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.”

Markets Recover Some Ground After Fed Statement

Signs of a slowing economy dragged down the stock market on Wednesday. Even the prospect of continued stimulus from the Federal Reserve did not help.

The three major market indexes fell by 0.9 percent. Small-company stocks fell even more as investors shunned risk. The yield on the Treasury’s 10-year note fell to its lowest point this year as investors moved their money into government securities.

Stocks sagged throughout the day, hurt by reports of a slowdown in hiring and manufacturing last month. Discouraging earnings announcements from major companies also did not help.

“Investors are going to be rattled by these numbers,” said Colleen Supran, a principal at Bingham, Osborn & Scarborough. She expects stock market swings to increase after the early gains of the year.

The Dow Jones industrial average closed down 138.85 points, at 14,700.95 points. Merck, the giant drug company, had one of the biggest falls in the Dow after reporting earnings that disappointed investors.

The Standard & Poor’s 500-stock index lost 14.87 points to 1,582.70. The Nasdaq composite index declined 29.66 points, to 3,299.13.

The stock market declined even though the Federal Reserve stood by its economic stimulus campaign after a two-day policy meeting. The Fed is maintaining its program to buy $85 billion in Treasury and mortgage-backed securities a month in an effort to keep interest rates low to encourage borrowing, spending and investing.

The Fed also raised concerns about the economy, noting that tax increases and spending cuts that kicked in this year were slowing growth.

“If you get a market that is purely built on free money, as opposed to solid fundamentals, investors should take pause,” said John Lynch, chief regional investment officer at Wells Fargo.

The Fed’s program has been one of the factors behind the stock market’s rally this year. But the market has stumbled in recent weeks after several reports suggested the economy might be weakening.

On Wednesday, a report showed that factory activity in April dropped to its slowest pace this year as manufacturers pulled back on hiring and cut stockpiles. Companies added just 119,000 jobs in April, the fewest in seven months, according to the ADP National Employment Report. The government will report on April employment on Friday, and the economy is expected to have added 145,000 jobs.

Company earnings drew investors’ attention.

Merck fell $1.31, or 2.8 percent, to $45.69 after cutting its 2013 profit forecast. The company said competition from generic versions of its drugs and unfavorable exchange rates hurt profit.

MasterCard eased $13.11, or 2.4 percent, to $539.80 after the payments processing company reported that revenue missed the expectations of financial analysts who cover the company.

About 70 percent of the companies that have reported earnings have topped the forecasts of Wall Street analysts, according to S&P Capital IQ. Revenue has disappointed, though, with about 60 percent of companies falling short. That suggests companies are raising profits through cutting costs rather than increasing revenue.

In government bond trading, the 10-year Treasury note rose 12/32, to 103 10/32, pushing its yield down to 1.63 percent from 1.67 percent.

Optimistic Investors Help Markets Make Up Ground

The stock market advanced on Tuesday as earnings season got under way, with the Dow Jones industrial average closing at another nominal record high on a rally in cyclical shares.

With the day’s advance, the Standard & Poor’s 500-stock index ended less than two points shy of its nominal record, recovering from steep losses last week.

The strength in the indexes indicates that investors are again using market declines as buying opportunities. The top sectors of the day, technology and energy, are groups that are closely tied to the pace of economic growth.

“It’s encouraging that we’re seeing cyclical sectors lead the rally,” said Joseph Tanious, global market strategist at J. P. Morgan Funds. “It’s a healthy sign — investors believe the market can continue to run higher.”

Among blue-chip technology stocks, Microsoft jumped $1.02, or 3.6 percent, to $29.61 as the Dow’s top percentage gainer. Intel shares shot up 66 cents, or 3.1 percent, to $21.75, and Hewlett-Packard rose 29 cents, or 1.3 percent, to $22.22.

The Dow industrials rose 59.98 points, or 0.41 percent, to close at 14,673.46. The S.& P. 500 gained 5.54 points, or 0.35 percent, to 1,568.61. The Nasdaq composite index added 15.61 points, or 0.48 percent, to 3,237.86.

While only 5 percent of S.& P. 500 companies have reported results so far, almost three-quarters of those have topped expectations, according to Thomson Reuters data. Still, profits are seen rising just 1.5 percent from the year-ago quarter, down from estimates in January for growth of 4.3 percent.

“Expectations have gotten managed down to the point where we could more easily see companies beat expectations, making it easier for us to pop,” said Kristen Scarpa, an investment strategist at Barclays.

Late Monday, Alcoa reported earnings that beat expectations, though revenue was below forecasts. Shares of Alcoa, which as part of the Dow is unofficially seen as setting the tone for the earnings season, closed flat on the day at $8.39.

First Solar, which surged $12.31, or 45.5 percent, to $39.35, was the S.& P. 500’s top gainer by far after forecasting 2013 earnings and revenue well above expectations.

The news lifted the solar sector, with Yingli Green Energy climbing 39 cents, or 21.1 percent, to $2.24, and Trina Solar up 56 cents, or 14.6 percent, at $4.40.

Recent reports have shown that the American economy is growing at a slow pace. The March employment report on Friday showed job creation was less than half of what economists had expected. Analysts said, however, that the market has the momentum to push indexes higher, even with the Dow industrials up 12 percent so far this year and the S.& P. 500 up 10 percent.

J. C. Penney was the S.& P. 500’s largest percentage loser, tumbling $1.94, or 12.2 percent, to $13.93 after the department store’s board ousted Ron Johnson as chief executive and replaced him with his predecessor, Myron E. Ullman.

Shares of Herbalife fell 3.8 percent to $36.95 after it said that KPMG had resigned as its independent accountant. One of KPMG’s senior partners in the firm’s Los Angeles office was accused of leaking secret information to a stock trader about Herbalife and the footwear company Skechers USA. The accounting firm said Monday night that it had fired the partner.

In the bond market, interest rates showed little change. The price of the Treasury’s 10-year note slipped 2/32, to 102 8/32, while its yield held steady at 1.75 percent.