Bitcoin Mining: Scams, Value Bubbles, And $7.5 Million Lost In A Landfill

Bitcoin mining just became physical when English man James Howells decided to go “mining” for his lost hard drive worth $7.5 million in Bitcoins. But as the Bitcoin gold rush begins some people are raising warning signs.

As previously reported by The Inquisitr, the US Senate recently held a hearing on whether the virtual Bitcoin currency should be considered legitimate by the Federal government.

Bitcoin (BTC) is an online digital currency created by a developer or group of developers using the pseudonym Satoshi Nakamoto in 2009 (and nobody knows who they really were to this day). The goal was to build an entirely new economic system designed for the digital age and not controlled by any government or centralized organization. It’s an electronic cash system that uses peer to peer networking along with digital signatures and cryptographics to generate currency, although it is possible to get a physical facsimile.

Bitcoin mining is a process that uses an Internet connected computer in order to generate the 64 digit number required for a Bitcoin for “free.” If your computer successfully solves the problem, you unlock a block of 25 Bitcoins, which, at the current market rates, is worth over $25,000. And Bitcoin mining is not illegitimate or illegal since that’s how the currency grow in number.

And Bitcoin mining is becoming big business very quickly because of the computer hardware requirements. For example, some companies are selling PC motherboards intended for Bitcoin mining. This can be compared to the gold rushes of yore, where merchants sold shovels and mining pans to eager prospectors. And, unfortunately, Bitcoin mining has become increasingly more difficult as intended so a single user doesn’t really stand a chance unless they join a mining pool or just buy a Bitcoin on the market exchange. Companies are literally setting up server mainframe level computer hardware in hopes of unlocking some Bitcoins.

But Bitcoin mining does have a maximum limit. The algorithm behind the Bitcoin network is designed to generate a maximum of 21 million Bitcoins and 12 million have been generated so far. At the current rate, all 21 million Bitcoins should be generated by 2140. You can see exactly how many Bitcoins have been created at any given moment at Blockchain.info, a website that monitors the Bitcoin network and hosts Bitcoin wallets.

So when James Howells bought his 7,500 Bitcoins in 2009 they were worth nearly nothing. Unfortunately, he also thought them worthless at the time since he disposed of the computer containing them. So about $7.5 million worth of Bitcoins are buried in several feet of garbage in an area the size of a football field. Needless to say, this type of “Bitcoin mining” takes the term to a whole new level.

Bitcoin Mining Scams

But the lure of free money has caused internet scammers and spyware makers to take notice. One company called We Build Toolbars is giving away software called Your Free Proxy, but the EULA/ToS agreement flat out says the company will use your PC to engage in helping their Bitcoin mining scam. So, technically, it’s not a virus since they’re telling you what they plan, but anti-virus maker Malwarebytes takes a dim view of such Potentially Unwanted Programs (PUPs):

“In my opinion, PUPs have gone to a new low with the inclusion of this type of scheme, they already collected information on your browsing and purchasing habits with search toolbars and redirectors. They assault users with pop-up ads and unnecessary software to make a buck from their affiliates. Now they are just putting the nails in the coffin by stealing resources and driving user systems to the grave.”

There’s also reports of hackers breaking into Bitcoin wallets and stealing all of the virtual currency… and there’s nothing you can really do about it unless your wallet happen to be insured by a service like Instawallet.

Bitcoin Value Bubble Going to Crash The Virtual Market?

But much of all this hullabaloo over Bitcoin mining may come to nought. After all the Bitcoin value was only $15 in January of 2013 and Professor Magnus Thor Torfason, Assistant Professor of Business Administration at Harvard Business School, believes we’re looking at an upcoming Bitcoin crash:

“Bitcoin is a very volatile asset, and the recent developments in the price of Bitcoins do have some of the characteristics of an economic bubble. Even if we assume that Bitcoins will eventually be worth ten times their current value, they may drop to a tenth of their value between now and then. We don’t really have good methods for assigning value to a currency like this, so you should treat any investment into Bitcoins as an extremely high-risk investment.”

Writing for the New York Times last week, Adrian Chen laid out the basic argument for not engaging in Bitcoin mining:

“All I can say is that the crash is going to be great. Bitcoin is too dependent on speculative mania to be of practical use as a currency.”

Still, Chen wished he’d bought a few shares years ago or engaged in Bitcoin mining when it was easier.

Do you plan on engaging in Bitcoin mining or will you wait for the market bubble to pop before snapping up some shares?