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The Rise and Fall of Bitcoin

For many who have never heard of the term "bitcoin" before I will break it down for you. A bitcoin refers to a decentralized digital currency created and traded using a client. Bitcoins offer low cost easy payments from one party to another with no centralized agent like a bank, government agency, etc. There are over 7 million bitcoins in existence. This figure is algorithmically determined.

As one friend put it to me, bitcoins are the perfect anti government, anti Fed, anti New World Order, anti Wall Street, anti.... (everything). One thing that is/was supposed to make bitcoins solid and secure from being devalued is that there is a finite amount of bitcoins (and i dont know offhand the figure). In sharp contrast to how the US government uses "quantitative easing" and continues to print money to fund all sorts of endeavors (from wars to social programs). With increasing amounts of cash, the value drops. This wasnt supposed to happen with Bitcoins.

Bitcoins are essentially "mined" using CPU and GPU processing from peoples computers. The faster your system, the quicker you can mine for a bitcoin. And since there are technically a finite number of "coins" to be mined, the more you get the more wealth you create. There are ingenious ways of mining coins, such as using multi core systems. One friend set up an elaborate set of computers complete with the highest end graphics cards in each. I think each computer had 3 or 4 video cards. The real power for mining bitcoins comes from GPU processing, not from a CPU. He was (and probably still is) running these computers 24 hours a day and his electric bill jumped an additional $250 USD per month. He then joined mining clubs and mining teams to further speed up his mining activities. At one point I spoke to him, his computers were "mining" over $5000 USD worth of bitcoins per month. (I know, not bad!)

One of the real beauties of Bitcoins is the anonymity of trading the coins and merchandise. While definitely not as anonymous as a pure cash transaction, bitcoins are still better than say other electronic payments systems (paypal, banks, etc).

 If there is no mass printing or quantitative easing of bitcoins going on, and its supposed to be stable, why is the value dropping? Back in June 2011 there was a major security breach on the bitcoin exchange (Mt Gox) causing the price of a bitcoin to plummet down to 0.01 USD. While order was eventually restored, and the price of the bitcoin went back up, this sort of hacking of the bitcoin model has left an uneasiness in the whole plan of things. The bitcoin reached approximately $33 USD in June, and now hovers at $2 in October 2011.

While our friend was making serious cash flow @ $15 per bitcoin he is now barely making ends meet at the current prices. If the price of bitcoins continues to drop, it could be curtains for the digital currency.

Are you a current or previous Bitcoin user?  If so, why?

About jake

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  1. I've been using bitcoin since it was worth one cent and I still love it. The fact that the prices have fluctuated does not concern me to much. I use it because there are no transaction fees. As a web developer its a huge help when clients pay me in bitcoins. It's so convenient and fast that we even give a 10% discount to anyone that pays with it.

  2. Anonymous1:01 PM

    People get too distracted by the current market price of a Bitcoin. When it was rising, "ahh it's a bubble" and when it's falling "ahhh it's a crash!"

    Markets move toward efficiency, and Bitcoin enables efficiency of transaction that is unprecedented (though admittedly awkward at this early stage).

    The price is going to be volatile for a long time. The system works beautifully, though, and the people building systems around it are not going anywhere.

  3. Its been in "crash" mode for quite some time now. I do think Bitcoin is here to stay. There is and will always be an underground market in need of anonymous transactions.

    Originally, I was very interested in Bitcoin when I had first heard about it. The thought if a monetary system that has finite number of "coins" gives value to each bitcoin. But the truth is, and my real concern lies with the fact it is really not entirely finite. Bitcoin has an algorithm that creates a new amount/greater amount of bitcoins over time. We all know what the Federal Reserve has done to the US dollar since 1913. It has been devalued over time. At a slow expansion of bitcoins, you wont feel the devaluation much. In time and when Bitcoin gains in popularity they will need to accelerate their expansion. Thus, bitcoins will either lose value or at least never reach a full value it could have held.