Did you get a stack of bitcoins for Christmas? Better spend them fast.
You remember bitcoin, the digital currency that was the talk of the tech industry last year. Bitcoin is issued by a private global network of computers, rather than by some government’s central bank. So it lets buyers and sellers bypass traditional banking systems and pay sharply lower fees for their transactions.
Not long ago, the bitcoin hype was inescapable. The value of a single bitcoin soared to over $1,000 by late 2013. In February, a Boston firm called LibertyX set up an ATM machine at South Station that spewed out bitcoins instead of paper bills. The following month, a search for bitcoin’s reclusive inventor made the cover of Newsweek.
But you haven’t read many cheerful bitcoin stories these past few months, because the value of the digital currency has shriveled. In late September, I signed up for Circle Internet Financial Ltd., a new Boston company that deals in bitcoins. Like all new customers, I got my first $10 worth for free. But being a thrifty soul, I didn’t spend the money. As of this week, my ten-spot was worth about $8.33. My bitcoins had lost 17 percent of their value just sitting there.
Lucky for me I hadn’t gotten the digital money back in January — bitcoins have lost two-thirds of their value since then. No wonder most sensible souls bailed out long ago.
But look who they’ve left behind. Boston-based entrepreneurs like Circle Internet founder Jeremy Allaire and the founders of LibertyX have kept right on investing in bitcoin businesses, convinced it’s just a matter of time before this new currency changes the world.
“Everyone is looking at this as the equivalent of the early days of the Web,” Allaire told me. He’s sure that in a few years people will be spending bitcoins as freely as we now count out $20 bills or transmit text messages. With bitcoin, buying and selling could become friction-free.
Remember when personal messages needed a postage stamp and an envelope and took three days to get there? Our financial transaction systems today are hardly better. When you buy something with a credit card, the merchant pays a fee of about 3 percent — which gets passed on to customers — and waits days to get his money. Or how about sending $500 to a relative in Acapulco? The first $7 of it goes to the Western Union money- transfer service.
This year, immigrants worldwide are expected to send $581 billion to friends and family back home, according to the World Bank, but 8 percent of it will be eaten up by fees.
That’s $46 billion in financial friction. Some of this is regulatory cost, as governments try to prevent money laundering and defund terrorists. But much of it is needless waste, the financial equivalent of postage stamps and envelopes.
In a bitcoin world, money behaves more like e-mail. You can send a payment anywhere, instantly and inexpensively. The African bitcoin startup Bitpesa charges just 3 percent to send money to people in Kenya, much less than Western Union. A US retailer that accepts bitcoin payments gets its money immediately, with a 1 percent fee for converting the bitcoins to dollars. That’s one reason why some sizable companies now accept them as payment, including Dell, Microsoft, Dish Network, Overstock.com, and Expedia.
Even the rival payment service PayPal lets people use bitcoins to pay for digital downloads of things like video games.
Bitcoins may lose some of their value from day to day. But that’s not important if you hold them only long enough to conduct transactions. That’s basically Jeremy Allaire’s business model at Circle. You link Circle to a bank account. When you need bitcoins, you can buy them instantly at the going exchange rate, then spend them immediately.
Thanks to LibertyX, you can now buy bitcoins as easily as lottery tickets. It runs four bitcoin ATMs in Boston and Cambridge. And this month, LibertyX started over-the-counter bitcoin sales at 2,500 retail stores in the United States, including a dozen in Boston.
So while the speculators have fled bitcoin, Boston’s tech entrepreneurs are as committed to the concept as ever, and with good reason. It’s a lousy buy-and-hold investment, but bitcoin is still shaping up as a better way for people to spend money. Especially if we spend it fast.
Correction: An earlier version of this story had the incorrect date for when a Bitcoin ATM machine debuted in South Station.