In February of this year, what is known as Mt. Gox (Magic the Gathering Online Exchange) declared bankruptcy after losing around 900,000 bitcoins which they were housing for users while operating as an
exchange bank.

This sparked the plummet of value in bitcoins that the bitcoin community has seen recently. But none of this really makes sense unless one understands – what are Bitcoins?

“It is a digital currency with no forced physical aspect that is not governed by any government or authority,” said Spencer Smith, junior computer science major who has been mining bitcoins since around two years ago.

Mining is the term used for discovering, or creating, Bitcoins.

“It’s so complicated it’s hard to put it in terms,” Smith said while trying to explain what exactly goes into mining.

To break it down, every time a transaction of Bitcoins occurs, that transaction becomes public record for all the miners of the Bitcoin community to begin mining. The transaction creates a block, which houses a math question that must be solved in order to reap the bitcoins from it. Once each block is solved, the user that solved it receives 25 Bitcoins.

The current value of a single bitcoin rings in around $600, meaning solving a block will leave you with a whopping $15,000 or so.

“Basically you’re solving a really hard math problem that is super hard to predict or fake,” Smith said. The mining, however, is done entirely by computers, not the people themselves. Miners put their computers to work in order to solve these logarithmic codes in the blocks.

“It uses both your processor as well as using your graphics card,” Michael Allen, assistant professor for the Political Science Department said. Allen explained that it can take weeks for a computer running at full power to solve one block. That’s why the most common way now for people to begin mining bitcoins is through joining a pool. A pool is a network of computers all working together to solve the same problem.

Then they distribute the bitcoins equally among all the members of the pool.

Allen suggested that this still may only be a good idea if you don’t have to worry about paying the electric bill, say if you live in the dorms.

“The energy you spend, the resources you consume to run your computer to mine the Bitcoins may not match what you gain from being part of a pool that gets the bitcoins out,” Allen said.

So how did Mt. Gox end up losing all these bitcoins with no way to find out where they went or who has them? One of the big appeals of bitcoins is that they are completely anonymous. No one knows who holds them or how many they are holding. Bitcoins are kept in digital wallets, but the owner of said wallets is not disclosed in any way. This way, no one can be sure if Mt. Gox was robbed, hacked, or if they are just keeping all the bitcoins themselves.

“The problem with bitcoin for it to be successful in the long run is that they want people to start using it as an everyday currency,” Allen said. “People will be reluctant to do so if they think it’s going to rise in value in the future.”

Many people feel Bitcoins will do in the future. The volatility of Bitcoins is extreme; the only value they have being derived from the demand, as the supply of bitcoins can already be determined as a finite number.

“We know over time the amount of Bitcoins that are going to be in existence ever is relatively fixed,” Allen said, “It’s a logarithmic curve.”

The estimated amount of bitcoins that can ever exist is around 21 million.

When bitcoins began just five years ago, they were worth pennies.

“I like the idea, but right now it’s kind of like a lottery ticket,” Mike Touchton, assistant professor for the political science department said. “It might work out very, very well in the long run if you buy the
ticket now.”

Though if people begin buying Bitcoins as a means for investment rather than for using as an everyday currency, the value of Bitcoins will drop extremely.

Touchton feels that the lack of regulation with Bitcoins, one of the main attractions, is also one of the biggest problems as to why it probably won’t be replacing any governmental currencies anytime soon.

“It’s a very interesting idea, but as we’ve seen in the last few weeks, without a government to back the creation or monitor the use of these Bitcoins there can be major problems with trust,” Touchton said. “When you put your money in a bank in the United States it is insured to a certain amount of money, so you know that if your bank falls apart that you will be reimbursed up to that amount of money.”