The market capitalization of the Bitcoin ecosystem crossed 1 billion US dollars recently. As the value of the each Bitcoin nears 100 US dollars, many have begun to take notice.
One likely source of this sudden interest is the Cypriot banking crisis. As depositors scramble to hedge their investments, the steadily growing notoriety of bitcoin raises some interesting opportunities. The two most alluring aspects that make the Bitcoin economy unique are the concept of mining and, interestingly enough, the automatic limits on mining.
Unlike other forms of currency, bitcoin users can create new money. By solving complex math problems users, or miners as they are often called, create new bitcoins where there used to be none. This operation is not strictly free “as in beer”. Miners need to invest time, electricity, and equipment into the endeavor. Profit is also not guaranteed. The nature of the math problems being solved mean that a single miner may never create new bitcoins on their own.
This self-limiting aspect of Bitcoin creates a fascinating set of contradictions. First there is a hard limit. There will never be more than 21 million bitcoins in circulation. It is important to note that each Bitcoin can be divided almost ad-infinitum. Some software only supports fractional bitcoins to 8 decimal places, but there is no hard limit in the Bitcoin system itself. Once all bitcoins have been mined it is expected that the value will increase as smaller and smaller fractions are transacted.