Thursday, December 05, 2013

Bitcoins Revisited

Two years ago I gave a lecture and posted about bitcoin. Of course what I didn't do was buy a bitcoin whose value back then was about $3 and today runs in the $1000 range.

Bitcoins have received quite a bit of press, particularly with the FBI shutting down Silk Road, the drug trafficking site which used bitcoins for their transactions. Then people realized that bitcoins are starting to become a real currency, with a market cap of about US$11 billion not far now from the money supply of the Costa Rica Colones (US$13 billion). Now governments are deciding on how to deal with bitcoins as a currency, one which they really can't regulate or control.

The Economist has one of the better articles on Bitcoins, talking about some of the technical issues involved.
The Bitcoin system is designed to cope with the fact that improvements in computer hardware make it cheaper and faster to perform the mathematical operations, known as hashes, involved in mining. Every 2,016 blocks, or roughly every two weeks, the system calculates how long it would take for blocks to be created at precisely 10-minute intervals, and resets a difficulty factor in the calculation accordingly. As equipment gets faster, in short, mining gets harder. But faster equipment is constantly coming online, reducing the potential rewards for other miners unless they, too, buy more kit. Miners have formed groups that pool processing power and parcel out the ensuing rewards. Once done with ordinary computers, mining shifted to graphics-processing units, which can perform some calculations more efficiently. Miners then moved on to flexible chips that can be configured for particular tasks, called field-programmable gate arrays. In the past year, bespoke chips called ASICs (application-specific integrated circuits) have appeared on the scene.
Then there was the paper Dorit Ron and Adi Shamir wrote that explored the bitcoin transaction graph and suggested a (now supposedly debunked) connection between the mysterious creator of bitcoins, "Santoshi Nakamoto", and Ross William Ulbricht aka Dread Pirate Roberts, the founder of Silk Road.

Bitcoins even make it to my Thanksgiving table. My brother thought they were a scam even though I pointed out the systems has no scammers. He remains unconvinced though he invests heavily in gold, which has the same property of the value mostly being there because people believe it has value.

I taught a lecture on bitcoins again in my intro theory course. We all generally agreed that a few years from now we'll all remember the days when bitcoins were worth $1000. Not sure we'll remember those days because bitcoins will be worth millions or because they'll be worth pennies.


  1. Have you bought some now?

    1. Maybe after the hype dies down and the price drops a bit.

  2. I have a small argument comparing BitCoin to an index fund on electricity that may interest your readers:

  3. My own bitcoin story:

    In Spring of 2011 I was at a Berkeley Grad Theory Retreat in Big Sur. James Cook started talking about this new thing called bitcoin and he explained the whole peer to peer and mining process. I thought it was a cool idea and so when I got home I decided I ought to buy some possibly to use in the future design of some generalized prediction market (a research interest at the time). The price was $15/BTC so I only purchased about $200 worth, or 13 coins. Soon after mtgox got hacked and the price fell to about $3. Some months later I tried to check into the site to see if my BTC were still there, but my login credentials failed. I contacted mtgox a few times but to no avail.

    About 8 months ago someone told me that BTC had skyrocketed, so I tried logging in again, this time with success. I thought it was a joke that the price was $100/BTC so I sold about 2/3 of what I had and felt happy for making a silly investment that turned into a 5x profit.

    Now at $1000/BTC I still have about 2.5BTC left, I've been selling off about 25% of what I have every time the price doubles. I still think the whole thing is quite silly, but glad that whimsical decisions in grad school returned more than a 20x profit. Plus it's a good story to tell.

  4. When investment agencies start to include BitCoin into their investment
    portfolio we are all buying BitCoins regardless of our individual appraisals
    regarding the viability of BitCoin. Perhaps thats how it always will be with
    financial instruments that we entrust somebody else to manage.

  5. You state

    "He remains unconvinced though he invests heavily in gold, which has the same property of the value mostly being there because people believe it has value."

    The odd thing is that currencies, including the US dollar, also have the property of the value mostly being there because people believe it has value.