Bitcoin Surpasses $200 Mark, Continuing 'Epic' Rise

Bitcoin, the digital currency that trades outside the control of central banks and international borders, reached new heights Tuesday, surpassing the $200 mark for the first time. That level comes just five days after bitcoin approached $150, a development that Mt.Gox, the largest exchange service for the currency, deemed to be "epic."

Bitcoin's rise has been sharp. It was only two months ago that exchange rates put a single bitcoin's value at around $20.

Because the digital currency's new gains have coincided with deep economic uncertainty in Cyprus, Spain, and elsewhere, some have suggested that a "bubble" was being created. As fears over inflation and even steep withdrawal fees rose, experts said, so did bitcoin. And if those fears waned, so would the currency's value.

But Jon Matonis of the Bitcoin Foundation tells Der Spiegel that he doesn't believe the connection is as direct as people think.

"Most transactions are still coming from affluent regions, like the United States and Northern Europe," he says. "What we are seeing is not a Cyprus bubble."

At Mt.Gox, which says it conducts more than 420,000 bitcoin trades each month, the digital currency didn't just plateau at the $200 mark. It plowed past it Tuesday, hitting a high of $240. As Jason Dorrier at Singularity Hub points out, that volatility is also linked to the currency's small size.

Bitcoin's popularity has also been linked to activities some governments may disapprove of, or seek to tax. NPR reported on its role in online gambling earlier this year. And a New York Times story this week also noted bitcoin's acceptance by Silk Road, a website often "used as a market for controlled substances and narcotics."

Bitcoin's growth has led to changes at Mt.Gox, which announced last month that it would limit the maximum amount of monthly withdrawals to between $50,000 and $500,000, depending on customers' "verified" or "trusted" status.

Whatever the cause, bitcoin's gains have translated into new wealth for people who bought into it since it was created in 2009. The currency is released at a very steady rate — "roughly every 10 minutes 25 new bitcoins come into circulation," as NPR's Steve Henn reported last week.

Its adherents say that regular pace, and the fact that there is only a finite number of bitcoins, make it an attractive alternative to government-backed currencies. Just over half of the 21 million bitcoins in existence have so far been released.

And the currency is gaining wide attention, with TechCrunch explaining how to "mine" bitcoins, and Forbes offering four reasons bitcoin is worth studying. Back in 2011, NPR's Planet Money team acquired some bitcoins, in an experiment that ended when robbers looted the virtual bank that had been holding the currency.

One "miner," Chris Koss, has his entire life savings in bitcoins — something he recently told Steve Henn has brought big gains, as well as worries over how long the boom will continue.

Its steep rise has made some folks wistful for the bitcoins they frittered away on, well, fritters — some cafes and bars in the U.S. and Europe accept bitcoins. And others have felt new pangs of regret for bitcoins they lost when a hard-drive suffered a catastrophic failure.

That's the case for Stefan Thomas, a programmer who tells Der Spiegel, "I once lost 7,000 bitcoins, because I had forgotten to make a backup copy."

If Thomas had held onto those bitcoins, they would be worth around $1.4 million today.

Cyprus Crisis Boosting Unique Currency, the Bitcoin

Currency markets are keeping close track of Cyprus' banking crisis and are braced for possible repercussions, but one currency has thrived in the chaos and zoomed in value -- Bitcoins. A Bitcoin is a digital currency that is traded electronically and does not need government backing. Despite its name, there is no coin to put in your pocket.

 Two weeks ago, one Bitcoin was worth $40, then a record high. Today, it's worth $72, largely because of "incremental interest" from euro and Russian ruble holders who are terrified by the situation in Cyprus, said Nicholas Colas, chief market strategist at ConvergEx Group, a financial technology company in Manhattan.

"The best-performing currency year-to-date has no home country, no central banker and no physical scrip," Colas said. The Bitcoin is "clearly having a breakthrough moment here, and a deeply surprising one given its novelty and nascent infrastructure," he said. The Bitcoin reportedly was invented by a man who called himself Satoshi Nakamoto, and who may -- or may not -- have been a 23-year-old graduate student in cryptography at Trinity College in Dublin. He wanted people to be able to exchange money electronically and securely without a third party's involvement.

Although there are no physical coins, Walmart sells Bitcoin gift cards, and as Salon noted, WordPress and Reddit take payments in Bitcoin. Charlie Shrem, the CEO of BitInstant, a payment processor for Bitcoin exchanges and other merchants, thinks the Bitcoin is the wave of the future. "Let's say you have someone in Cyprus who badly needs money," Shrem said. "How are you going to get that person money? There's not enough cash going around. Bitcoin can and will be used as a barter, or maybe a collateral tool." He believes that people will first use Bitcoin "for its better uses" like remittance, wire transfers, donations and micropayments, before it reaches a mainstream audience.

"Imagine being able to pay five cents to read an article online instead of these ridiculous pay walls that require expensive monthly subscriptions," he said. "People will start reading the news again. Right now, you can't do that. Try sending five cents over the Internet." But Diana Furchtgott-Roth, the former chief economist for the U.S. Department of Labor and a senior fellow at the Manhattan Institute, a conservative think tank, was unimpressed. "It's a gimmick," she said.

"The Bitcoin would never work in Cyprus because Cyprus is full of insolvent loans. Putting in different currency is not going to help. They would ideally have their own currency. Whether it's digital or dollars, they need to separate from the euro and put in economic currency that will attract more investment." Colas was also hesitant about the Bitcoin's future. "Whether it succeeds or fails is hard to predict," Colas said. "We're clearly in uncharted waters. But one thing is clear: Bitcoin is one more lens with which to assess the ongoing European financial crisis."

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Bitcoin Value Reaches An All-Time High Compared To The Dollar

Digital currency used in place of the dollar isn't exactly a new concept, especially online.

Indeed, Microsoft has used its own points as a sort of alternate currency for Xbox 360 buyers for a number of years, while a number of cross-platform games following the same strategy for points and auction houses.

One of the most popular forms of alternate digital currency introduced in recent years is known as Bitcoin. The company has been in the news in recent months with hackers reportedly making off with about $250,000 worth of digital currency in September of last year.

More recently, Mega announced that it would be taking Bitcoin as a form of payment.

Interestingly, this week Bitcoin hit an all-time high in terms of value compared to the US dollar. Indeed, the exchange rate for the virtual currency and the US dollar climbed past $32 for the first time ever. The previous all-time high was hit in June of 2011 when the exchange rate was set at $31.9099 for the US dollar.

At its lowest point, the exchange rate was under two dollars in 2011 but the value of Bitcoin has risen over the last several months as the currency makes its way to new markets.

Despite the $250,000 virtual money heist last year, Bitcoin has remained relatively secure. Other than Mega, a number of other major websites also accept the virtual currency for payment, including Reddit and Wordpress.com.

Last year a French bank also received clearance to become a Bitcoin exchange - helping to broaden the availability for the virtual currency. To be sure, the bank became certified soon after the total circulation for the virtual currency hit the 2.5 million mark.

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Miner Problem: Big Changes Are Coming for Bitcoin's Working Class

Will speedy new chips and smaller margins spell doom for the currency's core users?

Jim O’Shea, a web programmer, gadget lover, and family man living in Pennsylvania, became a digital gold miner in June of 2011.

The resource he mines is not World of Warcraft currency, personal data, or fancy new domain names. It’s Bitcoin, the internet-native currency that many believe has the potential to become a revolutionary new universal currency independent of governments, banks, and PayPal.

O’Shea has 24 computers running constantly in a shed behind his house, making Bitcoins. "My setup is kind of... ghetto. I have bugs crawling around on my rigs and there’s dust and pollen and cigar smoke," he told The Verge recently by phone. "I'm out here now, I don’t know if you can hear them in the background. Can you hear the hum?"

Bitcoin has been described as cash for the internet, but gold is a more appropriate analogy. Anyone can "mine" Bitcoins on their own computers by running a program that’s designed to produce a 64-digit number in a resource-intensive way.

This program randomly computes a cryptographic "hash" over and over until the result is below the number the network is looking for. The network rewards the first miner to get the right answer with 50 Bitcoins and then the process starts again. Only 21 million will be created in total, mimicking the scarcity of a precious metal. The race to mine them has attracted a rush of digital ‘49ers. There are many, likely thousands, like O’Shea.

"Other miners are more organized. They’ll rent this warehouse and wire it and build all these beautiful racks," he said. "I’ve known people that have actually moved their whole mining operation right next to the power plant so they can get the cheapest power."

O’Shea’s backyard operation brings in about $3,000 a month, he estimates, although the take is always changing because the price of Bitcoin is extremely volatile. He’s spent more than $60,000 on equipment, and his electricity costs run between $2,200 and $2,400 a month. He’s defrayed his cost significantly but has yet to break even.

"Some people have made retirement money, but I'm not one of them. I'm more into it just for the gadgetry," he said. "I’m in my backyard so I can come home, visit the kids, and then disappear into my cave."

New mines

 People have been mining Bitcoin since the currency debuted in 2009. The network automatically adjusts the difficulty of mining so that 50 Bitcoins are created roughly every ten minutes. In the early days, it was easy: anyone could run the Bitcoin-generating program at home on a CPU and crank out the coins without much effort. One early miner accumulated so many that he offered 10,000 Bitcoins to anyone who would deliver him two pizzas. At the time, that would have been around $100, but at today’s prices, it’s over $100,000.

Some miners are students, who take over whatever computers they can find. Others are bankers or venture capitalists, drawn by the ostensible investment opportunity. Some join mining pools, which let individuals combine computing power and hedge their investments; others are "solo miners," like O’Shea. Still others have set up botnets to stealthily infect unsuspecting users over the internet and harness the collective computing power to mine.
There is money to be made
The allure of passively cranking out Bitcoins has given geeks around the world goldlust. One IT worker at the Australian Broadcasting Corporation made headlines after he installed the Bitcoin software on the company’s servers; a college IT administrator confessed to Motherboard that he was secretly running the software on school computers. Another solo miner’s story went viral when he confessed on 4chan that he got minor but permanent brain damage from mining.

He had set up a small operation in his room, and the hard-working computers, running 24 hours, had given him heat stroke while he was sleeping. There’s an urban legend that one Bitcoin miner’s high electricity usage brought the cops to his door, suspecting a marijuana farm.

There is money to be made. Last year, miners generated $16.7 million worth of Bitcoins, using the price at the time the coins were created. But miners’ margins are getting thin. The popularity of the profession surged when the price of Bitcoins spiked up to $33 each in 2011.

That was good for Bitcoin, because the more miners there are, the lower the odds that any one person can override Bitcoin’s security measures with a so-called "51 percent attack." But it meant that mining became less lucrative and more competitive.

Miners started using GPUs, normally reserved for gaming, to mine Bitcoins at much faster rates. Anyone who wanted to stay in the game had to invest in new equipment. At today’s prices, only about $550 in Bitcoins is generated by all miners every eleven minutes. The total number of people mining Bitcoin is unknown, except that it is below 20,000. When you factor in equipment and electricity costs, many miners are underwater on their operations.
"I'd say that the majority of miners, especially large-scale ones that I know, including myself, are not paid off," said Jeff Brandt, who makes about $2,000 a month mining Bitcoin on the $40,000 worth of equipment he keeps in an 1,800-square-foot barn. "I would estimate that a majority of the Bitcoin network was built off of credit card debt."

Coming changes

 Because there is no central Bank of Bitcoin, miners are an essential part of the system. The currency was designed to incentivize users to process the network’s transactions by running the Bitcoin program on their own machines. Those users are rewarded for their efforts with transaction fees. In the beginning phases of the currency, the network also spits out 50 brand new Bitcoins for every "block" of transactions, which is called the "block reward."

Some people mine because they want Bitcoin to succeed, but most do it for the promise of profit, plunging time, energy, and hundreds of thousands of US dollars into mining.

Miners have dutifully generated just under half of the total Bitcoins that will ever be mined. But the mining industry is about to be thrown into turmoil due to two major changes expected to hit, entirely coincidentally, around the same time. One is the introduction of application-specific integrated circuits, or "ASICs," designed specifically to mine Bitcoins up to 1,000 times faster than current technology.

The other is a deadline hard-coded into the Bitcoin software. When the total number of Bitcoins reaches 10.5 million in about one week, the block reward will suddenly be cut in half — a protection built into the currency in order to prevent inflation.

The new chips, which retail from $150 to $29,899 for a "mini-rig," are purpose-built to mine Bitcoin. That ups the stakes for miners, since they will no longer be able to resell their equipment to non-Bitcoiners if mining becomes unprofitable. In the past, miners could resell their gear to gamers or other buyers. But if one of the new ASICs isn't being used to mine Bitcoin, "it's a doorstop," said Josh Zerlan, COO of Butterfly Labs, which is producing the new chips.

At least three companies are selling these chips, which are scheduled to start shipping in December. Whoever receives the chips first will have as long as two weeks to rake in profits before the network adjusts to the higher performance and increases the difficulty of mining, so miners rushed to place pre-orders. Zerlan told The Verge that 20,000 chips are on the way in the first batch, with an additional 30,000 to follow.

No one is quite sure what will happen to miners’ income when the new chips come online and the block reward drops to 25 Bitcoins every ten minutes instead of 50. The Bitcoin mining forums have been full of nail-biting since February. "The end is nigh," one user wrote.

Better, faster, stronger

In March of 2011, Yifu Guo decided to cash in on the Bitcoin gold rush. Guo, a 23-year-old student taking a break from his digital media program at NYU-Poly, made a calculated investment. If he spent a few thousand in computer equipment to generate Bitcoins, he could break even in 26 days — after that, he’d be making around two thousand dollars a month.

"I was like, no way. That’s absurd," Guo recalled on a recent blizzardy afternoon in a coffee shop in downtown Brooklyn, where he sipped a hot chocolate spiked with espresso. "The return was amazing." He bought the equipment and became a small-time miner. But it wasn’t long before he saw a bigger opportunity: instead of mining the gold, he’d sell the pickaxes.

Guo had connections to hardware makers in Taiwan thanks to a previous project to build a $100 Android tablet. He contracted with TSMC, the company that is reportedly replacing Samsung as Apple’s chip supplier, to produce custom-built chips comparable to the ones being peddled by Butterfly Labs. He took orders for 300 units, which he's calling Avalon, which he plans to ship in mid-January. The rush of orders crashed his site in two hours. His hosting company thought he was under attack.

Most miners are in it for profit, but many don’t know how tough it is to make money, Guo said. "A lot of them are uninformed," he said. "If you don’t have cheap power, don’t go into mining long-term."

When the new chips come online, he expects miners will have to go pro or go home. "A lot of people are going to stop mining," he said.

A mixed bag

CoinLab, a startup funded by Silicon Valley venture capitalist Tim Draper and others, hopes to give Bitcoin miners another way to make a buck. CoinLab was originally a Bitcoin mining startup that attempted to partner with video game makers in order to use players’ computers to mine Bitcoins.
That didn’t work out, so the company pivoted to a new model which matches Bitcoin miners with universities and other entities that need distributed computing power. CoinLab also runs a mining pool of more than 1,000 miners. As a result, CoinLab is very tied in with the amorphous mining community.

CEO Peter Vessenes remembers when Bitcoin mining was easy, before the economy had developed. "I got like 50 in an hour on my laptop or something," he told The Verge. "That was well over two years ago."

Vessenes expects that the new chips, coupled with the change in the block reward, will drive up the demand for Bitcoins and therefore the price, keeping more serious miners engaged. Further, he believes that mining technology will continue to improve, requiring miners to upgrade as often as annually. "No one is worried Bitcoin will go away in the next six months," he said.

Although the Bitcoin community has a lot of discussions about how the refine the currency, there were no calls to oppose the coming change to the block reward. Miners seem content to accept the rules of the currency, no matter how detrimental to profits. "There was a very interesting thing that happened in January or February of this year," Vessenes recalled. "It was a little too technical for the press to cover, a change to the Bitcoin protocol that could have an escrow agent release funds. Gavin [Andresen, the lead Bitcoin developer] put it out to miners for a vote.
"There were really interesting politics at that time. People changed mining pools because they didn’t like how the mining operator had voted.
"But no miners even brought up voting for keeping [the block reward] at 50. It wasn't even mentioned," he said. "I think that’s intriguing. These are all people putting in significant time and money, and they’re not even organizing to change the issuance. It feels nice to say there’s only going to be 21 million of these coins."

Keeping the faith

 Fon Duke is another Bitcoin miner who has spent $30,000 on equipment — but he lives in the California desert, and runs his rigs on solar power. He’s made back almost a third of his investment. When the new purpose-built chips went up for sale, he had to make a decision. "I was $15,000 in. I was half in on a mini-rig for $7,500 and then another $7,000 for singles and video cards. I had to basically, just like in the casino, I had to double down or cash out."

He pre-ordered the new chips in order to upgrade his operation. "Either I’m being very aggressive or I’m being very foolish," he said. "I wouldn't call myself a business. If anything, I’m just trying to recoup my funds. If it makes money I’ll be really ecstatic."

Bitcoin has come a long way in almost three years. Over the last month, there were more than 20,000 transactions per day done in Bitcoin, and the number of coins in circulation at valued at $114 million in today’s prices. Bitcoin is popular on the online black market, but it can also be used legitimately to buy food, electronics, computer services, and a lot more.

Bitcoin got what is arguably its best endorsement yet: the popular blogging platform WordPress started accepting the ecurrency in order to bring in customers from countries blocked by credit cards and PayPal.

But as the movement struggles to go from a novelty to a serious economy, the viability of mining is increasingly critical. Eventually, the block reward will disappear altogether, all the Bitcoins will have been mined, and miners will be compensated with higher transaction fees.

In theory, this monetary incentive should be enough to keep miners in the black. In practice, there are many more variables — the price of electricity, the distribution of computing power, the number of miners — that complicate the equation.

Bitcoin’s price has been driven up multiple times by speculators buying and selling the currency, but it’s miners who are its biggest investors. "The amount of growth we've seen in the last year just in the Bitcoin market as a whole, then in the mining market, is staggering. I can compare it to the beginning of the dot-com era," said Josh Zerlan, COO at Butterfly Labs. "Hopefully it won't have a big dot-com crash."

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