Jim Spends $555 on a Bitcoin Miner

September 2014

We'll know in a few months whether my ordering a $555 specialized computer for mining bitcoins was foolish. My friend Rick says I'll recoup that in less than four months and everything after that will be "gravy."

Bitcoin, as I wrote in June 2013, is an Internet-based virtual currency. At the time, it was trading at $115. As I write this, it's trading at around $600 after having gone over $900 earlier this year. Had you invested in bitcoin when I wrote about it, you would have more than quadrupled your investment at today's value.

Me, I'm not investing. I'm going to mine it. As I explained in my earlier column, bitcoin is created by running some software that attempts to solve very difficult mathematical problems. Solve these problems and you're rewarded with bitcoins. And as more bitcoins are "mined," the more difficult it becomes to solve these problems, until 21 million bitcoins have been created.

No one is completely sure who developed the open-source bitcoin software, but I think most agree that the concept is brilliant. And no one is quite sure whether bitcoin is simply another bubble, or if it will in fact become a useful currency. Already there are many people and businesses worldwide that accept bitcoin as payment, including some "brick-and-mortar stores" and some universities.

Me, I'm betting that bitcoin will become nearly as ubiquitous as PayPal. It just has so many advantages.

One big advantage is that most transactions are free, or as small as 4¢. If a merchant accepts bitcoin online, he or she doesn't need to give 3% to a credit card company. But the best part is that since transactions are mostly free, they can be tiny. Here's what I hate: the New York Times has been telling me lately that I need to pay $6 per month (that's $72 per year) to read their op-ed articles. I would much rather pay, say, 15¢ when I choose to read an article. But they can't charge me 15¢ because the transaction would cost way more than that.

Micropayments are going to happen sometime soon, and I think bitcoin will lead the way. Rick gave me .01 bitcoin to get started, worth about $6, and I can spend all or any portion of that to purchase something online. In addition, using bitcoin is anonymous in the same way as when you pay cash for something.

Your bitcoins, or portions thereof, live in a software wallet on your computer or on your mobile phone. You can send someone bitcoin via email or pay for something online as you would with a credit card. When you make a payment, your bitcoin in your wallet is reduced accordingly.

Bitcoin exists outside of any government, so how can you be sure someone isn't stealing or manipulating it? The beauty is that the software is open source: anyone can scrutinize it to see exactly what it is. In addition, the ledger that tracks bitcoin transactions is distributed; it's not hosted on a particular server someplace. Every person who uses bitcoin is actually simultaneously helping to maintain the worldwide transaction log. As my friend Rick explains, any accidental or intentional distortion of the record is automatically corrected by the majority of the correct copies of the ledger.

Given the advantages of this virtual currency, and given how popular bitcoin is becoming, it's hard to imagine it won't just keep playing more of a role in our economic life in this cyberspace era.

Plus, as in my recent column about "sharing economy" services such as the Uber taxi service and the Airbnb guest room service, what we're seeing develop, beginning with the eBay rating system, are Internet-based mechanisms for trust. A civil society is based on trust. And a role of government has been to enforce that trust. But new mechanisms are now being established that transcend government and create their own networks of trust. The result is proving to be useful and efficient. Bitcoin is simply yet another instance of a new Internet-based mechanism for trust.

A major challenge of bitcoin is its volatility. Someone might pay you a bitcoin today that will be worth 25% less tomorrow. Another is its lack of liquidity: too many investors and too few spenders.

Will I get rich mining bitcoin? I'll be happy if I recoup my $555, especially since bitcoin mining gets harder all the time and since its value is so volatile. I'll let you know what happens.

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© 2014 by Jim Karpen, Ph.D.

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