Its harshest critics compare it to a Ponzi scheme, but Ottawa’s true believers say Bitcoin is here to stay despite the recent collapse of one of the digital currency’s largest exchanges.
David Thomson is a software developer with Bit Access.
By David Sali
“It’s the future of transactions,” says David Thompson, who organizes a regular meeting of local Bitcoin aficionados at the Clocktower Brew Pub in the ByWard Market, the site of the city’s first Bitcoin ATM. “The freedom that the Internet provides for us with information, Bitcoin provides for us in terms of money.”
Bitcoin backers such as Mr. Thompson and former Ottawa mayor Larry O’Brien say the digital dollars have several major advantages over cash: they can’t be counterfeited, they can be transferred almost instantly, and, unlike credit cards, there are no transaction fees on purchases.
“Everyone who owns Bitcoins is now a Bitcoin evangelist,” says Mr. Thompson, a software developer who works for Bit Access, an Ottawa startup that manufactures ATMs where customers can buy Bitcoins with cash. “They want it to succeed.”
Still, not everyone is buying into the Bitcoin craze. Because the digital currency is unregulated and not backed by any government, its value can fluctuate wildly. When Mt. Gox, one of the world’s largest Bitcoin exchanges, vanished on Feb. 24, taking hundreds of millions of dollars of investors’ money with it, the value of a Bitcoin fell to US$470 from US$550 in a matter of hours.
“Normally, people like a money that’s reasonably stable in value,” says Nick Rowe, a monetary economist at Carleton University.
“I do get the sense that for a lot of (Bitcoin supporters, it’s) ‘Hey, this is so clever that it must succeed.’ That strikes me as rather dodgy. If somebody built a really, really clever mousetrap, it doesn’t mean anyone else would want to buy it. It does make one a little bit suspicious about how clever Bitcoin really is.”
There have also been a few tumultuous times at home recently for the currency’s supporters.
The company that originally planned to manage Ottawa’s first Bitcoin ATM, U.K.-based firm BiT Capital, announced early last month it was giving Bit Access up to $10 million in seed funding over the next two years to build and distribute Bitcoin ATMs across the world. BiT Capital founder John Bridge also said he was joining the Ottawa startup’s board of directors and would set up an office in the ByWard Market for his firm.
Most of BiT Capital’s handful of local employees, however, quit around the time of that announcement, including Kyle Kemper, who’s now a consultant with Ottawa-based Resilient 21 Group, which now manages the ATM at the Clocktower. He says he had “concerns with the way (BiT Capital) was being run, both professionally and financially.”
Bit Access co-founder Moe Adham says his company never received a cent from Mr. Bridge’s firm.
“We have no relationship with BiT Capital at this time,” Mr. Adham says, adding Mr. Bridge was never given a seat on the company’s board. “They were once a customer. They are no longer a customer.”
Attempts to reach Mr. Bridge for comment were unsuccessful.
David Descôteaux, a researcher at the Montreal Economic Institute, says Mt. Gox’s collapse is dramatic proof of just how volatile the currency really is.
“From the beginning, Bitcoin has had some trust issues,” he says. “It’s something new, it’s not regulated by government. So it takes a lot of time to build confidence among consumers and merchants. The security aspect was maybe not as solid as we thought, and I think this isn’t going to be good news for Bitcoin.”
The virtual currency is created when “miners” using supercomputers verify Bitcoin transactions by unlocking complex encrypted codes. The first “miner” to crack the code unleashes the keys to that string and receives new Bitcoins.
The currency’s value is determined solely by how much people are willing to pay for a Bitcoin, rather than by a central bank.
“It comes down to a theory of what is money as an acceptable medium,” says Mr. Kemper, who’s also a former gold trader. Initially, he dismissed Bitcoins but now calls the digital currency an innovation that could change the world of banking the way the Internet and e-mail changed communication in the mid-’90s.
“If someone’s willing to take that at this value, then that carries value. A lot of economists believe in it. It’s up to you to do your own research in all this and use a rational approach. Come to your own conclusions.”
Governments, meanwhile, have also begun to take notice of virtual currency. Last month, the federal government announced it was cracking down on Bitcoin and its digital competitors to make sure they aren’t being used by money launderers. Some countries, including Russia, have effectively banned the currency.
Mr. Kemper, however, defends Bitcoin, saying it’s no more likely to be used for illicit purposes than good old-fashioned dollars.
“The most shadowy of all the currencies has been cash,” he says. “But we don’t see the government going crazy about cash.”
Even other events that could potentially harm the currency’s reputation, such as the collapse of Mt. Gox, will be positive in the long run, he argues. The Tokyo-based exchange had been plagued by controversy for months, delaying trades and preventing members from selling Bitcoins, he says, so its demise might clear the way for more stable entities to take its place.
“Am I surprised at what happened?” says Mr. Kemper. “Yes, I guess. Is it totally unexpected? No. Obviously, their business wasn’t being operated properly. The bad actors need to be removed.”
Stashing large amounts of Bitcoins in third-party exchanges is a risky proposition, he says, and he advises users to keep their virtual loot in a secure digital wallet instead.
“This is very new. There are dangers in it,” he says. “It’s a lesson to people that exchanges are not wallets.”
Entrepreneurs such as Mr. Kemper hope that eventually, more stability will lead to more opportunity for emerging startups like Resilient 21 that cater to the digital currency sphere.
In addition to managing the Clocktower’s ATM – it splits a two per cent transaction fee with the pub – the company also makes point-of-sale apps for businesses that let customers pay using Bitcoins. In January, the Standard Luxury Tavern on Elgin Street became the first establishment in Ottawa to offer payment by Bitcoin, and Mr. Kemper expects many more to follow suit.
“It’s just a matter of time,” he says.
Bitcoin analysts like Mr. Descôteaux say that even if the pioneering digital currency doesn’t survive in the long run, it will leave an important legacy. Just as the early file-sharing system Napster paved the way for today’s iTunes, Bitcoin has shown the vast potential of peer-to-peer exchanges of money and other information, he says.
“The currency in itself can be very volatile and risky, but I think the technology behind it is probably going to stay,” Mr. Descôteaux says. “In what shape or form, it’s very hard to tell. The possibilities are still unknown at this point.”