An Internet Gold Rush

By Brian Chekal

The slow global recovery has many financial analysts focused on the stock market, poised to rapidly buy and sell at a moment’s notice. However, as recent events in Norway prove, investing in high risk digital currencies may pay much higher dividends.

Kristoffer Koch wasn’t expecting much; the 150 kroner ($26.60) he spent buying 5000 bitcoins was merely an experiment to help bolster the thesis on digital encryption he was in the process of writing. You can imagine the amazement that he – and the rest of the world for that matter – felt when he found that his small investment had risen 3,281,500% to a value of over 5 million kroner  – $886,000 – enough for him to sell a fifth of his nest egg and buy an apartment in Oslo. Koch had forgotten completely about his purchase and it was only the wild fluctuations in the value of bitcoins in the last couple of weeks that drew his attention and reminded him at all.

What are bitcoins? How could financial analysts and Harvard educated hedge fund managers miss such a brilliant opportunity? The answers lays in the nature of the investments. Bitcoins were created in 2008 by an anonymous developer under the pseudonym “Satoshi Nakamoto.” According to his algorithm, a series of computers would be sent to solve a series of math equations and problems, receiving bitcoin “addresses,” serial numbers if you will, for their work. As more and more bitcoins are created, or “mined” as many call them, the tasks become progressively more difficult, requiring more and more processing power and time for the same amount of bitcoins. The number of bitcoins being generated is not regulated by an overarching monetary fund like the IMF of Federal Reserve, making it impossible to print money to pay off debts. Like gold, the total amount of bitcoins that will ever be mined is limited, set to never change. Though in theory this would lead to the value of bitcoins steadily increasing until it leveled off, reality has shown that people’s perceptions of value change rapidly according to their exposures to it. For example, bitcoins have become tools for illicit transactions on internet black markets like the recently shut down site, Silk Roa,d because they are nearly impossible to track. When the FBI seized the vast stores of bitcoins Silk Road was using in its drug dealings, the value of the digital currency plummeted to just over $30. Within days this value shot back up, at the time of this article the currency’s biggest exchange site, Mt. Gox in Tokyo, reported its value to be over $250. When a hacker exploited a vulnerability in Mt. Gox’s  software and managed to steal $30 million worth of coins back in 2011, the currency imploded, plunging to mere cents to the dollar. This high volatility and the fact that the currency is pegged completely to people’s perceptions of it, has driven may would be investors away. Andisheh Tahriri, a junior here on campus, spent last summer mining bitcoins. He states, “Mining is not at all worth it; you need a dedicated computer to mine efficiently and depend completely on the price of bitcoins being high to have any chance of making up your investment. In my opinion, bitcoins rely too much on hype and should not be considered for anything but novelty.”