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Pittsburgh Post-Gazette | 10/15/2017 12:46:21 PM GMT

BIT BY BIT ; ATMS DEALING IN DIGITAL CURRENCY START TO SHOW UP IN PITTSBURGH

Tim Grant  Pittsburgh Post-Gazette
Bitcoin had been around for only three years when Sam Gutkind discovered the digital currency. That was in 2012 while he was a student at Carnegie Mellon University.

The nontraditional currency was selling for about $7 per unit. He was so excited about the future of this novel monetary concept that he tried to persuade his father to invest. "I thought it was a joke and I didn't buy it," Sam's father, Lee Gutkind, said.

Today a single bitcoin unit is valued at about $4,900, which would have yielded an astounding 69,900 percent return on that first investment.

While most people think of money in terms of either paper or coins, bitcoin is classified as a digital currency or what is also known as a cryptocurrency. It exists outside the traditional banking system. But bitcoins are accepted only by a relatively small group of retail merchants, which makes the currency unreliable as an everyday form of payment. That could be changing now that bitcoin ATMs are starting to appear on the landscape.

Two ATMs have recently been installed in Pittsburgh. One is at the One Stop Mini Mart on the Boulevard of the Allies in Oakland. The other is at the Quick Stop convenience store on Liberty Avenue, just outside of Lawrenceville.

The manager at the Liberty Avenue store reports a steady stream of customers coming in daily, with some depositing cash to buy quantities of virtual currency and others cashing in some of their bitcoins to get the U.S. currency more commonly accepted when buying snacks at the counter or paying the mechanic.

The advent of bitcoin ATMs could be a turning point.

"The question about the future of bitcoin's growth will be is it the chicken or the egg that comes first?" said John Sedunov, an assistant professor of finance at Villanova University. He is working on a research paper about bitcoin ATMs and whether bitcoin can become mainstream enough to replace traditional banking.

"Do more retail venues like grocery stores and movie theaters need to accept it first in order to stoke demand from ordinary people? Or is it the opposite?" he asked. "When you have all these people with bitcoins who want to use it as currency, does that drive more retail stores to accept it as a form of payment?"

Arrival of the ATMs

When bitcoin ATMs arrived on the scene about four years ago, the virtual currency and peer-to-peer payment system stepped out of the online world into the real world. Before, bitcoin users had to purchase the currency on a bitcoin currency exchange and transfer to a digital wallet.

Bitcoin ATMs in the Pittsburgh area are owned by private business people who service their own machines and stock them with cash. The machine owners pay rent to the owners of the convenience stores.

As of Oct. 1, there were about 150 bitcoin ATMs in the U.S. and about 350 outside the U.S., according to CoinMap.org, a website that tracks developments related to the cryptocurrency.

The down side of buying from an ATM is that the machines sell bitcoins at a significant premium - between 10 percent and 20 percent above market prices. The market price, which is based on its perceived value in the eyes of buyers and sellers, is always changing.

To buy bitcoins from an ATM, users need to enter a telephone number or scan a driver's license. Those who enter a phone number will receive a text message with a code.

Then users enter that code into the machine when prompted. The machine asks them to scan their virtual bitcoin wallet through a smartphone app.

Next, users open the digital wallet app, scan the wallet's QR code, and enter cash into the slot. The user hits "finalize transaction" and that's it. Bitcoins will be sent to the user's virtual wallet.

Betting on bitcoin

At a cost of about $4,900 each, most people won't want to buy a whole bitcoin. The ATMs can sell as little as $1 worth. Bitcoins can be divided into fractions as small as 0.00000001.

The currency's shifting market value has made it appealing for some investors. It's more accessible than gold and, at least in its early years, has had the potential for a big payoff.

Sam Gutkind, the 26-year-old CMU student, uses the ATM on Liberty Avenue to sell bitcoins about every month or two to raise cash.

"The money comes out in big bills," he said. "I'm talking about brand new $100 bills with the hologram stripe."

Being a college student, he said he never owned a hoard of bitcoins, even when the units were only $7.

"When the price got up to $50 per coin, I knew I was onto something," he said. "My dad thought I was a genius. That's when we started taking it seriously."

So seriously that he's even played the market a bit. A strategy that has worked for him so far is to purchase bitcoins using a credit card, wait for the bitcoin value to appreciate, then cash out enough to repay the credit card debt.

"There were times when the price dipped," he said. "But I never bought more than I could handle and it always bounced back. Now the price for bitcoin is close to the highest it's ever been."

Murky origins

Bitcoin has been in the public lexicon for years, but many people still don't understand it.

Unlike traditional payment networks like bank credit cards, the bitcoin network is not run by a single company or person. The system is run by a decentralized network of computers around the world that keeps track of all transactions, keeping a record that is always updating itself called a blockchain.

Bitcoin was created in 2009 by an unknown person using the alias Satoshi Nakamoto. A transaction is a transfer of value between bitcoin wallets that gets included on the blockchain. Bitcoin wallets keep a secret piece of data called a private key, which is used to sign transations, providing mathematical proof that the bitcoins have come from the owner of the wallet.

Whereas the U.S. dollar is backed by the U.S. government, the value of bitcoin is almost entirely based on people who use it agreeing that it is worth something.

Ownership of bitcoins is anonymous, which is why criminals have used it as a way to buy and sell drugs online.

As bitcoin gains acceptance, there are lingering concerns that it has no safeguards associated with its use.

The Federal Deposit Insurance Corp. covers customer deposits if a bank is robbed. Visa and MasterCard can issue a charge back and return a customer's money if a merchant engages in fraudulent practices. Those things don't exist with bitcoin, which relies on a system of trust that offers no recourse to a wronged party.

"Some bitcoin ATMs may have questionable anti-money laundering practices and procedures that allow people to go from [traditional] currency to bitcoin without it being traceable to them," said Austin Mills, head of the blockchain and cryptocurrency group at Atlanta-based law firm Morris, Manning & Martin LLC.

"If you buy bitcoin through Coinbase or another online exchange, they know who you are before they let you buy," Mr. Mills said. "To buy any meaningful amount, you have to go through a number of verifications regarding your identity."

Coinbase is a company that will link to a buyer's bank account or credit card and sell the buyer bitcoins for dollars. Opening an account with Coinbase is similar to opening a traditional bank or stock brokerage account, with identity verification requirements.

There are now 75 businesses in Pennsylvania that accept bitcoin as payment, Mr. Sedunov said.

Major companies that accept bitcoin include Dell, Expedia, PayPal and Microsoft. While Amazon.com does not accept the use of bitcoins directly for product purchases, buyers can use a bitcoin wallet to buy an Amazon digital gift card. Some companies that accept bitcoin, such as Overstock, will immediately convert bitcoin revenue back into U.S. dollars via Coinbase.

Marc Brands, a 40-year-old real estate investor who lives in Robinson, buys bitcoin as an investment.

"I don't really sell any," he said. "Different people have different reasons to buy bitcoin.

"I believe in it because I understand how money works. It's the anti-currency. It's anti-establishment, anti-government, anti-bank. People use cryptocurrency when they want to stay outside the establishment."

Tim Grant: tgrant@post-gazette.com or 412-263-1591.