work really well or really poorly. I just have my pinky toe in to make sure I feel the heat but don’t get burned.”

*names have been changed to protect anonymity.

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