People in Silicon Valley and beyond like to say it's not about the money; it's about changing the world. But with Bitcoin, it's about changing the money to change the world.
Dot-com pioneers and fresh-faced 20-somethings alike are founding companies to help transact the virtual currency. A nationwide network has formed for angel investors keen to back such startups, including one in New Hampshire. And the Winklevoss twins — made famous by "The Social Network" film — plan a Bitcoin investment fund.
But what is "virtual currency," anyway? And are those chasing Bitcoin headed for a gold rush, or fool's gold?
Nick Holland, a Javelin Strategy analyst in Boston, is among those who believe math-based currencies like Bitcoin, which enable transactions from one user to another without official oversight or high fees, could upset the centuries-old tradition of paper money — much as user-generated Wikipedia all but replaced the venerable Encyclopaedia Britannica.
Brothers Josh and Zach Harvey of Manchester — who identify themselves as Free Staters — and their partner, Matt Whitlock of Weare, developed the Bitcoin Machine, which made its debut at the Bitcoin 2013 conference in San Jose, Calif., in May. The company operates as Lamassu Bitcoin Ventures.
The machine allows users to insert currency into a bill validator. The machine calculates the value of the currency and displays a QB code (bar codes that mobile devices can read). Customers "read" the QB code with their mobile device, and Bitcoins are deposited into their virtual "wallet" based on the value of Bitcoin per dollar at that moment.
Bitcoin was created in 2008 by a programmer (or group) using the pseudonym Satoshi Nakamoto. Nakamoto envisioned a peer-to-peer computing network of interconnected users that could oversee the creation of a digital currency independent of any central authority, then regulate its trade.
Nakamoto capped the number of bitcoins that could exist at 21 million. And to keep the market from being flooded, Nakamoto set up a system in which new bitcoins can only be minted, or "mined," by solving complex mathematical puzzles.
Once a miner believes he or she has solved one of those puzzles, a message goes out to the entire network. If other users agree with the solution, new bitcoins are added to a public ledger that keeps track of the amount in existence; that number currently stands at just over 11.4 million.
The Nakamoto system varies the difficulty of each puzzle so that, on average, a new block gets mined every 10 minutes, keeping the supply predictable. The successful miner then pockets a bit of the new Bitcoin for his trouble, which he can sell or trade with other users.
The phenomenon was largely restricted to hard-core geeks until last spring's financial crisis in Cyprus. With the Mediterranean nation's government unable to guarantee bank deposits, some investors liquidated their savings into Bitcoin by linking their bank accounts to Bitcoin transfer services.
"That was kind of the catalytic event that pushed Bitcoin into the forefront," Holland said. It also helped create a frenzied run-up in the price, from around $14 per coin to more than $230; as of Friday afternoon it was trading around $95 on the various online exchanges that have sprung up to let users buy and sell the currency.
Bitcoin skeptics, to be sure, abound. California finance officials in June sent the Washington, D.C.-based Bitcoin Foundation a cease-and-desist letter asking if the group was conducting money transfers without a license. Officials with the foundation, which was formed in September, say they're simply in the business of developing certification guidelines for Bitcoin companies.
That such guidelines have yet to be formed reflects one of the chief concerns regarding the technology: Its Wild West atmosphere.
During Bitcoin 2013 — billed as the currency's first major U.S. summit — an organization called Bitcoin Not Bombs urged nonprofits to adopt the virtual payment system, trumpeting that it "cannot be manipulated by any government, bank, organization or individual."
The libertarian aspect meshes with Silicon Valley's hacker ethos. But it also led Homeland Security officials in May to briefly seize some assets of Tokyo-based Mt. Gox, the largest Bitcoin exchange, for not complying with money-laundering laws.
Critics note that transactions in the currency are anonymous, which has enabled the sale of illicit weapons and drugs. And because the coins are stored in online "wallets," there have been reported instances of hackers wiping out a user's holdings.
Many Bitcoin backers concede that adult supervision may be required if it is to gain broader use and trust.
"All these exchanges have realized, 'I have something really valuable here. I'd better follow the regulations,' " said Alex Ferrara, a tech investor with Bessemer Venture Partners in New York. Though he's waiting to bet on any startups in the space, he said: "For Bitcoin, going legit will be a good thing."
Here are just some of the many startups that have arisen to help people use the virtual currency Bitcoin.
• Lamassu (New Hampshire): Has developed an ATM to instantly turn dollar bills into bitcoins.
• BitInstant (New York): Platform for instantaneous Bitcoin transfers.
Bitpay (Atlanta): Lets customers of businesses ranging from software-makers to auto dealerships make payments in Bitcoin, then transfers cash to those merchants.
• Coinbase (San Francisco): Makes a "virtual wallet" that lets users buy bitcoins and pay for goods and services with it.
• CoinLab (Seattle): Backed by Silicon Valley investor Tim Draper. Recently tried teaming with leading Bitcoin exchange Tokyo-based Mt. Gox; the partners, however, are now in court.
• OpenCoin (San Francisco): Cofounded by E-Loan's Chris Larsen, it has created a payment system to transact various currencies, including dollars, Bitcoin and a new alternative, Ripple.
• Tradehill (San Francisco): Runs a Bitcoin exchange that competes with Bitstamp, BTC-E and Mt. Gox, among others.
San Jose Mercury News research