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By Robin Sidel
Nov. 5, 2013 6:59 p.m. ET
The price of bitcoin isn't the only thing about the virtual currency that is going through the roof.
Mining costs, industry parlance for the investments in sophisticated technology required to create bitcoin, are soaring as companies and people race to build ever-more-powerful computers to jump into the market.
In the mining process, bitcoin enthusiasts, technology experts and fledgling firms essentially generate units of the currency by solving complicated math problems with their computers.
The growing popularity and rising prices of bitcoin are causing a mad dash for the powerful computing power needed to generate the virtual currency, leading to profit pressure for companies and individual enthusiasts working to create their own stashes.
The speed at which such operations take place is now 40 times faster than in January, according to the Genesis Block, a New York research and data firm that tracks the bitcoin industry. In addition, hardware companies are hustling to keep up with orders for new equipment.
"The dollars that have been invested in this space are being reinvested into computational power," says Greg Schvey, head of research at the company.
There is a finite supply of 21 million bitcoin that can be created. There are roughly 12 million currently in existence.
The furor surrounding bitcoin production was referenced last week in a lawsuit filed against two bitcoin companies in which a New York-based investment firm contends bitcoin startup CoinLab Inc. and its mining unit violated a bitcoin-production contract.
The suit, filed by Bitvestment Partners LLC, contends that CoinLab reneged on a pact to produce nearly 8,000 bitcoin.
The lawsuit was a contributing factor in last week's bankruptcy filing of the CoinLab mining unit, Alydian Inc.
"Due to the lawsuit and the dramatic increase in mining speed in the Bitcoin network (lowering returns for all Bitcoin miners, including Alydian), Alydian felt that its duty was to ensure that Alydian's customers, creditors and investors maximize their possible returns through Chapter 11 bankruptcy protection," Peter Vessenes, CoinLab's chief executive, said in an emailed statement Tuesday. He said the lawsuit was baseless.
A lawyer representing Bitvestment declined to comment on Mr. Vessenes's statement. The lawsuit was filed in U.S. district court for the New York's Southern district.
The lawsuit and bankruptcy are the latest scramble around bitcoin, a fast-growing virtual currency that has seen roller-coaster trading and fueled a modern-day gold rush.
Bitcoin's increased popularity also has brought more scrutiny. A pair of Senate committees will hold hearings on the policy issues raised by virtual currencies in the coming weeks, according to Senate aides, a development that comes amid growing attention from government regulators on digital forms of money.
Bitcoin is a four-year-old virtual currency that isn't backed by a central bank and can be traded on a number of exchanges or swapped privately. A growing number of merchants also accept bitcoin as payment for goods and services, because the transaction costs associated with the currency are generally cheaper than those with credit cards or debit cards.
Bitcoin traded at record highs Tuesday, rising to $252.61 on the Tokyo-based Mt. Gox exchange. That gives those 8,000 disputed bitcoin a value of roughly $2 million.
But the rising prices have brought an increased push by so-called miners to use the speediest computers to get more bitcoin.
"There is an arms race for customized hardware that is more and more powerful and can process transactions faster and faster. But it is making it difficult to get a return on investment," says Jeremy Allaire, a technology entrepreneur who last week announced a new bitcoin-related company that received $9 million in venture-capital funding.
The power and speed at which the computers attempt to solve the problems and accumulate more bitcoin is measured in the so-called hashrate. Recently, the measure has soared and is now tracked in "petahash," bitcoin experts say.
Alydian's bankruptcy filing surprised many observers, because CoinLab is one of the best-known names in the virtual-currency industry, describing itself as a "bitcoin business incubator." Silicon Valley's venture-capital firm Draper Associates pumped $500,000 into CoinLab last year.
Mr. Vessenes also is the chairman of the Bitcoin Foundation, a nonprofit trade group that promotes the use of bitcoin.
The process of producing bitcoin is being further complicated by arrangements in which some mining companies essentially agreed to sell bitcoin to investors in exchange for cash to fund equipment needs, according to people who track the industry. With bitcoin prices rising, it is now more expensive for the miners to deliver that currency to their investors.
"Mining has gotten hypercompetitive very quickly," says Alex Ferrara, a partner at Bessemer Venture Partners, who is assessing investment opportunities in the bitcoin industry.
Topic: 2013-11-05 MarketWatch: Race to Mine Bitcoin Gathers Steam (Read 1981 times)
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