Lance Gunkel, CFP®, CFA, Managing Director
January 17, 2014
There are essentially two methods of obtaining Bitcoin, the digital currency. The first is to buy it from an exchange, where the going rate is $875 per coin (one year ago it was at $17). The other approach is to “mine” the currency. Bitcoins have a limited supply; in order to increase the supply computers must mine them by solving a series of complex calculations that add and certify the transactions of other Bitcoin holders. If a particular miner solves the problem before others, the miner earns 25 Bitcoins ($21,875 at today’s prices).
As the price of Bitcoins escalated, miners became more sophisticated and started to employ specialized processing chips. As this article from Bloomberg Businessweek indicates, mining was originally done in the basements of tech-savvy individuals, but today is done by large-scale prospectors. Chris Larson, the CEO of Ripple Labs, states that “mining was supposed to be a democratized thing, but it’s now only accessible to the elite of the elites.”
I’m still a Bitcoin skeptic. It seems that much of the interest is derived from the dramatic rise in the “value” of a Bitcoin, which could be a self-perpetuating phenomenon. When interest wanes, will Bitcoin still be a usable, viable currency alternative to the US dollar? I’m doubtful, but can’t wait to watch it unfold.