BitBuzz Daily: A roundup of the latest news and all things bitcoin.

There has been much talk around about the bitcoin bubble. It stems from the huge surge in value we saw from the end of last week with bitcoin spiking at about $900 at one point last night, to then fall again to around $600. In an immature market, this sort of volatility can be expected but it has already got the naysayers banging their drums.

An article by Michael Santoli on Yahoo Finance comments that these sudden swings in price are undermining bitcoin's potential as a currency, advising investors to participate with "play money," for now. In an interview with Yahoo Finance Editor-in-Chief, Aaron Task, they comment that such volatility could deter widespread adoption.  However,  Task,  says it is unlikely bitcoin will disappear anytime soon with the number of players already involved.

You can read the full article and see the video here


The dip in price, according to Tech Crunch's Alex Wilhelm is actually not as bad as it might seem. It's "not crashing", he says, "just slowly deflating".

Bitcoin! You almost have to shout it. The much ballyhooed currency has had a simply amazing last few weeks. It put on the finance nerd equivalent of a fireworks show, blasting from less than $400 per coin a week ago to a high of around $900 (Mt.Gox data).

The shot to the top was almost ludicrous in its intensity. When Bitcoin finally licked the $900 mark, it dropped in the same hour to under $600 before recovering, and dropping, and recovering, and dropping, and on and on and on.

But now, some time later, a trend is developing: Instead of Bitcoin suffering from a rapid collapse in its overheated price, the currency is experiencing a slower, if still very material decline. Currently trading just under $600, Bitcoin has shed one-third of its value in around a single day.

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And our own analysis posted this week, notes bitcoin's price could drop much lower back to around $100 and still be within the margins of a long-term steady rise in value.

Talking of bubbles, a couple of articles on Forbes have been analysing bitcoin’s performance, including this piece by Kashmir Hill, saying bitcoin could reach $1,700 before the bubble pops. Another article by Tim Worstall says we mustn’t rely on the ‘bubble’ behaviour as an indication of bitcoin’s future success.

Why do you even ask whether it is? A price gyrating like this is proof perfect of bubble behaviour. However, please do note that the existence of a bubble is not evidence that Bitcoin will either fail or succeed. There are often bubbles in things that succeed, just as much as the rubble of a bubble shows a failure.

The bubbleicious behaviour is of course the price gyrations going on.

Bitcoin’s value hit $900 on Mt. Gox exchange around 5 p.m. PST Monday, up more than 70 percent from Sunday’s close and setting an all-time high in the process. But, it also just dropped to $650 within the past 30 minutes, highlighting the current volatility of Bitcoin. The value of Bitcoin only hit $400 for the first time last week, and $500 for the first time on Sunday.

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However, one of the most interesting pieces written about the so-called bubble comes from a merchant and miner’s perspective. David Feeney in the Austrian Insider talks of his experience as a bitcoin miner and as a business owner, accepting bitcoin. He wants us to ask a few questions before we “start repeating mass media rhetoric regarding Bitcoin bubbles”. Here’s what he has to say:

My mornings are very predictable these days. Immediately after I wake up I walk to the living room to check my Butterfly Labs Easy Miner application to see what the Bitcoin market looks like for the day. Lately I have been anticipating the day that I will turn off my 30Gh/s miner and sell it to the highest bidder with access to “free” electricity. Contrary to popular belief, mining for Bitcoin is not a get-rich-scheme, but rather a calculated capital investment risk akin to any other mining market. That is why it comes as a shock to me when I keep hearing people throw around the word “bubble” when talking about the Bitcoin market. This recent activity is the sign of an extremely healthy Bitcoin mining and exchange system and, quite frankly, it’s exactly what was expected by the pioneers entering the market. It is showing that the cryptocurrency experiment is actually working.

One of the main appeals that Bitcoin has to the general public is as a tool to protect oneself from inflation and monetary manipulation by centralized governments. The way that this is done is by essentially emulating the model of mining finite precious metals (such as gold and silver) out of the ground. Bitcoin does this by requiring “miners”, such as myself, to solve algorithms (think big math puzzles for computers) to bring the initial coins into existence. As time goes on, the algorithms get more difficult and require additional computer resources to solve at the same rate; just as one would need to dig deeper over time to continue mining gold and silver. Periodical leaps in technological advancement allow miners in both industries to drastically lower their input costs which in turn allows prices to go back down once ample competition enters the market.

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The Senate hearings into the viability and associated risks of digital currency continue.

One Senator, at least, is doing his homework. Jerry Moran even reached out to the reddit community to get information, asking:  I’m one of the Senators attending today's U.S. Senate Banking Committee hearing related to bitcoin. What would you like me to know?

http://www.reddit.com/r/Bitcoin/comments/1qzwzl/im_one_of_the_senators_attending_todays_us_senate/

Overall, the first couple of days have ben regarded as positive for bitcoin, with some, such as Josh Dzieza on Technology Review, even noting a few new allies for the digital currency within the US Senate:

The crypto-currency Bitcoin gained some valuable—and surprising—new allies at a U.S. Senate hearing on Monday: financial regulators, law enforcement, and even the chairman of the Federal Reserve. The value of the currency reached a record high shortly after the hearing. 

Interested observers might have expected yesterday’s hearing on the potential risks, threats, and promises of virtual currencies to presage a regulatory crackdown: the hearing came just a month after the bust of Silk Road, a notorious online market that accepted bitcoins for guns, drugs, and other illicit goods. Though the hearing was nominally about digital currencies in general, the focus was really on Bitcoin, a currency that uses cryptographic techniques to allow money transfers directly between peers, rather than through a central authority like a bank or PayPal.

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Some bad news for BIPS and those with BIPS wallets. The company have temporarily closed its consumer wallet intitiative after it says it was the "target od a coordinated attack."

https://bips.me/press

And finally, just to end on a lighter note, you might have heard about the Word of the Year... This year The Oxford Dictionary chose SELFIE as 2013 word of the year. You might also be pleased to know that bitcoin made the shortlist of possible contenders. Maybe next year, eh.

FYI, their entry for bitcoin is:

bitcoin, noun:

a digital currency in which transactions can be performed without the need for a central bank. Also, a unit of bitcoin. [ORIGIN early 21st century: from BIT, in the computing sense of ‘a unit of information’ and COIN.]

The term first appeared in late 2008 in a research paper, and the first bitcoins were created in 2009. By 2012, the virtual currency was attracting wider attention and we began to see its steadily increasing use. A spike in usage was apparent in March – May 2013, which may be due in part to the market crash around that time.

Will the real Satoshi please stand up? The mystery of bitcoin's creator: Interview with Mike Hearn

There’s an enduring mystery in the bitcoin world; it has nothing to do with mining algorithms or hidden features within the bitcoin coding; it is: who is Satoshi Nakamoto? 

The enigmatic character who created the original Bitcoin software in 2008 is the subject of many theories as to who he is and where he is from. Depending on what you read, or whom you listen to, Satoshi Nakamoto is a pseudonym for one person or even a group of people, and theories as to his location or place of origin range from Japan, to Britain to Finland.

On the P2P (peer to peer alternatives) site in February 2009, Satoshi Nakamoto introduced bitcoin on his profile page, which states he is a 38-year-old male in Japan.

Prime suspects as to the hidden identity of Satoshi have included OpenCoin founder and creator of Mt.Gox, Jed McCaleb, and  Finnish compuer scientist, Martti Malmi. Malmi states here that he contacted Satoshi Nakamoto after he came up with the idea of a decentralised Internet currency. He was also the first person to make a Bitcoin to US dollar transaction.

According to the bitcoin Wikipedia entry, an investigation by Fast Company links three men, Neal King, Vladimir Oksman and Charles Bry, who in 2008 filed an encryption patent containing similar encryption technologies to bitcoin and the fact the bitcoin.org domain name was registered 72 hours later. Similar phrases were also said to have appeared in the patent and the 2008 bitcoin white paper.

Shinichi Mochizuki has been another name thrown into the ring. The Japanese mathematician was born in 1969, making him similar in age to how old Satoshi claimed to be and having lived and studied in the US also has fluency in English. On that point, it is also thought Satoshi could be British due to some of the language and formatting of his written work.

Even Paco Ahlgren has been mentioned and although much less widely circulated, his name has still cropped up in forums. The author and financial analyst has written articles extolling the virtues of bitcoin: http://www.pacoahlgren.com/pacoahlgren/bitcoin-cannot-fail/

So, although we may never find out the real identity, one man who probably has a better insight into Satoshi Nakamoto than most, is Google software developer and author of bitcoinj, Mike Hearn, who I spoke to recently.

He first heard about bitcoin back in 2009 when it was just a few months old and there were no forums or communities in which to get involved. Interested in how it worked and with no one to transact with, he emailed Satoshi Nakamoto. “I asked him some questions about how it worked and stuff I didn’t understand and he sent me some coins and I sent them back,” Hearn says, adding, laughing, “I should probably have kept them.”

With nothing much happening in the early days, Hearn “lost interest for a bit” but came back to bitcoin in September 2010, realising a small community had formed and bitcoins now had a price, albeit of only around 10-20 cents. He started to develop on it himself at that point and says, “Throughout this time I emailed back and forth with Satoshi quite a lot about technical topics.”

But when asked about who Satoshi is or whether Satoshi is one individual or possibly a group, Hearn seems adamant that Satoshi is just one man. “I don’t know where this idea that it was a group of people came from. Some people seem to say, ‘this is really clever therefore it must have been a group of people,’ but that doesn’t really hold. I don’t think there is any evidence that it was more than one guy. For one thing, the way the code was written implies it was the work of one guy.”

With Satoshi Nakamoto having stepped away publicly from bitcoin, I asked Hearn what he thought he would be making of how quickly bitcoin is growing and in particular, what he might think of how the pace of bitcoin mining is evolving. “I don’t think anyone really understood the speed at which things would go,” he says. “[Satoshi] talked about maybe one day there would be industrial consortiums with farms of GPUs. The way he phrased it was ‘in the distant future, this might happen.’” However, he seems to think Satoshi would have liked to delay that moment to allow as many people as possible to take part with their regular computers. “Satoshi did anticipate that mining hardware would get better but it was remote, theoretical possibility. The whole idea that it would take off sounded so ridiculous back then.”

Hearn believes it is not only the speed at which hardware is changing but also how fast it is entering public consciousness that would surprise Satoshi. When people were encouraging bitcoin to be used for projects such as Wikileaks, Hearn says Satoshi believed it was “too early” and bitcoin was “too small”. That argument certainly couldn’t be used today. 

Whoever Satoshi is, Hearn thinks he would have liked him. He ends by telling me, “I think I would have liked him if I’d met him. I even tried to recruit him to work at Google once.”

For a little more from this interview, a short clip is available here. Please bear in mind this is not a quality, audio recording but hopefully you find might find it interesting.  

More from this interview on decentralised exchange and alternative currencies will be featured in another post soon!

By Louise @ Bitscan

Going down the mine

Bitcoin Mining: The basics

Trying to explain what Bitcoin is or how it works can be a complicated enough task as it is, but at some point you have to delve into the minefield of – yes, mining.

Mention the word mining and the uninitiated might conjure up an image of a man with a pickaxe digging for precious metal. Although far from the reality, the analogy of mining for gold can be a useful one when applied to the mining of bitcoin, particularly as bitcoin has a finite supply and people are required to release bitcoins into circulation by effectively ‘digging’ them out of a specially encrypted code.

Take those first groups of young men, all heading for the hills to find their fortune in the gold rush and replace them with groups of Gen Y technophiles gearing up their computers to solve complex algorithms for bitcoins and you start to get the picture.

At its most basic, bitcoin mining is a network of computers, crunching numbers to solve mathematical problems. When they have found the answer, new bitcoins are minted.

If you look into mining in more depth, you have to start talking about hash rates and explaining the encryption algorithm, SHA256, which is used for many online security systems (such as internet banking and email) but in this case has been applied specifically to the security of the bitcoin network.

What these computers are actually doing when they mine is unlocking blocks of encrypted data to release bitcoins. These are released into a bitcoin address and the successful miner gets the private key to access it.

This provides a great incentive for people to mine and the more miners out there, the more secure the bitcoin network becomes. This is because not only do miners help issue the currency, they are also required to validate every bitcoin transaction that takes place. These transactions are confirmed with every new block mined.

However, as the number of miners increases and competition grows, the chances of successfully mining a block independently, goes down. This brings us on to the genius behind the coding for the mining of bitcoin, which is in the elastic difficulty of solving the equations, taking into account how many people are mining at any one time. It was built in to help regulate the amount of currency in circulation. So, as more people mine, the difficulty of the algorithm increases to prevent the market being flooded with bitcoins.

There is a predetermined rate of release for the currency, which means as more bitcoins are mined, the chances of finding new ones diminishes exponentially. A block is mined roughly every ten minutes. At the outset from 2009, one block released 50 BTC, but every four years, the amount halves, hence why the current worth of a block is 25 BTC. This value will continue to halve until all 21 million bitcoins have been mined into existence and this is expected to happen some time around 2040.

The New Mining Boom

As it becomes harder for people to successfully mine independently, bitcoin mining pools have established to amalgamate computing power. When someone in the pool mines a block, members of the pool get a share of the bitcoins, which are allocated proportionately to the amount of work a miner has contributed.

To take the gold analogy further, when there was plenty of gold available near the surface, one man and his pickaxe could have done the job and got a good return for his efforts. As more people got involved, competition would have increased and it would have become harder for one man to get the same reward. The miners developed better tools and then formed cooperatives to pool resources and get a share of the gold at the end.

This increased difficulty has prompted a surge of more powerful computing technology to try to increase the likelihood of successfully mining the bitcoins. From one man and his computer graphics card decoding blocks and earning a few bitcoins to an entire network of miners using specifically designed hardware.

It has become a multi-million dollar mining industry all of its own. A couple of years ago the field-programmable gate array (FPGA) became a step towards a custom mining chip. Now the application-specific integrated circuit (ASIC) miner is one of the latest on the market. One small piece of hardware can be plugged into a computer’s USB port and crunch away. One of these things can be purchased for around 1 BTC or approx. $100. 

At the other end of the market, Butterfly Labs have created powerful speed, encryption processors, which can set you back thousands of dollars.

For some, mining is not cost-effective. Apart from the initial outlay for the hardware, operating costs add up in Internet and electricity bills. As bitcoin is a digital currency, a miner must be online for it to work and with some people leaving their miners operating 24/7, electricity prices can create a big dent in finances. The financial incentive depends on the exchange rates and starts to diminish if the difficulty level reaches a point that the cost to run a mining rig exceeds the value of the bitcoins in return.

The chart below from blockchain.info shows how profit margins have fluctuated over the past year.

The constant hardware developments do mean it is advantageous to upgrade regularly otherwise, your more primitive miner could be slogging away trying to mine a block, which a newer, more powerful model can mine in half the time. The winners in the mining game may well be the companies producing the mining technology rather than the miners themselves.

So then comes the question: why bother mining? For some it is still a feasible way of generating some income and while there are still bitcoins out there to be found in the digital ether, there will remain a dedicated network attempting to release them.

The future success of bitcoin relies heavily on people’s willingness to use it. It is backed by the people; the network of miners, the owners and users of bitcoins; the entire bitcoin community. Everyone who uses it has that invested interest in not allowing bitcoin to fail and for this reason there will always be an incentive to mine. When all the bitcoins are mined, we might be looking at small transaction fees as a way to reward miners for keeping the blockchain going and validating transactions. Currently less than 0.8% of mining revenue is from transaction fees. But that is a good twenty to thirty years away and right now there are still more than 9.5 million bitcoins up for grabs. Grab your pickaxe…

By Louise @ Bitscan