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The Rises and Falls of Bitcoin

Part 1. Surge from $1 to $30 from April 14 to June 9, 2011

Back in April of 2011, very few people had heard of Bitcoin and it was trading at around a dollar. Bitcoin had been running steadily for over two years, and had quietly risen in price from under a penny to nearly a dollar. Suddenly a flurry of articles came out about Bitcoin in The Atlantic and a handful of other outlets. Amid the media attention, the price rose to around $5 but then on June 1, this article aired on Gawker advertising the SilkRoad and soon after, Bitcoin was featured on NPR. New speculators and SilkRoad users quickly bought into Bitcoin, and the price spiked, peaking at $30 on June 8 as exchanges like MtGox ran out of sellers to meet the demand. Up 1000% in the past month, Bitcoin was precariously overpriced and dropped in half by June 11. New speculators panicked over their losses and started selling. At $10 - $20, the price still seemed good to many early adopters who also started selling. Several security incidents like this Bitcoin holder losing 25,000 BTC on June 13 and MyBitcoin losing 100k+ BTC to hackers & going bankrupt a month later, drove prices down even further. The downward spiral persisted for 6 month, bottoming out at $2.05 on November 18, 2011 and then recovering up to around $5 by the beginning of 2012.

Part 2. Surge from $15 to $230 from Jan 16 to April 9, 2013

In January, 2013 Bitcoin prices had recovered from $5 up to around $15 over the past year. Then a financial crisis broke out in Cyprus, and news came out that the European Union and International Monetary Fund would seize 40% to 80% of the money in all Cypriot bank accounts as part of the Cyprus bailout. Cypriots desperate to keep their money, hurriedly tried to invest in Bitcoin. Trust in central banks & fiat currency hit a low and investors across the world bought into Bitcoin to hedge against their fiat holdings. Bitcoin was written about in Bloomberg and some hedge funds and Wall Street speculators started buying into Bitcoin for the first time, driving the price to a peak of $230 on April 9, 2013. Then on April 10th, investors realized that Bitcoin was overpriced, up more than 1400% over the past three months. Bitcoin lost nearly half of its value in a few hours in a sharp downward price correction and then dropped as low as $70 on April 16. Soon it recovered to the $100 - $150 range where it would remain for about 5 months.

Litecoin & other Bitcoin Alternatives

Bitcoin is no longer the only cryptocurrency around; lesser known crypto-currencies like Litecoin, Namecoin & PPCoin have all sprung up to challenge Bitcoin's dominance. Since Bitcoin is open source, it's trivial to create a Bitcoin copycat. And unsurprisingly, hundreds of Bitcoin copycats have been created by founders eager to make a fortune as their coin's "earliest adopter". Many of these cryptocoins bring little or no innovation to the table and have not gained any traction in the crypto-currency community. Others improve on Bitcoin's design, or bring new paradigms to the cryptocurrency concept. Click here for a full list of cryptocoins or see the stats for different crypto-currencies. Here's a breakdown of the top bitcoin alternatives and why they're important:
  • Litecoin - The silver to Bitcoin's gold, or the ".net" to Bitcoin's ".com", Litecoin is a clear runner-up in the crypto-currency race. Litecoin is capped at 84 million coins compared to Bitcoin's cap of 21 million. And litecoin transactions are confirmed every 2.5 minutes, 4 times faster than Bitcoin's 10 minute confirmation interval. Started on October 13, 2011 Litecoin now has the longest blockchain of any crypto-currency partly because of it's fast rate of block generation. Litecoin uses the scrypt hashing algorithm to generate blocks instead of the SHA-256 hash used by Bitcoin. Scrypt hashes are not easily computed with specialized ASIC processors, therefore litecoin mining is more accessible to miners using normal CPUs, providing a de-centralization benefit to the network. Litecoin has a market cap of $75 million as of April 28, 2013.
  • Namecoin - Started on April 19, 2011 Namecoin is an innovative crypto-coin which aims to create a decentralized domain name system for the internet. Whereas traditional approaches to DNS rely on a hierarchical network of trusted servers to route domain name queries to the appropriate web-hosts, Namecoin achieves domain name routing through the blockchain, relying on miners to preserve the integrity of domain name records. For compatibility with existing DNS systems, the Dot-BIT project has designated the ".bit" top-level domain to be used with Namecoin domains. But if successful, Namecoin wouldn't just be another TLD, it would be an alternative DNS root used in the same way that the ICANN-controlled DNS root is currently used across the internet. Like Bitcoin, Namecoin is capped at 21 million coins and uses the SHA-256 hash. Namecoin has a market cap of $7.5 million as of April 28, 2013.
  • PPCoin - Also known as "P2P Coin" or "PeerCoin", PPCoin improves on the security of Bitcoin with an innovation called "Proof of Stake". PPCoin takes the amount of time that coins have been in a wallet into consideration ("coin age") and allows "proof of stake" blocks to be minted in addition to the proof of work blocks which define the Bitcoin blockchain. Whereas other crypto-currencies are susceptible to a 51% attack, (where an attacker can double-spend coins by gaining more than 51% of the network's hashing power), proof-of-stake cryptocoins like PPCoin are not susceptible to this attack. In PPCoin, the block chain with the greatest total coin-age is chosen by the network, preventing the possibility of a 51% attack. PPCoin doesn't have a hard cap on coins, but caps the annual rate of coin generation at 1% per year. As of April 28, PPCoin has a market cap of around $7.5 million.