A Look at the Inner Workings of Bitcoin
By Bruce Harmon, PhD
By now you have gotten wind of Bitcoin, a global currency that exists online. My colleague, Dr. Nadav Morag, recently wrote about some of the pros and cons of Bitcoin. In that article, he explains the recent history of the global exchange of currencies and how Bitcoin compares to the currencies tied to nations. Here, I’ll reveal a little more about how Bitcoin works.
Using hundreds of computer servers, a small number of organizations generate Bitcoins by “mining” them by following an intense recipe for generating the virtual coin via computer. In just the past month, Bitcoin value has ranged between $400-500, indicating some stability. There may be money to be made as a Bitcoin miner. A recent article in Network World revealed the existence of a Bitcoin mine in Washington state was producing $8 million in Bitcoins per month using cheap electricity to power its server farm.
On the surface it appears that the exchanges that host the generated Bitcoins for buying and selling to consumers that want to hold them for online purchasing are legitimate, but this economy has not matured to the point of being regulated by any entity. The recent bankruptcy by Mt. Gox demonstrates some of the risk to holders – your exchange might not last. So there must be two reasons for holding Bitcoins: (1) purchasing online, and (2) speculation in hopes of making some money.
In the first case, you have a currency: the US dollar or another national currency. In the second case, good luck: the currency has stabilized which suggests more downside than upside.
Share your thoughts – what do you predict for the future of Bitcoin?