Bitcoin is a computer- and Internet-based currency, although some say it’s more a commodity than a kind of money. It’s decentralized, meaning there is no one authority (like a national bank system) controlling it, and it’s virtual, meaning it exists only in digital form. As I write this, 1 Bitcoin (BTC1.0) is worth about US$864, a considerable decline from the week before, when it crossed the $1,000 mark.
How do you get bitcoins? There are four ways. Sell something for bitcoins. Trade something for bitcoins. “Mine” bitcoins on a computer. Buy bitcoins with regular, old-fashioned money. A fifth way, stealing bitcoins, is supposed to be nearly impossible, because bitcoin “wallets” and transactions are heavily encrypted. Hence the alternate name for bitcoin and its many cousins: crypto-currencies.
Well, I wanted to get ahold of some bitcoins and another crypto-currency, peercoin. This was last week, when both were flying high relative to the dollar. I had nothing to sell or trade. My mid-range Lenovo notebook lacks the necessary computing power to mine bitcoins. So, my best and only option was to spend money and buy them.
Being a complete n00b, I stumbled around in the dark before discovering two sites that make it easy to buy bitcoin. I also found a bazillion others that make it less intuitive, if not downright shady.
Coinbase.com is based in San Francisco. You register for free, and once you link a US-based bank account to your Coinbase account and get it verified with a micro-deposit and withdrawal, you can buy up to BTC10. Coinbase seems well on its way to be the Amazon.com of bitcoinage in the USA, judging from this article at TechCrunch.
[If you want a simple introduction to bitcoin and Coinbase, TechCrunch has an interview with Coinbase CEO Brian Armstrong. I tried to embed it, but had no luck.]
After stumbling around sites that are primarily geared toward dollar, euro and ruble exchanges, I found two China-based sites — btcchina.com and rmbtb.com — that allow you to exchange Chinese renminbi for bitcoin. As it turns out, the Chinese are just gaga over bitcoin, probably because it provides an easy and relatively cheap way to convert renminbi into dollars, British pounds or euros. Such exchanges are also (so far) not closely monitored by Chinese authorities, who are likely using them, too, come to think of it.
Because it has a better English interface, I chose rmbtb.com. One big difference between it and Coinbase is the manner of transfer. Coinbase wants a direct link to your bank account. Using an intermediary, such as PayPal, is not possible. In fact, I found most bitcoin exchange sites consider PayPal radioactive, at least for deposits, because it permits chargebacks. Rmbtb.com, however, allows you to use two PayPal-like services in China, Alipay and Tenpay. I already have an Alipay account, so it was a fairly simple matter to move some renminbi from my Chinese bank account to rmbtb.com via Alipay.
Now, I was also interested in peercoin (PPC), which is less known than bitcoin, but which some gurus say will be even better in the long run than bitcoin. It’s also much cheaper right now than bitcoin, like about $5 for each peercoin. My original plan was to buy peercoin directly, skipping bitcoin completely, but I soon discovered going from dollars or yuan to peercoin is well nigh impossible without using wire transfers, or intermediaries that charge fees up to 10%. Wire transfers are too costly for small investments, and the exchanger websites are not exactly forthcoming in how much personal information you need to provide them before they allow you to use their services.
[One exchange site, paxum.com, asks for Social Security number, address, phone, date of birth, and a lot of other stuff that gave me the willies. It seems quite reputable, but that much information in the wrong hands could lead to easy identity theft. So, no thanks, Paxum.]
So, after stumbling around the labyrinth of exchangers, I gave up the idea of buying peercoin directly and went to one of the biggest exchanges, btc-e.com.
All told, I have about $240 tied up in this game, which is all I care to risk for the moment. As of this writing, my cryptocoins together are worth about $265. As long as bitcoin’s value against the dollar keeps rising, I should be OK. Peercoin has yet to gain any momentum upward.
The reaction to bitcoin by the USA and China, among other nations, has been interesting. Rather than shutdown bitcoin trading entirely, the US government has decided that Coinbase and other US-based exchangers have to perform due diligence on the identities of their users, to reduce the chance using crypto-currencies for illegal activity.
This requirement incidentally also makes it easier for the Internal Revenue Service to track trading in bitcoins. We expats are well aware that the long arm of the IRS extends around the world. We have to file our tax forms every year, and pay US income tax on our foreign income (above a fairly lofty sum I doubt I’ll ever reach). So, trying to use bitcoins as a way to stash money out of sight of the IRS is going to be harder.
Incidentally, American tax and bank reporting requirements mean that banks in cooperating countries with American accountholders have to tell the IRS how much those Americans have stashed on their offshore accounts. While several national governments have agreed to these requirements, many banks around the world are now refusing American customers. Even two of the online cryptocurrency exchanges I found expressly state they will not accept American customers, no matter where they live.
China, meanwhile, told its banks earlier this month they cannot trade bitcoins, but have not restricted individual Chinese from doing so. Right after this announcement, the value of bitcoin plunged from about $1,000 to less than $700, and has slowly been climbing up toward the $1,000 level since. Curiously, the Chinese government does not seem too worried about Chinese exporting their renminbi offshore via bitcoin, despite national restrictions on how much currency can be taken out of the country. The Chinese are major players in the bitcoin market, so Beijing’s sly acceptance of bitcoin may enable the currency to gain traction.
As this analysis in Salon.com says, this kind of government attention and regulation is just what bitcoin fans hope to avoid with their pet currency. The original concept of bitcoin, and its various cousins, was to create a currency free from central authority and regulation. Rather, the bitcoin network is supposed to self-policing and self-regulating. Now, some hardcore believers want to create a completely anonymous currency, in which no one would know who owns how much coin. [But how would you buy such a currency, I wonder?]
For the European Union’s reaction to bitcoin, check out this report in The New York Times.
Governments and law enforcement agencies hate the idea of completely anonymous, unregulated (and untaxed) financial instruments. Bitcoin is testing the limits (or the patience) of government authority. It may go the way of e-gold, killed by allegations of money laundering and illegal activity, and its own weaknesses, or it may become the 21st century version of pork bellies. Meanwhile, I’ll see if I can make some coin, as it were.