Junior Matt Sanchez dipped his feet in the Bitcoin mining waters last semester.
The computer science major purchased specialized “ASIC” bitcoin mining hardware, and had it mining the electronic currency 24/7 for two weeks. “ASIC” chips are computer chips made for bitcoin mining.
Despite investing about $100 toward this hardware, he found that mining did not have any payback.
“Through my experiences, I’ve learned that the amount of profit that I made throughout all my mining efforts was extremely minimal, and that everyone was joining the bandwagon to mine bitcoins,” Sanchez said.
Sanchez chose Bitcoin mining as the subject for a semester-long project because he was interested in the relationship between cryptography and electronic currency. Cryptography is the practice of techniques for secure communication.
Despite the lack of profit from mining, Sanchez felt that the process was a valuable learning experience.
“I had a lot of fun doing it and learned a lot about the security involved with digital currencies,” he said.
Bitcoin mining is a process involving computers solving complex mathematical problems. In return for correctly solving these problems, bitcoins are rewarded. This process is known as “mining” – much like how gold is mined, but with computer chips used instead of pickaxes.
Bitcoin was created in early 2009 and has since gone viral through the end of 2013 to become the most popular electronic “cryptocurrency” used today.
All dealings of cryptocurrency, electronic currency, happen through peer-to-peer computer software – there are no physical bills or coins that can be exchanged, and a central authority does not exist.
Only 21 million bitcoins can ever be created. After 21 million are mined, no more bitcoins will be able to be mined.
With the explosion of active miners, mining difficulty (how difficult the math problems are) has increased greatly, as a result. Bitcoin prices rose from $100 per bitcoin last August and spiked to more than $1,000 in December.
A single bitcoin is currently worth about $1,000, and can be purchased from websites such as MtGox.com. Recently, buying bitcoins as an investment, rather than mining them, has become more popular.
“I think it’s exactly like the gold rush, the first people who found gold made out like bandits, but as more people rushed to it – it became more scarce, and the crazy thing about bitcoins too is the more people mining it, the harder it is to actually mine it, because they become more and more obscure,” said Clay Ewing, a UM professor who teaches game design and programming.
Bitcoin storage and use
Bitcoins are stored in “Bitcoin wallets,” which reside on personal computer hard drives. Associated with each wallet are a private and a public key. The address of the public key can be given to anyone and allows others to transfer bitcoins to the wallet associated with the address.
However, in order to transfer bitcoins out of a wallet, the private key is needed, securing the wallet against unwanted removal of coins.
If the computer on which the wallet is saved were to fail, then a user would not be able to access or spend the bitcoins as they would become lost and unrecoverable. For this reason, it is important to keep Bitcoin wallets securely backed up.
Because bitcoins flow from person to person and not through a bank, transactions are nonreversible and cannot be prevented. Likewise, a Bitcoin wallet can never be seized or frozen. This is the main allure of Bitcoin.
Bitcoin provides the perfect means of payment for illicit goods and services. Various online black-markets have spawned, accepting Bitcoin payments in exchange for drugs and other contraband.
However, legal sites, like Overstock.com, are beginning to accept bitcoins as payments, promoting legal use of this currency.
The future of Bitcoin
Ewing is mining 24/7, but he is not attempting to turn a profit. He is simply mining for the fun and novelty of it.
“The idea of cryptocurrency is very cool to me,” he said. “It’s more of a hobby, not a money-making thing for sure … It seems like a natural progression to me to have digital currency.”
Bitcoin is the first of its kind – a starting point for future innovation, according to Finance department chair Douglas Emery. As it stands, Bitcoin may not be developed enough for it to be adopted by the general public. Rather, Emery believes Bitcoin represents “innovation at a small level,” and with the lack of a governing body, and its open-source nature, Emery has concerns about the stability of Bitcoin specifically.
But with society’s progression towards a paperless society, he can see the use of electronic currency becoming more widespread in the future. Electronic currency will continue to evolve, and new, better, iterations will emerge, Emery said.