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.