Bitcoin makes millionaires of some, bankrupts others
Published: Monday, January 27, 2014
Updated: Monday, January 27, 2014 22:01
Does Bitcoin have staying power in the world economy?
Overstock.com announced Jan. 9that it would begin accepting the internet-based currency Bitcoin. A Subway Sandwich in Allentown, Penn., will make a footlong in exchange for Bitcoins. Travelers can book a flight at Cheapair.com using the new currency.
With Bitcoins, you can even hire Ryan Hurley, a lawyer based out of Scottsdale, Ariz., which is good news for BitInstant CEO Charlie Shrem, who was arrested for allegedly money laundering in conjunction with his Bitcoin-based business.
Bitcoin, darling of basement-dweller netizens everywhere, is a digital peer-to-peer currency introduced in 2009. It is based on open source software and is independent of any government. More specifically Bitcoin is a cryptocurrency, meaning that at the currency’s core it is protected using cryptography, which has in the past year gained the attention of market analysts, investors, broke college grads, drug dealers, hitmen and slave traders.
A bitcoin is not a coin or physical currency at all and in reality each bitcoin is an address that links to a certain block in the Bitcoin block chain, an online and freely viewable database of every bitcoin and every transaction since Bitcoin’s inception. Since every bitcoin is simply a location in the chain and the block chain is open to view, the system protects itself by not only making each bitcoin’s ownership public knowledge but makes every transaction public and prevents issues like double spending or the creation of fraudulent bitcoins.
The block chain itself is protected with maintenance and the addition of new exchanges and other information – a crowd-sourced affair. The block chain requires every transaction to be verified before it is added to the block chain by individuals called miners. Miners, in exchange for this service, are rewarded with the processing fees from transactions and have access to newly created bitcoins.
New bitcoins are awarded to miners based on a never-ending raffle where random lucky miners are rewarded in freshly minted coins. This serves to introduce new currency to the system at a controlled rate to prevent both inflation and deflation by regularly assuring that new people have access to bitcoins but preventing too many bitcoins from coming into existence.
The whole system works as a myriad of checks and balances. Bitcoins are really only worth anything if they are in the block chain, and the block chain is maintained by millions of miners across the globe who work for bitcoins, both paying them to play and giving them incentive to continue mining and preserving the integrity of the block chain itself.
But downloading a mining client and hooking that old computer in your closet up won’t turn you into a millionaire overnight. As interest in the Bitcoin increases, so does the number of miners. Entire corporations in China and other countries have invested in farms of supercomputers with the sole purpose of mining more efficiently than your fancy aluminum Macbook Pro. The chances of making a buck mining, based on your computing power, is called Bitcoin Difficulty, and current calculators suggest you may pay more money for the electricity to run your computer than you would ever make using a standard home computer.
The other way to play the game is to buy bitcoins outright. When I began writing this article one bitcoin would cost a buyer $1,022. Just fewer than 600 words into writing this, and the price is now $964 according to bitcoinity.org’s market tracker. In October 2009 a dollar could net a buyer 1,309 bitcoins. Jered Kenna accidentally erased 800 bitcoins from his computer when he reformatted his hard drive, that’s almost $800,000 today. Fortunately for him, he bought 5,000 for $.20 a piece in the currency’s early days and is now one of many who are now millionaires simply for buying into the currency early. Not everyone has been so lucky. James Howells told Forbes.com about his $9 million mistake when he threw out a hard drive full of the then-worthless coins only to later discover their spike in value.
Stories like these have led to the invention of online bitcoin wallets, online resources to store and protect an individual’s bitcoins instead of saving them locally in a notepad file or something equally silly on a local computer.
In fact, Bitcoin has inspired hosts of cottage industries that have turned net savvy bums into over night millionaires. Even the Winkelvoss twins of Facebook fame have invested millions in Bitcoin, including $1.5 million in BitInstant, reaffirming the twin’s inability to ever have an investment go their way.
The dark side of Bitcoin came to light when Silk Road, an online black market, gained news notoriety and was eventually shut down. Due to the currency’s independence from any government and peer-to-peer transfer natures, it has become the payment of choice for online criminals whether they’re innocently selling Adderall to college students, supplying the good people of the world with illegal firearms or giving people the adventure of a lifetime through the world of sex slavery.
Okay, so bad people do bad things with Bitcoin, but that happens with any money right? What about those millionaires? Screw degrees, screw Sam Houston, and screw work. Let’s go make some millions. Well, before you go and invest every dollar you have in BTC like other get rich quick idiots the world over are trying to do, let me tell you: that ship has sailed. We’ve already been through the period of rapid growth for Bitcoin. That isn’t to say money can’t be made by intelligently investing in the currency, but more likely you’ll lose more than you make if you aren’t an experienced trader.