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Bitcoin, Considered and Reconsidered

NEW YORK ( TheStreet) -- In response to comments to my recent Lost in Translation: A Bitcoin Economics Puzzle, I've put together some answers to some of the more pressing and compelling questions posed by the story. Here goes:

You dismiss the difficulty of solving the algorithm by saying marginal cost of production is near zero. It is very, very hard!

Technology changes fast, very fast. Not only does technology rapidly advance, but it gets cheaper, too.

Let's look at the Univac (1968, cost about $1.6 million): 512k RAM, 1.3MHz speed, 100 MB memory. Takes up the whole room. Any serious research institution needed to have this thing, if they could afford one (and had the space). Graduate students needed to block time in the middle of the night, if they got approval that is, to use this thing.

Compare to the Samsung Galaxy S4 (2013, cost about $500): 2GB RAM, 1.9GHz, 16GB memory, expandable up to 64GB. Fits in my pocket. (And makes mobile calls, accesses email and the Internet, replaces/replicates my iPod, my GameBoy, my TV remote control, and my HP (HPQ) 12C...none of which existed at the time of the Univac.)

The point being, products and problems that seemed unimaginable become possible in short order --technologists, of all people, should know that. Creative destruction abounds! So while today one might think it is "hard" to mine the bitcoin, computing power will advance and it will become "easy" (or "easier," if you prefer) in short order.

There will be barrier to entry (as there is with anything, you need the equipment to produce a good), but after that fixed cost the marginal cost of production approaches zero.

What about electricity costs and the value of my time?

Electricity costs are essentially negligible. If your electricity bill is too large, install a dedicated solar panel and you have just turned electricity into a fixed cost, and electricity doesn't touch your marginal cost at all.

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