NPR

What Is Bitcoin?

The U.S. has the dollar. Japan has the yen. Now some people are trying to invent a new currency that's not tied to any country or government. It's called bitcoin.

Bitcoin is a lot like cash — for the online universe. It doesn't actually exist in the physical world. You can't hold bitcoins in your hand; they exist only on computers.

There is no center to the whole bitcoin system. It's not like there's one computer somewhere storing all the information. It's a peer-to-peer system, run by the people who use it. For Gavin Andresen, a programmer who has done a lot of work on the bitcoin system, that's a big part of the appeal.

For me that's more comforting than thinking that politicians or central bankers won't screw it up. I actually trust the wisdom of the crowds more.

To truly understand bitcoin, you need to use it. We started by visiting an online exchange where you can trade actual dollars for the virtual currency.

When we started working on this story, $7 got you one bitcoin. But when we went to the exchange, something crazy had happened. The price had more than tripled — to $23.80.

Bitcoin had had a wild couple of weeks. After the website Gawker ran a story about an online market where you could use bitcoins to buy heroin, LSD and other illegal drugs, the exchange rate for bitcoins started rocketing up.

Then someone posted online that they'd had a half million dollars worth of bitcoins stolen.

A few days later, the main bitcoin exchange web site got hacked and had to shut down for a while. So we couldn't buy bitcoins there.

We were running out of time and needed some way to buy bitcoins. We called up Gavin again, and he told us, the best way to buy bitcoins quickly, would be very low tech. We would have to meet someone who has them and exchange our cash for their bitcoins. Gavin gave us the name of a guy, Bruce Wagner, who hosts an online 'TV' show about bitcoin.

We meet Bruce at his office. He has us go to a website, MyBitcoin, to set up a digital wallet. We choose a username and password, and we give Bruce $40 in cash. He looks up the exchange rate, $17 per bitcoin, and gives us 2.352941176 bitcoins.

We finally have bitcoins, but before we use them, we had one last question — are they legal?

Ronald Mann, teaches at Columbia law school. He says bitcoins are legal, for now. But if it turns out they're used mostly for illegal stuff, the government could shut the currency down.

The bigger challenge, Mann told us, is getting enough people to use the currency. "I see its future as a real currency as very limited." In five or ten years, Mann said, "I think it won't exist."

For now, they do exist. So we decide to use our bitcoins to buy lunch at one of the few places that will accept bitcoins, a restaurant in Manhattan, Meze Grill. We order some smoothies, a falafel platter, and a chicken platter.

At the cash register, it takes a few minutes to log in from an iPhone and send the bitcoins to the restaurant, but eventually it works, we get our food and sit down for lunch.

Note: After we bought lunch, MyBitcoin — the online bank we used — was robbed and had to shut down. Here's Bruce Wagner's reaction.

Copyright 2014 NPR. To see more, visit http://www.npr.org/.

Transcript

RENEE MONTAGNE, Host:

The U.S. has the dollar, Japan, the yen. Countries in the eurozone have the euro. Now some people have come up with a currency not tied to any country or government. It's called bitcoin, and a number of online stores now accept bitcoins as payment. You can buy socks with them, computer equipment. One place will sell you coffee beans. David Kestenbaum and Jacob Goldstein with our Planet Money team gave the new currency a try.

DAVID KESTENBAUM: Bitcoins don't actually exist in the physical world. You can't hold one in your hand. They're just on computers.

JACOB GOLDSTEIN: We wanted to try to buy lunch with bitcoins. So we talked with Gavin Andresen, a programmer who's done a lot of work on bitcoin. He didn't actually create the bitcoin system, though. In fact, he said there's a strange story behind that.

GAVIN ANDRESEN: The idea started with a guy named Satoshi Nakamoto. He's a bit of a mysterious figure. We're not sure if Satoshi Nakamoto is his real name. I've only ever interacted with him via email.

GOLDSTEIN: Are you Satoshi Nakamoto?

ANDRESEN: I am not Satoshi Nakamoto.

KESTENBAUM: Whoever Satoshi Nakamoto is came up with a pretty clever system. Everybody who uses bitcoin has a digital wallet. And when you buy something, you send your bitcoins to someone else's wallet. It's what computer geeks call a peer-to-peer system.

GOLDSTEIN: There's no center to the whole thing. It's not like there's one computer somewhere storing all the information. The system is run by everybody. Bitcoin is money backed by the people who use it - independent of any government. For Gavin Andresen, that's a big part of the appeal.

ANDRESEN: For me that's more comforting than thinking that politicians or central bankers won't screw it up. I actually trust the wisdom of the crowds more.

KESTENBAUM: Bitcoin is a lot like cash - but an online version. There are no big fees. And transactions are anonymous. That makes it hard to know how many people are using bitcoins, but every day, hundreds of thousands of dollars worth of bitcoins are trading in online currency exchanges.

GOLDSTEIN: Satoshi set up the system so that there's a finite number of bitcoins that can ever be created. In that way it's a bit like gold.

KESTENBAUM: Gavin Andresen says the best way for us to get some bitcoins is to buy some. In the same way you can trade dollars for British pounds, you can also trade dollars for bitcoins in online exchanges. So we tried that out.

(SOUNDBITE OF TYPING)

GOLDSTEIN: When we started working on this story, seven dollars got you one bitcoin. But when we went to the exchange, something crazy had happened.

Now it says 23.8.

KESTENBAUM: No.

GOLDSTEIN: So, what, two weeks ago it was seven?

KESTENBAUM: What? Wait, is that right or is it flipped or something?

GOLDSTEIN: No, price per coin in dollars.

KESTENBAUM: This was part of a wild few weeks for bitcoin. The website Gawker ran a story about an online market where you could use bitcoins to buy heroin, LSD, and other illegal drugs. After that story ran, the exchange rate for bitcoins started rocketing up.

GOLDSTEIN: Then someone posted online that they'd had a half million dollars worth of bitcoins stolen.

KESTENBAUM: A few days later, the main bitcoin exchange website got hacked and had to shut down for a while. So we couldn't buy bitcoins there.

GOLDSTEIN: We called Gavin Andresen back to ask him if there was some other way.

ANDRESEN: Oh, you guys are in New York City?

KESTENBAUM: Yes.

ANDRESEN: And if you are physically in New York City, the fastest way to get bitcoins is to find somebody else in New York City who is willing to sell you bitcoins for cash. And then you meet them in person and you give them some cash and then they transfer bitcoins to you. It's primitive, but that's the best you can do right now if you want to get bitcoins quickly.

KESTENBAUM: Gavin gave us the name of a guy, who was actually just ten blocks away: Bruce Wagner.

Hi, I'm looking for Bruce Wagner:

BRUCE WAGNER: I'm Bruce Wagner.

GOLDSTEIN: Bruce Wagner, it turns out, hosts this online TV show about bitcoins.

WAGNER: Everyday, we talk about bitcoin for an hour. There's so much to talk about. And then - that's "The Bitcoin Show." And then we have it in Spanish language "El Show The Bitcoin" on Wednesdays, that's weekly.

GOLDSTEIN: We sit in Bruce Wagner's office where he has two computers. He has me go to this website mybitcoin to set up an account. But when I go there it shows an enormous account balance. It turns out the person who sat there before me forgot to log out.

WAGNER: Someone else was using that computer.

GOLDSTEIN: So whoever this person is has a lot of bitcoins.

KESTENBAUM: Twenty five thousand bitcoins, worth $426,000 dollars.

WAGNER: Yeah.

KESTENBAUM: Bruce Wagner said that money was not his. He wouldn't say how many bitcoins he has, but he clearly feels like they're a good investment. Last year these things were worth pennies.

GOLDSTEIN: I signed up for an account at mybitcoin. All I had to do was create a username and password. I didn't have to provide my name or any other personal information. Then I gave Bruce $40 in cash, and he looked up the exchange rate.

WAGNER: That comes out, my calculator, to 2.352941176. You might wonder why we go that many decimal places. And the reason is because we expect the bitcoin, one day, could be worth $100,000 a bitcoin. So those decimal places will matter in the future. Now watch this. I hit send payment, and now hit view balance and see if you see it there.

GOLDSTEIN: Oh there it is. My account balance is 2.35294117 bitcoins.

GOLDSTEIN: We had our bitcoins. But before we used them, we had an important question. Are they legal? Can you just, create and use some new currency?

KESTENBAUM: We called Ronald Mann, at Columbia Law School. And he said, it is legal - for now. If it turns out bitcoins are used mostly for illegal stuff, the government could shut the whole thing down.

RONALD MANN: If you put something out on the internet as a payment system, what you have to observe as a regulator, is what are the things that it's useful for. OK? And if its main attraction is that it's wholly anonymous that's not something that ordinary consumers care about. The main people that are really excited about a wholly anonymous payment system are people that are violating the law.

GOLDSTEIN: And there is this thing called the Stamp Payments Act, which prohibits the creation of private money.

MANN: Now the statute's very old, it hasn't been applied or interpreted by a court in more than 100 years, so what it would mean in the modern context is very hard to say.

GOLDSTEIN: But Ronald Mann said bitcoin faces a much more basic challenge. For it to take off, a critical mass of people has to prefer using bitcoin to using dollars.

MANN: That's why I see its future as a real currency as being very limited.

GOLDSTEIN: I mean what do you think bitcoin will be like in, I don't know, five years or ten years?

MANN: Oh, I think it won't exist.

KESTENBAUM: Won't exist. In which case, early adopters like Bruce Wagner could find their bitcoins one day worth nothing.

GOLDSTEIN: We used our bitcoins to buy lunch, which you can do in Midtown Manhattan at Mezze Grill. There's even a sign in the window.

Bitcoin accepted here.

KESTENBAUM: We got smoothies, Jacob, you got the falafel platter. I got the chicken platter.

Unidentified Man: Rice pilaf or bulgur wheat?

KESTENBAUM: Bulgur wheat, please.

Man: Bulgur wheat.

GOLDSTEIN: At the cash register, it took me a few minutes to log in on my iPhone and send my bitcoins to the restaurant. But eventually it worked.

KESTENBAUM: The owner says he gets a handful of people paying in bitcoins every day. I'm David Kestenbaum.

GOLDSTEIN: And I'm Jacob Goldstein, NPR News.

(SOUNDBITE OF MUSIC)

MONTAGNE: OK, so after our reporters bought their lunch, mybitcoin - the online bank they used - was robbed and had to shut down. Bruce Wagner, who hosts the online show about bitcoin, says he lost tens of thousands of dollars worth of bitcoin.

(SOUNDBITE OF MUSIC) Transcript provided by NPR, Copyright NPR.

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