The founder of BitInstant, one of the first Bitcoin spin-offs, shares his insights into the complex currency that could change everything
You might scoff at Bill Gates’ banal quote asking you to “be nice to nerds” as “chances are you’ll end up working for one”. But he was right. And here’s another one you should be nice to.
At just 23, Charlie Shrem, a self-confessed Bitcoin geek, says he’s a millionaire. As the founder of Bitcoin transaction company BitInstant, Shrem has transacted $14m in Bitcoin since setting up the business in 2011 with Wrexham-based Gareth Nelson (yes! There’s a Briton behind Bitcoin). What probably has made him a millionaire is being one of the earliest adoptors of Bitcoin. In fact, he’s currently the vice chairman of the Bitcoin Foundation, one of the biggest groups promoting Bitcoin.
Shrem has even set up a two-storey bar EVR (pronounced “ever”) in New York where you can buy drinks with Bitcoin. Friends call him “four-fingered Charlie” for wearing a ring engraved with the password to access his Bitcoin wallet – he calls it his “most expensive possession”.
The young and restless Bitcoiner is ready to debate with anyone who doesn’t believe in the alternative currency, be it a Bitcoin novice like me or the Nobel Prize-winning economist Paul Krugman.
Despite Shrem’s success, there is still much confusion among the public about Bitcoin. Can you use it buy drugs? Is it a danger to tax authorities? Does it mean the end of banks? I grilled Shrem for answers.
Q. Hi Charlie. So, how did you get into Bitcoin?
I am the kind of person who’s interested in different ways of doing things and believes that there is always room for disruption. So, while in Brooklyn College I launched a start-up called dailycheckout.com, which instead of selling a thousand different products like Amazon does, took one product every day and sold a thousand pieces every day for a really cheap price. The business was going great but I reached critical mass and realised that it could never become a multimillion-dollar business.
It was great experience but it was nothing that could change the world. Then in early 2011, I stumbled upon Bitcoin and thought it was pretty interesting and decided to buy some. It took me two weeks to get Bitcoins, it was the worst process ever. I lost money on it and it was a whole failure.
The concept engulfed me but I knew that the only way it was going to succeed was to make the process of buying and selling easier. Then browsing through Bitcoin forums I came across an idea from this guy who I’ve never met before in the UK called Gareth Nelson. He posted an idea about opening a Bitcoin business and needing $1,000. I replied to him and said I’ll chip in $1,000 and let’s do this together. Fifty-fifty all the way, all the time. Today, our company has 15 employees and has processed over $14m, and I’ve still never met him.
Q. Can you tell me more about Gareth and your partnership?
Garth’s based in Wrexham, Wales. He’s got Asperger’s but is a very smart guy. We’ve become super-amazing friends and very close through the business. We’re really loyal to each other to the point that there have been opportunities that he could’ve screwed me or I could have screwed him. But we both didn’t do it. We’ve really built this business out of trust and I am really happy with the way it’s going.
Q. Are you a millionaire?
If I combine all my assets, I’ll be a millionaire. I never imagined it but here I am. However, I haven’t splurged my money – nerds and geeks don’t care about the money. I don’t hold everything in Bitcoin, I don’t think that’s a smart thing to do but you need to be a smart investor.
Q. What’s the idea behind wearing a ring with your Bitcoin log-in engraved into it?
It’s a cool ring. I wanted to have a cool way to save my Bitcoin. It’s definitely one of my most expensive possessions.
Q. So what is Bitcoin, in layman’s terms, and how does it work?
It’s two things – it’s a payment system and a currency. It’s very important to understand that they are two different things and it’s important to separate them. Whenever someone’s talking about Bitcoin, 99% of the time they are talking about one or the other – not both.
The Bitcoin payment system is a protocol, a way of sending money over internet. It’s like sending an email using the internet. Just the way the system of sending messages over the internet is standardised, Bitcoin’s a standard of sending money over the internet. So, instead of sending a value or a currency, you’re sending a unit of value called the Bitcoin.
The thing about Bitcoin is that it’s not there yet, it’s not at the mainstream level that you can be able to easily jump onboard and see its utility. It’s still in the tech nerdy space. My job with the company and with the foundation is to make it mainstream.
I still don’t know how it works, I am learning every day. Bitcoin is like the internet, you never know everything, you can learn more every single day.
Q Is there a physical coin? Is there a place where can you get it?
There are both. You can buy them online. The first time you buy Bitcoins you pay in dollars.
Q. Can you exchange it with other currencies?
Pounds is the number two currency it’s exchanged in, followed by euros.
Q. Who decides the price?
There is no central authority regulating the demand and supply of Bitcoin, it’s decided by the people selling and buying it. It’s decided by Bitcoin stock exchanges like Mt.Gox.
New Bitcoins are produced by mining – a process where computers solve a complex maths problem. The genius founder of Bitcoin, Satoshi Nakamoto, put a cap on Bitcoin so that there can be only 21 million of Bitcoin that can be generated, so the maths problems get ever-more complex as more coins are produced.
Q. So for example, if the 21 million mark is reached, will that be the end of Bitcoin?
21 million is an arbitrary number. One Bitcoin can be split between one hundred million people. I can send you right now .000000001 Bitcoin if I want to. So should the level be reached, breaking Bitcoin will solve the problem.
Q. Like other payment systems go down, can Bitcoin too?
I know a few months ago the Visa network in Canada went down. They have one central data centre, all the transactions go through that centre. There was a big power surge and no one in all of Canada could use their cards.
That can never happen with Bitcoin. Why? Because instead of having one central database, that database is cut up and split between everyone who is using Bitcoin all over the world. So if you want to shut down Bitcoin, you’d literally have to shut down the entire internet.
Q. Tell me more about your Bitcoin transfer company BitInstant.
We’re one of the largest companies within Bitcoin and are probably one of the first start-ups in the space. We are the premier clearing house for Bitcoin – normal currency comes in, Bitcoin comes out and then Bitcoin comes in and normal currency comes out.
We have 700,000 locations in the US. You can go to any Walmart, CVS, Walgreens, and buy Bitcoins from these regions. We’re about to launch a British arm and already have about 50,000 locations in the UK from where you can buy a Bitcoin. You can walk into a location, buy a Bitcoin and witihin minutes send it to the US. Your family can then go to one of our locations and get that in dollars and get it in an hour.
Our locations in the US are public but locations in the
UK are secret. That’s because we haven’t launched in the UK yet.
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Q. You own a bar called EVR in New York which accepts Bitcoin. How’s it going?
It’s going great. I launched it just for fun and didn’t realise it’d take off. People are very excited to have the option of paying in Bitcoin and we love it too.
Customers willing to pay in Bitcoin are presented with tablets with an app called BitPay. The app converts the bill in dollars to Bitcoin and customers get a barcode. They then scan the code through their phone and the payment is taken from their Bitcoin wallet.
So say a customer buys a pint of beer today, he would pay $7 or .05 Bitcoin.
Paying through Bitcoin helps us save a lot of money – with BitPay you pay 1% transaction fees compared to 3-5% with credit cards.
Q. Why did we need Bitcoin? Was it founded because of a frustration with banking systems?
Yes, 100%! That’s why Bitcoin was created. If banks were listening to the people from the beginning, Bitcoin would’ve never existed.
Having said that, I don’t think Bitcoin is born out of the catastrophic failure of the banking system, it’s created out of the catastrophic failure of the international monetary and fiscal system. The fiscal policy of different countries and how governments print money arbitrarily and use the money supply is what made Bitcoin.
Q. There are no transaction fees for exchanging Bitcoin. Do you think that will affect the way banks operate?
I think banks have to change and adjust their business models just like everyone else does if they want to make money.
There are other ways banks can make money other than transaction fees. You’re not paying the bank to send the money, you’re paying the bank to hold your money, keep it safe.
I chat to bank officials all the time. I get views from all over the spectrum, from people who like it and people who hate it. Some people love it, some hate it.
Q. Can Bitcoin be used to buy drugs online?
That’s bullsh*t. I have processed over $14m and there’s not one terrorist or criminal activity that has been used through my system. We monitor all money laundering protocol, all major customer policies and we’re licensed in 48 out of the 50 states in the United States.
The US government has applied money laundering rules to Bitcoin. Therefore, the currency is regulated like Western Union. Companies trading Bitcoin need to fulfil bookkeeping requirements and have to declare any transaction of more than $10,000.
Q. Is Bitcoin a danger to tax authorities? Does it provide a way to amass wealth without being taxed?
That’s not true at all, people who say that don’t understand it.
When you have a Bitcoin and it boils down to tax reason, you have to declare what you own, and when you convert it into dollars, you have to declare it too.
Q. Can you get away with not declaring them?
You can’t for long. If you don’t declare it, you can get into trouble with tax authorities.
Q. A common complaint with Bitcoin is that the price is very volatile. What do you have to say to that?
The price fluctuation has happened three times, and it wasn’t a crash, it was a market correction. The first time was a year and a half ago, where the price went from $3 to $30 within a week and dropped back down to $8. Then it kept rising and went from $50 to $250 in two weeks and dropped back to $80. Now it’s at a $130, you see market correction happening.
The press gets involved, speculation happens, people buy in and sell out and it moves in circles. You’ll see a lot of that but I think in the next three years you’ll see much less of that and the market will become a lot more stable.
Q. You’ve said the past that Paul Krugman’s got it all wrong. Why do you say that?
Oh Paul Krugman doesn’t understand Bitcoin, he wrote an article in the New York Times the other day and he got everything wrong. He doesn’t understand how it works, he doesn’t know how to separate the unit in value and the payment system itself. His fundamental economics is wrong and I’m happy to debate him any day about it.
He’s a Keynesian economist and I’m an Austrian economist, there are fundamental differences. He believes in spending to fix the economy and I believe in saving to fix an economy and be smart about it and spend, spend, spend.
Q. Krugman says “Bitcoins derive their value, if any, purely from self-fulfilling prophecy: the belief that other people will accept them as payment”. Is he wrong?
Ha! That’s exactly where he is wrong. The US dollar derives its value, if any, purely from self-fulfilling prophecy: the belief that other people will accept them as payment. Think about it, why else is the dollar valuable?
Bitcoin, like gold or silver, has intrinsic value, it’s a global decentralised payment system which is the largest global network in the history of the world.
Q. Are you saying Bitcoin will become mainstream?
Yes, why not. There are a lot of ways to do that, you can use it to send money home, payments from person to person, there are a lot of different things you can do with that. You have all types of companies who are going to try and do that.
Q. You had your Bitcoins stolen a few months back – is Bitcoin that easy to steal?
Yes, I had my Bitcoins stolen. The problem is that Bitcoins can be hacked if they are all kept in the same computer. But now you can keep your Bitcoins in a Bitcoin bank and hopefully, soon enough, they should be insured to make sure if they get stolen, they cover that loss like the banks do.
Q. How will you get more Britons to start using Bitcoins?
We’re going to be building a remittance company and help people buy pounds in the US by giving US dollars instead of them using a normal Forex company, or banks taking a crazy percentage. People can just buy Bitcoin and sell Bitcoin for pounds.
Q. What’s the future of Bitcoin?
I don’t know yet. Bitcoin will find its place in the world. It’s great for remittance, donation or helping small countries in Africa in moving money between them, and supporting trade and people who live in these locations. It’s not going to overtake the world’s monetary system slowly but surely. We don’t want that, we want people to have better access to money and trade in that. I’m a purist – I want to make the world a better place.
Q. Give me three tips for investing in Bitcoin.
It’s a risky investment. Don’t spend any money you don’t have, don’t borrow money to buy it. Understand that it can pick up and drop anytime.
Q. Finally, what do you see yourself doing 10 years down the line? Will you still be Bitcoining?
I would be having a good time with Bitcoin. It has the potential to become the next Apple or Facebook, I wouldn’t be here if it wasn’t this way.
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