A volunteer army of computers facilitates the Bitcoin network (or “mines Bitcoin,” in the cryptocurrency parlance), acting as the mechanism that moves money from place to place and effectively keeps Bitcoin operational.
Mining Bitcoin generates more of it, so over time, the people running these computers are rewarded for their efforts.
But the fluctuating value of Bitcoin and the increasing costs associated with mining present a problem. If Bitcoin’s value drops too low, miners are no longer incented to keep their node of the Bitcoin network operational.
According to Peter Leeds — financial expert and author of “Penny Stocks For Dummies” — it will no longer be worth it to mine bitcoins when the price dips below $US350. If a bunch of miners should quit, we’ll see a bottleneck, an increase in time required to complete a payment.
If all of them should quit, Bitcoin payments stop going to their intended recipients. It would effectively end Bitcoin.
BUSINESS INSIDER: What’s your general take on Bitcoin? The future of money? A means to launder it instead?
PETER LEEDS: Bitcoin is a great concept, but there are too many obstacles to make it a reliable and usable currency over the long term. Regulation, taxation, volatility and diminishing returns for those who make money from it will result in the long-term failure of this experiment.
BI: What’s the deal with Bitcoin’s volatility?
PL: Anything so thinly traded is prone to fluctuation. At the same time, the currency is so new that it is passing through a phase of growing pains. Each new event (whether negative or positive) will have a magnified effect when traders extrapolate the potential results.
BI: Can it be prevented?
PL: The volatility will be greatest at first, and with anything so speculative there is almost nothing that can be done to smooth out the price fluctuations since they are caused by independent traders. Over time, speculation will decrease, as will mass-market interest, and the volatility will decrease in lock-step.
BI: Should people be buying bitcoins right now as the value shrinks?
PL: All investors should steer clear of the whole Bitcoin craze. Like anything, there was a great deal of money to be made by those who got involved early. That early growth phase has now passed, and anyone coming late to the game (meaning getting involved now) will suffer loses as interest in the digital currency diminishes.
BI: Is it worth it to start mining Bitcoins today?
PL: Mining costs are in the hundreds, if not thousands, for electricity and the computer hardware. Meanwhile the rewards are decreasing, most recently falling from 50 to 25 bitcoins as reward for running a block (verifying transactions, securing the network). If the value of a single bitcoin drops to a certain tipping point (my analysis team and I peg it at $US350 USD per bitcoin), mining no longer becomes economically feasible. This would put the entire network at risk of collapse.
BI: What’s the immediate future look like for Bitcoin?
PL: We will see the first attrition among merchants in the coming months. Specifically, there are many businesses that currently accept Bitcoin, who will change their mind or stop taking the payment type. The volatility, additional reporting requirements, taxation and complication will become too much, and they will reverse course on the digital currency.