In late 2012, sophomore Keaton Ochoa heard about a new way to “make a bunch of money on the computer” through Bitcoin, an experimental digital currency introduced in 2009.
He initially passed it off as a scam, but after a little research decided to purchase some out of curiosity at a rate of 1 bitcoin per $5.
Now Bitcoin has become a common name in the news, and Ochoa made a huge return off his unintentional investment: 1 bitcoin now hovers at a value around $800, 160 times his original investment.
Ochoa wouldn’t disclose his exact earnings, but he said he made a substantial profit and is continuing to research Bitcoin for his sophomore project.
Bitcoin is a digital cryptocurrency, meaning it employs cryptography (a method of communicating data between two parties that can’t be understood by any others) to control the creation and transfer of money.
Like the U.S. dollar or the euro (or any other currency), Bitcoin is simply meant to facilitate the exchange of goods and services, though few major companies currently accept Bitcoin.
“The only thing that’s actually worth buying is alpaca fur,” joked sophomore Jacob Sands, who has purchased $30-40 worth of Bitcoin.
Ochoa said he has bought a guitar and some computer games with his Bitcoin, has converted some back to dollars and is saving the rest.
Bitcoin is expanding, though—last month, Overstock.com and the Sacramento Kings became the first major retailer and the first professional sports franchise to accept Bitcoin.
Where Bitcoin differs from conventional currency—according to a thesis by pseudonymous founder Satoshi Nakamoto—is in its lack of a centralized third party (such as a bank or credit card company) to verify transactions.
Instead, Bitcoin uses cryptography and a network of users to verify transactions through a process known as “mining.”
This means that Bitcoin can be transferred directly from person to person securely, with little to no transaction fees and with potential anonymity, much like a digital version of physical cash.
The low or nonexistent transaction fees are obviously convenient and make microtransactions viable, according to Ochoa.
“If you send a dollar with a credit card, there is a huge fee— like 30 cents,” he said. “But if you use Bitcoin, the transaction fees are really small, so you can reasonably send small amounts of money. And if you send a million, the fee would still be only around a dollar.”
The anonymity and separation from a central authority have also enabled illegal activity, most notably the online black market Silk Road, sometimes known as the “eBay for drugs.”
This illegal usage has given Bitcoin negative publicity, but Ochoa said it is unfair to judge Bitcoin by the illegal uses alone.
“At the end of the day, the dollar is still being used for the most money laundering and the most drug sales,” he said. Illegal activities aside, some people enjoy the sense of security that comes with Bitcoin’s anonymity.
“I wasn’t planning on buying anything I needed to hide anyway, but it’s a nice thing to know that (my purchase history) can’t be traced,” junior Alex Bushberg said.
About a year ago, Bushberg purchased 0.6 bitcoin for around $65-75. He forgot about it until he discovered months later that Bitcoin had hugely increased in value—but he no longer had the email account his Bitcoin was purchased with.
“I was really upset—I had basically missed out on $600,” he said.
Bushberg later decided to try mining Bitcoin.
Each Bitcoin transaction over a roughly 10-minute period is compiled into a file known as a “block,” which is later added to the “block chain,” the permanent record of all Bitcoin transactions.
Each block is encrypted with a intentionally difficult mathematical problem and made public.
Mining is the process of using a computer (and a lot of power) to solve this problem, check the past records to en- sure the transactions are legitimate (primarily preventing double-spending) and broadcast the confirmed transaction back through the network.
As an incentive for people to dedicate the large amounts of computational power necessary to mine, a pre-determined sum (currently 25 bitcoin) is distributed among the miners
that solve each block (which happens roughly every 10 minutes), serving the added purpose of injecting Bitcoin into the economy.
The reward has encouraged many to “mine” in the hopes of making money, but few have made a substantial profit.
Bushberg said he didn’t end up making more than a few cents from mining over a two-week period.
Senior David Myers attempted to dedicate his computer to mining Bitcoin, but he said his computer almost caught on fire after a day and he made close to nothing.
“You spend more money on electricity than you make from mining,” he said. “You’d need an incredibly powerful system to really make a profit.”
Since few companies currently accept Bitcoin and mining is only marginally profitable, many users treat it as an investment, similar to stocks.
Some, like Ochoa, saw a massive increase in value, but with few users compared to long-established national currencies, Bitcoin is very volatile.
On Feb. 10, one of the Bitcoin exchange websites, Mt. Gox, shut down due to an issue that could be exploited to commit fraud. In the course of that day, the value of 1 bitcoin dropped from around $850 to a low of $535 before rebounding again to nearly $700.
“I don’t trust (Bitcoin) at all, as evidenced by its value (changing rapidly),” said senior Troy Hoddick, who has mined and researched Bitcoin.
“The fundamental basis that Bitcoin is based off of is that the only thing needed for a currency to work is people holding faith. I disagree with that—there needs to be some sort of tangibility.”
Hoddick said he is too skeptical to invest his own money into it, and he doesn’t think Bitcoin will survive in the long term after the initial novelty dies down.
Others, such as Sands, think that Bitcoin’s publicity and volatility will help it grow stronger.
“People don’t consider it a currency because it’s so volatile, but everyone keeps talking about it,” Sands said. “And if every- one keeps talking about it, the value goes up.”
Ochoa agrees.
“I think it’s going to continue to thrive in the next few years,” he said. “More governments may start regulating it, but it’s looking good. Adoption (of Bitcoin) will spread as more people get their hands on it.”
