Article

The Bitcoin ATM: Possible, yes. Marketable...?

The Bitcoin ATM concept has received a lot of press lately. Is it deserved?

April 4, 2013 by Suzanne Cluckey — Owner, Suzanne Cluckey Communications

On March 25, just at the height of the Cyprus banking crisis, a press release began to circulate online. The release publicized a blog post written by entrepreneur Jeff Berwick, who announced:

I have decided to move forward with what I believe could be the next multi-billion dollar business venture: Bitcoin ATM.
But that isn't all. It is wholly our intention at Bitcoin ATM to put the company in the right position to open its very first ATM in Cyprus. If we did this now, and we are moving quickly to make this so, we would be the only functioning ATM on the island.

The last sentence is curious, since Berwick had noted a few paragraphs earlier that bank-owned ATMs in Cyprus were functioning.

Even more curious is Berwick himself, an ex-investment banker/stock broker who ran a boom-to-bust Internet investment site in Canada and declares himself an "Anarcho-Capitalist. Libertarian. Freedom fighter against mankind's two biggest enemies, the State and the Central Banks." Currently, he is editor-in-chief at an online site, The Dollar Vigilante, which is dedicated to teaching followers how to survive and prosper "during and after the dollar collapse."

That would be the same dollar dispensed by the Bitcoin ATM that Berwick said he now plans to deploy in Los Angeles.

Is there any 'there' there?

Considerable doubt persists as to whether Berwick's machine actually exists beyond the prototype stage. His blog post includes a picture of a Bitcoin ATM, which appears to be a standard automated teller machine with a custom wrap.

But a search of "Bitcoin ATM demo" turns up only a video of a different, cash-in Bitcoin ATM developed by a pair of New Hampshire entrepreneurs, Zach Harvey and Matt Whitlock.

Still, Berwick said in an April 3 article by Motherboard, "Yes, of course, the first one is fully done and ready, we're going to take pictures and videos of it tonight, and we might even do sort of a press release launch — maybe in Los Angeles — in the next week or so, to show everyone they're working."

The Bitcoin ATM website consists of a home page and two drop-down registration forms. The site does not include a picture of the machine, but does solicit for investors, franchisees and licensees, designers and programmers.

Does the world want a Bitcoin ATM?

The larger question is not whether a bitcoin-exchanging ATM can be — or is being — put into production. The question is whether there's a market demand for an ATM that deals in a medium of exchange currently used by maybe 60,000 people. (That's as of a 2011 estimate from the Bitcoin wiki, which noted that users are hard to count because of the anonymous nature of Bitcoin and the fact that one person might have several accounts.)

Answering this question requires a closer look at Bitcoin, which is simple in theory, but mind-bogglingly complex in execution.

Bitcoin is a virtual currency — and an increasingly popular one. It has no central bank; it exists digitally in an amorphous, decentralized pool called a peer-to-peer network. The programming is open source, so no single entity owns or controls it.

The mind-bending part is how a bitcoin is generated: math. Bitcoins are "earned" by performing (via computer processor) random, exceptionally difficult math computations. Solve the problem, earn 25 bitcoins. Sell those bitcoins to others who value them as a means to carry out highly secure, highly anonymous purchasing transactions. (No surprise, they're very popular in the illegal drug trade.)

Each Bitcoin member enters the collective by opening a secure online wallet in which bitcoins are kept. Each wallet has a private key — a cryptographic signature that proves the wallet owner's right to spend bitcoins from that wallet. Only the owner has the key, which is stored on his or her hard drive.

Bitcoins are (mostly) purchased with government currency. Funds can be added through a number of channels, including authorized online agents and merchants such as Walmart and Osco (similar to prepaid card funding, with a similar transaction fee).

Bitcoins are used like cash to make purchases (many online merchants accept them, as well as some brick-and-mortar retailers). Funds are transferred almost instantly and transactions are irreversible — and free in almost all cases.

And it's pegged to what?

The value of the individual bitcoin derives from three factors: scarcity — the supply is limited to 21 million bitcoins; consistent, mathematically-controlled generation of the currency in constantly diminishing amounts; and the willingness of members to accept an existential, computer-generated construct as currency (granted, all currency is construct these days).

When the maximum bitcoin supply is achieved (in 2040, probably) the price will stabilize. Until then, the value of a bitcoin is wildly unpredictable.

For example, the banking crisis in Cyprus generated a huge demand for bitcoins in Spain, where a similar banking crisis seems possible. As demand for the timed-release supply skyrocketed, so did the price.

The Bitcoin wiki provides a good explanation of bitcoin supply as well as answers to a good many other Bitcoin FAQs — including how a currency pegged to nothing but the solving of a mathematical equation can hold value.

The balance sheet

As a currency, Bitcoin has both advantages and disadvantages.

The pros:

no third-party seizure
no taxes
no tracking
no transaction costs
no risk of charge-back

The cons:

limited acceptance
possible loss of wallet/funds in a hard drive crash
value fluctuation according to demand
no buyer protection for goods purchased with bitcoins
risk of unknown technical flaws (subject to hacking, ddos, etc.)
built in deflation due to scarcity-related hoarding
no physical form
no government-backed valuation
the possibility of government intervention

The Bitcoin website warns that investing in the virtual currency is a risk:

"The price of a bitcoin can unpredictably increase or decrease over a short period of time due to its young economy, novel nature, and sometimes illiquid markets. Consequently, keeping your savings in bitcoin is not recommended. Bitcoin should be considered as a high risk asset, and you should never store money that you cannot afford to lose with Bitcoin."

Many members of the financial services sector have been following the unfolding Bitcoin story with interest. One of them is Bernardo Bátiz-Lazo, departmental chair in business history and bank management at Bangor University in Wales.

"I am skeptical it will become the dominant payment media," Bátiz-Lazo said. "We might see some more growth as international retailers (such as Amazon) use it to grow into geographies where there is no PayPal, or where there are high cross-border payment fees. I think banks are missing the boat here as this is also mirroring a surge of specialists in the financial transaction market-servicing business."

A viable ATM business model?

"While the Bitcoin ATM business model will be very tricky to refine, this type of kiosk could have a larger addressable market than similar concepts tried in the past, such as the gold bar vending machines that have deployed in Dubai and other very wealthy markets," said Sam Ditzion, president and CEO of Tremont Capital Group. "While this concept will need to overcome several significant security and regulatory hurdles, it could be compelling in certain markets where the public has lost its faith in its banks and currency."

One of the hurdles is a recent clarification by the Fed of its rules regarding digital currency. In essence, the rule is that bitcoin-bitcoin exchange does not fall under its purview, but bitcoin-dollar exchange does.

This being the case, existing ATM regulations would surely apply to any Bitcoin ATM in the United States (and probably any other country with regulated currency).

And if the Bitcoin ATM is subject to traditional ATM regulations, then it's already redundant with a far more sophisticated machine — the deposit-taking ATM. Just add software.

Read more about multi-function ATMs.

About Suzanne Cluckey

Suzanne’s editorial career has spanned three decades and encompassed all B2B and B2C communications formats. Her award-winning work has appeared in trade and consumer media in the United States and internationally.