Bitcoin Bubble

Bitcoins are on the tip of everyone’s tongue these days; probably because they quadrupled in price in the month of November.

Although they’ve been around for years, this is the first time they look like they might live up to their promise: challenging the US dollar for dominance. Should you buy them? Or are we seeing a Bitcoin bubble? I’ve been following Bitcoins since the year they were put into circulation, so I thought I would share my thoughts with you.

A Brief Explanation of Bitcoins

How Bitcoins are created is…technical. For the sake of this article just know you have to find rare numbers with a specific property. As you find these numbers, Bitcoins are created. The more numbers are found, the harder it is to find new ones. The process of searching for these numbers and receiving Bitcoins is called Bitcoin “mining.”

In theory, the number of Bitcoins that can be created is incredibly large (should run out around 2140). In practice the supply is limited by processing power. A couple of weeks ago I priced out how much it would cost to rent a few racks of servers and run a mining application across all of them (well, one for each CPU core). My back of the envelope math showed that my rental fees would break even with the value of the Bitcoins I mined (they were worth ~$1,000 at the time). I figured it wasn’t worth my time and moved on.

You can still make money by mining, but it requires specialized hardware and a smart algorithm. Unless you’ve a lot of experience managing server farms and/or programming FPGA’s, its’ more cost effective to buy Bitcoins than mine them.

Great…now I know how they’re created, what are they used for?

The …read more