DeKALB – On Wednesday, a Bitcoin was valued at more than $16,000, compared with the estimated $1,000 it was worth at the beginning of the year.
The staggering price appreciation of Bitcoin, one of the most common forms of cryptocurrency, prompted Dustin Gurnitz of DeKalb to make a $40 investment in Bitcoin in November.
Gurnitz said that he feels comfortable enough in the currency to let it play out – and the amount he stands to lose is relatively small, anyway.
“I don’t see [a bubble crash] happening in the near future, but I think there’s a possibility of it happening at some point,” Gurnitz said.
Bitcoin was the first “cryptocurrency,” so called because it uses cryptography to secure online transactions in a complex and continually growing list of records called a blockchain. Computer operators who add to the blockchain can be rewarded with Bitcoin.
Buying Bitcoin is one of the ways consumers have been investing in cryptocurrency. But whether Gurnitz’s 0.003 percent of a Bitcoin is liquid enough to sell is uncertain.
In 2009, when Bitcoin was created, it might have been a wise investment for the average consumer if he or she was planning on mining it. Any standard PC could undertake the process of Bitcoin mining, which involves adding transaction data to the currency’s global public ledger – the blockchain – for profit.
Despite the skyrocketing prices of the digital currency, however, the computations required to make Bitcoin lucrative have become so complex that the average person is more likely to win the lottery than to earn a major payout through Bitcoin mining, said David Gunkel, director of graduate studies at Northern Illinois University’s Department of Communication.
“Early on, [Bitcoin mining] was easy, and the bar to get involved was very low,” Gunkel said. “Now, if you want to do [mining], you’ll need a garage full of CPUs with a full A/C unit. The computers would have to run constantly with internet and electricity connections. It’s not only an initial investment, but an ongoing payment for energy and operating costs.”
Bitcoin can be collected in three ways: mining, trading against other currency or receiving it as payment for services. To buy, a person must first set up a digital “wallet” to store their cryptocurrency, which can be done on websites such as Coinbase. Users then can connect their bank account, debit card or credit card to change digital currency into and out of their local currency.
Gurnitz said he used the Coinbase investment app to make his exchange, and likes how it allows you to set price points that will alert a consumer when the price of Bitcoin is dropping.
The process of mining, however, is only going to get harder and harder. Gunkel said that by the year 2040, 99 percent of all Bitcoin will have been discovered.
“For 100 years, only 1 percent [of Bitcoin] will need to be discovered, which devotes a lot to such a small amount,” Gunkel said. “You’re playing an elaborate mathematical game, pouring a lot of energy from not necessarily green sources into making it happen.”
Bitcoin was the first decentralized cryptocurrency on the market, but others, such as Litecoin, also have popped up over the years. Gunkel said the initial idea was to be a liberating currency that could be made available to the developing world, where people might not have access to central banks.
“The reality of the situation is that Bitcoin has turned into an asset and not a currency for exchange, so people have hoarded the asset and are waiting for it to appreciate,” Gunkel said. “It’s closing in on a $20,000 Bitcoin-to-dollar exchange, which is really impressive, but the question is whether this is a phenomenon that can be consistent over time, or whether it’s a bubble.”
Gunkel added that a rapid rise in value in a short amount of time is common bubble economics.
“It doesn’t mean that there isn’t something here that will give it longevity,” he said. “It’s anyone’s guess as to how long it will be performing this way.”
Based on its volatility, it also is difficult to say how liquid Bitcoin might be when it comes time to find a buyer to cash out.
One innovation of these cryptocurrencies when they first came out was allowing online transactions to occur without the need for a third-party verification service, meaning no transaction fee, or at least a very small one.
“Third parties are expensive,” Gunkel said. “To broker deals, they have to siphon for themselves to stay functional.”
Because of this, cryptocurrency had become popular for online criminal activity and was used by sites such as Silk Road, an online black market shut down by the FBI in 2013 that was used primarily as a platform for selling illegal drugs.
Gunkel’s research mainly focuses on the social aspects of artificial intelligence and robotics, but he also has published work on blockchains, which are continuously growing lists of records, or blocks, connected and secured through cryptography.
He said these can be used in all kinds of ways, including as the ledgers for cryptocurrency transactions, that can revolutionize the exchange of online records and ideas.
“That’s the big innovation, and we’re going to see that rolled out everywhere,” Gunkel said. “It is able to utilize what the internet is good for, which is trading digital information online only and supplying some validation mechanism, so that we’re ensured that the information has some integrity.”