More than 18 million bitcoins are in circulation, but they are unlikely to be jingling in anyone’s pockets. The “coin” was created to serve as a form of virtual currency, and while Bitcoin garners a considerable share of headlines — particularly due to its volatile ups and downs in value — many folks do not have a good handle on what it is and most do not own one.
That is changing. Cryptocurrency availability and use has expanded to the point of facilitating businesses that can benefit from its worldwide, digital nature. Blokpax, LLC, a Columbia-based marketplace for collectables traders, is one such business.
“Crypto in general will change the world the way the internet did,” says Jeff French, founder of Blokpax. “Crypto decentralizes the power away from banks and gives it to the people and allows instant, trustless payments to anyone, anywhere in the world.”
Cryptocurrency’s origin began with a 2008 white paper by Satoshi Nakamoto, “Bitcoin: A Peer-to-Peer Electronic Cash System.” Satoshi Nakamoto could be a pen name for an individual or a group — their exact identity has never been determined.
Satoshi laid out the concept of a currency that would not exist on paper or as stamped metal but as digital code, perhaps a string of 0s and 1s unique to its owner. Bitcoin’s original use was to serve as a prize for members of a computer network who solved complex mathematical problems. Members are referred to as “miners” and are rewarded with bitcoin for confirming digital transactions involving the currency.
“In the beginning, all the people who were doing this believed in the idea there should be a peer-to-peer currency system without government involvement,” says Phil Yanov, a technologist and founder of Tech After Five, which puts on monthly networking events in Columbia, Charleston, Charlotte, and Greenville. He says he dabbles in cryptocurrency. The number of folks like Phil is growing.
A July 2021 survey by researchers at the University of Chicago found that while only 13 percent of Americans purchased or traded cryptocurrency in the prior 12 months, 61 percent of that group said they had started within the previous six months. On the other hand, 62 percent overall indicated they did not understand cryptocurrency enough to invest, with 35 percent citing security concerns.
Cryptocurrency transactions are confirmed using blockchain technology. Blockchain refers to a type of digital database that users can update and share simultaneously. In this case, blockchain serves as a ledger that notes the transactions in such a way that bitcoins cannot be altered or used for simultaneous transactions. Each ledger entry is a “block” in the chain of data, providing security via transparency. “Trustless” refers to the fact that participants do not have to know each other or rely on an intermediary to complete a transaction.
“An enormous number of people are keeping parallel copies of the ledger,” Phil says. “Those cooperative groups make sure it can’t be easily gamed.”
Cryptocurrency is not the sole use of blockchain, however. It has become more popular in business and financial applications, especially in large organizations where people at multiple locations need to access real-time information.
“That’s where more of the potential benefits of blockchain come into play,” says Alek Bevensee, CPA manager for analytics and insights with Elliott Davis, LLC. “What it will allow a CPA firm to do is continuous auditing. There will no longer be a need to wait until Dec. 31 to see financial transactions from May.”
The food industry has jumped on blockchain as a way to trace shipments for product safety. With growers, distributors, and retailers better able to pinpoint a particular crop of lettuce, for example, massive food recalls could become a thing of the past.
“In logistics, you can see when goods are packaged, when they’re loaded onto the truck and the exact time they arrive at their destination,” Alek says. It may be longer before blockchain proliferates in some other industries. “If companies are using handwritten records, they’re likely several steps away from leveraging blockchain.”
Alek says he trades in small amounts of cryptocurrency “just for fun.” Bitcoin’s volatility allows someone to make, or lose, money quickly. On Sept. 5, 2021, one bitcoin was worth $51,751.50. By Sept. 23, it had dropped to $40,683, but by Oct. 11, it had rebounded to $57,487.40.
“Cryptocurrency right now for me is more of an investment vehicle than a true currency,” Alek says. “I can’t go to the gas station and pay with cryptocurrency.”
Efforts are underway to change that. Businesses such as Overstock.com and Starbucks are beginning to accept cryptocurrency payments. Several types of cryptocurrency can be bought and sold with the PayPal app.
“There are multiple ways to buy bitcoin on your phone and save it,” Phil says. “The Cash App and Robinhood are consumer products; basically you’re holding it in their digital wallet.”
Digital wallets are electronic accounts, typically accessed through one’s smartphone, that allow a consumer to spend or receive money without pulling out a credit card or handling cash. A familiar use would be contactless checkout at stores. Another method for holding cryptocurrency is called “cold storage” in which coins are moved offline to a device that uses multifactor authentication for access. One of the ironies of the cryptocurrency age is that some people acquired bitcoin early and saw its value enjoy thousandfold increases but forgot the passwords to their wallets or died without leaving instructions to heirs.
Because cryptocurrency mining requires tremendous amounts of computing power, its consumption of electricity is controversial. Tesla, which was allowing payment in bitcoin, decided to backtrack due to sustainability concerns. Phil says that considering the types of computing systems used in bitcoin mining, the typical bitcoin transaction is more expensive than a credit card transaction in terms of resource usage.
“They’re little, portable supercomputers,” he says. “It’s a giant parallel processor that uses a lot of electricity and gets really hot so it needs a lot of air conditioning.”
As of Oct. 1, 2021, CoinMarketCap, a price-tracking website for cryptoassets, counted more than 12,000 different types of cryptocurrency on more than 400 exchanges, with an estimated market capitalization worth nearly $2 trillion. It measured bitcoin’s market share at 42.7 percent. Ethereum ranked second, at 18.5 percent.
Ethereum, which launched in 2015, is not solely focused on currency. It serves as a decentralized computing platform that uses blockchain. Ethereum refers to its currency as ETH. When ETH is exchanged or when someone uses an Ethereum app, a user fee is charged in ETH. Miners are paid in ETH.
Non-bitcoin cryptocurrencies are often referred to as “altcoins.” They include Cardano, Dogecoin, and Litecoin. One of the best-known websites to buy and sell cryptocurrency is Coinbase, launched in 2012, which claims more than 68 million users in more than 100 countries. Another platform, Binance, has its own coin, BNB, to power its blockchain system.
A portal to the world of cryptocurrency sits right off Greene Street in Columbia, where a Bitstop Bitcoin ATM resides in the back of 5 Points Tobacco. Bitstop account holders can insert cash and have bitcoin sent to their digital wallet. It is one of several types of cryptocurrency ATMs in the Midlands.
“We noticed that cryptocurrencies were on the rise, and I have cryptocurrency, so I knew it was up-and-coming,” says Essam Kablaoui, whose family owns 5 Points Tobacco. They installed the machine in the spring of 2021. “People wanted a more secure way to get their cryptocurrency. We get two or three people every couple of weeks. It depends on whether bitcoin is on a rise or on a dip. If it’s on a dip, we see more people.”
In regards to his cryptocurrency ownership, Essam says he is looking five to 10 years down the road. He sees it as an investment in his family’s financial future. Digital currency is not recommended for investors who are not risk-tolerant and do not have time to wait out market downturns. Not all cryptocurrency is as volatile, however. Some, called stablecoins, peg their value to an asset such as gold or the dollar. Tether and USD Coin are examples of stablecoins.
Meanwhile, systems are being developed to borrow, lend, and earn interest on cryptocurrency. Crypto-friendly products are being created, such as non-fungible tokens. An NFT is a one-of-a-kind digital file, such as a video, music, or drawing. NFTs use blockchain to confirm originality and ownership.
“Once you have those things, all that remains is demand and that you have a belief system for value,” Jeff says. “We both agree that a $100 bill is worth $100, and we can use it for trading. Why do we believe that? No gold or anything backs that asset, and if there were, what makes gold valuable? All value is a belief system.”
Major League Baseball sold a Play of the Day highlight NFT from an Atlanta Braves victory for $25. Some NFTs have been exchanged for cryptocurrency worth millions of dollars. Columbia’s Blokpax deals in digital-only trading cards while also using NFTs to facilitate trades of traditional, three-dimensional cards. Cryptocurrency and NFTs are seen as natural companions, and Jeff says cryptocurrency enables international sales of cards to take place seamlessly.
The entire market of blockchain financial transactions occurring online without the involvement of institutions is referred to as decentralized finance, or DeFi. The benefit of DeFi is people can access financial systems without the approval of gatekeepers such as banks or governments and without having to provide third parties with personal information. One of the downsides is DeFi might be a perfect system for criminals to hide and spend their loot.
As one can imagine, the crypto-crime link ignites heated disagreement between financial regulators and cryptocurrency proponents. Statistics are in conflict as well. A 2019 report published in The Review of Financial Studies estimated 46 percent of bitcoin transactions were linked to illegal activity; however, the Chainalysis 2021 Crypto Crime Report put its estimate at less than 1 percent.
The crypto-crime link makes headlines when ransomware attackers ask for payment in bitcoins. But is cryptocurrency itself safe? Does one risk seeing it disappear from one’s digital wallet due to hackers or technical glitches? A Cryptocurrency Security Standard has been created in order to provide confidence. It outlines requirements for any organization dealing in cryptocurrency and is designed to be compatible with existing regulations governing data security and digital transactions.
Phil wonders about the actual anonymity of cryptocurrency ownership as the blockchain grows. A bitcoin ransom was paid out in the 2021 Colonial Pipeline hack, but some of it was recovered by investigators who tracked down virtual wallets used to collect the payment.
“Basically, they unwound this big transaction,” Phil says. “There’s so much data out there, people can analyze data and find out who owns what. You can use process of elimination to find out an awful lot.”
Government regulation is currently a worldwide patchwork. Some have referred to the overseas cryptocurrency market as a Wild West environment. Governments in China and Singapore have been trying to limit digital currency activity, but El Salvador adopted bitcoin as legal tender, and Venezuela established a digital bolivar as currency.
In the developing world where governments might be unstable and inflation is unpredictable, bitcoin is seen by some to be a safer place to store wealth than a state-run bank. In nations that are beginning to develop their banking infrastructure, cryptocurrency is considered just as viable as a traditional dollar-based banking system.
In the United States, little regulation of cryptocurrency has occurred so far. Experts believe that will change. Wall Street wants to get more involved, possibly offering investors products such as exchange-traded funds that track cryptocurrency. To do so would require guidance from the Securities and Exchange Commission.
Blockdata, a news website that promotes the adoption of blockchain technology, reported in August 2021 that 55 of the 100 largest banks have invested in cryptocurrency and/or blockchain-related companies, either directly or through subsidiaries. Asset management firm Fidelity Investments, which says it has been mining bitcoin since 2015, created Fidelity Digital Assets to assist institutional investors with the custody and trading of cryptocurrency.
The Internal Revenue Service has determined that virtual currency is property, like land or equipment, and subject to taxation as such. This may create challenges for taxpayers, given the anonymous nature of transactions, wild swings in price, and the difficulties of tracking gains and losses across multiple wallets and exchanges. Additionally, if currency exchanges and virtual wallets reside in foreign countries, this could further complicate matters by creating foreign filing requirements.
Lucy Gates, a CPA and tax principal with Elliott Davis, says gains or losses will have to be reported every time cryptocurrency is traded or exchanged for goods and services, every time it is traded for cash or another cryptocurrency, and even when it is mined.
“The need to recognize gains and losses on every transaction is very cumbersome,” Lucy says. “This is going to be a really challenging area. There will have to be guidelines that continue to come out. It’s still so new, and the IRS generally lags behind. Things are going to develop over time with this.”
Jeff remembers explaining the internet to his parents more than two decades ago. He believes some crypto and NFT projects will fail spectacularly, just like some online startups did. But he also sees virtual currency and NFT versions of Amazon and Google emerging as well.
“Regulators and big stakeholders that face disruption will try to slow it down, but I believe the tech is too good — and too powerful,” he says. “Do your own research. Be smart. But don’t miss this opportunity. Paradigms don’t change like this often. When they do, wealth is created. Lots of wealth.”