You can’t hold it, fold it or find it hidden in your couch cushions.
But virtual money such as Bitcoin and other cryptocurriences is being used more and more often to make purchases on the Internet — accepted by companies such as Microsoft, Expedia, Overstock and PayPal.
And now, a new Des Moines company is jumping into a field that reaps as much controversy as it does praise.
Leverage Holdings, a startup working downtown, is developing a mobile application to make transactions between Bitcoin holders more secure. In the process, the startup’s team hopes to install Iowa’s first Bitcoin ATM, allowing residents to buy the cryptocurrency using cash.
Leverage’s effort is an attempt to address one of the chief concerns surrounding Bitcoin and other cryptocurrencies: Can users rely upon it as a dependable form of currency, without fear that their investment will be lost?
The startup’s goal is to create a mobile application that would essentially create an escrow agreement between the buyer and seller. No payment would be exchanged until both sides meet certain conditions.
“(Currently) it’s just blind faith that you’re sending from you to me, me to you,” said Taylor Webber, Leverage’s senior developer. “That third party that can potentially be there is what we’re trying to do, to provide that security for a small minimal fee.”
Is it safe?
Leverage’s team is banking its venture on Bitcoin, a type of cryptocurrency, or virtual money, that is unregulated by the government or traditional banks.
Such digital currencies have opened up a new realm of innovation for payments, catching the attention of those wanting to transfer money faster than more traditional online payment systems.
Cryptocurrencies have attracted millions of followers, with some users attracted to the payment system because it is largely untouched by outside regulation. Others view bitcoins as another way to bypass traditional banking and payment systems, likening it to Apple Pay or Des Moines’s own Dwolla.
As they gain acceptance, they’re helping reshape commerce on the Internet.
“They’re interesting, but, as with a lot of these technologies, what they tend to do is force a change in the traditional technologies,” said Doug Jacobson, an Iowa State University professor of electrical and computer engineering. “We saw this with peer-to-peer in the music-sharing world. It forced the recording industry to change their model from albums to microtransactions for music.”
But cryptocurriencies have also opened up new doors for illicit activities and the loss of millions of dollars through hacking, computer failure and rapidly fluctuating currency values.
While Bitcoin users can hold their currency in digital wallets online or in “cold-storage” on hard drives disconnected from the Internet, those options leave them susceptible to hacks or hardware crashes — and once that virtual money disappears, there’s no way to get it back.
“If you have currency and you put it in your bed, under your mattress, and the house burns down, your currency goes away,” said Brian Mennecke, an ISU associate professor of information systems. “It’s the same sort of thing with cryptocurrency. If you have a hard drive and your hard drive crashes, it’s still gone.”
Losses also can occur when bitcoin-related companies go under.
For example, when Japanese Bitcoin exchange Mt. Gox filed for bankruptcy early last year, hundreds of millions of dollars’ worth of bitcoins evaporated with it, the Associated Press reported.
Federal authorities got involved, seizing millions from Mt. Gox’s U.S. subsidiaries. The case also snagged Dwolla when the U.S. government halted Dwolla transfers to the Japanese exchange.
The value of Bitcoin has also seen serious volatility.
Unlike cash, Bitcoin is traded more like an asset or commodity, such as gold, and its value sways as users trade in or buy more of the coins.
“There are people who are holding bitcoins almost like playing in the stock market,” Jacobson said. “Anytime you’re in a market where there’s speculation, then there’s going to be fluctuation.”
In the past week, the value of one bitcoin has equaled about $230. A year ago it was closer to $760, with a high of about $1,000 per coin in late 2013.
“If someone moves into cryptocurrencies, they better know what they are doing,” Mennecke said.
The Internal Revenue Service has said it considers virtual currencies as property for tax purposes.
Mining for money
The adoption of cryptocurrencies has prompted security concerns as well.
To acquire bitcoins without buying them from other users, individuals have to mine for the virtual coins, which first popped up in 2009 when the algorithm that creates the coins started. That protocol restricts the amount of bitcoins that exist to 21 million. Mining them requires setting up machines with plenty of computing power to solve complex mathematical problems needed to find the yet unclaimed coins.
Jacobson said that can cause cybersecurity problems for large institutions. Last April, for example, a hacker compromised Iowa State University servers in an attempt to generate enough computing power to mine bitcoins.
The hack also exposed the Social Security numbers of about 30,000 former students.
However, those kinds of mining security hacks aren’t really aimed at individual personal computers, Jacobson said.
“The average individual sitting at home doesn’t have to worry about it as much anymore,” Jacobson said.
Bitcoins are also far from becoming the standard for everyday shopping. Few retailers have signed on to accept the digital currency, unlike those who accept PayPal or ApplePay.
But the currency has seen traction. Overstock.com, the online retailer, and Microsoft are among companies that have started accepting bitcoins as payment.
‘The Wild Wild West’
Leverage’s team of four is trying to build off the crytocurrency’s strengths and shore up its weaknesses, the startup’s founders said.
David Miller, a former Des Moines Area Community College instructor, and Ryan Twedt, a local marketing professional, co-founded Leverage. Michael Mikkelson, Leverage’s project manager, and Webber joined soon after.
Last year, Miller and the others moved into one of the fourth-floor offices owned by Gravitate, the Des Moines co-working space. The office is now filled with computers, some monitoring Bitcoin’s value, while others whirr away mining for unclaimed digital coins.
The startup had planned to install a machine, similar to an ATM, on the first floor of the Midland Building. That would have allowed local users to buy bitcoins at a physical location.
“They’re in Kansas City, they’re in Minneapolis, they’re in Omaha,” Miller said. “There’s a void here.”
On Tuesday, those plans changed. Gravitate founder Geoff Wood told The Des Moines Register the machine was not the right fit for the building, declining to elaborate.
Miller later said Leverage is rethinking what to do with the ATM.
Regardless, Leverage’s team still sees opportunity in the virtual currency, saying it is fostering new innovations and technology.
“It’s the Wild Wild West,” Twedt said.
What it means
CRYPTOCURRENCY: Digital or virtual currency that is exchanged, transferred and used to purchase items online. It has no printed form, unlike dollars, euros, rubles, pesos and yuan.
BITCOIN: The most common cryptocurrency and a type of payment network. It is unregulated by government authorities and has no banks.
More about Bitcoin
BITCOIN VALUE: Bitcoin’s value has been highly volatile, because it is traded more like a stock or asset, such as gold. When it began in 2009, its value was small, but eventually rose to more than $1,000 before plummeting. Currently, one bitcoin is worth about $228.
WHY IT’S GOOD: Supporters of Bitcoin and other cryptocurrencies tout that the payment methods are untouched by government or businesses, and users may largely remain anonymous.
WHY IT’S BAD: Since the currencies are virtual, they are susceptible to hackers, malware and hardware crashes that can wipe out a user’s entire virtual wallet. Once virtual coins are lost, they can’t be retrieved.
Bitcoin VS. bitcoin: There’s a difference between Bitcoin (which is capitalized) and bitcoin (which is not). The capitalized Bitcoin is a specific type of digital currency, different from others such as Litecoin and Dogecoin. The lower-case bitcoin is the individual unit of currency.
(Correction: A prior version of this article incorrectly stated when the Bitcoin protocol first came into existence.)