Bitcoin: Modern-day gold rush or risky investment?

Bitcoin: Modern-day gold rush or risky investment? »Play Video
An Everett man and other investors have created the largest Bitcoin mine in North America, capable of 1,000 trillion calculations per second. It's located in Eastern Washington.
At the Wafl Stop in Bellingham, owner Kenny Spotz has a brisk business. You can get the standard Belgian waffle mixed with a variety of fruits. But the mobile restaurant's specialty is a pizza waffle. It's everything that's in a pizza whipped into the waffle batter.

"At first it didn't sound appealing, but we make what people want and now we are known for it," says Spotz. The Wafl Stop is also known for something else. It was one of the first businesses in the Northwest that takes Bitcoin, the volatile digital currency making headlines for its skyrocketing value, a mysterious past and uncertain future.

"We believe in the system," says Spotz. Unlike credit cards, with Bitcoin there's no transaction fees, no banks, no government involvement.

Bitcoin is a peer-to-peer payment system developed in 2008 by an anonymous computer programmer or group with the given name of Satoshi Nakamoto.

Recently, Newsweek tracked down a California man and identified him as Nakamoto. He told the Associated Press he is not Bitcoin's creator but did have plenty of knowledge of Bitcoin's system which relies on an open source public ledger to keep track off all the Bitcoins in circulation.

The currency has an appeal to nonconformists seeking an anonymous way to transfer funds, sometimes in large amounts. It's been a currency of choice on black market websites that deal in guns and drugs because it's harder to trace Bitcoin than money order or transfers.

But to the common man, Bitcoin has the appeal of a modern-day digital gold rush. There is a limited amount of Bitcoin available and the race is on to unearth what hasn't been found.

Bitcoin is one of those things that takes a while to wrap your head around. With apologies to Bitcoin enthusiasts, it may be time to oversimplify how it works so the rest of us can understand why it's so popular.

At its most basic level, Bitcoin is about value. Value is nothing more than what two people agree on a deal. If one exchanges a dollar for a hamburger, both sides agree that the value is the same. Bitcoin operates the same way.

Currently, Bitcoin is trading on exchanges at $650. Two years ago, it was $20. In December 2013, it peaked at $1,120. Clearly, Bitcoin has value to a lot of people willing to exchange dollars for Bitcoin and vise versa, but it's been a volatile currency.

"If this was truly a currency this would be unprecedented levels of volatility right now," says University of Washington economics professor Phillip Bond. He doesn't see Bitcoin replacing the dollar but until its price settles down, Bond doesn't think it will be accepted by the mainstream business world.

"People often say Bitcoin is a bubble, and I agree with that. Also in a sense, in some way, all currency is a bubble because all currency you're holding is what you expect to get tomorrow," says Bond.

It's that promise of tomorrow that has created a new breed of miners who have exchanged their picks and shovels for a fast computer.

Bitcoin is created by "miners." Only 21 million Bitcoins will ever be made available to mine, and so far roughly two-thirds has been discovered.

An easy and effective comparison to make is the gold rushes of the 1800s. When gold was discovered in the river beds of the Yukon and California, it was easy to find at first. But soon, the gold got harder to find and serious miners had to spend more time and money to dig deeper to find the gold.

The same is true with Bitcoin. Anybody can generate Bitcoin using one of several free programs on the Internet known as a Bitcoin miner. Miners also need a computer with fast graphics processor or a customized Bitcoin mining chip and an Internet connection.

A Bitcoin is generated when the mining software completes a mathematical task that keeps the Bitcoin network secure. Be the first in the world to complete the task, and a Bitcoin is earned. It's a cycle repeated hundreds of times a second with no guarantee a Bitcoin is generated every time. Without miners constantly looking for Bitcoin, the network falls apart. It's an oversimplification but that's how it works.

Nowadays, it's not worth it to have a single computer working 24/7 mining Bitcoin. In order to profit from Bitcoin mining, you need to go big like Dave Carlson. The Everett man and several international investors are sinking millions of dollars into a sophisticated mining operation in Eastern Washington.

"We have one petahash of mining capacity," says Carlson. That's 1,000 trillion calculations a second.

"Its largest mine in North America and most of the rest of the world," he says.

He says he's earning an average $8 million worth of Bitcoin a month, or roughly 200 Bitcoins a day. In the Bitcoin world, that's a staggering amount.

His company, MegaBigPower, has invested over $1 million into two warehouses that feature hundreds of mining rigs running side by side on dozens of racks that stand seven feet high. It consumes 1.4 megawatts of power - enough to run a small town. It currently relies on huge fans circulating outside air to cool the rigs. During a recent visit, it was 30 degrees outside and 102 inside.

"I don't even know how many rigs we are running; we are expanding all the time," says Carlson. Each mining rig is valued between $5,000 and $6,000 and relies on the Bit Fury processor that has been custom-engineered to run the algorithm Bitcoin requires.

"The business plan was designed at $50 Bitcoin," says Carlson. With Bitcoin now trading near $650, that's quite a profit if it's converted into dollars.

"I'm a very happy man," says Carlson. Now he faces the Bitcoin miner's dilemma - when to exchange that Bitcoin into dollars.