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Vitalik Buterin is the brains behind what some say is the next generation of bitcoin, called Ethereum. (MATTHEW SHERWOOD FOR THE GLOBE AND MAIL)

Bitcoin believers: Why digital currency backers are keeping the faith Add to ...

It’s unclear, however, whether every country will allow bitcoin transactions. In China, the country’s central bank recently ordered commercial banks and payment companies to shutter their bitcoin trading accounts, trying to clamp down on the use of bitcoin as a way to get around China’s strict currency controls.

Tax authorities in Canada and the U.S. have recently said bitcoins are not money, but taxpayers who make money selling them need to report those gains for tax purposes. In the February federal budget, Ottawa warned it would bring in unspecified rules to curb the use of bitcoin and other virtual currencies by money launderers and terrorists.

For their part, Canadian banks are watching bitcoin closely, as it, or something like it, could one day be a major competitor for their payment processing services.

Bill Downe, chief executive officer of Bank of Montreal, said recently in an interview with the Financial Post that if bitcoin was properly regulated, he could see the bank dealing in it, just as it deals with foreign currencies.

But Gordon Nixon, CEO of Royal Bank of Canada, was more dismissive at his bank’s general meeting in February: “I have a very difficult time understanding the sustainability of a currency that doesn’t have a government or central bank behind it.”

Some economists are also skeptical of bitcoin’s future. Jean-Paul Lam, a University of Waterloo professor and former economist at the Bank of Canada, says he believes bitcoin is a bubble.

He warns that it suffers from inherent limitations. As part of bitcoin’s basic design, the total potential number of bitcoins is fixed, and will max out at 21 million, a trait its boosters say makes it inflation-proof, unlike the traditional “fiat currency” that can be printed by central banks.

But if, as many speculators and investors hope, bitcoins continue to increase in value, this would actually make them unattractive as a medium of exchange, Prof. Lam says. Consumers will want to hang on to them instead of use them.

Bitcoin’s extreme swings in value over recent months demonstrate the practical challenge. “If I have bitcoins right now, and you ask me to buy my coffee in bitcoins, I will think twice,” Prof. Lam said. “I will look at the value right now and if I wait five more seconds, you don’t know if the thing is going to fluctuate. ... If I am paying in dollars, I know their value won’t fluctuate so much.”

The next phase for bitcoin

Bitcoin’s challenges haven’t dampened the high spirits of the people who attend the Toronto meet-up.

At the gathering, Ryan Scott shares his vision with the crowd for his startup, which he calls Knights of the Satoshi. (Bitcoins are each divided into 100 million Satoshis, in honour of the currency’s purported founder.)

The self-taught Mr. Scott, who worked as a sales supervisor at Future Shop until last year, says his business will allow customers to contract out the mining of bitcoins to him. This will spare them the need to purchase expensive computers and pay for electricity and air conditioning to keep servers from overheating. He is currently looking for data centres to store his computers. “It was a passion or a hobby that turned into something more,” he said of his interest in bitcoin. “I never expected bitcoin to go where it is, the huge upward potential.”

Some in the bitcoin world are already talking about what they see as the next level of innovation, that goes beyond bitcoin but builds on the technology.

Vitalik Buterin, a 20-year old Torontonian who dropped out of the computer science program at the University of Waterloo, is the brains behind what some say is the next generation of bitcoin, called Ethereum – but to outsiders, the concept may seem more than a bit vague.

He describes it as a platform that will allow software developers and bitcoin users to make contracts with each other, allowing them to hedge bitcoins, or create their own virtual currencies, or even buy virtual shares in virtual companies. Bitcoins must first be exchanged into Ethereum’s own virtual currency, called ethers, which will initially be sold to finance the venture.

At the meet-up, Michael Perklin, who recently quit his job as a digital forensic investigator with a telecom company to start a bitcoin security business, shows the crowd a brief video promoting next week’s Bitcoin Expo in Toronto, apologizing for using tiny speakers for the audio.

While he admits that securing bitcoins against hackers is a “cat and mouse game,” he is confident that bitcoin is here to stay: “You cannot put this technology back in the box. ... You can’t unmake bitcoin technology. So it is not something that can just disappear tomorrow.”

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What is Bitcoin?

Bitcoin is a completely decentralized form of virtual currency that enables direct payment over the internet by skipping the middleman, which is usually a bank or credit card company. Transactions are safe due to cryptography used to prevent double spending, counterfeiting, or theft. Users can use bitcoins for a variety of real transactions.

How does Bitcoin work?

Before a Bitcoin can be purchased, a user must install a virtual 'wallet' onto a personal computer or mobile device. The wallet is similar to personal finance software and keeps track of Bitcoin balance and transactions.

The user then pays for bitcoins, either through a credit card, bank account or anonymously with cash. Bitcoins are transferred directly into a Bitcoin account, and the user can send and receive payments directly to a buyer or seller.

Similar to trading stocks, a buyer can place an order for a Bitcoin through an exchange program once the funds are available. Bitcoins can also be purchased from third parties.

Users pay far fewer associated fees by skipping the middle man in each transaction, and they can also maintain a much higher level of anonymity.

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