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SALT LAKE CITY — Mike Caldwell is trying to introduce virtual currency — bitcoins — into the real world.
"When I would talk to people about the idea of virtual currency, it was too abstract," the Salt Lake software engineer said. "The idea that I wanted to convey … is that a bitcoin is something that you can hold in your hand."
Bitcoins were unleashed into the world in 2008 by a mysterious developer or developers known as Satoshi Nakamoto. Nakamoto posted a white paper in 2008 and the next year released the software establishing the Bitcoin system.
A bitcoin is actually a long string of numbers and letters that can be sent over the internet without going through a bank.
To promote the idea, Caldwell paid a car wash token company to produce physical bitcoins, into which he embeds those alphanumeric keys and sells as Casascius coins.
"Casascius coins are a functional representation of a bitcoin," he said. "What they are is literally a small paper bitcoin wallet." A bitcoin wallet is something you use to keep your bitcoin keys secure.
They've become so popular, particularly among collectors, that the value of circulating Casascius bitcoins exceeds $250,000. Images of his coins are often accompany national articles about bitcoins.
Caldwell likes the bitcoin idea, in part, because there's no central monetary authority.
"Instead, it's people trusting in a computer algorithm to manage the supply of money and to manage transactions and to manage accounting," he explained. "The whole idea isn't as much to replace paper money and it isn't to replace coins — it's to replace trust in flawed human institutions."
Instead of banks and the Federal Reserve, there are what are called miners, computers like the ones owned by Mike Brennan.
The Salt Lake college student sold his Lexus and cashed in his life savings to buy a rack of nine machines that run 24-7. He says he pays more that $500 a month for electricity.
"I don't recommend anyone do this," he laughs, "because it is high risk." Miners keep track of all virtual currency transactions, making sure no one double-spends or counterfeits bitcoins. They work as part of a vast network eight times more powerful than the world's top 500 supercomputers combined.
In exchange for all the computer work, miners earn bitcoins. This is how new money enters the bitcoin economy. (Because bitcoin mining, over time, requires more and more computer power, Brennan recently switched to mining Litecoins, another virtual currency.)
Despite its growing popularity, bitcoins haven't exactly gone mainstream. Online, you can purchase a growing variety of services and products, including, due to the anonymous nature of transactions, illicit drugs, but you can't go out for lunch and buy a pulled-pork sandwich.
Unless you're at Bubba's Barbecue in Salt Lake City. Co-owner Tom Westlund began accepting bitcoins late last year. He became interested because decades ago he helped market an early smartcard payment product.
"We conceived of digital currencies being exchanged, but the infrastructure wasn't there," Westlund said.
- Regulators worry about bitcoins as a vehicle for money laundering. Earlier this year federal prosecutors shut down the Liberty Reserve currency service, which, they say, had laundered $6 billion using another virtual currency.
- Silk Road, the online bitcoin clearinghouse for illegal drugs, has been so successful, other competitors are now entering the market.
- There have been numerous bitcoin hacks and heists. In 2011, using counterfeit bitcoins, someone drove the price of a bitcoin from $17.50 down to almost nothing in just a few minutes.
- The price of bitcoins has had plenty of ups and downs.
He said at first at Bubba's, he would get one or two bitcoin-paying customers a week, but after the value of the currency began to rise, the bitcoins stopped coming.
"It became more of an investment to people," he said. "They held onto ‘em thinking they're gonna ride the wave."
For instance, Wil Bown, a friend, the first bitcoin customer, paid .6 bitcoins for a sandwich. At the time, a bitcoin was worth ten dollars. The sandwich cost Bown six dollars.
When we spoke to Bown recently, bitcoins were valued at more than 129 dollars. At that rate, that sandwich cost 77 dollars. Had he saved his bitcoins, we could have made 123 dollars.
Because of bitcoins' volatility, there are fewer bitcoin customers and more bitcoin speculators.
In 2011, Mike Caldwell bought $20,000 of bitcoins and sold them over the next few months, he said, for a return of more than 1,000 percent. He turned $20,000 into more than $200,000.
"For something I held only a few months," Caldwell said, "I would say that's a pretty fantastic return."
Later that year, however, the bitcoin crashed, dropping from about 27 dollars to less than three dollars. But the bitcoin endures.
"The long game is with bitcoin," Caldwell said. "It'll be volatile. Maybe it'll be volatile for years and we don't know that, but the fundamental society change that bitcoin is about to bring about is in the long game. This isn't Paypal 2.0. This is like Federal Reserve 2.0."