Bitcoin back in favor after price pop and drop

The future of world currency is currently wedged between the diapers shelf and candy rack in a Detroit party store.

There inside Timmy's Market on 7 Mile, a few steps from the store's bulletproof-glass-enclosed checkout, is the unlikely location of one of Michigan's first and few bitcoin ATMs. The touch-screen machine converts dollar bills into bitcoin, the virtual currency that exists only on the Internet and isn't backed by any government.

The store's manager, Nick Mikhael, said the bitcoin ATM gets about 10 users a day. Many of his regular customers were at first perplexed by the odd device with a weird name.

"A lot of people ask, 'What is this?' " Mikhael said last week. "I say bitcoin. They ask, 'What is that?' "

Bitcoin emerged from tech geek obscurity two years ago as a hot new currency for the Internet age without ties to any country or central bank. Coveted by futurists and libertarians, the currency's exchange value rocketed from under $14 in early 2013 to over $1,000 for 1 bitcoin by that December.

Tales of Bitcoin Millionaires hit the media, and online merchants such as Overstock.com started accepting bitcoin payers. As curiosity grew, a small number of bricks-and-mortar businesses in Michigan began accepting bitcoin and a handful of bitcoin ATMs popped up.

But momentum faded throughout 2014 as bitcoin's exchange value began to plummet back to $200. Negative factors included the collapse of the world's largest bitcoin exchange in Japan called Mt. Gox, where nearly 650,000 bitcoins were ultimately lost or stolen, and an unpopular Internal Revenue Service declaration that bitcoin would be treated as property for tax purposes and not currency.

The pace of bitcoin's acceptance at metro Detroit businesses continued to grow, although more slowly, but some early-embracing merchants stopped taking it completely.

Now bitcoin's value is again on the rise again for unclear reasons, spiking above $400 last week before settling to $375 on Friday, according to the Coinbase.com exchange. Whether the currency ever expands beyond its niche and goes mainstream is an open question.

"Does every average consumer need to have bitcoin to survive? I don't know that we're at that stage yet," said Michael Dupree Jr., a Michigan native and owner of EasyBit, a Denver-based bitcoin ATM company. "But if you're a consumer and you want to go online and buy stuff and potentially get a better deal using bitcoin, I do highly recommend it."

More than 30 metro Detroit businesses currently take bitcoin payments, according the CoinMap website, or more than triple the number in January 2014. However, several of the listings are small online catalogs; two others, including a cosmetic surgeon's office, denied accepting bitcoin when contacted for this report.

Donald Katz Law in Birmingham is one of two or three law practices in the state that currently takes bitcoin as payment from clients. In an interview, attorney Donald Katz said his firm got into bitcoin in the belief that some type of digital currency is bound to eventually catch on.

"If you want to pay me in Visa or MasterCard or bitcoin, to me there's no difference," Katz said. "I would take beaver pelts as long as I can convert it to cash and put it in my retirement account."

He has done two bitcoin transactions for legal services since last fall: one for an individual and the other involving a company. One of those clients was overseas in a country with tight currency controls and needed a way to move money, he said. He subsequently transferred the cyber currency into real dollars through a bitcoin exchange website.

"I look at it as an asset transfer," Katz said. "For a big transaction, it makes a lot of sense. If you're buying a company and you want to buy it in bitcoin, we can do that."

Other recent bitcoin converts include Chickpea in the D eatery and Urban Bean Co. coffee shop, both in downtown Detroit. Chickpea owner David Ayyash said he gets about four bitcoin-paying customers a week, typically men in their 20s and 30s.

"We had a couple customers ask for it and so we figured, 'Why not?,' " Ayyash said. "We don't get a ton of bitcoin customers, but it seems to be increasing."

Bitcoin fans praise the Bronx Deli in Pontiac and Farmington Hills as the first Michigan restaurant to allow take bitcoin. The Farmington Hills location currently gets about three bitcoin customers a day, which is slightly fewer than when it had a bitcoin ATM on premises, said cashier Morgan Pearson. (The ATM was removed this summer for maintenance and has not returned.)

There is a dark side to bitcoin as well. It has become a favored currency among extortionists, drug dealers and underworld types.

Detroit Mayor Mike Duggan said last year that computer hackers had seized control of a city database and demanded 2,000 bitcoins -- or nearly $750,000 at current rates. The city did not pay that ransom because it didn't need the database.

More recently, the 67-year-old chairman of a Hong Kong oil exploration company was abducted in September by kidnappers who demanded a bitcoin ransom equal to $9 million. He was rescued in Taiwan by police, who found him with shackled feet and bruises and cigarette burns, according to media reports.

For other, non-criminal reasons, some early bitcoiners have gone back to only dollars.

Matthew Abramsky, co-owner of Tony’s Ace Hardware in Hazel Park, started accepting bitcoin in late 2013 to see if the new currency would attract new customers. Bitcoin transactions avoid the typical 2.5% to 3.5% transaction fees on credit cards, although merchants must still charge customers sales tax.

Abramsky said he did about $500 worth of bitcoin business, including the sale of a snow blower, but discontinued the experiment after a processing problem with a transaction.

"It was nice to be there at the beginning, but it was also nice to get out before something bad happens," he said last week. "When I have to pay my bills no one wants to accept bitcoin."

Web developer David Smith, 34, of Lansing is among the bitcoin true believers. He speaks at bitcoin conferences, regularly transacts business with it and personally owns about 260 bitcoins, worth just under $100,000 as of Friday. He praises bitcoin for its ability to lower the barriers to conducting business between richer countries and poorer countries that have less developed financial services and fewer people with bank accounts.

Smith initially viewed the currency as simply an investment opportunity, "but then I got into bitcoin and found out all the cool things it could do for people and fell in love with it." He has no plans to cash out his bitcoin stash, even if the currency's value plummets again. "I think I would ride it all the way down" he said.

Smith recalled an atmosphere of near euphoria during a late 2013 bitcoin conference in Las Vegas that he attended while the currency's exchange value was climbing above $1,000 for 1 bitcoin. One year later, the mood was much more subdued, even though bitcoin had become more useful as a currency. The big difference was the collapse in price.

"I wasn't around for the tulip bubble, but there were probably a lot of similar characteristics," Smith said, a reference to the mid-1600s Dutch "tulip mania" that is considered a classic example of a speculative bubble that inevitably bursts.

The bitcoin ATM inside Timmy's Market, 17700 W. Seven Mile in Detroit, is one of six in southeast Michigan belonging to Southfield-based MT Group. All of them are located in gas stations, check-cashing or party stores.

The machines are all one-way ATMs that change dollars into bitcoin for a person's virtual wallet, but do not spit out cash. The machines typically charge a 3% to 6% markup and pay small commissions to the owner of the store.

The six ATMs have a $100 upload minimum and collectively do 100-150 daily transactions, said Andrew Konja, MT Group's owner. The machines have a driver's license swipe and fingerprint reader for extra security on large transactions.

Cashing out of bitcoin is typically done via bitcoin exchanges such as Coinbase.com that change and deposit dollars into a banking account. Bitcoin experts say a small number of two-way bitcoin ATMs do exist in the U.S., although so far none in Michigan.

It is nearly impossible to buy significant quantities of bitcoin with a credit card either online or through an ATM because of fraud concerns.

For economists, one significant innovation found in virtual currencies like bitcoin is the ability to conduct fast, secure and friction-less monetary transactions across borders, especially in countries such as China with rigid governmental controls over how much money is allowed to leave.

"It's the fact that you can move the money without it being controlled by a minister of finance or anyone else," said Erik Gordon, a professor at the University of Michigan's Ross School of Business and its law school. "That's what I think will give it mainstream allure."

That theory could explain the recent observations of Sam Kulaak, a clerk at Ace Check Cashing, 20011 Plymouth Road in Detroit, who has chatted with people who used the location's new bitcoin ATM.

"I ask sometimes what they use it for, and they say, 'Well, I'm buying something from China,' " Kulaak said.

Contact JC Reindl: 313-222-6631 or jcreindl@freepress.com. Follow him on Twitter @JCReindl .

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