Bitcoin Gets Toehold in Kansas City, Mo.

A website that maps bitcoin-friendly locations plots more merchants ready to accept the currency around Kansas City than in all but three other U.S. markets — and it’s thanks largely to one Overland Park company.

by Mark Davis, The Kansas City Star (TNS) / November 18, 2014

Grant Brown and Mark Vick are intent on turning this heartland town into a bitcoin city.

They’re setting up vending machines in the Kansas City area to dispense the cybercurrency. One listing of bitcoin ATMs shows more of them here than in New York, Los Angeles and nearly all other metro markets.

Bitcoin — created by high-speed electronics, stored on encrypted digital wallets, exchanged through computers and seeking dollar-like status — enjoys other elements of an emerging ecosystem here.

A website that maps bitcoin-friendly locations plots more restaurants and merchants ready to accept bitcoin around Kansas City than in all but three other U.S. markets — and it’s thanks largely to one Overland Park company.

A meet-up group gathers on alternate Mondays to chat about electronic currencies. And one Kansas City law firm has made a business of helping entrepreneurs tackle bitcoin questions, including whether their ideas are legal.

All the activity has supercharged bitcoin’s backers here.

“It’s a money system run by the people, for the people,” said a Kansas City area shop owner who promotes bitcoin under the identity Bitcoin Beamer but wants to keep his efforts separate from his usual business. “I’m going to push it to the moon.”

In the bitcoin world, however, Kansas City is still better known for what’s become a courtroom battle.

The Federal Trade Commission in September charged Overland Park-based Butterfly Labs Inc. with fraud to put the company under a court-appointed receiver’s control. Butterfly has denied the agency’s claims that it took up to $50 million from customers and failed to deliver computers that would allow the buyers to earn bitcoin.

Nor has bitcoin reached the street here, the way it has in California.

“San Francisco, LA, yeah, I saw a lot of it, just walking around,” said Kansas City resident Dan Fowler, who bought clam chowder with bitcoin in a Bay-area restaurant. “I don’t see that in Kansas City, but I’d love to see it.”

Bitcoin primer

Bitcoin backers see it as an alternative, and government free, way to pay for goods and services.

It carries no government backing the way the United States backs the dollar, Japan backs the yen and European countries back the euro.

Still, a currency can be anything people agree on as a medium of exchange, even seashells. Virtual money appeals to many as a way to limit government involvement in private transactions. Many worry about the temptation of governments to devalue national currencies in the name of economic policies.

They say that can’t happen with bitcoin, which is the brainchild of a man, or group, using the name Satoshi Nakamoto. Efforts to further identify him, or them, have failed.

According to Coinbase.com, Nakamoto set up bitcoin so that it had to be earned by using computers, a process that has become known as mining bitcoin.

Mining requires increasingly sophisticated equipment working to solve what one backer called an “algorithmic crypto-puzzle.” Roughly every 10 minutes, the network of miners around the world finds a block of 25 new bitcoins and the puzzle process starts again. So far, nearly 13.6 million bitcoins have been mined.

Bitcoin, however, was set up so that only 21 million of them ever could be found. Furthermore, it would take until 2140 — or another 126 years — to mine the last one.

To make the remaining supply last that long, the puzzle becomes increasingly complex, and future blocks hold fewer bitcoins.

Advocates say this is why bitcoin is bound to hold value. So far, however, it has bounced around, from only $12 per bitcoin two years ago to more than $1,000 last November and around $360 recently.

Miners at work here

Around the area, Kansas City Power & Light was among the first to notice bitcoin mining.

For example, KCP&L asked Grant Brown earlier this year about why his power use had soared. According to Brown, his bill hit $2,391.56 in one month.

“When we do see increased usage, that is something we investigate,” said Courtney Hughley, a spokeswoman at KCP&L. It could be a sign of illegal activity, such as someone stealing a customer’s electricity.

Brown explained what he was doing, and the crew saw the array of bitcoin mining machines in his basement.

These machines draw lots of power and chase bitcoin 24/7.

They also run hot. An infrared thermometer recorded temperatures of 180 degrees and higher on equipment Brown now uses. Stack a bunch of these in a basement and the air conditioning works overtime, too, driving electric bills even higher.

Brown has since combined his mining setup with business partner Mark Vick at a commercial location in Belton, which they’ve asked not to be disclosed for security reasons.

“This is not even all of our stuff. We’re going to fill this place up,” Brown said on a visit to the site.

The machines also are loud, which Brown demonstrated by shouting over the din of miners running behind him in this video. Just one more reason serious miners end up moving to a commercial site.

Good machines can be hard to come by as no major company has gotten into the business of making them.

Butterfly Labs, the Overland Park company fighting the FTC in court, became widely known in the bitcoin community for the mining machines it sold.

“One of their most popular products was the Jalapeno. Those Jalapenos, everybody wanted a BFL Jalapeno,” Vick said.

The company began to face increasing complaints when it was late shipping, or failed to ship, the newest generations of its mining equipment, which customers had paid for in advance. That was the heart of the FTC’s complaint against Butterfly Labs.

Because of the increasing difficulty in finding bitcoins, most miners are joining together in mining pools. They share their efforts and collective bitcoin earnings.

“All of these miners out there are racing against each other to find the next block” of bitcoins, said Ben Casebolt, who mines bitcoins in an underground office park in Kansas City. “Pools allow someone like me who doesn’t have a mining farm … to find these blocks.”

A matter of verification

Bitcoin counterfeiters are an obvious problem that backers say have been solved by the mining process.

As mining equipment searches for the next set of new bitcoins, it also works to validate all of the bitcoin transactions that happened in the previous 10 minutes.

It’s a tedious process that traces the history of each bitcoin from the latest transaction back to when it was mined, as Vick explained in this video.

Miners earn small amounts of bitcoin for confirming transactions, and users get the certainty they’ve received real bitcoins. They don’t have to verify the money’s legitimacy the way many cashiers use a special pen to check whether $20 bills are real.

“Bitcoin miners are (also) accountants. That’s the simplest way to explain it,” said Kyle Carlson, who formed the Kansas City meet-up group in August.

Joe Henderson, an Olathe resident who writes about bitcoin as Bitcoin Sachs, said this validation process could limit bitcoin’s use because it takes too long.

Blockchain.info, a website that displays bitcoin transactions, reports average confirmation times of 7.5 minutes. But users say it takes 20 minutes or longer for enough validations to accumulate in the network to rest easy about a deal.

As Henderson points out, that won’t work in the Wal-Mart checkout line.

Resolving such day-to-day issues, however, will be critical to bitcoin’s future and the value of all the bitcoins in circulation.

“Unless people use it, the value doesn’t go up,” said John Kennyhertz, a Kansas City attorney who has done work for several area bitcoin-focused businesses.

Using it in Kansas City

In Kansas City, bitcoin is becoming easier to get and spend.

Several Kansas City area sellers and buyers show up on Localbitcoins.com, which operates somewhat like Craigslist.

ZenBox, a Santa Monica, Calif., company, has delivered a bitcoin teller machine to the SetCell cellphone store in downtown Kansas City. It turns dollars into bitcoins and bitcoins into dollars, but it’s not hooked up yet.

Bitcoin miners Brown and Vick have set up four bitcoin machines in the Kansas City area and have another ready to go. These are one-way tellers, more like vending machines, that spit out bitcoin and take in dollars.

In the nascent world of bitcoin, a handful of teller machines is a pretty big number. It’s more machines than in New York (3) or Chicago (2), Atlanta (1) or Los Angeles (3), Dallas (4) or Seattle (2), according to Coindesk.com.

Brown and Vick also recently bought a website that allows users to pay their traditional bills with bitcoins. Billpayforcoins.com is now in a testing phase.

Kansas City landed surprisingly high on an early October ranking based on the number of places that accept bitcoins as shown on Coinmap.com. We were No. 4 with 87 sites, mostly Asian restaurants and pizza places, and just ahead of San Francisco among the country’s friendliest bitcoin cities, according to itBit.com’s report.

Credit for about half the Kansas City list goes to Aleks Elesev at Overland Park-based Menufy.

The company helps restaurants with their online ordering and payments technology. Elesev pressed to include bitcoin payments along with credit cards and other traditional means for all 400 clients, including 42 in this market.

“I saw how passionate people in the bitcoin community are,” Elesev said.

Some Kansas City area merchants are finding less traffic than they expected from being bitcoin-ready.

Overland Park resident Michael Gager sells loose color gemstones at lifetime-gems.com. A year ago, he set up to accept bitcoins. Few competitors were taking the electronic currency, so it looked like a way to bring in more business.

“I have had no sales from bitcoin,” Gager said.

Tivol, the jeweler on the Country Club Plaza, got some media attention early this year when it began to accept bitcoin but has backed away.

Though bitcoin is making inroads here, it has a long way to go before it starts to work like currency.

“It’s going to take a concerted effort from a small but passionate group of folks, who are pushing it forward continually,” Fowler said.

To reach Mark Davis, call 816-234-4372 or send email to mdavis@kcstar.com. Follow him on Facebook and Twitter @mdkcstar.

Struggling to be money

Bitcoin is but one of dozens of electronic currencies competing for your attention as an alternative to dollars.

One website lists more cybercurrencies than letters in the alphabet. Don’t like bitcoin? Altcoin.com suggests asiccoin, bytecoin, cloakcoin, darkcoin and others, right through yacoin and zetacoin. Consider avoiding the 26 others it lists as scams.

Fraud was one of the risks from virtual currencies that the U.S. Consumer Financial Protection Bureau has raised. It also notes that virtual currencies aren’t kept in federally insured banks, and no one is required to accept them as payment.

The virtual currency world is waiting for the regulatory world to figure out what to do about bitcoins.

Kansas’ banking commissioner formally declared that bitcoin and other virtual currencies aren’t money at all. Bitcoin users loved the ruling, which means these alternative currencies can change hands beyond the reach of the state’s money transmitter law.

The Internal Revenue Service has said that bitcoin buyers who sell them later for more money owe taxes on their gains. But the IRS also says employees paid in bitcoin will owe income tax, just as if they’d received dollars.

And there are worries about what happens should Washington decide to ban bitcoin.

“The No. 1 concern is what the U.S. government is going to do with it,” Bitcoin Beamer said during an interview that he posted online.

For others, the lack of government backing makes it difficult to understand why bitcoins are worth anything at all.

The reason is that a currency can be whatever people agree on, and historically has been whatever was handy, such as shells, barley or peppercorns. Money simply has to be able to hold onto its value, provide a way to price goods and services, and be that one item accepted in exchange for everything else.

In a digital world, money need not exist physically. It moves electronically, as when consumers swipe debit cards, employers directly deposit paychecks and banks credit savers with interest. Bitcoin exists only electronically.

Yet, bitcoin struggles in part because it has a dubious record as a store of value. Bitcoin’s price in dollars has fluctuated wildly. In short, the value of a stash of bitcoins has acted more like shares of stock than a stack of dollar bills.

To see bitcoin in action, visit blockchain.info. The website publicly logs a steady stream of bitcoin transactions, showing how many bitcoins were involved, who got them and who paid them.

Sort of. In the bitcoin world, identities consist of long strings of random numbers and letters. Here’s one plucked from blockchain.info: 17VLaUiLVhaGygXySMV7GwBNmSmc5J3xk6.

It is the cyber address of someone’s digital bitcoin wallet, having seen 757 transactions involving 14.9 bitcoins, according to the site.

©2014 The Kansas City Star (Kansas City, Mo.)