In October last year, when he first heard about the digital currency bitcoins, 23-year-old Colombian student Pedro Delgado knew he had to get involved in some way.
“To me the idea seemed really innovative and super interesting. I said to a friend from university: ‘let’s try to do something with this’, because for me it seemed like this was the moment,” says Delgado.
They began looking for an avenue to use bitcoins and decided to set up a kind of currency exchange in Buenos Aires, buying and selling the digital currency in exchange for Argentine pesos or US dollars.
Delgado’s timing was fortuitous, buying his first bitcoins when they were valued at around US$170 three months ago. The price would peak at over US$1,147 in early December before dropping to US$694 a few days later. Today the price of one bitcoin (BTC) is around US$840.
The volatile price fluctuations demonstrate there is ‘real’ money behind Bitcoin, which first appeared in 2009, just one of the reasons more of the world have started paying attention to it. Once ridiculed as the currency of hackers and called “characteristic of a Ponzi scheme” by the European Central Bank, in 2013 bitcoin came into the mainstream.
Among early adopters of Bitcoin there is an unbridled enthusiasm and conviction that it could potentially change the world due to its decentralised structure. In Argentina, which has the largest community of bitcoin users in Latin America, the currency poses possible solutions to problems such as double-digit inflation, a devaluing peso, and strict currency restrictions, but is not without risk.
What are Bitcoins?
Bitcoin is the first digital currency (other types known as altcoins have popped up since), it is not controlled by a central body, and is traded peer-to-peer over the internet. Bitcoins are divisible by eight decimal places, meaning you can buy a cup of coffee for around 0.0036 BTC.
‘Miners’ use software programs that solve mathematical problems to mint bitcoins. There is a maximum of 21 million coins that will be created, the last expected to be mined in 2140. They are mined at a diminishing rate, meaning the algorithms become harder to solve and fewer bitcoins come into the market. Currently, a miner is rewarded with 25 bitcoins roughly every 10 minutes and 57% of all bitcoins have been mined. It is expected that by 2017, 75% will be in the market.
The other way to obtain bitcoins is to buy them: the first step is to set up a digital wallet to store the bitcoins and then find someone, like Pedro Delgado, to pay hard cash to transfer a bitcoin into your wallet. Tourists and locals alike can get in touch with Delgado or any trader using the website localbitcoins.com. Delgado said he normally meets with buyers, has a short friendly chat and transfers the bitcoins to or from his smartphone to theirs in exchange for cash. The whole process takes around 10 minutes.
Bitcoin exchanges have also been set up where units can be bought or sold on the open market at the going average rate. And, if you happen to be in Canada, you can buy bitcoins using a Bitcoin ATM. Every time a transaction is made it is registered on the Block Chain, a public ledger which doesn’t reveal the identity of traders but ensures each bitcoin can only be traded once.
It is unknown who is behind the pseudonym Satoshi Nakamoto, the creator of Bitcoin. Satoshi, an individual or a group, published an academic paper in 2008 outlining Bitcoin and released a version of the software in 2009, creating the Bitcoin network and first bitcoins. Contact between Nakamoto and the community faded in 2010 – the open source software means the network is not controlled by anyone, rather the entire community of bitcoiners. His or her identity remains a mystery but one could assume Satoshi is living very comfortably if he was busy mining in the early days of his creation.
The Bitcoin Community in Argentina
It is estimated that between 5,000 and 6,000 Argentines use bitcoins, making it the largest community in Latin America. According to the Fundación Bitcoin Argentina, around 50 to 60 local businesses accept the currency, and there are several hundred bitcoin miners.
Rodolfo Andragnes, vice-president of Fundación Bitcoin Argentina, says that the popularity of Bitcoin can be explained in part by the country’s economic past and present.
“Argentina is very attentive to all these kinds of things. As a country we, all Argentines, have suffered financial crises many times… They see in Bitcoin an opportunity to avoid the problems that we suffer here,” says Andragnes.
In December, Belgium investment advisor Tuur Demeester, who is closely connected to the Bitcoin scene in Argentina, fired up the audience at the first Latin American Bitcoin Conference in Buenos Aires declaring: “The true meaning of this Bitcoin revolution is actually that Bitcoin marks the end of monetary apartheid. Bitcoin is the end of financial discrimination and segregation based on nationality and political privilege.”
One advantage Bitcoin offers Argentina is that, due to the finite number of units available, it is a currency that will not inflate. Also, there are fewer regulations when it comes to buying and selling currency as the money does not pass through a central body.
“Argentines are very used to saving money under the mattress because many buy dollars and save in the dollar. There is a culture more prone to this situation,” explains Andragnes.
Last week the peso experienced its sharpest devaluation since 2002 followed by the easing of restrictions for residents wanting to buy dollars. Andragnes says it is too early to tell what impact these changes will have on the Bitcoin market in Argentina; in recent years the currency has been traded at the unofficial ‘blue dollar rate’ as Argentines have been unable to buy dollars from banks.
“To be honest, today I don’t know what kind of impact this will have on bitcoins but I think that Bitcoin is a great solution for most Argentines. People still don’t believe in pesos and are still moving away from them and changing them into dollars or another kind of currency,” says Andragnes.
According to Fundación Bitcoin Argentina, bitcoins are a completely legal and valid form of currency in the country, though so far the government has made no formal comment. Andragnes expects that this will change this year and the foundation is working to build a positive regulatory future for Bitcoin in Argentina.
Diego Gutierrez Zaldivar, President of Fundación Bitcoin Argentina, told the Latin American Bitcoin Conference that the little contact they have had with the government has been positive. “They see Bitcoin as innovation and something that can really improve people’s lives, not as the enemy… I don’t think we will have a problem,” he said.
Bitcoin and Governments
Sergio Lerner, a Bitcoin authority, cryptographer, and computer security specialist from Argentina, has reported on several of Bitcoin’s vulnerabilities. Lerner, as well as the Fundación Bitcoin Argentina, doesn’t recommend anyone convert their life savings to bitcoins.
“I wouldn’t recommend that anyone invest all their savings in Bitcoins or any virtual currency… There are chapters in the Bitcoin story that haven’t been written yet – the storyline depends on governments, businesses, developers, and the strength of the Bitcoin community,” Lerner says.
While governments could prohibit bitcoins, forcing the network underground, its peer-to-peer structure would make it near impossible to completely shut down. However, the virtual currency can still be affected by political or regulatory developments: the price of Bitcoin suffered a major blow in December when China, a country with one of the largest communities of Bitcoin users in the world, ruled that Chinese financial institutions could not trade in bitcoins. The price of the currency has recovered and stabilised so far in 2014.
Lerner believes it unlikely that governments would choose this path. He cites the US Senate hearing in November where the general attitude towards Bitcoin was one of tolerance and acceptance of the innovations in the financial sector, “which was classified by the [Bitcoin] community as a Bitcoin Lovefest.”
Furthermore, the FBI has recently come into possession of nearly 30,000 bitcoins classified as the proceeds of crime after the closure of Silk Road, an online marketplace that used bitcoins to sell drugs. A court in the US has determined the coins, valued at almost US$25m and four times their value when they were seized in October, can be sold. As yet, how they will be sold is unclear, but a US government agency trading in the currency would be a clear endorsement.
The Silk Road website has been a source of bad press for Bitcoin, most recently with the arrests of two operators of Bitcoin exchanges in the US, charged with money laundering. Advocates defend Bitcoin arguing that by far the majority of drugs deals globally are conducted using US dollars. In fact, most criticisms of Bitcoin are defended using the logic that the same could be said for traditional forms of currency.
For some, Bitcoin security is a far more immediate concern than government intervention. Lerner explains that bitcoins allow the user to become their own bank, and with that freedom comes risks to security and information. Bitcoins can be extorted or stolen by hackers or be accidentally deleted or lost, like the British man who threw away a hard drive containing 7,500 bitcoins. Lerner raises the novel idea that although bitcoins do not need banks to be traded, their vaults and security procedures may become a useful place for the safekeeping of hard drives of bitcoins.
Another factor that could impact on the price of Bitcoin comes in the form of ‘second generation’ digital currencies such as QixCoin, Ethereum, Ripple, or Dogecoin.
A Platform for Innovation
The growing number of Bitcoiners in Argentina has created favourable conditions for start-up companies operating in Latin America.
“Bitcoin is, for me and for many others, not only a real and tangible financial innovation but also a release of a torrent of ideas about the future of the world. Further, socially, it is a powerful, transformative, and viral idea,” Lerner says.
Lerner’s fascination with Bitcoin came from years of working in information security, research in to peer-to-peer systems, and “an eternal interest in resolving everyday problems with innovation and changing paradigms, and a profound rejection of the way some governments enforce their monetary policies.”
Lerner is the creator of FirmCoin, a physical bitcoin token that operates in the same way a bank note does. Bitcoins, or other cryptocurrencies, can be loaded onto the reusable card, which can be used to make and accept payments offline using Near Field Communication, overcoming the problem of poor internet access that may prevent digital transactions. FirmCoins are the evolution of a bank note for Lerner, they include counterfeit prevention and protection against double-spending.
Another Argentine pioneering business in bitcoins is Martín Fernandez, founder of BTCTrips, which allows people to buy international flights with bitcoins, offering travel to India, Australia or Iceland from BTC3.
Bitcoins in 2014
Globally there is a loyal community of ‘Bitcoiners’ promoting an alternative to traditional currencies and a new way to think about money. Entire businesses have already begun paying wages and overheads solely with bitcoins and there are plans to launch Bitcoin satellites to serve as a nodes for the bitcoin network, keeping the system running if it ever came under attack.
It is a complicated universe that divides opinion, concludes Lerner. “Everyone must come to their own conclusions. They must evaluate what their government is doing to protect their savings, and what are the risks and benefits of using a currency without a government.”