Month: April 2013

Roger Ver is an entrepreneur, investor and Bitcoin Pioneer. He has bet a lot of intellectual and monetary capital in the Bitcoin revolution, which he supports not just because it is a technological advance in our financial infrastructure, but also because of the new hope for human liberty that it represents.

 

Bitcoin Magazine: How and when did you first hear about Bitcoin?

Roger Ver: I first heard about Bitcoin in late 2010 on the www.freetalklive.com radio show / podcast.

 

BM:Why is Bitcoin important? Why is it different?

RV: Bitcoin is different from any other payment form in the history of mankind.

For the first time in history, anyone can transact with anyone else, anywhere in the world,  and it is impossible for a 3rd party to interfere in any way.

 

BM:What makes you think that it will catch on?

RV: All throughout history,  people (thieves, kings, tax collectors) not directly involved in a transaction, have forcibly interfered in other people’s transactions.  Bitcoin now gives everyone on the planet the option of removing themselves from the arbitrary control of others.

 

BM:What makes you think that it will last? Is it really that resilient?

RV: The only reason Bitcoin wouldn’t last would be because something even better comes along, so all the proponents of individual liberty still win.   If Bittorrent is any example,  the Bitcoin network really is that resilient.

 

BM:Is Bitcoin really censorship-resistant? Can it thrive in, for example, China? Argentina?

RV: It can thrive anywhere in the world with the internet.  That currently includes China and Argentina. Even non-Bitcoin users would be rioting in the street if a government tried to cut them off from the internet.

 

BM:Can Bitcoin scale? What will it need to support 100 million users?

RV: Bitcoin can scale, but will surely experience some growing pains along the way. As it scales,  there will be more and more people with a vested interest to help fix any issues that arise.

 

BM:How will Bitcoin change the world? Describe your best-case scenario for Bitcoin 10-20 years from now.

RV: Governments currently pay for their actions through theft (taxation), and counterfeiting (inflation).  Bitcoin will make taxation much more difficult,  and inflation impossible. More people were killed in the 20th century by their own governments than by all wars combined. The odds of you being murdered by a government, not including wars, is higher than your chance of dying from diabetes, alcohol, tobacco, traffic accidents, homicides, and just about all other single medical illnesses.

In my ideal world, Bitcoin will bring an end to the nation state, allowing people across the world to deal with each other on a voluntary basis.

 

BM:Do you consider Property a Natural Right (like Free Speech)? Or is it just an artificial legal construct? What about IP?

RV: I believe that property is a natural right that stems from each individual’s ownership of their own body.

People own property when they mix their labor with something that was previously unowned,  or voluntarily trade with others for existing property.   I was persuaded by Murray Rothbard‘s arguments regarding IP.  Patents are an illegitimate grant of monopoly privilege by the state.  Copyright is a perfectly valid contractual agreement.

 

BM:Medium of Exchange or Store of Value? If you had to choose just one of these two functions, which would you rather have Bitcoin be optimized for? 

RV: In most circumstances these have traditionally been two sides of the same coin.  Bitcoin is currently better as a medium of exchange,  but with time, I believe it will also become a store of value.

 

BM:Are you worried about competition? Do you think that Bitcoin will be replaced by something better?

RV: I hope Bitcoin is replaced by something even better for the same reason I hope my computer will be replaced by a better model in the future.  Things being replaced by something better is what makes the world a better place.

 

BM:What do you think will be the first big Bitcoin fork that really divides the community? Which side will you choose?

RV: I don’t know what will cause the first big fork,  but I am sure that I will take the side that supports individual rights.

 

BM:Can Bitcoin be hijacked and mutate into Fedcoin? can it be centrally controlled?

RV: I think this is unlikely since people can now voluntarily chose to use whatever crypto currency they want.

 

BM:What Bitcoin projects are you currently involved in?

RV: I’ve invested over $1M USD of my own money into over a dozen Bitcoin related startups.

The most well known would be Bitcoinstore.com, Bitinstant.com, Bitpay.com, Blockchain.info, Coinlab.com, Bitcoinfoundation.org. If you have a great Bitcoin related idea that needs funding,  please contact me!

The One Foundation, the first officially recognized private charitable fundraising organization operating in China, has now also become the first Chinese organization to start accepting Bitcoin donations. The organization published a donation address on April 23, and received 230 BTC ($30,000) within two days, instantly making it one of the most successful Bitcoin charities to date.

The One Foundation was originally created in 2007 by renowned Chinese film actor Jet Li, who then took a year off film-making in 2008 to promote the foundation. Private fundraising organizations are highly regulated in China – even now most applications to create one are simply rejected, so for the first three years of its operation the One Foundation was not even an independent organization; instead, it operated under the umbrella of the Red Cross Society of China, a government-connected organization operated by the Ministry of Health. However, its partnership with the Chinese Red Cross was a restrictive one. “Jet Li complained that the One Foundation had little say in deciding on the use of money it had raised,” Xinhuanet’s Wu Chen and Wu Caixia write. “According to his plan, his foundation sought to focus more on supporting domestic grass-roots NGOs, which lack both money and professionals, while the Red Cross Society of China is an organization paying more attention to disaster relief.”

In 2009, the Chinese government started a trial project in its “special economic zone” in Shenzhen to streamline the registration process, allowing the local government of Shenzhen to register foundations – a power previously only held by the federal government. Shenzhen authorities were willing to work with the One Foundation, and it was finally able to register as an independent foundation in 2010. In 2011, the Chinese Red Cross’s reputation was damaged by a scandal in which a 20-year-old claiming to be the “commerce general manager” of the organization, Meimei Guo, publicly flaunted artefacts of an extravagant lifestyle that many assumed had been paid for with charity money (it was later discovered that she was the girlfriend of someone involved with the Red Cross; he has since resigned). Concerns over government corruption and extravagance are common in China; the Chinese Red Cross is administered by the Chinese Ministry of Health, and so its employees gain the “iron rice bowl” guaranteed job security and welfare benefits of public servants – benefits that many feel are undeserved when ordinary Chinese working outside government agencies have little of either welfare benefits or job security. The Meimei Guo incident reignited these concerns, and two investigations into the matter was carried out.

When the Ya’an earthquake struck in April 2013, the total lack of confidence in the Chinese Red Cross became painfully clear. “Right after the quake,” Financial Times columnist Julie Zhu writes, the RCSC said on Weibo, China’s answer to Twitter, that it had sent a team to ‘inspect’ the quake-hit region. Tens of thousands of Chinese microbloggers fired comments back. The message from most of them: ‘Get lost'”. “As an ordinary citizen, I will never donate a penny to the Red Cross Society,” one user of Weibo, the Chinese equivalent of Twitter, wrote, and another added “The RCSC is shameless. The earthquake is terrible enough. We don’t need you to ‘inspect’. Get out of our sight.” By the end of the day, the agency had received only $23,000 worth of donations. Because of its past relationship with the Chinese Red Cross, the One Foundation also took some of the reputational damage from the Guo Meimei incident; its staff had to frantically rush to remove an old Red Cross link from their site when a user stumbled upon it. However, at the same time the foundation is quietly gaining credibility as an alternative, although both organizations are careful to avoid outright competing with each other for individuals’ donations.

Soon after the earthquake struck, the One Foundation also decided to try something new: accept donations in bitcoin. The organization released the address on April 21, and within two days it received over 230 BTC – marking what appears to be the first significant Chinese Bitcoin fundraising drive in history. “Welcome geeks and hackers’ bitcoin donations to the One Foundation,” a representative wrote in a brief reply written in Chinese when asked about the donation address by Bitcoin Magazine. The 230 BTC donated are worth about $30,000 today; when compared with the agency’s total receipts of $2.4 million USD, this means that, within the scope of this particular fundraising drive, Bitcoin was responsible for an entire 1% of China’s largest independent charity’s revenue. The amount was not even from a single donor; the three largest donations were 88, 39 and 25 BTC respectively, but all other donations were 10 BTC or lower. Given that the organization had started accepting Bitcoin quietly, with no news of its Bitcoin acceptance or even the earthquake in the English-speaking Bitcoin media, this leads to an important question: where did the donations come from? There seems to be only one logical answer: a growing, and already quite developed, Bitcoin community in China itself.

There are also other signs that point to a massive surge of interest in Bitcoin in the Chinese community. Just like everywhere else, interest in Bitcoin according to standard indicators like Google Trends and exchange trade volume has risen massively over the past four months, but in fact Bitcoin in China is growing even faster than elsewhere. While trade volume at the leading exchange MtGox peaked at about 10 times January volume during the peak two weeks ago, trade volume on BTCChina increased by a factor of 30. April 23 became the first day that any country downloaded the reference Bitcoin client more than the United States; the country in question was China.

There are a number of reasons to believe China has solid potential to take up Bitcoin. The Chinese already have experience with virtual currency in the form of QQ Coin, although that particular attempt at virtual currency was eventually crippled by Chinese regulatory authorities. Bitcoin may enable Chinese users to evade currency controls to a much greater extent than previous centralized systems like QQ Coin ever did. Earning or trading virtual currencies in video games is also a popular occupation; the archetype of a “Chinese gold farmer” collecting in-game assets in massively multiplayer online games to sell for profit is quite real.

The greatest hope, however, lies in bridging the Chinese and Western worlds. Most of North America and Europe are standardized on a number of proprietary platforms for payment: PayPal, Visa and Mastercard come to mind. China has its own equivalents; Alipay is perhaps the best known. Bitcoin will not fix the language barrier between the two worlds, but it can certainly make economic interaction much more seamless; a store catering to Chinese expats called IWannaBuy started accepting bitcoins only a few weeks ago. Bitcoin may even end up being a significant boost for the entire Chinese non-profit sector; charitable donations in China currently only amount to about 0.09% of GDP, so the fact that Bitcoin opens the door for these organizations to receive international donations – from, say, Chinese expatriates living in Canada and the US with families still in China, opens an opportunity for Bitcoin and Chinese charity at the same time. The Bitcoin community has just shown that it alone is willing, and able, to donate as much to the One Foundation as all of China did to the Chinese Red Cross – suggesting that Bitcoin may play a significant role in China’s non-profit, and perhaps even for-profit, sectors in the years to come.

After reaching $20 Billion in mobile transactions, PayPal President appeared on Bloomberg TV’s “The Pulse,” with Guy Johnson to discuss mobile security and share his thoughts on the Bitcoin currency. This morning, PayPal President, David Marcus, expressed his fascination with Bitcoin and opened the door to a potential implementation of the up in coming online currency. As PayPal strives to remain the leader in innovative and convenient ordering and payment processing for individuals and merchants, we are prompted to wonder whether such a hunger for leadership and ingenuity will prompt PayPal’s leadership to take the final jump to accept payments in the Bitcoin currency.

Most recently, PayPal worked with Jamba Juice to develop a PayPal iPhone app to provide advanced order and payment options. In essence, customers, can locate a nearby Jamba Juice on their mobile devices, place an order, pay for their order, and have their juice ready to go upon arrival to the popular smoothy and fruit juice chain. Such a process would be expedited with the use of the Bitcoin currency. Without a need to go through multiple steps, interested customers merely need to use a Bitcoin wallet and scan a QR code to process payments.

What attracts most to mobile payments is the convenience factor for merchants and customers. Additionally, having admitted that lines are blurring between online, mobile and offline payments, Marcus leads us to believe that PayPal may opt into the Bitcoin currency payment system based on digital wallets. Expressing an attentiveness to follow the ever changing lifestyles of customers, Marcus shared a potential interest in considering the Bitcoin currency and new payment techniques to meet customer needs. As convenience and relevancy is key, Bitcoin opens the door to expedite mobile transactions and save merchants and customers time and money.

Furthermore, in light of a push for more convenient payment processing methods, PayPal is still mindful of customer and merchant security in transactions. In an age of growing identity theft, PayPal is working with Google and Lenovo in the FIDO Alliance to develop a technology that provides greater authenticating methods for online and mobile payment devices an option to prevent hackers from accessing accounts by stealing passwords. Marcus expressed that while looking to increase in its competitiveness and speed in processing transactions, PayPal is also working to develop a greater level of trust with merchants and customers.

We already know that Bitcoin is a secure method of payment. Spending with Bitcoins does not subject consumers to the same risk of identity theft as spending with credit cards.  Credit card numbers and billing information can be stolen by identity thieves who assume people’s identities and spend their money. With With bitcoin, people can simply send payment to a merchant’s Bitcoin address without releasing any financial or personal information.

Marcus has cracked open the door to further consideration of the PayPal’s relationship with the Bitcoin currency. Here’s to another step into prominence for the Bitcoin currency.

OzCoin, one of the larger Bitcoin mining pools, has reported that an unknown attacker managed to hack into their server, defacing their website and database and stealing 923 BTC ($135,000) from their Bitcoin wallet. However, in less than a day over half of the money was seized as it was passing through the web wallet StrongCoin, and promptly returned to Ozcoin. 354.06 BTC are still missing, and will likely never be found, but this nevertheless leaves OzCoin with a much softer blow than what anyone expected.

Although most people agree with StrongCoin’s actions, this is nevertheless a very worrying sign for the security and privacy of StrongCoin, and other web wallets by extension. StrongCoin is what is often called a hybrid web wallet, accessible as a website on the internet but doing all of the transaction signing and address management in Javascript on the client side. Essentially, the client is downloading a fresh version of the wallet software from StrongCoin each time, and from that point, in theory, the software becomes just as secure as any other client-side program. The user’s wallet data, including the private keys needed to sign transactions, is backed up on StrongCoin’s servers, but it is encrypted and decrypted client-side using the user’s password so, once again in theory, there should be no way for StrongCoin themselves to get hold of the user’s private keys. StrongCoin heavily advertises this feature; on the website’s front page, they write: “Therefore our servers only hold encrypted private keys and neither we nor anyone else can spend your Bitcoins. Only you.” Except they just did.

Inspections of StrongCoin’s client-side code have confirmed that StrongCoin is in fact operating exactly as a client-side web wallet should. This leaves only one possibility: StrongCoin essentially hacked their own service. By injecting code that would automatically send all of a user’s funds to themselves as soon as the user entered their password, a web wallet provider can easily steal from any of their users provided that they log in with enough frequency. Attacks like these are the reason why security analysts have generally come out against Javascript cryptography; this and other arguments are well-explained in Matasano’s article “Javascript Cryptography Considered Harmful“. This time, StrongCoin used this vulnerability to do good, but at the same time they have critically undermined the trustworthiness of their service; people use hybrid web wallets over centralized services like Coinbase precisely because they do not trust central service providers to always do the right thing.

It should be noted that the other major hybrid web wallet provider, Blockchain.info, has taken steps to protect their users against such an attack. Their web wallet is also offered in the form of a Chrome and Firefox extension, which is essentially equivalent to any other piece of desktop software with the sole difference being that it relies on the user’s browser to interpret its source code. Safari users also have a Wallet Verifier plugin, although its scope is much weaker.

The other issue is privacy. Explaining how they discovered that the thief was using their service, StrongCoin wrote that “Everytime you make a payment from StrongCoin the fee goes to 1STRonGxnFTeJiA7pgyneKknR29AwBM77 so any payments from strongcoin held accounts are easily traced back to the site.” Presumably, bitcoins from the theft were traced through the blockchain until one of the transactions made its way to StrongCoin, at that point establishing a direct link between the StrongCoin account and the thief. This actually marks the first time that a significant amount of money was successfully recovered using the help of blockchain analysis. Although blockchain analyses made by various researchers have been able to draw intricate graphs mapping Bitcoin transactions to a few high-profile users, until now the public transaction log in the Bitcoin blockchain had not managed to track down or stop a single large-scale theft – casting doubt on claims that Bitcoin is not anonymous. This incident does not imply that Bitcoin now has no privacy at all; StrongCoin’s counter-hack was only possible because the transaction came very soon after the original theft and the thief had not yet made any strong attempt at obfuscation, and StrongCoin’s wallet in particular is weak in terms of privacy because add transaction fees are sent to one particular address (1STRonGxnFTeJiA7pgyneKknR29AwBM77). However, it is still a worthy incident to point to when confronted with concerns that Bitcoin facilitates untraceable theft.

Those using StrongCoin should decide for themselves whether staying with StrongCoin is worth it. Those who enjoy StrongCoin for the user interface features should probably stay; StrongCoin has been in the Bitcoin community for a long time, and if users are willing to outright entrust their funds to exchanges it is not a leap to trust StrongCoin to do the right thing as well. Those who like the cryptographic client-side security aspect, on the other hand, should consider switching to Blockchain.info – or, better yet, a client-side wallet like Electrum. As for StrongCoin themselves, if they wish to maintain their status as a secure hybrid web wallet, they should quickly get to work on catching up with Blockchain.info and implement a Firefox and Chrome extension.

The most famous torrent site in the world, The Pirate Bay, has just started accepting Bitcoin donations, placing a donation address on their front page. The initiative quickly proved to be very successful, raising over 10 BTC ($1,300) in little more than a single day, and other major torrent sites have quickly started to do the same thing. EZTV, OpenBitTorrent, PublicBitTorrent and istole.it have all added Bitcoin donation addresses onto their front pages.

In terms of promoting awareness, this is a fairly large step forward for Bitcoin. The Pirate Bay is ranked by Alexa as the 77th most visited site on the internet, placing it above all other Bitcoin-accepting sites to date except WordPress at 21st. However, the Pirate Bay’s use of Bitcoin, and that of the other torrent sites that have rapidly followed suit, is much more prominent. Unlike WordPress, Namecheap and Reddit, which do not make any attempt to advertise their acceptance of Bitcoin beyond an initial press release, the Bitcoin address on The Pirate Bay in particular is immediately visible to everyone who accesses the page. The message that The Pirate Bay is sending is clear: you do not need to be ashamed about supporting Bitcoin. Sure, Bitcoin is controversial, with some mainstream economists coming out outright against it, but what revolution isn’t? As an organization whose very continued existence has come to symbolize an ongoing victory against the pro-copyright establishment, The Pirate Bay understands this better than almost anyone else – except perhaps Wikileaks, although incidentally Wikileaks accepts Bitcoin too, and are actually doing quite well with it.

Of course, businesses like WordPress, Reddit and NameCheap are not charities, and essentially since have already made the bold step of accepting Bitcoin in the first place we should not demand them to more actively promote Bitcoin from the kindness of their hearts if they do not want to. Fortunately, however, at least in spirit The Pirate Bay is a charity, and as members of the Bitcoin community, we should be very grateful that such organizations exist. It is only through people and organizations continually and passively promoting Bitcoin in this way that the currency will reach any kind of significant cultural acceptance – simple news articles primarily lead to transitory interest that, in the case of the latest bubble, has already largely faded away. News promotes Bitcoin as something special; passive promotion promotes Bitcoin as something normal. The answer to which one evokes less hostile attention from regulators, more interest from casual users, and ultimately more willingness on the part of more traditional businesses to accept Bitcoin and show it, is clear.

When donating bitcoins in general, there is one security reminder that is important to repeat: don’t copy a donation address from anything other than the official website, and do not post a donation address without directly linking to the page that confirms the address as being legitimate. Posting fraudulent donation addresses is very easy, and it would be a shame if the Bitcoin community’s charitable nature were to be exploited by the most trivial of scams. Stay secure, stay safe, and feel free to donate a few bitcents today.

After nearly six months of delays, Butterfly Labs has finally released a copy of what appears to be the final version of one of their long-awaited ASIC mining products. Similarly to how Avalon first shipped a sample copy of their mining rig to Bitcoin developer Jeff Garzik, Butterfly Labs shipped their first unit to David Perry of Coding in My Sleep. David received the unit Saturday evening, and uploaded a video of himself unboxing and testing it the same day.

The unit in question is a Bitforce SC Jalapeno, the smallest of the four models that the company is selling, and it appears to be running flawlessly, connecting to mining pools with minimal setup and consistently cranking out 4.5-5.7 GH/s, within fifteen percent of its operating specifications. However, aside from the hash rate the statistics do not nearly live up to what the company had originally promised. The device is roughly 10x10x8 cm in size, about three times higher than the relatively flat design that had originally been conceived for the Jalapeno – the name itself coming from the idea that the machine could be used as a coffee warmer. In fact, the company has now quietly dropped the Jalapeno name from this low-end version of its product, preferring instead to use the more mundane “5 GH/s Bitcoin Miner”. However, the device is still somewhat better than those of its chief competitor: Avalon’s miner offers 65 GH/s for 620 W , or about 10.5 W per GH/s compared to Butterfly Labs’ six, and fits into the space of a desktop computer – a space into which Butterfly Labs can put 120 GH/s worth of its Jalapenos.

The device’s power consumption is 30 watts, giving an efficiency of 6 joules per gigahash (or 6 watts per GH/s; the two units are the same), six times higher than what the company originally promised. However, for those who have been following mining news, this is not surprising. When Avalon first released their miners in January, founder Yifu Guo had said in an interview: “They won’t reach the power consumption they were claiming. Recently they changed it to 1.2w, but they won’t even reach that.” Avalon’s own simulations at the time showed that even with Butterfly Labs’ superior 65-nanometer precision manufacturing process it would only be possible to reach about 3W per GH/s. At the time, many (including myself) criticized Avalon for their inferior figures with regard to both power efficiency and size, but now the truth has become clear: Avalon was simply being realistic.

In February and March, Butterfly Labs staff informed customers on their forums that they were having problems keeping to their power consumption targets, and at the beginning of April Bitcoin developer Luke Dashjr publicly confirmed that Butterfly Labs had a working ASIC, but the machine was consuming 180 W to produce only 25 GH/s. The device was not quite production-quality, and some argued that perhaps it was working so inefficiently because it was defective, but at that point it became clear to everyone that 1.2W would remain a pipe dream for many months to come. With its current efficiency of 6 W per GH/s, the “Jalapeno” remains more efficient, but far from what had been originally promised.

Thirty watts is still not a very high power expenditure; the extra 25 watts gives an expenditure of 0.6 kWh, or about $0.10 per day – a pittance compared to the $29.52 per day (that’s 5 GH/s per miner / 75000 GH/s total network hashrate * 25 BTC per block * 144 blocks per day * $123 per bitcoin) of profit that the device can currently produce. But it is nevertheless a serious inconvenience for two reasons. First of all, contrary to Butterfly Labs’ original intent, the device won’t be running off a USB anytime soon. Second, and more importantly, assuming that larger units will have a similar power to output ratio, people in apartments will have difficulty powering large numbers of Single SCs or a MiniRig (now expected to be 10 kW), meaning that those buyers will need to come up with alternative arrangements to run their machines.

Fortunately, Butterfly Labs has provided just that: in a recent FAQ update, the company wrote: “When ordering equipment from Butterfly Labs, you have the option of hosting your equipment locally with one of our affiliate data centers. Your hosted units will be added to a mining farm and you will be paid out regularly based on their collective output.” What is interesting is that Butterfly Labs and its competitor ASICMiner, taking two completely different paths, have now seen their business models converge to one and the same: Butterfly Labs, initially only selling machines, is now offering what from the buyer’s view is essentially an investment product – although they are careful to maintain that they are still actually selling hardware, giving the buyer the responsibility of configuring their device on the software side, and ASICMiner, originally literally selling shares, is now also selling machines. For those concerned about Bitcoin network centralization, Butterfly Labs’ announcement is unfortunate, as a significant fraction of the Bitcoin network will end up headquartered in one place, although the hosting location will not be administrated by Butterfly Labs themselves, and ASICMiner’s opposite announcement effectively counteracts the added centralization from this program.

So far, only the Jalapeno has been publicly released to anyone, so it still remains to be seen exactly what Butterfly Labs will do with their larger units. Josh Zerlan has said that the medium-size Singles will likely be about twice as large as the original ten-centimeter cube design and slightly wider, and stated in a public update that “obviously the minirig can’t fit 1.5 TH/s in a case the size of what we were planning, but we have some interesting solutions with regards to that,” but more specific answers are not available just yet. Fortunately, it appears that the Bitcoin mining company that we have been waiting on for so long is now in the final stages of working out these problems, so the Bitcoin mining landscape will continue to be interesting to watch for many months to come.

The fourth largest Bitcoin exchange in the world, BitFloor, has announced that it is closing its doors, and will soon be refunding deposits to customers. The announcement has nothing to do with recent technical problems that all exchanges have been facing for the past week to due the sudden massive increase in trade volume; rather, the root cause behind the shutdown is the closure of BitFloor’s US bank account. Founder Roman Shtylman writes:

I am sorry to announce that due to circumstances outside of our control BitFloor must cease all trading operations indefinitely. Unfortunately, our US bank account is scheduled to be closed and we can no longer provide the same level of USD deposits and withdrawals as we have in the past. As such, I have made the decision to halt operations and return all funds. Over the next days we will be working with all clients to ensure that everyone receives their funds. Please be patient as we process your request.

– Roman

founder – bitfloor.com

Trading has been suspended, and BitFloor founder Roman Shtylman assures users that they will get all of their current deposits back over the next few days, including USD holdings which will be refunded directly to depositors’ bank accounts by ACH transfer. International users are asked to await further instructions.

The exchange was a very popular way of buying bitcoins in the United States, so BitFloor customers will now have to look for alternatives. Some BitFloor users will undoubtedly be picked up by the dominant exchange MtGox through its North American partner Coinlab, although other options include Coinbase, CampBX and BTC-e.

Particularly affected by the shutdown are those users who had lost their deposits when the exchange was hacked in September. BitFloor lost $250,000 from the hack, normally a fatal loss for an exchange of its size, but BitFloor soon came back online with the promise that it would eventually pay back its depositors over time. The exchange even started fulfilling its promise, paying back 1.7% of the money owed in November and another 1% in March, but the remainder of the debt remains unpaid, and although most people had already written off the loss in September, there is now no longer any hope at all that the money will ever be recovered.

The announcement is also an unfortunate one because it represents a step backwards in the progress of the exchange industry as a whole. BitFloor is far from the first Bitcoin exchange to fall victim to this kind of shutdown; many Bitcoin exchanges around the world, including several times even MtGox, have had their bank accounts shut down, although in MtGox’s case the exchange’s main bank account in Japan has remained unscathed. The number of shutdowns has waned in recent months, but the risk has remained as risk for every exchange in the industry since exchanges first began to appear en masse in 2011. Now, when the need for more exchanges is clearer than ever, a reinforced precedent of banks shutting down smaller exchanges may instead push more users to larger and generally more resilient exchanges like MtGox out of fear for the safety of their funds. Fortunately, today exchanges do place much more emphasis on maintaining a healthy relationship with their banks and ensuring legality, and new alternatives are constantly appearing. Tradehill intends to launch a new, high-quality Bitcoin exchange soon, the cash-based Bitcoin ATM continues to be under development as a completely fresh alternative, and we can be sure that there are other projects now under development. Although Bitfloor will certainly be missed, hopefully it will soon find an even better replacement.

…then they laugh at you, then they fight you, then you win.

 I’ve always thought that to understand the mindset of a publication you just have to look at the advertising that it carries. Follow the money. That more than anything will tell you not only what hot-button issues a certain editor will care about (and his bias), but also who his readers are and what they might be interested in.

 If this is true, there is no other publication that represents the international mainstream economics establishment better than The Economist. Nowhere else will you find a higher concentration of ads and job listings for and from international institutions, executive MBAs, sovereign wealth funds, development banks and economic think tanks. When Washington’s IMF, Paris’ OECD or the WTO need new staff, you’ll probably see some of these positions advertised in The Economist’s pages.

 Thus it is hardly surprising that their editorial line reflects the Keynesian-monetarist mainstream consensus, with an added dose of central banker and international bureaucrat hero-worship. Their default position is to dismiss and abhor any kind of non-state voluntary money and defend our currently dominant fiat money system like rabid dogs. Their disparagement of gold and their dismissal of Bitcoin over the past few years has rivalled with Paul Krugman’s in bile and viciousness.

 Therefore when The Economist dedicates not one, but two full page pieces to Bitcoin in a day, and when these articles seem to be a little less dismissive than usual, we should really pay attention. The old guard is watching and worried. The fact that they no longer make the usual ignorant “Bitcoin can be hacked” or similar claims, also shows that they have been studying it in earnest.

 In Mining Digital Gold the attack is fairly obvious: Bitcoin is Napster.

 “Just like Napster, Bitcoin may crash but leave a lasting legacy. “

 Savvy investors and users should be looking to the next generation and view Bitcoin as an interesting and enlightening precursor, but not really waste too much time and effort on it. Litecoin and Ripple get a mention. I’m surprised the author didn’t mention Freicoin, after all if they are so scared of “hyperdeflation” they must love Gesell’s demurrage fee.

They fail to fully understand network effects and the first-mover advantage. They also fail to understand the power of open source projects and how they can evolve, especially if there is large and vibrant community of thousands of motivated individuals continually working on it. They also forget that Bitcoin had many failed precursors who could more accurately be called the Napster of voluntary internet currencies: DigiCash, e-gold and a score of other failed digital gold currencies, but also the original idea behind Paypal, before the PayPal Wars turned it into what it is today. Perhaps a proliferation of other cryptocurrencies will even help Bitcoin grow.

Neither is A New Specie much more subtle:

“The Bitcoin tribe is still a small one, and consists mainly of computer geeks, drug-dealers, gold bugs and libertarians. But wild fluctuations in the value of a Bitcoin, from under $20 at the start of the year to over $200 at one point this week.”

 …and of course never forget to add a taste of insult, guilt by association and other assorted smears.

 What I found particularly interesting was this:

 “There is a limit to how far digital currencies like Bitcoin can spread. Long-term demand for the dollar is guaranteed by the fact that American citizens must pay taxes in dollars. Governments will never confer the status of legal tender on a private currency.”

 It is not only historically wrong, as even the US government has recognised as legal tender not only private monies but also foreign money (read Edwin Vieira’s excellent book “Pieces of Eight : The Monetary Powers and Disabilities of the United States Constitution” or George Selgin’s “Good Money”), but it is also irrelevant. The citizens of Argentina and Venezuela care little for their local legal tender laws when they transact in US dollars. The people of Zimbabwe ignored Robert Mugabe’s and Gideon Gono’s ban on the use of dollars, euros, rand and gold as an alternative to the Zimbabwean dollar that they had destroyed. Similarly, the citizens of the World Wide Web will pay very little attention to the lack of a government seal of approval. Bitcoins can’t be used to pay for taxes? That’s a feature, not a bug.

 Finally this made me laugh:

 “Bitcoin might end up like MySpace, the now moribund precursor to Facebook.”

 In a sense the Bitcoin community is still relatively small. My estimate, based on the number of downloads of the original client and the statistics published by some online wallets, is between 1.5-2 million users at present (if someone has more precise numbers, I’d be delighted to see them!).

This is just a small sample (many thanks to blockchain.info for its transparency)

At its peak MySpace claimed 100 million users. If and when we get there, I’ll be happy to buy The Economist Group for a couple of bitcoins.

 The fact that even establishment mouthpieces like The Economist, Paul Krugman (this is just silly Paul, although I like the video game reference) or even this Georgetown clown see the need to comment on, and attack Bitcoin is a good sign. It is also a symptom that money talks, and that Bitcoin’s market cap is pretty loud at this point. Publicists say that all press is good press. However, in my humble opinion, Bitcoin is past the point where it needs much more press. What we need now is critical mass. Once we get to 10 million users growth could become exponential.

 Bitcoin’s ultimate success is far from guaranteed. There are still many dangers, both internal and external. A lot of work needs to be done, on scalability, exchanges and many other weak points. However we have the best odds in a hundred years of returning money to the free markets.

 We are winning.

In the New York Times, columnist Paul Krugman has written a lengthy article criticizing Bitcoin from an economic point of view, entitled “The Antisocial Network”. This is the third article on Bitcoin that Krugman has written so far, following “Golden Cyberfetters” from September 2011 and “Adam Smith Hates Bitcoin” from April 12. Although he is far from the only economist to have a dim view of the currency, unlike the others his writings on the New York times are read by a large number of people, and the article is also a representative sample of what many who share his political ideology are likely to believe, and so it deserves some specific attention.

The first thing that immediately comes out when reading the article is: Krugman has not bothered to do his research. After the introductory paragraphs, he asks the questions “What is bitcoin?”, and starts to answer “It’s sometimes described as a way to make transactions online — but that in itself would be nothing new in a world of online credit-card and PayPal transactions,” and then follows up “So how is bitcoin different? Unlike credit card transactions, which leave a digital trail, bitcoin transactions are designed to be anonymous and untraceable.” And then – that’s it. Krugman expands on the point a few sentences further, repeating the old canard that Bitcoin is “primarily” used for “narcotics and other illegal items”, but then he utterly fails to cite any of Bitcoin’s other advantages. Namely: no chargebacks, reducing costs for some merchants by as much as ten percent, much lower fees – low enough, in fact, that with BitPay’s recent fee cut to 0.99% the roundtrip of buying bitcoins with USD in the United States, giving them to a merchant, and having the merchant convert them back to USD has lower fees than a single credit card swipe (that’s 1.99% vs 2.9% + $0.30). Bitcoin is also international, making is just as easy to send money from Kyrgyzstan to Guatemala as it is to your neighbor. This is the reason why many believe that the next great Bitcoin bull markets will originate in China and Africa.

As for drugs, Krugman’s claim that “the main use of bitcoin so far, other than as a target for speculation, has been for online versions of those dark-alley exchanges” is outright false. Silk Road has actually considerably decreased in relative importance. Privacy has far more uses than just drugs; Target’s algorithms discovering that a girl was pregnant before her own father is one often-cited example. Also, although Bitcoin advocates often try to steer clear of making the point, even if Silk Road was much larger than it is, the majority of Americans now support legalizing marijuana – making Krugman’s mention of the Silk Road serve more as an ad than an actual criticism.

Krugman, however, does not talk about any of the above. Rather, as he frequently does, he examines the Bitcoin through a single lens: that of his particular views on monetary policy. Both in “Golden Cyberfetters” and “The Antisocial Network”, Krugman seems fixated on the fact that there will only ever be 21 million bitcoins in circulation, and the only partical criticisms of Bitcoin that Krugman has made rest on either this or the concept of mining. “The whole concept of having to “mine” Bitcoins by expending real resources amounts to a drastic retrogression,” Krugman writes in the previous piece. Of course, this is a reasonable argument – if a decentralized currency would emerge that has all of Bitcoin’s properties but does not waste energy on electricity, it would be a significant improvement over Bitcoin as it stands today. Ripple‘s consensus is one way that might potentially be done. However, when looking at the energy properties of Bitcoin it is important to realize the very thing that Krugman has failed to: that Bitcoin is much more than just a currency. The fiat currency analogue of Bitcoin miners – that is, the systems that Bitcoin mining has a chance to replace is not just the mint and the Federal Reserve; rather, it’s the mint, the Federal Reserve, Visa, Mastercard, Paypal, Western Union and half of the banking system.

The reason that one can make such a lofty claim is that, unlike fiat currencies, which have only become digital through proprietary addons created by intermediaries such as those listed above, Bitcoin is digital from the start. In the case of fiat currency, you do not need any intermediaries to transmit money offline – you can just hand the counterparty the bill – but you certainly do need them to transmit it online. And in an age when interest rates in the traditional banking system are essentially zero, the reason why most people deal with banks at all is that they have to in order to do anything financial in an increasingly digital age. With Bitcoin, on the other hand, that need disappears. Sending money is as easy as sending an email, and so any intermediaries that do exist either have to do with interfacing with the traditional banking system, or adding genuine value. Of course, I say half of the banking system because banks do, at least in theory serve an important function in the economy, and regardless of who is doing is that function will have to be done somehow. Thus, banks will certainly not disappear entirely in a world where Bitcoin emerges into the mainstream. However, they will actually have to provide depositors with an incentive for storing their money with them, and part of that will necessarily be convincing depositors that they are legitimately engaged in making loans to value-generating businesses rather than martingale-style gambling – and their size and scope will almost certainly considerably reduce as a result.

As for the monetary critique, I personally agree that having an entire world running on nothing but Bitcoin as a medium of exchange and store of value would be a disaster. But that is extremely unlikely to happen. Bitcoin is only the first in the cryptocurrency movement, and we will likely see many more to come. Ripple already stands out as a promising candidate. A cryptocurrency based around a built-in mechanism for trading computer power is something that we may well see in ten years’ time. Bitcoin may well simply serve as an intermediary “glue” currency that will make it easier for all of the world’s other currencies – fiat currencies, other cryptocurrencies, local currencies, not-so-local currencies based around internet communities, gold, and even potentially stocks and bonds, to work together with minimal friction. The Bitcoin network can also serve as the backbone of the decentralized stock exchange, allowing large corporate and perhaps even government bonds to be traded as monetary instruments with a stable value and most of Bitcoin’s advantages.

Now, for the philosophical. Although it is difficult to notice, in the next section Krugman actually contradicts himself. Near the middle of the article, he writes: “Gold’s value comes in part because it has nonmonetary uses, such as filling teeth and making jewelry; paper currencies have value because they’re backed by the power of the state, which defines them as legal tender and accepts them as payment for taxes. Bitcoins, however, derive their value, if any, purely from self-fulfilling prophecy, the belief that other people will accept them as payment.” Near the end, however, he makes the opposite claim: “Even when people relied on gold and silver coins, what made those coins useful wasn’t the precious metals they contained, it was the expectation that other people would accept them as payment.” So which is it, Mr. Krugman, is money something that has always been just a social convention, or is it something that requires the support of physical value or the power of the state to have value?

The answer is, yes, money is just a social convention, Bitcoin, the US dollar, and to the extent of over 90% of its current value even gold included. First of all, the US dollar is not “backed” by the power of the state in the standard sense of the word – there is no ratio at which the state guarantees that a certain number of dollars satisfies this tax obligation. If the value of dollars on the market went down by a factor of ten, the value of each dollar toward paying one’s taxes would do the same. Even if you let this point slide, however, what Krugman ultimately fails to realize is that power is also “just a social convention”. To understand why, consider why people follow laws. Certainly, many of the most important laws on the books are simultaneously points of basic morality – don’t kill, don’t steal, and don’t defraud, and many people follow them for that reason alone. But what about gambling laws, drug laws, the intricate complexities of the tax code, patent laws (why 20 years instead of 21?), and business regulations? The answer is, if you break the law, the government will come at you with guns. But why does each individual police officer with a gun come at people (at least in theory) only when the victims have broken laws? Because if he won’t he’ll get fired, and perhaps even disciplined – by a legal system backed by other people with guns. There are authorities and chiefs at the top, but why do the rank-and-file follow them instead of other chiefs. The chiefs themselves do not have the military power in their hands to coerce their entire bureaucracy. The answer is, it’s just a social convention. This is the world we live in – it’s social conventions all the way down.

Second, the aspects of Bitcoin on which Krugman is fixated are not about avoiding society – indeed, the only possible function of money is as an intermediary for economic association. Rather, they are about avoiding centralized control. Those who hold pro-government beliefs often make the point of conflating society with government – making the argument that if you do not like centralized authority and control then you must be some sort of mountain man opposed to the obviously superior strategy of “doing things together”. A cursory read of libertarian economists like Mises, however, will quickly show that those who generally oppose government intervention do not do so because they despise cooperation – in fact, Mises and Rothbard in their writings essentially regard free-market cooperation as the highest good. The different sides may disagree on the extent to which decentralized cooperation and society is possible, but it is along those lines that this particular philosophical point promoted by some Bitcoin advocates is made – not some hatred of society in general.

The truth is, decentralized protocols are everywhere, and have served us well for thousands of years. Language, and spoken language in particular, is one example; although we have seen linguistic prescriptivists and the institutions like the Académie Française try to enforce some usages as more elevated and “correct” than others, by and large their efforts have failed; “slang” French has developed into a rich and expressive language in its own right without the Académie’s approval. In writing, prescriptivists have had more success, although that is because writing is taught through centralized formal education rather than the more natural style of learning by example through which children learn how to speak, but by and large language remains a construct that is literally “by the people, for the people”. The internet is another example; although it is far from fully decentralized, is far more decentralized than any long-distance communication medium we have seen before.

And finally, although the architecture of mainstream social networks like Facebook is centralized, it does not need to be; the only reason why alternatives like Diaspora have not caught on to date is their failure to overcome the barrier of network effects, not anything inherent in their lack of a centralized authority, and the existence of one in the case of Facebook arguably only harms it – see the concerns about advertising and privacy. Furthermore, although social networks are, for the time being, centralized, the activity that comes out of them is not – the leaderless Arab spring is one example, and even in their more mundance use the very purpose of a social network is facilitating the ultimate decentralized cooperation protocol of all: friendship.

But what is the benefit of decentralization and lack of control in the world of money? Many answers were given above: centralized systems are less responsive, power corrupts, and so on. But there is also another one: stability. This argument may seem ludicrous made in the wake of the largest bubble and crash in nearly two years, but one has to remember that the reason why Bitcoin is currently subject to such fluctuations is its small size, and the fact that so much of its value is dependent on the percentage chance that it will grow much larger than it is today. If Bitcoin becomes mainstream, we can reasonably expect it to be more stable than gold, as the two are somewhat similar in their function as stores of value, but unlike gold there is no uncertainty in Bitcoin’s supply.

Krugman’s argument against moving away from a fiat currency standard is that the US dollar has remained stable, and inflation continues to appear far away, and so there is clearly nothing wrong with the state of central bank money printing. In fact, Krugman says in other articles, since the introduction of fiat currency depressions have actually been much less frequent. But we have already seen that argument elsewhere: nuclear weapons. The “mutually assured destruction” doctrine stated that nuclear weapons would actually bring us peace, because nobody would dare start a war when the consequences could well be the end of the world. And, judging from historical evidence, it looks like it worked. Although we have seen some close calls, with the Cuban Missile Crisis and an accidental false alarm in 1983 almost leading to the annihilation of billions of lives, altogether American nuclear hegemony held through, saving tens of millions from the evils of conventional warfare. And yet a growing number of people are now looking to abolish nuclear weapons entirely. Why? Read over the last two sentences carefully. The lack of medium-scale wars that nuclear hegemony brought saved tens of millions of lives, but it almost killed three billion. This is the effect of illusory stability through centralization: you replace guaranteed small shocks with a small risk of a big one, and until the big shock comes those who express their fear of it are decried as charlatans – and when it does come, their dead bodies are memorialized as heroes.

An argument can be made that centralized fiat currency, in the form of the US dollar/Euro hegemony, is similar; Greece and Cyprus are roughly parallel to the Cuban Missile Crisis and the 1983 incident, although unlike the Soviet incidents both Greece and Cyprus are still very far from safe. For the past three years, we have been a step away from what appears to be total collapse. Given that risk, and the catastrophic consequences of total collapse becoming reality, the more frequent recessions of the 19th century seem preferable by comparison. “The very act of suppressing fluctuations renders systems extremely prone to large-scale disruptions,” the economist Nassim Taleb writes (those interested in complexity and fragility in economics should consider reading his books The Black Swan and Antifragile for a deeper view).

In this context, having even one currency that is free from political control can make a large difference. The purpose of Bitcoin is not simply to replace the fiat currency standard with a pure 21-st century gold standard; rather, the purpose is to add a measure of diversity by giving people a choice. If Bitcoin collapses, there will still be USD, stocks, bonds and gold are a store of wealth. If the “mainstream” economy collapses, Bitcoin’s rise following the Cyprus incident shows well that Bitcoin serves as an effective hedge. The US dollar is not the endgame – history shows that few currency regimes last longer than about fifty years without going through fundamental changes like hose in 1933 and 1971, and neither is Bitcoin. But it is quite likely to be either part of the next solution or a stepping stone that will get us there.

April 10 was perhaps the most eventful day on the Bitcoin markets in nearly two years. The price started the day at roughly $200, briefly spiked up to an all-time high of $266, and then precipitously crashed, dropping down to nearly $100 in a matter of hours, and perhaps signalling the end of the four-month-long rally since the currency first started to rise from its plateau of $13 in January this year. Trade volume on all major exchanges, even if denominated in bitcoins, hit an all-time high, including a total of over $45 million USD (550,000 BTC) traded on MtGox on April 12 alone, and over $30 million on April 12 – altogether earning the exchange significantly over $100,000 in revenue over the three days. Public attention on Bitcoin hit an all-time high, with the Bitcoin subreddit briefly becoming the 14th most viewed Reddit community, even surpassing front-page categories such as “movies” and “technology“. For the next two days, the carnage continued, and the price fell to a low of $54.20 before partially recovering roughly to the April 1 level of $100, as the Bitcoin community is left wondering what is going to happen next.

The major events of the crash are as follows. At 12:00 GMT on Wednesday, March 10, the Bitcoin price struck its new high of $266, and the direction the price was going slowly began to turn down. After collapsing to $240 the price briefly rebounded to $258, but then quickly resumed its downward path, breaking below $225 in four hours, $200 in five hours and striking a low of $105 at 19:20 GMT, before once again temporarily rebounding to a maximum of $203 for several minutes. During the downswing, the trading ending lag on MtGox – that is, the amount of time between a user making an order on the exchange and the order being processed, itself reached a new record high: over seventy minutes.

Seeking an explanation for the crash, many quickly came up with one possible answer: DDoS attacks. A distributed denial-of-service, or DDoS, attack, consists of an individual or organization with a large computer network attempting to deliberately overwhelm a target with requests so that the server is too busy to handle legitimate users. Such attacks had happened to MtGox before in the past few months, the likely intent having been to trigger a price crash which the perpetrators can profit from by shorting or buying at the bottom, and so naturally many were wondering if the same had happened on April 10. But MtGox’s Twitter account, which would become the main outlet for public relations messages from the exchange throughout the entire period, soon confirmed that this was not the case; “it is not DDOSed, it is lag due to high volume trades,” the tweet explained. A few hours later, trading somewhat subsided, and latency decreased, but soon enough another problem appeared: some users were having problems reaching MtGox’s website at all. Fortunately, the issue was not too serious; “Network maintenance, don’t freak out!”, a second tweet explained.

Soon enough, however, the DDoSers did finally join the scene. Access to the site continued to be sluggish, and less than than twenty minutes after the tweet about the maintennance, MtGox released yet another tweet: “Maintenance Over, however we are now under a DDoS attack.” Also, users investigating MtGox’s public order logs soon discovered that another kind of DDoS was taking place at the same time: MtGox’s database was being flooded with thousands of small orders of very low value, which many believe could have no possible purpose other than to slow MtGox down.

A few hours after that, MtGox responded to the situation with a drastic move that had not been done for nearly two years: for two hours, the exchange shut down trades entirely, claiming that its staff needed the time to upgrade its servers to handle the increased load. After the two hour maintennance, however, the exchange had further technical issues, and remained essentially inaccessible for eight hours further. The Bitcoin economy was already in a state of shock, and loss of the largest exchange in the Bitcoin economy, on which roughly 60% of all trades normally take place, put the markets into a state of panic. Other exchanges, many of which were also intermittently down due to the combination of DDOS and trading activity, disagreed on exactly what the price was supposed to be, but a general consensus soon formed: it was going further down. BitStamp dropped down to about $60, and when MtGox finally re-opened it quickly dropped from its pre-shutdown level of $120 to $75, briefly rose back to $130, and then once agan plunged, ultimately hitting about $60 as well. On April 12, MtGox struck a low of $54.25, but the panic finally subsided, and the price has since rebounded to over $100.

What is most interesting about the price crash, however, is not the change to the price itself – rather, it’s what we learned from it. Ultimately, the crash has served as a sudden, massive stress test to all sides of the Bitcoin ecosystem: the infrastructure’s ability to hold together, the market’s ability to withstand and recover from the sudden drop in price, and the Bitcoin community’s ability to retain its confidence. And the test proved to be very revealing. We now know exactly what are the strengths of the Bitcoin economy, where the performance is acceptable and where we seriously need to improve.

The main weakness of the Bitcoin economy is now obvious: the exchanges, and specifically the singular dominant position of MtGox. After MtGox was first created in 2010, it quickly became by far the largest exchange in the Bitcoin economy, at its peak in June 2011 reaching a market share of over 97%. Since then, the relative size of MtGox has decreased somewhat as other exchanges have slowly gained the community’s trust, but the market remains an oligopoly, with MtGox still retaining a market share of about 65%. The sheer volume of bitcoins traded on the exchange, combined with the prime importance of exchanges to the Bitcoin economy, gives MtGox the power to, whether through malice, incompetence or simple human error, significantly manipulate the Bitcoin price in either direction unilaterally.

On April 10, it was MtGox’s poor preparation that proved to be the deciding factor. The trading lag problem that MtGox faced on the first day of the crash was not new; in fact, it had been present during nearly every minor flash crash on the way up to $260 since the price first broke through its 2011 all-time high of $32, with trading engine lag frequently reaching twenty to forty minutes at its peaks. Despite this advance warning, and despite the massive amount of resources that the company had at its disposal following three months of rapidly increasing profits from trade commissions, the exchange did nothing to improve its systems – until it was already too late.

Other exchanges tended to perform better than MtGox throughout the three days of the crash, but they too were not unscathed. BitStamp shut down entirely for about one hour on April 11, but remained relatively responsive for the rest of the duration. Bitfloor had three brief shutdowns lasting one to two hours each, and BTC-E saw about three hours of downtime on April 11.

Thus, the technical issues alone are relatively excusable; other Bitcoin exchanges, including BitFloor, BitStamp and Coinbase, are also struggling to adapt to the Bitcoin community’s rapid growth, although some are managing better than others. MtGox’s main failure, rather, is how it dealt with them. Soon after its tweet confirming that there was no DDoS, the exchange released a longer message (Pastebin) explaining what had happened in more detail. The message started with the following, now infamous, phrase: “we would like to reassure you [that] no we were not last night victim of a DDoS but instead victim of our own success!” It then followed:

Indeed the rather astonishing amount of new account opened in the last few days added to the existing one plus the number of trade made a huge impact on the overall system that started to lag. As expected in such situation people started to panic, started to sell Bitcoin in mass (Panic Sale) resulting in an increase of trade that ultimately froze the trade engine!

“To give you an idea of how impressive things were here are some numbers that we would love to share with you guys:

• The number of trades executed triple in the last 24hrs.
• The number of new account opened went from 60k for March alone to 75k new account created for the first few days of April! We now have roughly 20,000 new accounts created each day.

In th eyes of many Bitcoin users, perhaps grieving at the sudden disappearance at their hope of instant riches, but also legitimately angry at the exchange’s failure to perform up to the Bitcoin community’s expectations, the message amounted to little more than rubbing salt on their wounds, gloating that while the rest of the Bitcoin economy, and even MtGox’s actual service, was in disarray the exchange’s usage volumes and profits were higher than ever.

The second major error that MtGox made was shutting down the exchange. Upgrading one’s systems is a laudable goal, and even if it took a twelve-hour downtime it had to have been done eventually, but MtGox missed completely on timing. At a time when the Bitcoin market was in the middle of its greatest phase of instability in nearly two years, and what Bitcoin users wanted most of all was simply confidence that the infrastructure still worked, almost without warning the exchange responsible for nearly two thirds of all of the world’s Bitcoin trade simply shut down. To be fair, there was some warning; at the end of their message denying a DDoS attack MtGox wrote that they would have to “close the exchange for two hours in the next 12 to 24hrs to add several new servers to [their] system,” but few received the message, and moreover there is a large difference between the two hours that were promised and the ten for which the exchange was down in reality.

Since then MtGox has made an honest effort at damage control, and took two major steps to regain the public trust. The first, unfortuantely, proved to be counterproductive. Seeking to make up for their poor performance in the eyes of the Bitcoin community, MtGox temporarily lifted all trading fees on the exchange. At first glance, this appears to be an act of niceness, but an understanding of basic economics would have quickly revealed the folly of the scheme: once fees were taken off, trade volume spiked up massively, and trading lag once again hit over 45 minutes on April 13, requiring MtGox to shut down once again for five minutes.

The other measure that MtGox took, however, was quite laudable, and undoubtedly had a positive effect on maintaining confidence. MtGox CEO Mark Karpeles opened thread on Reddit saying “We are MtGox. Ask [us] anything.” Some quotes from MtGox’s answers include:

We absolutely understand this. The fact is that we are programmers and engineers, not PR guys, and we are still building out our capabilities beyond technology and into servicing our customers better. So, yes, we’re moving on this now and have secured help … Please keep in mind that we are not native English speakers, and that was a poor choice of words. The “success” is in the quick uptake of bitcoin most of all.

NO. Everything is accounted for (BTC and money). Fractional reserve is absolutely against our principles. In fact 90~95% of BTC are held in cold storage.

No. We have a company policy that forbids employees (contractually) from trading on the exchange

Our system was designed to handle 2~3x our normal load, but now we’re experiencing 10x the amount, which was difficult to prepare for (it takes weeks) with the sudden new accounts. We have two problems: the DDos and volume related to new accounts. The trade engine is capable of accepting much more of a load. Within 2~3 weeks we will completely rewrite the trade engine, in the meantime we shut down the system today and installed a new server with the current trade engine. Of course, if we didn’t have DDos everything would be fine, so now we’re dealing with two issues at once.

MtGox now much more frequently releases updates on Twitter, and posts longer messages on issues like outages and denial of service attacks when needed. As a result, the exchange has arguably shifted from being one of the most closed companies in the Bitcoin community to one of the more open.

Nevertheless, what the events of the past three days have shown is two things. First, the current state of Bitcoin exchanges as a whole is woefully inadequate to handle the kind of load that would come with being a mainstream part of the global financial system. The root of the problem is not the lack of a sufficient number of servers; rather, it’s architecture. Aside from the brief maintennance and DDOS on April 11, MtGox’s network-facing servers generally performed well, and it was clear that processing orders was the bottleneck. From the information that is publicly available, many have concluded that MtGox’s database architecture can currently only handle orders in series (ie. one at a time) – a setup that works decently for small numbers of transactions, but breaks down completely at a large scale.

“A modern stock exchange today really isn’t an application, it a group of systems that pass messages. Stock trading systems are designed that way so that when you place an order it wil be executed in a predictable and constant amount of time,” security expect Andreas Antonoupolos explains on The Daily Bitcoin Show. The exchanges we have today, on the other hand are largely designed more like traditional web applications, an industry in which order of operations is not particularly important because the activity of most accounts is independent. This is understandable; most Bitcoin exchanges were originally designed by web developers, who may be experienced in their own fields but had no experience implementing financial systems before they came to Bitcoin. However, it nevertheless means that the performance of nearly all exchanges is currently highly suboptimal.

Fortunately, Bitcoin is now seeing more and more attention from mainstream financial institutions, and it is quite likely that from this attention much more high-quality exchanges will emerge. There are already specially designed high-volume exchanges appearing specifically to serve the needs of high-volume institutional investors; Tradehill’s Prime and the Malta-based Exante’s Bitcoin hedge fund may well be only the first two of many more to come, and now that the recent FINCEN ruling has established guidelines describing the legal status of Bitcoin exchanges it would not be surprising if a mainstream financial firm was already working on a professionally designed Bitcoin exchange for ordinary users as well.

Second, the Bitcoin economy is now simply too large for one exchange to handle, no matter how efficient and scalable its architecture may be. Both this crash and many previous crashes, large and small, were ultimately caused by some kind of lag or glitch on MtGox, and the fact that the actions of a single company are essentially the deciding factor for whether each individual flash crash turns out to be minor or catastrophic bodes ill for the future stability of the Bitcoin markets. There are alternatives; BitStamp has expanded greatly in the past few months, as have Bitfloor and BTC-e, and very soon they will have the opportunity to expand much further. The reason is this: one of MtGox’s main advantages over exchanges like BitStamp to date has been the fact that it allows users to place orders even if they do not have enough money in the right currency to fill them – a very useful feature, as it allows a trader to, for example, put a buy threshold at $110 and a sell at $140 and set himself to profit from a movement in either direction if he believes that the price will ultimately stabilize in between. Starting April 17, however, this feature will be gone, making MtGox no longer any better than BitStamp or anyone else.

There are also several other options are on the horizon. One developer in San Francisco has started ButterCoin, an open source project to create an exchange platform that can handle a high level of load. Another “exchange” worth watching is Ripple, a new decentralized digital payment network that intends to allow users to store and handle any currency, including fiat currencies, bitcoins and potentially even precious metals, using Bitcoin-like wallets, addresses and transactions. Ripple includes a built-in “decentralized exchange” functionality that allows users to trade one currency in the Ripple network for another directly – that is, without involving any third parties to complete the transaction. The system is not perfect; just like Bitcoin, ultimately every server must verify every transaction, but unlike MtGox the architecture was designed to be highly parallelizable from the start, allowing servers to scale to any number of transactions simply by adding more cores.

But there is also an aspect of Bitcoin that has held its own extremely well the last three days: its reputation. Even after Bitcoin crashed, articles on The Economist, Time and TechCrunch rushed out to look “beyond the bubble” and defend it, the Winklevoss twins, known for their very early involvement in Faceboook, caught the media’s eye for their support of Bitcoin, and the Business Insider ran a piece by Dan Kaminsky positively discussing one of Bitcoin’s greatest strengths: its security. “It is a fairly open secret that almost all systems can be hacked, somehow,” Kaminsky wrote, “… by all extant metrics in security system review, this system should have failed instantaneously, at every possible layer. And, to be fair, it has failed at other layers – BitCoin thefts have occurred, in the meta-code that surrounds the core technology itself. But the core technology actually works, and has continued to work, to a degree not everyone predicted.” After the crash, CNBC added a Bitcoin price ticker to their webpage – an indicator that at least that organization believes that Bitcoin is something worth watching for many months to come. In June 2011, the response was the opposite; media attention quickly turned grim, and over the next five months mainstream websites wrote a number or articles describing Bitcoin’s ignominous fall. This time, the extent to which the usually fickle mainstream media is willing to continue believing in Bitcoin should shock everyone. To an extent that many still do not realize, this is a hugely positive sign for Bitcoin going forward.

From here, it is hard to tell what will happen. The last two major crashes, one in June 2011 and the other in August 2012 had very different aftermaths; after the crash from $32 to about $15 June, the price continued dropping, almost hitting pre-bubble levels with its November low of $1.994. After August, the price recovered quickly, bouncing between $10 and $13 for four months before finally starting its present rise. This time, anything could happen. We could always see further drops, with one capitulation following another and the price perhaps even dropping below $30, we could stabilize at $100 to $180 or we could see $500 within two months; at this point it is simply too hard to tell. Even if Bitcoin’s meteoric rise does not continue, however, all in all in two years’ time we will have gained greatly from the ordeal. Out of the bubble of 2011 came companies such as BitPay, WalletBit (now BIPS), BitStamp and BitInstant, all of which are now mainstays of the Bitcoin economy. We have already seen a number of businesses come out of 2013; the BitcoinStore, Prime and Ripple are three great examples, and there are many other projects brewing behind the scenes, and if Bitcoin continues to grow it will be these that set the stage for the bubble of 2015 – or the bubble of May 2013. Until it comes, we’ll never know.

Using botnets to mine bitcoins is nothing new or interesting, but the latest entry in this wide category seems to be spreading quite rapidly through the Skype network. This iteration in the Bitcoin-mining-as-virus trend is really only unique because of the speed and method with which it’s spreading itself as well as its relative immunity to virus scanners.

While early reports have this malware spreading at 2,000 clicks per hour, the infection rate may be somewhat lower. To the best of our knowledge, this malware can’t magically infect your computer just from clicking a link – like most Skype malware, the link goes to a file which must be downloaded and executed by the user. This means that anyone who doesn’t fall for the old “funnypicture.jpg.exe” trick will register as a click but won’t be infected, though nefarious parties always seem have new tricks up their sleeves to trick even seasoned veterans.

Once infected, this virus begins CPU mining on the infected system. Yes, CPU mining.

Inexplicably, this most modern of Bitcoin malware is using the oldest and least profitable method of Bitcoin mining possible. Even with huge numbers of compromised computers it’s unlikely that CPU mining is earning this particular evil-doer much money at all. This move seems especially foolish when malware already exists that uses the much more profitable GPU of infected systems to mine.

Indeed, this new malware seems to lack most of the features we’ve come to expect from Bitcoin-based malware: It runs at a high priority, so users will notice it quickly as their systems slow to a crawl and it requires manual action on the part of the user to become infected, ensuring it can’t possibly reach peak efficiency. The only thing this seems to have going for it is that it’s not picked up by most of the major virus scanners – yet. Given that most virus scanners use a sort of fingerprint of known malware to do their thing, there’s usually a brief period like this for every piece of malicious code. Assuming the rest of this malware lives up (or down) to its already-established reputation, it’s only a matter of time before every virus scanner in town can find and kill it.

The good news in all of this is that, slow and drama-filled though it may be, the beginning of the ASIC era of Bitcoin mining is likely to raise mining difficulty so high that this sort of thing is unlikely to continue. In the meantime, well, botnets are still evil and all but I suppose I’d rather see them securing the network than sending spam.

The amount of Bitcoin-related media out there has gotten quite large over the past few years. For over a year now we’re had Bitcoin Magazine, but we also have a growing collection of Bitcoin songs, Bitcoin internet memes, a (unfortunately now defunct) Bitcoin video show and hundreds of Bitcoin guides, articles and books.

Now, we have another kind of media to add to the collection: a half-hour daily podcast. The show, founded by Adam Levine, Paul Russo and Eli Sklar, has already aired three episodes, and has plans to continue producing five episodes per week for at least the next six months. It will cover topics from all parts of the Bitcoin ecosystem – “like Forbes covers money,” Adam Levine explains, and include an educational discussion of some aspect of the Bitcoin technology every day. There will also be a variety of different formats, including the daily audio podcast and a weekly video show aired on YouTube. Altogether, the show has the potential to be a great resource for Bitcoin newbies and more frequent Bitcoin users alike.

The three episodes that are already out can be found here:

https://soundcloud.com/mindtomatter/the-daily-bitcoin-episode-1
https://soundcloud.com/mindtomatter/the-daily-bitcoin-episode-2
https://soundcloud.com/mindtomatter/the-daily-bitcoin-episode-3

Happy listening!

Initially, Amagi Metals had joined the Bitcoin community with little fanfare. When four-year-old company first started accepting payments in Bitcoin in December 2012, it made no attempt to advertise the fact; indeed, the first time that the company received any significant attention from the Bitcoin community at all was when a visitor stumbled upon the site and created a Reddit forum thread in January. Even after that, for the first three months the Bitcoin option saw little usage, and after the forum thread came and went most of the Bitcoin world did not know that the company even existed.

However, behind the scenes word soon began to spread as a number of factors turned in Amagi’s favor. First of all, the Bitcoin community has grown massively in the last few months. Public attention on Bitcoin is through the roof, and nearly every business in the Bitcoin economy has seen massive spikes in usage. Second, the precious metals sector of the Bitcoin economy has shown itself to be ripe for competition. For over a year, Coinabul has been by far the dominant precious metals seller in the Bitcoin community, but it has been criticized for relatively high prices, and in the past month in particular the company suffered two major setbacks. At the beginning of March Coinabul’s reputation was shaken by a public relations mishap in which the company refused to refund an insured silver shipment that had failed to deliver because the insurance company failed to refund them, and two weeks later one of its two main employees, Jon Homlquist, left the company to work on BitcoinStore full time. Although Coinabul is still stronger than ever, these three factors together have prompted an increasing number of users to look for alternatives.

Fortunately, Amagi stepped in at just the right time. On March 14, the company announced that its total Bitcoin volume had reached $50,000, and three weeks later that figure was up to $175,000. Since then, volume has increased to an average of about $20,000 to $50,000 per day, and just today Amagi’s Stephen Macaskill reported that Bitcoin sales have exceeded $220,000 in the past 24 hours – transforming Amagi into one of the largest merchants in the Bitcoin community overnight.

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Stephen Macaskill is excited to be a part of the rapidly growing Bitcoin community, and has agreed to give Bitcoin Magazine an interview.

1. Tell us a little about the company. When was Amagi Metals first created, who were the people originally behind it, and why did you decide to start a precious metals company?

Amagi Metals was started by a friend of mine as a hobby to collect and sell coins and base metals. It was started as an eBay store back in 2008. His hobby turned profitable and paid for his college tuition. I saw a lot of potential in the business and he wanted to follow other ventures. So I bought the company from him and rebranded it as Amagi Metals. I chose the name because the 4,000 year old Sumerian cuneiform symbol amagi is the first known human representation of the concept of liberty. I think financial responsibility is important for a free society. Unfortunately the simple lessons that our grandparents taught us to manage our money have been lost. So my goal is to promote financial responsibility and sound money, so that we may live in a freer world.

2. How did you first find out about Bitcoin, and why did you decide to start accepting it?

I first heard about bitcoins from the libertarian community around 2010 when I was still in school. A friend called me one day in late 2012 and suggested that I start taking bitcoins. It didn’t take much convincing after that to accept bitcoins because I was already intrigued with the bitcoin experiment. So we started accepting bitcoins about a week later. It has been an exciting few months for us in the bitcoin community, to say the least.

3. What would you say are some of the important ways in which your company distinguishes itself from other previous metals sellers?

We focus on financial education and the promotion of sound money, free markets, and free minds. Some other precious metals companies may touch on those subjects, however they do not actively engage in the ideas of individual liberty paralleled with owning precious metals.
There are only a few reputable precious metal companies that accept bitcoins. Of those companies, we have the lowest prices and are comparable to the big names such as APMEX.
Our philosophy is also a little different from some of the big companies you may have heard of. We see gold as money, not as an investment, other companies advertise gold as an investment. I am referring to an investment as something you buy, wait for it to go up in value, and sell, for a profit. However we do not see gold and silver like that. Unless used as a currency, we think you should buy and hold gold and silver forever in the hopes that you never have to use it. Precious metals are used as an insurance policy, or hedge against inflation and economic turmoil and to protect your actual investments, such as stocks.

4. Where in the world do you ship to? If you ship outside the United States, what are your shipping fees, for both US and international, and how long does it take for shipments to get through?

We ship worldwide, however we do not ship to every country. USPS does not allow shipping of precious metals to some countries and other countries cannot be insured by insurance provider, so we do not ship to them. Shipping costs vary depending on location, the value, and weight of the metals. Domestic shipments generally run between $2-40, and international shipments run between $5-200.
Domestic shipments take 3-5 business days to arrive after your order has shipped. We mostly ship through USPS, which is a government run organization, so we tell customers that it may take up to 7 business days just to be safe. International shipments can take anywhere between 2-6 weeks to arrive. International shipping times can be very difficult to predict because of customs and shipping distance. The longest shipment we’ve seen has been 8 weeks to Australia, however we have seen shipments to Australia take as little as a week to arrive.

5. Also, you claim that all shipping is insured. How does the insurance work if a shipment is damaged or fails to arrive for whatever reason? Do you refund the customer first and then wait for the insurance yourselves, ask the insurer to pay back the customer, or something else?

For orders under $50, we actually self insure. A transaction is a binding contract, so we honor all orders either by delivering the goods, or refunding the customer, no matter what. If a shipment that is insured (over $50) is lost in transit we must file a claim with our insurance company. The insurance company usually requires us, and our customer, to fill out an affidavit. The affidavit we sign is basically a sworn statement saying that the goods were sent and packaged properly. The customers affidavit is a sworn statement that they did not receive the goods. We do not refund the customer until after they help us fill out this paperwork, so that we can complete the insurance claim. After filling out the affidavit we send either a refund or a reshipment, which is determined on a case by case basis, such as if we still have the item in stock.

6. You mention that you’re now getting nearly $200k per month in revenue through Bitcoin. Exactly how much is that compared to the rest of your business?

In the last few days we have actually been doing between $20,000-40,000 per day in just bitcoin sales. Bitcoin sales are only a part of our business, however it is beginning to become a substantial part. So much so that we have to hire additional employees to help handle the bitcoin orders. I find this astounding because the bitcoin community is creating jobs. We can directly attribute the hiring of our next few employees to the growth of our bitcoin sales. A politician could not say the same thing about job creation.

7. Do you have any plans to more specifically expand towards or target Bitcoin users in the future?

Yes, we have just added a bitcoin currency selector to our website so that customers can see prices of our products in bitcoins. We also have a gold/silver price ticker that updates every 60 seconds and can now be viewed in bitcoins. We are working on a landing page to help users understand bitcoins, where to buy them, and the benefits of alternative competing currencies and sound money. Many other bitcoin accepting companies already have these pages, so hopefully the more companies that make it easier for people to understand bitcoins, the more people can easily start using them. We are also spending bitcoins back into the community through advertising, graphics design, web development, and recently working with an insurance company who accepts bitcoins to see if we can work together.

8. Anything else you would like to tell us?

I am so thrilled be in the midst of this revolutionary phenomenon. It has changed the way we think about money and alternative competing currencies. Bitcoins have generated real wealth, jobs, and the spread of individual liberty around the world. At first I just acknowledged this phenomenon as something pretty cool, but to be a part of it and to see the spontaneous order of the bitcoin community in motion is something spectacular to witness.

Trace Mayer recently appeared on FOX Business and was asked the question by host Melissa Francis: “Bitcoin is just insane and it has really taken off. People are paying attention to it. But is it for real?”

His response, “Yes, it is definitely for real. I remember the first time I encouraged people to buy Bitcoins it was around a nickel per bitcoin and now it is around $133. So those people who would have followed that advice would have been able to participate in one of the largest bull markets in history and this bull market is not even close to being over.”

[youtuber youtube=’NM32O5YqgdY’]

Why is this bull market not even close to being over?

SELLER’S REMORSE

Price discovery is always an interesting phenomenon. There are always bulls and always bears. The scoreboard is kept in profits and is the only opinion that matters.

The next decades, and particularly six months, are going to be extremely exciting with the bitcoin price. You may be tempted to sell but seller’s remorse is a terrible feeling. You have done the analysis, taken the risk but then to sell out before the vast majority of profits just leaves a particularly bitter taste in one’s investing mouth. It is even worse than just missing the opportunity.

After all, who wants to be like the Litecoin trader with seller’s remorse? One guy wrote a sad tale on Reddit about how in January 2013 he bought 80,000 litecoins at $0.068 and sold them at $0.20. Litecoins reached $5 before moving down to around $3.5 today. So he realized a 194% return, or $10,560, but missed out on a 7,250% return, or $394,560 and is feeling seller’s remorse.

Kind of the opposite of David Choe who could have gotten a few thousand dollars for painting a mural at Facebook but instead got stock that turned into $200m. You have to be in it to win it!

WHY THE BITCOIN PRICE IS MELTING UP

In financial terms, a price can ‘melt up’ when it is significantly undervalued. I wrote about this Bitcoin price melt-up starting on 21 March 2013 and predicted ‘I think a fair value price for bitcoins is around 3-7 bitcoins per ounce of gold.’ With the ratio currently at about 10 bitcoins per ounce of gold; that prediction may turn out to be overly conservative and now we are seeing it happen.

Then we have financial fools like Michael Pento, others who have not been around the Bitcoin market very long and still more who have not done very much substantive due diligence except to reference the bitcoin price chart and all of them loudly proclaim there is a Bitcoin bubble.

But they missed out on the previous large gains in the Bitcoin price and they know it by looking at their own balance sheets. Scoreboard! So, why would any rational bitcoin holders lend them any creditability?

Instead, how about we freshly analyze the state of the Bitcoin economy and then apply where the price could go and then come to a conclusion on what long-time members of the Bitcoin community should do to profit the most. Scoreboard!

First, we have little scrappy run of the mill Bitcoin investors like Jeremy Liew making outlandish statements like ‘In all the scenarios that I’ve painted above, Bitcoin prices need to go up by 100x or more.’

So who is Jeremy Liew? Well, he was named to the Forbes’ Midas list in 2011 and 2012, has received an MBA from Stanford and is a Partner and managing director at Lightspeed Venture Partners which has backed over 200 companies and is currently investing out of a $675m fund and recently wrote an article for TechCrunch titled Why VCs Love The Bitcoin Market.

And you think Jeremy Liew is alone among his Silicon Valley VCs and Wall Streeters?

How about Adam Draper, an established VC, who will ‘incubate 5-7 Bitcoin related companies in our next batch‘. Why? The reasons stated earlier are: (1) increased investor confidence in the Bitcoin protocol, (2) reduced legal uncertainty from FinCEN guidelines, (3) Cyprus bank deposit seizures, (4) current adoption by large tech companies like WordPress, Reddit, Expensify and Namecheap and (5) the rising price where he stated ‘My prediction – Bitcoin hits $225 by August.’

And how about Fred Wilson a principal of Union Square Ventures who made a crap-ton of profits backing Zynga, Twitter, SoundCloud, Meetup, Foursquare, Etsy and plenty of others. Over a year ago, when prices were around $5, he wrote, ‘I’ve mentioned Bitcoin a number of times on this blog. It is something our firm is watching closely.’ And what do you think he has been doing over the past year? Right, just twiddling his thumbs watching the Bitcoin juggernaut gain financial mass and transactional momentum.

And how about the recent frontpage article in the Financial Times? The relevant passage: “Some finance industry entrepreneurs have leapt at the opportunity. Exante, a Malta-based asset manager, set up a Bitcoin fund last year that was largely intended as a fun punt. Wealthy investors each put in $1,000 when Bitcoins were trading at $13 on the understanding they could lose the original investment. Exante predicted that public and media interest would take off when Bitcoins were trading at $100. Managing partner Gatis Eglitis claims they are now getting 20 calls a day from large asset managers looking to invest up to $100m.”

Plus, most of the VCs and Wall Streeters including in my opinion Mr. Liew, Mr. Draper, and Mr. Wilson, do not really know what is going on in the Bitcoin economy and are operating on incomplete data. As I explained to one of Mr. Wilson’s associates, all they really see is the tip of the iceberg because of Bitcoin’s increasing role as a settlement currency. If they could see the full iceberg then the feeding frenzy would really get crazy.

But people like Roger Ver, long-time Bitcoin advocate, knows what is going on and is willing to put his money where his mouth is as evident from this 4 Aug 2011 video where offered to make a $10,000 bet that Bitcoin would outperform either gold, silver, the S&P 500 or the USD by 100x over the next two years.

[youtuber youtube=’http://www.youtube.com/watch?v=gfydIbhduu0′]

At the time of his bet gold was trading at $1,664.25, silver at $41.62 the S&P 500 at $1,200 and bitcoins at $9.26. Currently gold is trading at $1,580.70, silver at $27.12, S&P 500 at $1,553 and bitcoins at $160.00. So, only the S&P has outperformed the USD with a 29.4% return compared to bitcoin’s 1,633% return or 55.5x the S&P 500’s return.

It will be interesting to see whether Roger Ver’s prediction comes true within the next four months. Assuming the S&P 500’s return stays the same at 29.4% return then the approximate bitcoin price will need to be around $270. But anyway you analyze it the bottom line is clear: Those who followed Mr. Ver’s advice would have profited greatly!

The bottom line: there are a ton of funds flowing into Bitcoin. And nothing could be more exciting for the bitcoin price than a feeding frenzy of well capitalized financial sharks in a market as tight as Bitcoin who then have a financial incentive to build out the infrastructure that will enable greater adoption, hyper-monetization with Bitcoin ‘going viral’ as a currency (the opposite of hyperinflation) and the accompanying network effects.

Second, the economic characteristics of Bitcoin are like a Giffen good which inverts the traditional supply and demand effects. With Bitcoin the supply is fixed and known to all market participants. However, what is unknown is the float that is available for sale; which I will get to later.

There is only transactional and speculative demand. For transactional demand the price is irrelevant. So that simply leaves speculative demand. And since Bitcoin is a Giffen good that is produced only to be hoarded and not consumed therefore it has a paradoxical effect: As the bitcoin price rises it decreases float supply and increases demand.

The bottom line: You better strap yourself in and make sure your bitcoins are in cold storage because this price discovery is going to be a ‘4G inverted dive’ that may cause you to blackout thinking you are lucid dreaming because the traditional ways of analyzing this Bitcoin market and its players are inverted. I would tell you but the ‘Bitcoin gods’ have deemed it classified.

[youtuber youtube=’http://www.youtube.com/watch?v=wUZxSf_P2r0′]

HOW TO MAXIMIZE YOUR RIDING OF THIS BULL MARKET

A rise in the price of bitcoins represents a wealth transfer from holders of some other assets to holders of bitcoins. Having been involved in Bitcoin for such a long time and having known, worked with and strategized with so many people therefore I really hope the Bitcoin community gets to benefit from this massive upcoming wealth transfer and not sell out early like the Litecoin trader.

[youtuber youtube=’http://www.youtube.com/watch?v=X4d_29vJlB4′]

The long-term trend of Bitcoin is extremely positive. I like to look at the 200 day moving average to filter out the daily noise.

To maximize your profits from this long-term secular crypto-currency bull market you merely need to (1) hold onto your bitcoins, (2) restrict supply as much as you can (this is very important!) and (3) make any of these newcomers, like the VCs and Wall Street sharks, pay extremely dearly for whatever trickle of bitcoins you do choose to spend. Notice I said spend, like buying a new Porsche or one of 500,000+ products from the Bitcoin Store, and not sell as in like USD, EUR, etc.

Currently, there over 14,500 people waiting for MtGox verification of their trading accounts and if they are looking to use Bitcoin as a transactional currency for purchases from BitSpend or Silk Road then the price is irrelevant to them. And then we have a ton of Silicon Valley VCs and Wall Streeters fighting over each other to establish multi-million dollar positions. But that amount of capital is going to look tiny compared to what is scheduled in about six months.

There are only about 80,000 bitcoins of ‘float’ on a daily basis. Remember, prices are set at the margin. Simplistically  and only for an example in aggregate, this means that if there is a positive funds flow into bitcoins of about a mere $4m then it will move the price by about $50. So, obviously, if there are any large blocks of bitcoins, ‘walls’, are gobbled up extremely quickly by this hot money from VCs and Wall Streeters. If that float can be reduced from 80,000 to 40,000 then the same $4m will move the price $100. That means VCs and Wall Streeters will have to pay more dearly to get any bitcoins. Squeeze them for all they are worth!

And if you start acquiring bitcoins on a regular basis, as a service provider or merchant and are using a service like Bitpay then increase the percentage you hold as bitcoins or you can regularly buy bitcoins with a percentage of your paycheck to further dry up any other supply.

Solution: Remove the walls and dry up any other supply of bitcoins.

CONCLUSION

You know what’s cool? A $150 per bitcoin? No, a $1m per bitcoin. It may take a decade to get there but the fiat currency market coupled with fractional reserve banking is the largest bubble in the world and since the Great Credit Contraction has started along with Bitcoin being a censorship-resistant honey badger of a currency it just may eat these bankster cobras.

After all, the Bitcoin market, at current prices, is simply far far too small for these amounts of fund flows and is the key reason why the VCs and Wall Streeters are melting up the price by buying any bitcoins that appear for sale. Plus, saving bitcoins is where the virtuous cycle begins.

And for those who think there is a massive Bitcoin bubble. The last bubble went from $0.05 to about $32 and unlike so many who are calling this a bubble I know what it felt like back then because I was there. For a comparable move the bitcoin price would need to move from about $5 to around $3,200, a 20x rise from current prices, and we are only about 5% up this ‘wall of worry’. And like usual, Scoreboard, because we are playing this game for financial keeps:

[youtuber youtube=’http://www.youtube.com/watch?v=KPxDoFbsvWA’]

TARGET ACQUIRED: TARGET LOCKED

 

In January, Bitcoin saw a flurry of positive news on a scale that had not happened since May 2011. Bitcoin’s gambling websites, including SatoshiDice, BitZino and Seals With Clubs, all reported record volumes. All three major merchant service providers either expanded their offerings in some way or lowered their fees. Bitcoin’s statistics, including number of transactions, market capitalization and trade volume, were higher than they ever were in history, and those that still remained were higher than at any point after the bubble of 2011. Many people, including myself, predicted that the onslaught of increasing media attention would not last. However, in February we were proven wrong. Reddit and Kim Dotcom’s Mega, two of the most widely known names in the internet community, started accepting bitcoins for payment, and popular domain name registrar and webhost Namecheap followed suit in March. The Bitcoin price surged past higher than it ever did before, and positive media attention kept on coming. Even the few security crises that Bitcoin had during this time were either ignored or even treated as positive news, with journalists praising the Bitcoin community’s speed and efficiency at handling the issues as they came up. Here is an overview of all that happened in these past two months.

All Time High!

• The Bitcoin price broke through the all-time high of $31.91 that it had set back in June 2011, and started rising even faster past that point, approaching $100 at the end of the month.
• Soon following Bitcoin’s thrust past $32, a number of popular news sites ran articles strongly in favor of Bitcoin, including The Guardian’s “Bitcoin: More Than Just the Currency of Vice”, Business Insider’s “Bitcoin Just Took a Key Step Toward Being Mainstream” and vice.com’s “Is It Time to Take Bitcoin Seriously?”.
• The weekly Google Trends volume surged past its 2011 all-time high, a rise of over 300% since January. The monthly volume for March did not quite beat that of June 2011, reaching only 98% of the high (a figure that has already been massively overshot in the beginning days of April).
• Bitcoin’s market capitalization broke through $1 billion, and the number of transactions and the growth of the blockchain size continued rising.
• Interest in Bitcoin in Spain increased massively following the crisis in Cyprus, and some download statistics for Bitcoin clients in spain have increased by a factor of ten.
• BitPay announced that it had processed a transaction volume of $5.2 million during the month of March, and now has 4,500 merchants.
• The Bitcoin Reddit community at reddit.com/r/bitcoin became the 65th largest on the site by the average number of subscribers online, surpassing many other communities including “r/relationships“, “r/humor“, “r/seduction“, “r/Drugs“, “r/baseball” and “r/food“.

Just A Little Blockchain Glitch

• The BitLC Bitcoin exchange announced that it would be closing since one of the company’s key shareholders, also the holder of the company’s cold storage wallet, disappeared with a large portion of customers’ funds.
• BitInstant had its VirWoX account hacked through a combination of social engineering and DNS spoofing, costing them $12,000.
• Because of a bug in bitcoind 0.7, the Bitcoin blockchain split into two, with bitcoind and BitcoinQt 0.7 clients on one chain and bitcoind and BitcoinQt 0.8 users, and most others, on the other. The event led to the Bitcoin price temporarily falling from $48.5 to $36.5, but the problem was quickly solved and the price recovered to $45 within a day. A number of news sources reported on the incident, but nearly all were either neutral or even positive, praising the Bitcoin community’s response and the price’s quick recovery.

Business Adoption

• eToro, a site that describes itself as the “world’s largest social investing network”, announced that it will soon accept bitcoin deposits.
• The Malta-based financial broker Exante announced its new Bitcoin hedge fund, allowing institutional investors to easily and safely invest into the Bitcoin market.
• Reddit started accepting bitcoins for its premium Reddit Gold service, becoming the second most popular website after WordPress to accept Bitcoin, and its parent company Advance Publications became the largest company to accept Bitcoin, eclipsing Wuala‘s parent company LaCie (which no longer accepts Bitcoin, likely due to lack of interest).
• Kim Dotcom announced BitVoucher, a Mega reseller which allows users to buy Mega’s premium file sharing services for bitcoins. Although Mega was already purchaseable for BTC through hosting.co.uk, BitVoucher was significant because it carried Kim Dotcom’s personal endorsement.
• Namecheap, a popular domain registrar and seller of web hosting and VPS services, announced that it would accept bitcoins as payment.
• WinPoker, a poker site connected to the iPoker network, the largest collection of online poker sites in the world, started accepting Bitcoin deposits and withdrawals.
• The Internet Archive announced that it would start paying a portion of some of its employees’ salaries with bitcoins, and received over $1000 in donations during the day following the announcement.
• The Finnish software developer SC5 announced that it would start paying employees’ salaried in Bitcoin as well.
• Expensify, the world’s most popular application for submitting expense reports, added an option for users to ask for their expenses to be repaid in Bitcoin.
• E-Gov Link, a suite of services for local governments seeking to interact with their constituents online, announced Bitcoin integration into their products. “Now municipalities can offer their citizens another option in paying for services like permits, utilities, class or event registration, shelter reservations, or even parking tickets,” the press release reads.

Developments from the Inside

• Pizza for Coins, a site that acts as a proxy for users to order pizza at Domino’s, Pizza Hut and Papa John’s, launched in February, receiving widespread media attention.
• Soon after, Bitspend opened its doors, allowing users to buy anything available for credit card payment online for bitcoins. When the site first opened, it was overwhelmed with orders and had to close its doors within hours to keep up with the demans. The site re-launched the following week, and also received its share of media attention, although less than Pizza for Coins.
• Bitcoin Wireless ran its public beta, allowing mobile phone users to top of their phone plans with bitcoins at or in some cases even below cost.
• Coinlab announced a deal with MtGox in which it will take over transactions for US and Canada clients, allowing US and Canadian users to exchange their bitcoins through the service without paying high international banking fees.
• BitPay received another round of venture capital funding, helping to pay for its recent move to Atlanta and hiring an expanded team of new developers.
• OpenCoin made the first major release of Ripple, an alternative cryptocurrency network that would give customers the ability to hold and send any supported currency, including USD, EUR, CHF and in the future possibly even gold and silver, in a decentralized fashion.
• The BitcoinStore, a Bitcoin-only electronics retailer that offers hundreds of thousands of products often cheaper than anywhere else on the internet, sold $500,000 worth of goods in the first quarter of 2011 and managed to renew the contract providing them with top-tier discounting from their distributor, Ingram Micro.
• Tradehill, a popular Bitcoin exchange from 2011 that shut down over a year ago due to legal issues, announced their return to the Bitcoin community, releasing their first new product: Prime, a Bitcoin exchange specifically designed for high-net-worth institutional investors.

Today, Bitcoin is in that same zone of uncertainty that it was in in the late stages of the run-up to the crash in June 2011. Public interest is continuing, although the focus of media attention has, perhaps unfortunately, slowly shifted from focusing on Bitcoin’s properties to its rapidly increasing value. The price appears to be entering a full-on mania phase, so we should all be prepared for a crash; for those who have earned a small fortune from Bitcoin’s increasing balue already, taking at least once or twice one’s initial investment out is likely the right thing to do, if only to preserve one’s sanity. But in the long term, the future for Bitcoin is looking brighter than ever. We have seen venture capital investors increasingly looking into Bitcoin, unprecedented Bitcoin adoption with reports of more adoption soon to come, and public attention is increasing on all fronts. Although few believed that this would happen in the bleak months of October and November 2011, over the past two years the Bitcoin economy has grown by a factor of over a hundred. Just imagine what Bitcoin in the spring of 2015 will be like.

By now, we are all aware of the financial calamity that has befallen Cyprus in the past three weeks. Since the deposit haircut was first announced and banks were shut down, many have lost their jobs as businesses suddenly find themselves without the means to pay anyone, others have seen their plans for retirement ruined, the economy has largely reverted to cash, and the banking sector, one of the two key pillars of Cyprus’ economy together with tourism, will never be the same again.

We at Bitcoin Magazine and the team behind GoldMoney GoldMoney, however, have decided to actually go to Cyprus and see what the locals themselves have to say. The result: our first ever video co-production, “Cyprus – A Wake Up Call: Rethinking Money“, a short 15-minute documentary produced by Mihai Alisie from Bitcoin Magazine, Paul Buitink and Ian Jessep from GoldMoney, and Trace Mayer, who has participated in both organizations.

We are very excited to be able to bring this to the public, as this is our first major foray into both video production and in-depth investigative journalism. And, rest assured, this will not be our last. As Bitcoin Magazine continues to grow we will continue to improve on the quality of both our journalism and our presentation, including growing into other forms of media such as videos and podcasts. For now though, enjoy the video!

The BitcoinStore, a very popular electronics retailer in the Bitcoin community, has announced that has managed to keep its contract with its wholesaler, and so will continue be able to continue selling goods at its current low prices. The store first launched in November 2012 with a simple proposition: hundreds of thousands of electronics products for sale for bitcoin, all cheaper than anywhere else on the internet – major retailers like Amazon and NewEgg included. Because the BitcoinStore is Bitcoin-only, it would not have to pay any of the costs associated with accepting credit cards, including the standard 2.9% fee, PCI compliance, identifying potentially fraudulent purchases and handling chargebacks, and the key attraction of the store is that it would pass these savings on directly to the consumer. On top of this, Bitcoin entrepreneur Roger Ver secured for the BitcoinStore another advantage: a contract with Ingram Micro, which describes itself as “the world’s largest distributor of computer and technology products”, at the highest possible tier of discounting. That is, despite being a less than six month old startup, the BitcoinStore has been able to buy its products from Ingram at the same prices available to the largest eletronics retailers in the world.

However, the contract came with a string attached: the BitcoinStore had to reach a sales volume of $850,000 in the first quarter of 2013 to maintain it. In the first three months of operation from mid-November to February, the store saw some attention, but by Feruary it became clear that they were simply not getting enough – with little over a month left, the BitcoinStore still had over $800,000 to go. At that point, Jon Holmquist and Roger Ver were desperate, and sought to save their business with a bold move. On February 27, the store officially launched, a step that the two were delaying until then due to issues with the website, and offered its customers the ultimate discount: a 0% markup on all purchases. The pair also launched a massive marketing campaign, and pleaded with the Bitcoin community to support them during this critical time. Orders came rolling in; the BitcoinStore earned nearly $300,000 by mid-March, and by the end of the month the figure was up to $500,000.

Thus, the BitcoinStore did not quite live up to the original conditions of the deal, but since, as Jon Homlquist has just announced, the contract has been renewed, Ingram was clearly sufficiently impressed by the last month’s performance – or by the rapid growth of the Bitcoin community as a whole – to give the store another chance. The BitcoinStore now has to earn another $850,000 of revenue by June 30 to keep its contract once again – a goal that is still not that easy to reach, as it must now continue to earn $283,000 per month even though many of its potential customers have already bought everything that they needed in March, but Holmquist is confident that they will succeed. “We’ll be pushing ads heavily and will be launching some new programs to introduce new people to Bitcoin,” Holmquist writes.

The success of the BitcoinStore, together with the success of so many other BitPay merchants in the month of March, makes a strong case for the strength of the Bitcoin economy; although over the past thirty days the currency has been massively deflationary, with its value rising nearly 200% from $31.25 to $93.03 over the month of March, at the same time sales are higher than ever. Of course, this is very far from a solid empirical argument that deflationary economies are superior, or even work, in the context of a full-scale society, but does deliver a strong blow to concerns that the Bitcoin economy will somehow asphyxiate itself as the price goes up due to lack of spending.

The BitcoinStore will, for now, be keeping its 0% markup, and Ver is okay with taking a small loss to keep the store running. To him, the BitcoinStore is not intended so much to be a profit-making business, but rather a proof of concept, a business that shows just what becomes possible in the world of e-commerce once all of the inefficiencies of legacy payment systems are stripped away. The intended audience of Ver’s performance? The very same mainstream electronics retailers that the BitcoinStore’s prices are now crushing. “You all are a huge part of that global marketplace. You all have been approached about accepting Bitcoin and yet not one of you has started accepting Bitcoin payments. Our sales show that there are consumers out there that want to purchase electronics with Bitcoin… And our prices show that Bitcoin can dramatically lower prices.”

With today’s announcement, however, Ver has upgraded the message to a warning: accept Bitcoin, or accept our wrath. “So here’s the deal I want to make with each of you,” Ver writes, “accept Bitcoin payments by the end of 2013 and we’ll gladly close down our website. But if you don’t accept Bitcoin… we’ll keep rolling. We have already made over a half million in sales and we have only been open a month! If you don’t listen to your consumers, we’ll continue taking them from you. I assure you, Bitcoin is geeky enough to appeal to many of your consumers, and the savings we provide is convincing enough for many others. We’re a startup and we’re already regularly beating your prices, imagine what will happen as we grow bigger.”

A week ago, BitPay CEO Tony Gallippi announced that his payment processing service had set a new record: a transaction volume of $2 million in the first twenty five days of March. Now, however, Gallippi has revealed that the popular Bitcoin payment processor has eclipsed that figure yet again, and in a third of the time – leading to a new record high transaction volume of 5.2 million dollars for the month of March.

BitPay’s growth in the past month has been very rapid; in February, Gallippi reports, the company only processed a total of $687,000 from 2,300 completed invoices. In March, the transaction volume of $5.2 million comes from 5,100 completed invoices, and the company also added 1,300 new merchants, raising their total to 4,500 as of the end of the month. Although it cannot be said for certain, the figure also likely places the total aggregate of BitPay merchant sales above those processed by the Silk Road, the notorious online black market for illegal drugs that uses Tor and Bitcoin, combined with a proprietary mixing service, to ensure that both the internet connections and the payments of its users remain anonymous. The site was last estimated to have a volume of $2 million by a researcher at Carnegie Mellon University in August 2012, and since then the one public statistic released by Silk Road – the number of users and posts on its forum, has increased by about 50-100%, suggesting a current volume of around $3 million to $5 million. From a public relations standpoint, this is a positive sign for Bitcoin: the legal Bitcoin economy is now almost certainly larger than the illegal one, especially when one takes other merchant services like WalletBit/BIPS and Coinbase into consideration, and is growing at a much faster rate.

Gallippi suggests several reasons that may be the driving factors behind BitPay’s sudden surge in volume. First of all, on March 25 the company lowered transaction fees for merchants receiving their revenue as bank deposits from 2.69% to 0.99%, making the round-trip process of buying Bitcoin (1.00% flat fee at Coinbase), sending it to a merchant and having the merchant convert the bitcoins back into fiat even cheaper than the 2.90% fee charged by Visa and MasterCard. And some merchants are even passing on the savings; “with our recent reduction in fees, our merchants are using our all-inclusive 0.99% fee to offer discounts to their customers for paying in bitcoin,” Gallippi writes.

The other major factor is two specific businesses; the Bitcoin Store and Avalon. The Bitcoin Store first opened in November with a simple proposition: hundreds of thousands of electronics products for sale, all cheaper than anywhere else on the internet – major retailers like Amazon and NewEgg included. The company would use the advantages of chargeback-free and cheap payment processing offered by Bitcoin and BitPay, together with a contract with the wholesaler Ingram negotiated by Roger Ver, to lower their costs as much as possible, and pass on the savings to consumers. At the end of February, seeking to reach the volume threshold needed to retain its high-discount contract with Ingram the Bitcoin Store launched a promotion: 0% markup on all purchases. The promotion was hugely successful; the site processed nearly $500,000 in sales in March, much of which was in the last week, and although this is below the original volume threshold of $850,000 Bitcoin Store’s Jon Holmquist writes that “even if we don’t get to renew our current contract with Ingram we’ll just get a slightly worse contract.” The deadline has now passed, so the Bitcoin Store will be giving an update on the fate of the contract very soon.

Avalon is the first seller of application-specific integrated circuit (ASIC)-based Bitcoin mining hardware to release a functional product. Because Avalon’s major competitor, Butterfly Labs, has been delayed by several months with a working prototype confirmed only yesterday, and because of the recent meteoric rise in the Bitcoin price Avalon’s hardware has been hugely profitable for those lucky enough to have bought it; Bitcoin developer Jeff Garzik’s Avalon device paid for itself in nine days, and given the current Bitcoin price and network statistics it is producing an even higher USD-denominated revenue today. As a result, Yifu Guo has increased the price on the third batch from $1500 to 75 BTC – over $6500 throughout the last week of March, and yet people are continuing to buy them.

Of course, the Bitcoin economy as a whole, and even “just” the legal Bitcoin economy, is larger than just BitPay, and BitPay’s alternatives are all growing at the same time. Reddit uses Coinbase to process payments, Mega uses Zipbit, Avalon rotates between the various payment processors for its batches and many other businesses use custom platforms developed in-house. Furthermore, sales are not the only economic activity that takes place; an small but increasing number of businesses is now paying its employees in BTC. Thus, the Bitcoin economy as a whole, even not taking into account Silk Road, is likely considerably larger than $5 million per month – yet more evidence that Bitcoin’s recent rise in media attention and popularity is more than just speculation.

Bitcoin developer Luke Dashjr has confirmed that a prototypes Butterfly Labs ASIC is now hashing. The device is still far from full capacity, pushing out only 25 GH/s at a power consumption of 180 watts, but this is nevertheless the first definitive proof that Butterfly Labs is producing a legitimate product, and is not too far from finally releasing its first batch.

Butterfly Labs’ Josh Zerlan also recently provided updates on the state of Butterfly Labs’ production in an IRC channel. The core of the conversation is this:

BFL_Josh: Well guys, I had planned on updating everyone with a video of a board hashing here in KC tonight, but I haven’t been able to get that together yet, so I’m probably going to have to push it off until tomorrow. We are targeting a start of shipment next week, but I’m not quite ready to commit to that at the moment, given our past estimates. It’s imminent, though.
Lab_Rat: It hashes????
BFL_Josh: Yes, it hashes

Further down in the conversation, Zerlan provides the main reasons for the current delay. Zerlan writes: “We may miss our power targets, that’s been part of the hold up… we think there’s a problem with the power consumption and we’re trying to figure out where it’s having an issue … What’s causing even more consternation is the fact that the wafer we burned for tests runs at far less power than a second wafer we mounted on the BGA package… so it may be a wafer by wafer thing, and since we only have two datapoints, it’s hard to nail down the issue.” To many in the field, these difficulties are unsurprising; in mid-January, Avalon founder Yifu Guo wrote on the topic “recently they changed it to 1.2W, but they won’t even reach that. We ran 65nm simulations and they should be around 3W.” But to many of Butterfly Labs’ customers, who have now suffered from six months of delays, power consumption does not even matter; given that every extra day represents a lost opportunity for profit that will never come back, almost any level of power consumption is acceptable if it means that the devices will ship faster.

Butterfly Labs’ shipment has been awaited by the community for nearly ten months; the company was in fact the first to start accepting pre-orders in June 2012. Although the original shipping date was scheduled for October, the company suffered a number of delays that changed their expected shipping date first to late November, then early January, then mid-February and finally where it is today. In the meantime two other major ASIC producers, Avalon and ASICMiner, have also started hashing, and are partially responsible for raising the network hashpower from 20 TH/s to 55 TH/s over the past three months (the other contributing factor being the rapidly increasing BTC price). However, the community is still watching Butterfly Labs intently for one key reason: its potential hashpower. Although the output of Avalon and ASICMiner has been small, with Avalon’s first release being 20 TH/s and ASICMiner’s launch 12 TH/s, Butterfly Labs’ preorders altogether make up over 60 TH/s – more than is currently on the entire Bitcoin network.

For the security of the Bitcoin network, it is arguably quite fortunate that Butterfly Labs has been delayed by so much; if their machines had come any earlier, or even today, the company would have had access to more hashpower than the rest of the entire Bitcoin network put together, fundamentally compromising a key assumption of Bitcoin’s security. This threat was a major reason why Avalon founder Yifu Guo decided to go ahead with his project; “that was our main goal – we wanted to prevent this potential monopoly,” Guo wrote in a recent interview. However, it turned out that the major providers released in just the right order; Avalon started shipping their first, 20 TH/s, batch first on Jan 19, although all but two of their devices were delayed by many weeks after that date. ASICMiner started hashing on Feb 14, starting off with 2 TH/s and slowly ramping up over the past two months, and over these past two months hundreds of anonymous GPU miners turned on their hardware because of the increased mining profitability from Bitcoin’s rapidly growing price.

The rapidly rising Bitcoin price has been a massive boon to the Bitcoin mining industry in general. Since the beginning of the year, the Bitcoin price has risen from $13.3 to over $100, making mining extremely profitable for those lucky enough to have the hardware to do it. The fact that Bitcoin mining is now so heavily focused on specialized hardware compounds the advantage; while in 2010 or 2011 such price increases were quickly met with large numbers of off-the-shelf GPUs joining the network, now the most powerful miners are all specialized devices, and production takes months to compensate for the increased demand. When Jeff Garzik received Avalon’s first ASIC at the end of January, the device paid for itself in nine days, and its profitability since then has only increased. As a result, Avalon has raised the price on their third batch to 75 BTC, or $7,500, and has nevertheless sold a significant number of units. Because ASICMiner is not selling their hardware, instead selling shares and doing mining in-house, they can benefit from the increased value of their revenues directly. Notably, Butterfly Labs has not increased their prices, but even if they continue to keep their prices the same they will still benefit massively from increased sales.

In the next few months, Bitcoin network hashpower will only continue to increase. Avalon’s three shipments altogether will make up a total of 1500 units, or over 75 TH/s, and ASICMiner is planning 50 TH/s by the end of April, and 200 TH/s soon after. By the end of the year, ASICMiner’s friedcat writes on Bitcointalk, ASICMiner’s total hashpower may be as high as 1000 TH/s, and friedcat even adds that “some may say that 1,000TH/s at the end of this year is too conservative.”