Bitcoin: Be prepared for the rise of digital currency, adopters say

Each day, Lorne Lantz buys his lunch with bitcoin. Some say the burgeoning digital currency has no real value but his sandwiches say otherwise.

Bitcoins and other "cryptocurrency" have started to rise from the fringes of the internet to the cusp of mainstream use a remarkable breakthrough for a currency which made its online debut only four years ago.

When they first began moving online, bitcoins could buy you almost nothing. Now, there's almost nothing they can't buy. From songs to survival gear, cars to consumer goods, hard currency to hard drugs retailers are rushing to adopt the virtual currency for all its perks. Bitcoin ATMs are popping up in major cities like Toronto, Ottawa and Vancouver.

• READ MORE: Why are Canadians buying Bitcoin?

It solves so many big problems in the financial industry, said Lantz, a recent DeGroote School of Business graduate who is now an engineer working on financial startups in Silicon Valley. Were moving towards everything being done digitally.

Advocates describe bitcoin as the foundation of an almost utopian economy: one with no borders, no change fees, no closing hours, and no one to dictate what you can and can't do with your money.

The currencys detractors say bitcoin in and of itself has no value, that it just functionally meets certain payment and monetary needs, which has attracted investors who then give bitcoin real financial value through speculation. The Conservative government also singled out the seedier side of the currency in its 2014 federal budget this week, pledging to ensure it cant be used to launder money or finance terrorism.

But early adopters in the Hamilton area say digital currency is just going to keep growing.

Bitcoin: moves quicker, costs less to move, easy to track: user

I knew it was going to be huge, Lantz told CBC Hamilton. The McMaster grad really became invested in bitcoin in the summer of 2012.

Cryptocurrencys benefits are many, Lantz says. Take, for instance, the traditional process of sending money overseas. Oftentimes transferring funds can take upwards of five days, it can be expensive, and you dont know exactly where your cash is in terms of the conversion process at any given point.

Bitcoin, by contrast, moves much quicker, costs less to move, and you can track it every step of the way.

Cryptocurrency is also extremely valuable in places like India and Africa, where the mistrust of banks and governments make people leery of intense oversight and favour carrying cash, Lantz says.

• READ MORE: Bitcoin virtual currency hitting the mainstream

My guess is countries in Asia will adopt it much faster than the rest of the world, he said. Bitcoin will have a big future everything just depends on adoption.

That means more clarity on the regulations and rules surrounding virtual currencies, he says because until that happens, no large banks will work with a bitcoin company.

Right now, bitcoin is more advantageous for merchants than consumers, Lantz says. Fees are almost nonexistent for businesses when compared to things like credit cards. The same cant be said for consumers, however, who miss out on things like travel points on their credit cards.

Incentives will help with implementation on the consumer level, he says. Its a matter of figuring out the magic formula to get consumers to adopt it.

Okay, so how does it work?

Bitcoins mechanics were first outlined in a research paper by Satoshi Nakamoto which is considered to likely be a pseudonym. The coins themselves made their online debut in 2009.

How coins are created, how transactions are authenticated and how the whole system manages to power forward with no central bank, no financial regulator and a user base of wily computer users all comes down to computing power and technical wizardry.

Bitcoin is generated by thousands of so-called miners. These are people who, working individually or in groups called "mining pools," use powerful computer components to run software that solves a series of mathematical puzzles. Each time the miner solves the puzzle, they receive bitcoins, which they can trade for currency or otherwise put into circulation.

So why should they get money for doing this? The argument is that these users essentially become a decentralized version of the Bank of Canada. They invest their own time and resources like electricity and computing power and in turn, the bitcoin network is supplied with the processing power needed to maintain a transparent, running tally of all transactions. A similar process applies to all alternative digital currency.

The tally, or block chain is one of the most important ways in which the system prevents fraud, and the miners are rewarded for supporting the system.

As of Friday afternoon, a bitcoin is worth $720 Cdn.

This video explains the basics of bitcoin:

You can use it to buy cocaine

One of the most prominent destinations for bitcoin remains Silk Road, a black market website where drug dealers advertise in a consumer-friendly atmosphere reminiscent of Amazon or eBay complete with a shopping cart icon, a five-point rating system and user reviews. The site uses Tor, an online anonymity network, to mask the location of its servers, while bitcoin payments ensure there's no paper trail.

That sort of illicit candyland has made the Canadian government nervous enough to mention virtual currency in its budget documents.

The move is part of a sweep of measures aiming to sever possible links between domestic organizations, such as charities, sports groups and online casinos, and organized crime or terror groups.

It is important to continually improve Canadas regime to address emerging risks, including virtual currencies, such as bitcoin, that threaten Canadas international leadership in the fight against money laundering and terrorist financing, the budget document says.

The plan is to change laws and regulations so crime syndicates and terror groups cant make use of bitcoin or online casinos to keep their illegal operations running under the radar.

Senior officials said these measures werent brought in because of a specific threat or incident, but rather to ensure the government is prepared for a potential problem. The changes came out of a finance committee report on money laundering.

Silk Road has its own problems, however according to a BBC report, the website has been hacked, resulting in a $2.7 million withdrawal worth of bitcoin.

"Our initial investigations indicate that a vendor exploited a recently discovered vulnerability in the bitcoin protocol known as 'transaction malleability' to repeatedly withdraw coins from our system until it was completely empty," the administrator of the site, known as Defcon, said. That kind of breach shows that bitcoin's security isn't airtight.

Building a community

But the community springing up around burgeoning cryptocurrencies is the best part of this whole concept, says Jeffrey Brittain, who is hedging his bets on Dogecoin, currently the fourth most valuable cryptocurrency online and is named after the popular Shiba Inu doge internet meme.

Most of these coins are only as strong as the community behind them, said Brittain, a Hamilton resident working with the Salvation Army. Most bitcoin that has been mined so far is in the pockets of ultra elite users with high-end computers. Dogecoin, by contrast, is a much more open and inclusive community. And the community aspect is whats driving this, he said.

Dogecoin is also worth substantially less. As of Friday morning, it was worth 0.00166 Cdn but Dogecoin is also significantly easier to come across and amass. Brittain owns about 124,000 Dogecoins, which is worth over $200 Cdn. He says the value of the coin has gone up about $100 in the last week.

Virtual currency can fluctuate wildly in value and seem unstable but then so do some of its more traditional counterparts. Some say bitcoin got new momentum after the banking crisis in Cyprus pushed depositors there to find creative ways to move money.

Its basically a decentralized banking system. Its a wild market, Brittain said.

Its probably more volatile but that doesnt mean its not a real currency.