I was sitting on a plane, recently. On my way to Atlanta.
One row ahead. There was a security, software engineer — or something. We started chatting.
He got into a story about how his friend was mining bitcoins using those specialty machines (which range in price from roughly 3,000 to 15,000 bucks) and how this dude was making a mint.
Mining, by the way, is the process of adding transaction records to Bitcoin’s public ledger, the block chain, according to the Bitcoin wiki. Folks accomplish this by using servers in order to run Bitcoin’s algorithm.
Remember how this all works, this experimental, decentralized cryptocurrency only releases so many bitcoins per day — awarded to miners who are churning the process.
There will only ever be slightly less than 21 million bitcoins. And, today, there are only about 12 million.
However, despite the increased utility bills (somewhere around an extra $300 a month) and the cost to run the operation, this software engineer claimed that his buddy was clearing about $4,500 a month.
But, this week, the Department of Justice stated the obvious: Bitcoin isn’t illegal, despite some of its more shady uses. according to Bloomberg.
“We all recognize that virtual currencies, in and of themselves, are not illegal,” Mythili Raman, acting assistant attorney general at the Justice Department’s criminal division, said at the hearing.
The Committee on Homeland Security and Governmental Affairs, which solicited comments in an Aug. 12 letter, scheduled the hearing “to explore potential promises and risks related to virtual currency for the federal government and society at large” after the Silk Road Hidden Website was shut down in October. The closing of the marketplace, where people could obtain drugs, guns and other illicit goods using Bitcoins, is helping fuel a rally in the virtual currency as speculators bet that the digital money will gain more mainstream acceptance.
To me, that means one thing: A smaller number of bigger miners, monopolizing and centralizing the system.
You see, there’s a potential flaw in bitcoin. Inherent to how the system works it’s possible for a few powerful players to take control of Bitcoin, according to a research paper written by a Cornell University post-doctorual fellow.
The flaw is due to the nature of how bitcoins are created — people “mine” them by solving a complex puzzle with their computers. If used correctly, the system is set up so that someone guesses correctly every 10 minutes, and the winner gets 25 bitcoins. Because people compete against one another for the digital currency, bitcoins are mostly evenly distributed.
But bitcoin miners could exploit a weakness in the system that would give them a greater chance of getting bitcoins than rival miners: Solving a puzzle gives miners a much higher chance of solving the next one, and those solutions are typically stored in a public log called a “block chain.”
(Note: this thesis has been argued, and partially rebutted in the Bitcointalk forums)
I reached out to Jon Matonis, the executive director of the Bitcoin Foundation to give me a better perspective.
Your thesis that if bitcoin is for speculation then it cannot be money is not entirely accurate. Gold rush miners in 1840s were definitely speculating but it didn’t make gold any less moneyish.
Also, the speculators provide needed liquidity.
Bitcoin protocol is often criticized for what you outlined but it is the fairest way to get new monetary units into the system. Securing the block chain and preventing double spends for the first 130 years deserves to be rewarded, wouldn’t you say. early adopters are the ones taking the risk and building out the network now.
Still, in my (limited) view, the federal government has just opened up the floodgates.
Bankers. Traders. Financial Services professionals of all kinds see the value in Bitcoin. They’ve salivated over the potential profits.
The spirit of bitcoin was never meant for that.
This — I’ve heard time and time again — is a conceptually interesting currency that has the power to revolutionize the way we pay each other. Not, as many are now thinking, a way to speculate on big returns.
Perhaps my single-serving, airplane friend had a point: Bitcoin is a great way to make easy money.