The Bitcoin Economy

While you may have a few bucks in your wallet, the reality is most of our daily financial transactions are virtual, from swiping a debit card at the gas pump to using a smartphone app to pay for that morning coffee. The common thread is you’re using U.S. dollars.  But a small percentage of people are using bitcoin, a decentralized digital currency created in 2009 by an IT developer known by the alias Satoshi Nakamoto that operates with no central authority or bank. New Hampshire has gained some notoriety in the bitcoin economy thanks to Lamassu Bitcoin Ventures, a Manchester firm that has built and sold more than 220 bitcoin ATMs worldwide. Their ATMs take dollars and convert them to bitcoin, or BTC, which are then sent to a mobile bitcoin wallet app.

You’ve likely heard of bitcoin, but like many people, don’t know what it actually is. Bitcoins are a digital currency that can be bought and sold on more than 50 exchanges worldwide. There are currently 12.6 million bitcoins in circulation, though that number keeps rising. The system was set up to allow a maximum number of 21 million bitcoins to be created. Bitcoins are created by a process called mining. Special software and sometimes hardware downloaded to a user’s computer uses computing power to run mathematical algorithms whereby people compete to “win” or earn bitcoins by solving complex math problems. Most people, though, buy bitcoins at an online exchange or through a bitcoin ATM. Proponents of bitcoin like that it is anonymous by design, meaning payments between bitcoin wallets carry no identifying information, and that it is not controlled by any government or bank. The value of the bitcoin has varied greatly since its inception (and even from month to month), but the three largest U.S. dollar exchanges were all trading just below $500 per bitcoin in mid-May. One year ago a bitcoin was worth $92.55.

In NH, about two dozen businesses accept bitcoin as payment including two lawyer’s offices (one in Manchester and one in Concord), a gas station in Twin Mountain, a Newmarket café, a Manchester house painter, a rock climbing gym as well as the NH gubernatorial campaign of Andrew Hemingway, among others. Most of these businesses accept bitcoins through Bitpay, a third party service like Square that takes bitcoin payment from the buyer and sends the equivalent in U.S. dollars to the seller.

The Bitcoin ATM

New Hampshire is considered a hub of the bitcoin economy, in large part due to Zach and Josh Harvey, brothers and co-founders of Lamassu Bitcoin Ventures, one of the first and largest companies to sell bitcoin ATMs. The Harveys moved to NH because of the Free State Project, a movement to attract 20,000 people to NH who believe in limited government intervention in people’s lives. They combined their philosophy of limited government with backgrounds in political science and computer science to create Lamassu, which has about $1.1 million in revenue through bitcoin ATM sales since last October (70 percent of that revenue is in bitcoin). ATMs cost about $6,500 a piece and buyers pay no user fees back to Lamassu, a key difference from other bitcoin ATM companies.

“Bitcoin was definitely invented as an ideology,” says Zach Harvey. “The reason it was invented is because there was no free market for currency. What’s special about our machines in the bitcoin world is it’s something you can see and touch. It’s not just a concept. We don’t want to be just bitcoin ATMs. We want to be bitcoin portals.”

Lamassu’s machines are in dozens of countries, though the largest number are in Canada. Buyers are mostly individuals and businesses who place the ATMs in high traffic areas, though he says no big players in the bank or ATM business have bought them yet. As of now, none are in NH but one has been ordered. Whenever there is a conference about bitcoin, the Harveys are invited. They have been featured in many major media outlets including Wired.com, CNET, Forbes, Bloomberg Business, The New York Times and The New Yorker. The business pays most its bills in bitcoin, and its business structure is as decentralized as the bitcoin currency. Lamassu is based in Manchester but incorporated in the British Virgin Islands. The Harvey brothers are the only employees; everyone else is a contractor, and most are paid in bitcoin. The graphic designers are in Germany and the machines are made in Portugal. The Harveys’ self-funded the business and currently take only what they need to live, putting the rest back in the business.

Securing a Digital Currency

Bitcoin has received a flurry of bad press, mostly concerning security issues and ties to the black market economy. The largest bitcoin exchange, Mt. Gox, filed for bankruptcy earlier this year when $500 million in bitcoins was stolen through suspected hacking into the exchange. Bitcoin was also featured in stories about the Silk Road, a virtual black market for illicit drugs where all sales were in bitcoin. The site used Tor, a program that hides your physical location and IP address. When the FBI shut down the site last fall, Silk Road had amassed $1.2 billion in sales in two and a half years.

In the legal marketplace, bitcoin is different from dollars and other currencies in that it is not backed by the Federal Deposit Insurance Corporation, but it is also not tracked. Money held in bitcoin wallet apps is exchanged using a public number as the only identification and cannot be traced to an individual. At bitcoin ATMs, people scan a QR code to transfer money from the machine to their digital wallet. Harvey says the company does not have any information about users except their bitcoin wallet address, which Lamassu cannot use to access the wallet in any way. “It’s a complete new financial experiment run by no one,” Harvey says of why he likes it so much.

It may be run by no one, but it is being watched. This year the Internal Revenue Service (IRS) added a new rule requiring people to track bitcoin purchases and the dollar value of bitcoin at the time of purchase. The IRS now treats bitcoin as property, and those using the currency will be charged capital gains just like stock investors.

Doing Business in Bitcoin

According to Coinbase, an online bitcoin wallet app, there are more than 1.1 million consumer bitcoin wallets and 28,000 merchant bitcoin wallets. In April, there were about 50,000 bitcoin transactions daily worldwide. That is miniscule compared to the billions of daily credit card transactions, according to creditcards.com. Still, the digital currency is gaining attention.

Many NH businesses have started accepting bitcoin in the last year. One of those is BD Ross Law Office in Manchester. Attorney Brandon Ross used to think of bitcoin as “funny money” and refused to take it, but as more people asked, he changed his mind and set up a Bitpay account. That resulted in landing about a half-dozen new clients this year who pay in bitcoin, among them Lamassu. “It’s not a huge part of my business, but it’s enough I really can’t ignore it,” says Ross. “I’d be leaving money on the table, and I don’t want that.” Using Bitpay, the money is transferred into dollars before it reaches Ross. He pays a 1 percent fee to Bitpay to accept bitcoin, less he says, than taking a credit card. Ross stresses he doesn't take bitcoin payments upfront but rather after services are rendered to abide by regulations meant to address credit card payments to attorneys. “The real value in bitcoin and other currency is not as a movement. It’s going to be as a payment mechanism.”

Nathanial Sliffe agrees. Sliffe owns Nate’s Great Paint in Manchester, a residential house painting business. Sliffe is not part of the Free State Project but considers himself “liberty minded” and prefers limited government. So when friends asked him to accept bitcoin, he opened his own bitcoin wallet and has so far accepted payment from one customer. He still has the bitcoin, though he used some of it for a purchase on overstock.com. Indirectly, people can purchase many more things by bitcoin. Gyft.com lets users pay with bitcoin for gift cards to hundreds of major retailers including amazon.com, Walmart, Sears, Target and Applebees.

The digital currency has even entered politics. New Hampshire GOP gubernatorial candidate Andrew Hemingway accepts campaign donations in bitcoin through Block Chain, though he limits it to the equivalent of $5,000 (below the $7,000 individual state limit). He says a number of people have donated in bitcoin and reached this limit. Those donations are not anonymous, and can’t be by law, but the bitcoin wallet still retains its anonymity in providing no information that can be tracked to an individual, as bitcoin wallets transfer a public number only with the money, and not a credit or bank account number or address and phone number as other payments do. “I would say accepting it shows I represent getting the government out of people’s lives,” he says. An entrepreneur with a technology background, Hemingway sees bitcoin as more than a way to increase campaign donations. He is campaigning in part on a platform to allow people to pay for state services with bitcoin.