Bitcoin, the virtual money that exists only in digital form, is spawning a real-world hardware boom.
The currency, used to buy and sell everything from electronics to illegal drugs on the Web, has surged to about $135, more than 10 times its value a year ago.
The rally has created a cottage industry of speculators eager to get their hands on Bitcoins, which can only be created digitally by using powerful computers to solve complex software problems. That has in turn boosted a market for high-powered machines, some costing more than $20,000 apiece, which are custom-made to unlock new Bitcoins in a process called mining, a nod to the excavation of minerals and metal ore.
“Mining can actually be quite profitable when miners are able to get their equipment in a timely manner, which is what keeps many of us looking for better, faster and cheaper hardware all the time,” said Andrew Korb, who set up a fund that buys systems to mint Bitcoins and shares the proceeds with investors.
Beyond investing in the currency, the speculation has extended to equipment manufacturers targeting Bitcoin miners and automated teller-like machines for cashing in or exchanging the currency. Startups such as Butterfly Labs Inc., KnCMiner AB and Robocoin Technologies say hardware sales have soared along with the price of Bitcoins.
Korb, 24, has persuaded 65 people to invest 907 Bitcoins worth more than $100,000 in the Korb & Co. Investments Mining Fund. The group, which has a prospectus online, has bought computers from Butterfly, KnCMiner and CoinTerra to crunch data. His CoinTerra gear has yet to be delivered because the startup hasn’t begun shipping yet.
“Like during the gold rush, it’s the shovel companies that made money,” Korb said in an interview.
Korb, based in Burlington, Vermont, is taking a risk, since the cryptographic challenges embedded in Bitcoins get increasingly complicated as more digital money is created. That in turn fuels greater demand for computing power. The virtual currency was designed that way, so that the money self-regulates supply and prevents out-of-control inflation.
Since being introduced four years ago by a programmer or group using the name Satoshi Nakamoto, there are now 11.8 million Bitcoins in circulation, according to Bitcoincharts, a website that tracks the digital currency’s activity.
Butterfly Labs, whose mining computers can cost more than $22,000 apiece, has sold thousands of units, posting revenue that’s growing by triple digits annually, according to Jeff Ownby, vice president of marketing and e-commerce.
CoinTerra, based in Austin, Texas, raised $1.5 million in funding from angel investors in August. Virtual Mining Corp. started taking orders for its equipment in July, with one recent purchase reaching $140,000, Chief Executive Officer Kenneth Slaughter said.
“We are starting to do a lot of big sales,” said Slaughter, who is also mining Bitcoins.
About 1 million Bitcoins are being generated by miners every year, estimated Tuur Demeester, an investor in CoinTerra. The total number of Bitcoins is capped at 21 million, based on rules embedded within the software code, and the increasing complexity of the cryptographic problems for creating them means it will probably take years to reach that limit. In 2009, people could mine 50 coins every 10 minutes. By the end of 2012, that amount was halved to 25 coins, said Slaughter.
CoinTerra received 125 orders for its mining equipment on its first day of sales, with the initial delivery scheduled in December, according to CEO Ravi Iyengar, a former chip-design researcher at Samsung Electronics Co. and Nvidia Corp. (NVDA:US) Customers will recoup their investment in less than 60 days -- and double or triple their investments within a year, he said.
“Bitcoin is all about performance,” Iyengar said. “The greater performance, the greater share of Bitcoins you can get.”
Dabbling in the Bitcoin market carries risks. First, the inherent difficulty of unlocking new Bitcoins makes it costly. Virtual Mining’s Slaughter said the sooner people start mining, the more likely they are to make a return on their investment in computing hardware. Yet the more Bitcoins created, the more complicated the process becomes, increasing the computing power needed to make them -- and the expense of doing so.
“A lot of the manufacturers started shipping, and it’s twice as difficult to mine these coins than a month ago,” Slaughter said. “The difficulty is going to shoot up so fast. People are going to say they can’t make any money.”
Slaughter, who runs six Avalon mining machines from BitSynCom LLC that cost him $1,500 each, said he’s creating about 1.2 Bitcoins per day, or the equivalent of about $162. That’s down from $300 a day in September and $1,200 a day in August.
“It’s probably a wash due to the amount of energy used and the time used,” said Ugo Egbunike, senior ETF specialist at IndexUniverse, an index-fund researcher. “It’s probably correlated with the growth in Bitcoin’s popularity. They might be a little misled in how much yield they could get out of these mining strategies.”
The Bitcoin market is also volatile. The currency’s value dropped as much as 33 percent earlier this month after the U.S. Federal Bureau of Investigation seized the “Silk Road Hidden Website,” an online marketplace for drugs and other illegal goods where anonymous users conducted transactions with the digital currency. The closing spurred concern that demand for the currency would decline.
The value of Bitcoins has since recovered. Some people are buying Bitcoins as a refuge amid concern that the U.S. will breach its debt ceiling, hurting the U.S. dollar. Bitcoins are also being purchased as a hedge against a rising rate of inflation in Argentina.
“If there’s a U.S. default, I wouldn’t be surprised if the value of Bitcoins is back above $200,” Michael Terpin, co-founder of BitAngels, an investor group focused on Bitcoin startups, said in an interview. The value of Bitcoin rose 11 percent to $135.40 on Bitcoin exchange Bitstamp today, according to tracker Bitcoincharts.com.
The burgeoning hardware market isn’t limited to mining gear. Demand is also emerging for automated teller machines that exchange Bitcoins for dollars, euros and other legal tender. Three New Hampshire residents are working on making Bitcoin ATMs for a venture called Lamassu Inc. Designed in Portugal and costing as much as $5,000, about 40 of the machines have been ordered from customers from as far away as Australia, Denmark and Brazil, CEO Zach Harvey said.
Robocoin, another Bitcoin ATM maker, unveiled a machine in August priced at $18,500. The Las Vegas-based company received 15 orders in the first 36 hours, according to CEO Jordan Kelley.
“Since we’ve announced preorders, it’s been insane, Kelley said. ‘‘My fingers are cramping from writing e-mails.” Based on initial demand, he projects sales of 100 units in the first year.
Mitchell Demeter, a 27-year-old who operates a physical dollar-to-Bitcoin exchange store in Vancouver, said he’s ordered five Robocoin machines.
“We are looking to scale our business, and doing so would require a lot of manpower,” Demeter said. “Robocoin solved those problems for us.”
He’s planning to put the ATMs at coffee shops and other locations throughout Canada, and recoup his investment in three to six months by charging a fee of about 3 percent per transaction. Like Demeter, many Bitcoin buyers are young. Many have attended local Bitcoin-enthusiast gatherings and have purchased everything from beer to luxury cars using the currency.
“Everybody is trying to get in early at this point,” Egbunike said. “It’s people trying to get in before the rush.”
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