Bits Blog: The ‘Other’ Server Makers Are Gaining Ground

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Tool Kit: Virtual Currency Gains Ground in Actual World

A type of digital cash, bitcoins were invented in 2009 and can be sent directly to anyone, anywhere in the world. You don’t have to go through a financial institution, which means no fees and no one tracking your spending habits. With a current market capitalization of $1 billion, bitcoins are beginning to be more widely accepted. You can use them to pay for a pizza or make speculative bets that could end up financing your child’s college education.

But bitcoins, and other digital currencies, have also come under scrutiny. Liberty Reserve, an online payment system, was shuttered in the spring by New York authorities, who said the company used its digital currency, known as LRs, to launder up to $6 billion. And law enforcement officials have voiced concerns that bitcoins could also abet illegal transactions. Bart Chilton, a commissioner on the Commodity Futures Trading Commission, suggested that bitcoins might be ripe for regulation.

Moreover, some critics say the bitcoin infrastructure is insecure, as hackable as any other computer-based system.

“The way the basic bitcoin system works is both incredibly solid and incredibly clever from a technical standpoint,” said Nicholas Weaver, senior staff researcher at the International Computer Science Institute in Berkeley, which studies and advances a range of emerging technologies. “The system’s security is fragile, however, and the economic model behind bitcoin is, well, crazy stupid.”

Nonetheless, paying with bitcoins can be a weirdly fun way to make transactions. Here is a primer on how to do it.

Like gold, bitcoins, which are both a currency and a commodity, are in limited supply (there is a cap of 21 million total) and have to be “mined” before they are put in circulation. Anyone can mine for bitcoins by downloading software, known as the bitcoin client, which algorithmically crunches a bunch of numbers to legitimize or authenticate a sequence or “block” of past bitcoin transactions. So bitcoins are basically minted as a reward for contributing to the smooth operation of the system. Validating a block yields 25 bitcoins, which are currently worth $2,675.

The fluctuating price of bitcoins, also like gold, is a function of supply and demand, as well as psychology. “Bitcoins have value because people say they have value,” said Andrew White, a former I.T. manager for the Wikipedia Foundation and now a digital currency entrepreneur in San Francisco.

Unlike fiat currencies like the United States dollar and virtual currencies like Facebook credits and the one invented by Liberty Reserve, bitcoins are not created or controlled by a central authority. But with the blistering rate of bitcoin transactions these days, you need a pricey and complex computer rig to effectively run the bitcoin client and procure some bitcoin bounty. An easier way to get bitcoins is to just find someone willing to sell them to you.

Julian Tosh, an I.T. systems administrator in Las Vegas, for example, lets friends and family buy items on his Amazon wish list and pays them back in bitcoins. “This works well as long as I need stuff,” said Mr. Tosh, who also presides over a Wednesday “Bitcoin Lunch Mob” in Las Vegas, which gathers to discuss and trade bitcoins.

But maybe you don’t personally know any bitcoin enthusiasts like Mr. Tosh or the Winklevoss twins, Cameron and Tyler, who own around $11 million worth and have filed papers with the Securities and Exchange Commission to form a bitcoin investment trust. If so, you might try localbitcoins.com, which lists people in your area who are willing to exchange bitcoins for cold hard cash. The market price Tuesday afternoon was $107 for a bitcoin. Be sure to check out sellers’ profiles and reviews to make sure they are reputable. And, of course, it’s always a good idea to meet in a public place to make the transaction.

Bitcoins can be easily transferred and stored using a digital wallet app on your Android mobile device. Popular wallet apps include BitcoinSpinner and Bitcoin Wallet. There are no iOS bitcoin wallet apps and Apple did not respond to e-mails seeking an explanation. But Blockchain has an online wallet service that you can access using any Internet-connected desktop, laptop, tablet or smartphone.

You can also get bitcoins through Mt.Gox, the largest bitcoin exchange and where the currency is traded as a commodity. But it’s a cumbersome and lengthy process, requiring wire transfers and scanning identity documents. The company, which is based in Japan, also charges a 0.6 percent fee for all transactions.

Keep in mind that the United States Department of Homeland Security in May seized Mt.Gox’s United States accounts, saying it misrepresented the full extent of its financial operations. The company did not respond to requests for comment but continues to function as before the seizure.

Another option is Coinbase, a bitcoin transaction platform, which recently announced a $5 million infusion of venture capital. While it’s still a nascent venture (not even a year old), the service hasn’t had any major hiccups yet and is relatively simple to use. You just enter your bank account and routing number, how many bitcoins you want and click “buy.” You can also send bitcoins to others through your Coinbase account. Just know you’ll be charged a 1 percent transaction fee.

Once you have your bitcoins, the fun part is spending them. Bitcoin. travel, BitcoinsInVegas.com, Spendbitcoins.com and Reddit have directories of businesses that accept bitcoins as payment. And Bitpremier.com lists high-priced luxury items (cars, jets, yachts, etc.) you can buy with bitcoins.

To make a purchase, all you have to do is type the receiver’s key code or scan their QR code into your bitcoin wallet and you’re done. Like cash transactions, you can’t cancel payment later, so be sure it’s what you want before you click “send.”

Brewster Kahle, a founder of the Internet Archive in San Francisco, said he routinely used bitcoins to pay for lunch at a local sushi restaurant. He’s interested in the technology and appreciates the libertarian aspect of it. “Bitcoin used to be just in the land of computer geeks, but not anymore,” he said.

More businesses are accepting bitcoins lately thanks to Bitpay, which supplies software for processing bitcoin payments. The merchant pays a 0.99 percent fee per transaction versus the 2 to 4 percent fees charged by credit card companies. Bitpay will also immediately convert bitcoins to dollars if the merchant desires.

“Bitcoin users are pretty enthusiastic, so you get instant loyal customers,” said Adam Penn, owner of Veggie Galaxy, a restaurant in Cambridge, Mass., which began accepting bitcoins through Bitpay in May. “So far, it’s been a no-risk revenue generator.”

Also last month, Bitpay announced a partnership with the mobile gift card app Gyft, which will allow people to use bitcoins to purchase gift cards from hundreds of retailers including Brookstone, Lowe’s, Gap, Sephora, GameStop, American Eagle, Nike, Marriott, Burger King and Fandango.

“It’s a huge development,” said Mr. Tosh in Las Vegas, who predicts Gyft’s embrace of bitcoins will lead to widespread use of the alternative currency. “Pandora’s box has been smashed.”

Or maybe not. The legal trouble at Mt.Gox sent a shiver through the market as did S.E.C. charges last week that the founder and operator of the lesser-known Bitcoin Savings and Trust in McKinney, Tex., was running a bitcoin Ponzi scheme.

Still, bitcoin advocates point out that, despite some bad actors, the actual system has not had a major security breach. Nevertheless, even the most ardent bitcoin boosters urge caution. Bitcoins have appreciated more than 700 percent since this time last year — an increase some have compared to a bubble bound to burst.

“It’s supervolatile, so I’d tell people to go slow,” said Peter Vessenes, chairman and executive director of the Bitcoin Foundation, a nonprofit organization that promotes the currency. “Never hold more bitcoins than you’re prepared to lose.”

Inside Asia: Smartphones Gain Ground in India

More than four years after it started selling iPhones in India, Apple is aggressively pushing the devices with installment payment plans that make it more affordable, a new distribution model and a marketing blitz.

“Now your dream phone” at 5,056 rupees, or $94, read a recent full front-page ad for the iPhone 5 in the Times of India, referring to the initial payment on a phone priced at about 45,500 rupees, or almost two months’ wages for an entry-level software engineer.

The newfound interest in India suggests a subtle strategy shift for Apple, which has moved tentatively in emerging markets and has allowed rivals like BlackBerry and Samsung Electronics to dominate with more affordable smartphones. With the exception of China, all Apple stores are in advanced economies.

Apple expanded its Indian sales effort in the second half of 2012 by adding two distributors. Previously it had sold iPhones only through a few carriers and stores it calls premium resellers.

The result: Shipments of iPhones to India between October and December nearly tripled to 250,000 units, from 90,000 in the previous quarter, according to an estimate by Jessica Kwee, a Singapore-based analyst at the consulting firm Canalys.

At the MobileStore, an Indian chain owned by the Essar conglomerate, which says it sells 15 percent of the iPhones purchased in the country, iPhone sales tripled between December and January, thanks to a monthly payment program introduced last month.

“Most people in India can’t afford a dollar-priced phone when the salaries in India are rupee salaries,” said Himanshu Chakrawarti, the MobileStore’s chief executive. “But the desire is the same.”

Apple, its distributors, its retailers and banks share the advertising and interest costs of the marketing push, according to Mr. Chakrawarti. Carriers like Bharti Airtel, which also sell the iPhone 5, run separate ads.

India is the world’s second-largest cellphone market by number of users, but most Indians cannot afford fancy handsets. Smartphones account for just a tenth of total phone sales. In India, 95 percent of cellphone users have prepaid accounts without fixed contracts. Unlike those in the United States, Indian carriers do not subsidize handsets.

Within the smartphone segment, Apple’s Indian market share last quarter was just 5 percent, according to Canalys, meaning its overall penetration is tiny.

Still, the industry research company IDC expects the Indian smartphone market to grow more than five times, to 108 million units in 2016, from about 19 million last year, which presents a big opportunity.

Samsung Electronics dominates Indian smartphone sales with a 40 percent share, thanks to its wide portfolio of Android devices, priced as low as 5,900 rupees. The market has also been flooded with lower-cost Android phones from local brands like Lava and Micromax.

Most smartphones sold in India are much cheaper than the iPhone, said Anshul Gupta, a Gartner analyst: “Where the masses are — there, Apple still has a gap.”

Apple helped create the smartphone industry with the iPhone in 2007, but last year it lost its lead globally to Samsung, whose free Android software is especially attractive in Asia. Many in Silicon Valley and on Wall Street believe the surest way to penetrate lower-income Asian markets would be with a lower-cost iPhone, as has been widely reported but never confirmed. The risk is that a lower-cost iPhone would reduce demand for the premium version and eat into Apple’s margins.

The new monthly payment plan in India goes a long way toward expanding the potential market, Mr. Chakrawarti said.

“The Apple campaign is not meant for, really, the regular top-end customer; it is meant to upgrade the 10,000-12,000 handset guy to 45,000 rupees,” he said.

Apple’s main focus for expansion in Asia has been Greater China, including Hong Kong, mainland China and Taiwan, where revenue grew 60 percent last quarter to $7.3 billion.

Asked last year why Apple had not been as successful in India, Timothy D. Cook, the company’s chief executive, said that its business in India was growing but that the company remained more focused on other markets.

“I love India, but I believe that Apple has some higher potential in the intermediate term in some other countries,” Mr. Cook said. “The multilayer distribution there really adds to the cost of getting products to market.”

Apple, which has partly addressed that situation by adding distributors, did not respond to an e-mail seeking comment.

Ingram Micro, one of its new distributors, also declined to comment. Executives at Redington, the other distributor, could not immediately be reached.

BlackBerry, which has seen its global market share shrivel to 3.4 percent from 20 percent over the past three years, is making what is seen as a last-ditch effort to save itself with the BB10 series.

The high-end BlackBerry Z10, introduced in India on Monday, is expected to be priced not far from the 45,500-rupee price tag for an iPhone 5 with 16 gigabytes of memory. The Samsung Galaxy S3 and Galaxy Note 2, the Nokia Lumia 920 and two HTC models are the main iPhone rivals.

Until last year, BlackBerry had a market share of more than 10 percent in India, thanks to a push into the consumer segment with lower-priced phones. Last quarter, its share fell to about 5 percent, according to Canalys, just ahead of Apple.