Bitcoin Ends July Up 39%, YTD 2012 Now Up 98%
The bitcoin exchange rate ended July 2012 with nearly a 40% gain — the biggest monthly gain so far this year.
The July BTC/USD closing price of $9.35 means a bitcoin cost two and a half dollars more than when 2Q2012 ended.
For 2012, where the price opened at a $4.72 level, the price rise from January 1st now exceeds 98%.
The algorithm that governs the rate of bitcoin issuance (one of the products of “mining”) readjusts so that over time issuance is at the same rate. Between adjustments however, issuance can occur at a slightly higher rate when there is more mining activity. This is what happened in July where the price rally occurred even with the daily average issuance rate coming in 2% higher in July than in the month prior.
The 238,650 bitcoins issued which Bitcoin miners took in during the month is valued at $1.93 million using the average daily valuation for the month of $8.12. Along with the rising exchange rate, mining profitability has been rising as well.
The 39% rise in the exchange rate for the month is offset partially with the increase in the mining difficulty. Since that increase in difficulty was less than 18% though profitability rose to levels that haven’t been seen since January.
Though mining hardware can use off-the-shelf GPU and PC hardware, a large amount of the increase in capacity added during the month can likely be attributed to volume shipments of a variety of FGPA models. To the left is a photo of mining operator darkice with new “BFL Mini rig” hardware, each of which costs about $15K USD.
Mining operators who were constrained by electrical circuit limits using GPUs are now able to add capacity using FPGAs due to their vastly lower power requirements.
If a very large amount of funds hadn’t gone towards pre-sales of an FPGA successor, the BFL product line branded “SC”, there would have been an even larger amount of FPGA capacity brought online by now.
Because of the millions of dollars going towards the purchase of mining hardware and towards pre-sales of technology still at the R&D phase, many miners are actually bitcoin-poor — they’ve used their mined coins as investment capital for new equipment.
The trading volume at the exchanges with customers from Europe continued at a record pace in July. The BTC/EUR (Euro), BTC/GBP (British pound sterling), BTC/PLN (Polish zloty) markets saw volumes up 20% or more and markets at exchanges where SEPA payments are accepted (such as the BTC/USD market at Bitstamp) also beat records for monthly volume. In all, for the month there were over 2.3 million bitcoins exchanged into and out of fiat and other virtual currencies.
If bitcoin is being acquired simply as a store of value then it becomes a risky investment as should the exhange rate take a pause or start to drop. Speculators become sellers and the rush for the exits only compounds the selling.
However, investment in bitcoin as an asset that might appreciate in value isn’t the only speculation surrounding bitcoin. Bitcoin is a pseudonymous digital currency. This means that identity is not required to receive, store and spend funds. Once bitcoins are acquired, financial transactions no longer need to go through the banking system.
This property has now been discovered by high yield investment program (HYIP) operators and the pace of participation only appears to be accelerating.
This should come as no surprise. One of the first online services to accept bitcoin was called the Bitcoin Randomizer and it did not hide its function. Randomizer advertised that it would issue payouts to earlier ponzi participants using the proceeds brought in from the most recent contributors. There was no deception and in the end, those that did lose a couple dollars worth of bitcoins when the operator shut the service down likely got their money’s worth from the entertainment value.
What has emerged since, however, is quite frightening. Professional poker player Bryan Micon (@DonkDown) has compiled a list of questionable investments, well “obvious ponzi schemes” as he describes them. Micon has experience with scams in the poker arena and has put some effort towards outing these HYIPs just as he has done using his website for outing poker-related scams.
Micon isn’t the first to call a spade a spade. The Bitcoin.org lead developer, Gavin Andresen (@GavinAndresen), commented that HYIPs are “(almost?) always dressed-up Ponzi schemes” and he makes a plea to participants to “please lick your wounds quietly when they implode”. Andresen showed prescience back at a time when bitcoins were selling for under a quarter dollar each when he remarked that “we’re in the Wild West days of open-source currency. I expect people will get burned by scams, imitators, ponzi schemes and price bubbles.”
There are likely hundreds of thousands of bitcoins or more (valued in the millions of dollars range) already involved in HYIP gambling and it is likely many of the bitcoins remain unspent by the operators. The result is an artificial demand for bitcoins. These bitcoins are not likely then being offered for sale at the exchanges, which might cause the exchange rate to rally on hardly any news without there being any other development that might help to explain why a 40% rise in one month might be justified.
Following the first collapse of a large ponzi (of which the largest is “in its final week or two”, Micon asserts) the result might be more than noticeable at the markets in the form of a sudden selloff — the pin that ends this latest Bitcoin bubble.
Or perhaps, since HYIPs existed long before Bitcoin was invented (with the OSGold HYIP collapse in 2002 being among the largest) the event goes down being little more than a learning exercise at the school of hard knocks.