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The big winner from Bitcoin’s price rise? Advanced computer hardware makers.
As they said during the California Gold Rush of the 1850s, it is the shovel companies that made the big money….
Despite periodic bouts of volatility, Bitcoin prices continue to steadily rise, and now, at about $135, are valued at more than 10 times what they were a year ago. The latest volatility injection came earlier this month, when on October 2 the FBI had announced that it shut down online black market website Silk Road and arrested its supposed founder Russ Ulbricht. Bitcoin prices immediately dropped in price by nearly 20% (see chart below).
Why the sudden drop in Bitcoin prices? Silk Road ran on Bitcoins. which make for a very nice anonymous payment mechanism for illicit things such as those sold on Silk Road, mainly illegal drugs. There were about 600,000 Bitcoins worth about $80 million tied up in Silk Road — about 5% of all Bitcoins in circulation. The Bitcoin market became very worried that Silk Road’s closure would dampen demand for Bitcoins, sending the price down from about $127 to $103.
Bitcoin one month price chart. Source: Bitstamp.
However Bitcoin quickly demonstrated its resiliency, with the price bounding back up quickly and now, less that two weeks later, Bitcoin prices already surpass their pre-Silk Road level and are trading at about $135.
As we began the article above, the real winners in all this (beyond the few Bitcoin speculators who have been patient enough to ride out the volatility wave and hang on to their Bitcoins, such as the Winklevoss twins) have been the few specialized computer hardware outfits which supply specialized high-end computing machines enabling Bitcoin mining. These include not-very-well known names such as Butterfly Labs, KnCMiner, Robocoin Technologies and CoinTerra.
What is Bitcoin mining? Unlike other ‘real’ currencies which are controlled and created by a central bank, Bitcoin is a high tech currency which can be created only via an increasingly difficult procedure called mining. Bitcoin miners, using high end computing machines, are charged with solving complex software problems in order to create new Bitcoins. The cryptographic challenges embedded in Bitcoins get increasingly complicated over time as more Bitcoins created. Bitcoins were designed that way, so that the money self-regulates supply and prevents out-of-control Bitcoin inflation.
As Bitcoin mining gets more difficult, the demand for higher end machines increases as well.
In the meantime, the FBI is having its own Bitcoin mining problems. Or more specifically, Bitcoin unlocking, Although Silk Road has been closed and Russ Albricht is in custody, the FBI has been able to (digitally) confiscate only a small fraction of the Bitcoins tied up in Silk Road. The FBI has taken control of about 26,000 Bitcoins worth about $3.5 million, mainly those in Silk Road customer accounts. But the nearly 600,000 Bitcoins worth close to $80 million belonging to Silk Road itself cannot be unlocked without the cooperation of Albricht, who has the key. The likely result? Some sort of plea bargain landing Albricht a much more lenient sentence and getting the FBI its unlocked Bitcoins.
For a more detailed explanation of Bitcoin mining click here. (Note: very technical).