If you've watched our video from today, you've caught a glimpse of the saga that was our attempt to buy and then subsequently sell a Bitcoin at SXSW. In retrospect, it wasn't a very bright idea. But we were curious, not only of the prospect of using cyptocurrency as a fungible good for making purchases, but also of the promised ability to turn Bitcoin into real cash dollars. Both of those goals were theoretically possible in that week in Austin, which had hosted a recent Texas Bitcoin Conference--spurring several local businesses (read: food trucks) to start accepting Bitcoin as a novel marketing tactic. Austin was also home to one of the first Bitcoin ATM operators in the nation, with no fewer than three places in the city to make automated in-person transactions. Yes, here was a machine that promised not only to slurp up your dollars to transfer fractions of Bitcoin to your digital wallet, but also let you cash out of virtual currency for Uncle Sam-backed bills.
Oh, if only it was that easy.
Something we didn't really explain in the video (because we frankly still don't completely understand it ourselves) is how the Bitcoin ATM system worked. The ATMs are built by a company called Robocoin, a Las Vegas-based started founded by two brothers who were previously making Bitcoin-for-cash transactions locally, in person. According to a Wired report, Mark and John Russell, wanted to find a way to automate the process using a machine, while still working within the still-evolving regulatory guidelines set by US government for Bitcoin transactions. Naturally, they teamed up with a Nevada slot machine maker to start making prototypes. Honestly, the warning signs were all there.
Because of those tricky (and still muddy) regulatory requirements, Robocoin doesn't actually run its kiosks. They just make them and sell them to operators for $20,000 a pop. Their first customers set up shop in Canada, where Bitcoin trading regulations are more lax--the machine doesn't need identification verification to take or dispense cash. Austin-based Bitcoin Agents was the first operator to install Robocoin machines in the states (a Hacker Dojo in Mountain View wasn't far behind), putting machines in three locations timed to open with the Texas Bitcoin Conference and SXSW. Handlebar was where we ended up buying our Bitcoin, and where I spent the next few days hanging out to try to get it give our money back.
I still have that .97 Bitcoin in my digital wallet.
Buying the Bitcoin from the Robocoin ATM was at least a straightforward process. It happened like you saw in the video--I had to create an account with the Bitcoin Agents through the Robocoin machine, giving it my telephone number (for SMS verification), creating a PIN, scanning my palm, letting it take my photo, and then also scan a copy of my driver's license. That's a whole lot of personal information, which in retrospect was pretty stupid of me. Bitcoin Agents holds on to that identification data to comply with government anti-money laundering laws, but there's no promise that they can't be hacked or won't use that information for suspect ventures in the future. Anecdotally, my identity hasn't be stolen yet, but I have received on average one strange telemarketing call a week since signing up for Robocoin--the first of which was from an adult chat service just hours after giving the Robocoin machine my phone number.
There's also the matter of the transaction fee, which for one Bitcoin (~$617 at time of purchase) was $38, or over 6%. Robocoin operators make money from these fees, which they charge for both buying and selling of Bitcoins. These fees are just one of the sources of controversy regarding Bitcoin ATMs; in Vancouver, the Robocoin operator had to hire a part-time chaperone to watch over the kiosk and prevent other traders from intercepting customers with the promise of lower-cost or free transactions.
The biggest hassle was in trying to get our money out from the Robocoin machine, selling the Bitcoin back to Bitcoin Agents. The process here was incredibly convoluted and opaque. After logging back into the machine with my phone number, PIN, and palmprint, the kiosk spit out a receipt with a QR code representing the wallet address of Bitcoin Agents. The idea was that I would use my wallet to send the Bitcoin value to the operator, with the promise that after receipt, the machine would dispense the equivalent in cash--minus the transaction fee.
My mistake was in not paying a "miner's fee" after sending the Bitcoin to the operator. This was a step that wasn't made clear in the selling process, neither by the Robocoin machine or my Blockchain app. The way I understand it now, transactions have to be confirmed by the Bitcoin network, with the data of that transaction being attached to new blocks of data that's generated by the mining process. The data blocks keep a permanent record of all the transactions taking place in the network, but miners don't have to include your transactions in newly mined blocks. That's why the miner fee exists--it's a small fraction of a Bitcoin to incentivize miners to attach your transaction to their blockchains and therefore validate it. Merchants and operators typically require the arbitrary number of six confirmations before considering the transaction legit. And the typical transaction fee--0.0001 BTC--was not made clear when I sent the Bitcoin to Bitcoin Agents.
So instead of the transaction being confirmed in the 15-minute average it usually takes, our Bitcoin was lost in limbo for over a day. I sent a support email to Bitcoin Agents, and received a text message the next day (they matched my name to my phone number, I assume) from Mike Piri, the owner of the Austin Robocoin machines explaining the situation. Fortunately, Mike agreed to refund the transaction for exactly what I had sent to the machine, but by that time I was already on a flight back to San Francisco. The Bitcoin still remains in my wallet, having now depreciated to $480
Was it foolish to give so much personal information and cash to machine? Absolutely. Our mistake was not understanding how Bitcoin transactions and confirmations work, and this test was an expensive learning experience. Still, we got a silly video out of it, and it's hopefully a cautionary tale about the risks of Bitcoin and experimental technologies. We'll make fools of ourselves any day so you won't have to.