bitcoin
It was only natural that John Smithwick would be interested in bitcoin. “I’ve always been fascinated with the idea of what currency is,” Smithwick said. “Maybe 10 years ago, I started reading the works of Ludwig Von Mises and Frederick Hayek, these economists who taught about pure free-market economy.”
This curiosity drove his interest in bitcoin, the current leading cryptocurrency, a digital, unregulated currency that derives its value from complex cryptography. Bitcoin, Dogecoin and other cryptocurrencies are the product of the collision of the digital age and the idea that currency shouldn’t be controlled by any government or institution.
“I’ve always thought that it’s kind of dangerous that your central government also controls your central bank,” said Smithwick. “A pure, decentralized currency intrigues me.”
Out of a sense of experimentation, Smithwick decided to purchase a bitcoin, but the task was daunting. Bitcoin is traded on a series of independent exchanges, and purchasing bitcoin can require converting a local currency (U.S. dollars) into another currency that is accepted by an exchange (i.e., the Euro, or Linden Dollars, the currency of the online community SecondLife). After numerous financial transactions, account creations and several weeks, Smithwick bought his first bitcoin for $120. The next day, however, the value plummeted to around $7.
“I thought I’d hedge my bet, and so I bought a second one,” he said.
That eternal optimism is characteristic of others who own or mine bitcoin and other cryptocurrency, despite the increasing difficulty of the mining process (which creates and secures the currency and drives transactions), the general volatility of the value, and the collapse of some high-profile currency exchanges.
“It's a beautiful technical innovation,” said Ry Walker, a partner at the Cincinnati-based startup Differential. “I call it ‘open source money.’ It took years for open-source software to impact commercial software, but now it's an unstoppable force. I look forward to watching the same thing happen with bitcoin.”
The mining process is the first challenge for those getting a foothold in the cryptocurrency realm. Bitcoin miners use their computers to process other bitcoin transactions through a series of complex computations designed to confirm the legitimacy of those transactions. These transaction records are called blocks, and they are added to a ledger known as a block chain. When this takes place, a miner is rewarded a certain number of bitcoins. The process is designed to require effort and take time, so that bitcoin itself is equivalent to any other commodity that is extracted slowly and with effort, thus giving it value. As more bitcoins are mined, the difficulty in mining then increases to compensate by keeping the rate of mining down.
“I've been involved in bitcoins for about four years now, going back until someone could still mine successfully with just the CPU [central processing unit, also known as the processor] from their home computer,” said Chris Hall, who works in information technology at the University of Kentucky Albert B. Chandler Hospital. “With each jump in mining technology, the older bitcoin miners become obsolete and the quest to have the fastest and most stable miners is never ending.”
Ben Cichanowicz, an employee of the Commonwealth Office of Technology in Frankfort, mines both bitcoin and Dogecoin, another cryptocurrency, as part of mining pools. He mines bitcoin through an investment of processing power in a shared server, while he uses his graphics card in his home computer to mine Dogecoin.
“I wasn't too sure about it but read enough to know that the earlier you started mining, the more money you would make as mining difficulty climbed and more people got into doing it,” he said. “The network difficulty in solving the [bitcoin] blocks is much higher than a year ago and requires significant hardware resources, which cost money. It’s hard to break even, even in a mining pool. Timing is critical. You have to get strong hardware in place early. That's how you win.”
Cichanowicz currently has about $46 worth of bitcoin and $38 worth of Dogecoin, but he is loathe to actually spend it.
“[It] took so long to earn the little bit I have,” he said. “It's better to keep whatever is earned thus far and into the future and hope the value rises in what I have.”
The value has been anything but stable. Cichanowicz noted that the Dogecoin he owns was worth more than $50 a few weeks prior. Still, the prevailing sentiment is one of investment in the future rather than present payoff.
“It's true that the bitcoin market has been volatile at times, however it provides a hedge for other commodities,” said Hall. “Bitcoin seems to have a negative correlation with gold, and this can be a very useful addition to your investment portfolio.”
“I own them personally, and a business venture that we own also holds bitcoin,” said Walker. “Most of my business partners at Differential are holding bitcoin as well. Not an ungodly amount, because we bought in during the up cycle last year. But we're all long on bitcoin.”
“Anything can happen. It's fun thinking it might be worth an incredible amount someday,” said Cichanowicz.
“I'd rather not spend any I have earned and see what happens as a novelty.”
The novelty aspect of bitcoin is not without its own attraction. The chief of police in the town of Vicco, Ky., has asked for his salary to be paid in bitcoin, the first such transaction of its kind. The FEC now allows bitcoin to be used as campaign contributions as well.
“It's still so early, I'd say we're in the final stages of experimental usage. When bitcoin has its next breakout upswing, I expect the pendulum swings from ‘curiosity’ to ‘useful.’ For now, it's mostly the potential of bitcoin and the blockchain [the encryption that gives the currency both security and value] that holds my interest,” said Walker.
For Smithwick, just acquiring them was hard enough, let alone figuring out how to spend them, but then the worst happened. Mt. Gox, the exchange where his two bitcoins resided, collapsed and declared bankruptcy in February, ostensibly taking his bitcoin with it. Smithwick estimates that they were worth $600-$700 each at the time. Despite the loss, his enthusiasm for the cryptocurrency hasn’t waned.
“I’m not scared away by the bankruptcy situation,” said Smithwick. “When the Silk Road [an online black market site shut down by authorities in October of 2013] was raided by the FBI, everyone thought it was the end of bitcoin. It bounced back; it’s totally resilient. The concept of it I’m totally still behind.”