Bitcoin. By now, you have surely heard of it. The digital currency (or is it a commodity?) created in 2008 and officially launched in 2009, made headlines in late 2013 when it reached dizzying prices on the open markets and grabbed the attention of some big names like the Winkelvoss twins and Peter Thiel.
This is a physical bitcoin wallet designed by Max Mellenbruch
My interest in bitcoin, however, is a bit less philosophical and substantially more geeky. It is super nerdy when you get down to the nuts and bolts of it. Sure, the underlying concept known as blockchain technology is extremely likely to change the global economic landscape in ways similar to how the internet changed the global communication landscape. And as an investment it is certainly high risk/high reward, which suits my style.Indeed, it’s where bitcoin actually comes from that has most captivated me. If you’ve read anything at all about bitcoin, you have probably seen references to the currency being mined. Bitcoin is created by a global network of computers constantly crunching numbers, looking for the solution to a cryptographic puzzle which will unlock (solve) the next block in the chain, rewarding its finder with 25 whole bitcoins (plus some change from the minute fees paid by senders of the transactions which that block contained).
In 2010 I read about bitcoin and thought, “Huh, that’s interesting. I’m going to build the software and play around with it.” I downloaded the source code and started compiling, but hit a snag when some dependency wasn’t present on my development machine, then got distracted – probably by one of my dogs or maybe it was work. Either way, I never finished setting that up. And boy do I regret that. Had I finished compiling the open source code that would allow me to mine some bitcoin back in early 2010 when almost nobody was doing it, I could have earned loads of bitcoins in almost no time at all, just by goofing around with the code. Imagine how many pairs of weird socks I'd have today!
Physical Worldcoin wallets in .999 fine silver, by Antaui
Instead, I revisited the project in early 2013, after bitcoin had reached $100 on the open market. I discovered that some people were already accepting bitcoin as payment for goods and services on the open market. And then I found that there were “alternative” digital currencies, like Worldcoin and Litecoin which used a different cryptographic algorithm for mining, and Peercoin which implemented a concept called Proof-of-Stake, which is essentially earning interest by holding the coins in a wallet on the Peercoin network. All these “altcoins” had different features than bitcoin. This whole world was, and still is, incredibly fascinating to me. So I educated myself and learned where it was all headed. That’s when I decided to make an investment.I bought some bitcoin using localbitcoins.com and began trading various digital currencies on marketplaces like BTC-E and Cryptsy and, later, Bittrex and Poloniex. I joined Twitter as an alternate persona focused on this technology and met people around the world who I remain friends with to this day.
Mining rig in the bathtub. Made for a nice warm bathroom all winter long
The more I learned about mining, the more interested I became, since I’m already a sucker for geeky hardware projects and the soothing hum of small fans running at 2500 RPM surrounding me in my home office. By the end of the year I was building computers out of consumer-grade hardware, mounting them in milk crates, and packing them full of graphics cards. You see, the common graphics card is specially tuned for rendering 3D graphics very quickly. It so happens the kind of mathematical operations this component is built to perform are also very good for breaking cryptography by brute force, which is basically the essence of cryptocurrency mining. During the winter of 2013/2014, we rarely ran the furnace in my home, because there were at least one of these beastly devices dissipating roughly 1000 watts of heat in every room. My wife was especially fond of the one I kept in the guest bathroom (in the tub, of course), because it meant that room was always warm and toasty, no matter the state of the furnace thermostat.
Mining rig in the kitchen. Wife wasn’t so fond of this installation.
Now, as this was a boom time for altcoins, during which nearly every new “coin” that was launched was bound to have a phenominal break-out once it hit the digital markets, my home mining operation was rather profitable. I took those profits and paid a full year’s lease on a small industrial space at the edge of town, installed a 100A electrical panel, and moved all my gear there. Eventually I stopped buying mining hardware, but the devices I still have remain profitable, mostly because bitcoin is still trading above $300 and also because electricity is relatively inexpensive in Nevada.
When the lease at my little workshop is up next year, I’ll likely shut it all down and liquidate, then move to passive trading of the various currencies in an effort to continue to grow my digital net worth. Considering the performance of my IRA over the past five years, I consider this a kind of retirement plan. At least for the time being. And if it all goes down the tubes due to some massive unforeseen failure in the core open source code that keeps the many blockchains around the world moving forward day in and day out, leading to a complete bust in the digital currency space… well, I’m ok with that. It’s been a fun ride so far, and something tells me this really is only the beginning. But man, am I ever kicking myself for not compiling that bitcoin mining software nearly five years ago.
Crypto mining “farm” in a dumpy industrial space on the outskirts of town.
This is a Big Deal
Finally, I wouldn’t be nearly as involved and invested in digital currencies if I didn’t believe the whole concept were headed in a positive direction. The benefit of these blockchain-based currencies is the speed at which value can be transferred globally. Bitcoin is relatively slow, taking up to an hour for a transaction to be fully verified by the global network of bitcoin miners and users. But many of the alternative currencies are much, much faster. For example, Viacoin, which is one of the more promising digital currencies in my opinion, can complete a transaction in under two minutes, with typical transactions being completed in about 72 seconds. Gaw Miners’ Paycoin aims for a 60 second block time, which means transactions are generally fully verified in about three minutes. Even litecoin, the first altcoin, has a typical block generation time of 2.5 minutes, which is four times faster than bitcoin. The point of decreasing transaction times is to make these currencies better-suited for day to day use by consumers, and ultimately we will be seeing retailers worldwide accepting one or more of these currencies at the point-of-sale.
Here’s the real value in blockchain technology for use as a store or wealth and a means to transfer value: Imagine you need to send $10,000 to someone in, say, France. Traditionally, you would go to either your bank or something like Western Union and send the money that way. It would take up to three business days, and you would pay an assortment of fees for things like the “wire transfer” and “currency exchange”. But if your friend in France uses bitcoin, and has the means to convert it to cash in his or her local currency, then you can send the money in the form of bitcoin without ever needing to talk with a bank or an under-payed staffer at a Western Union branch or your local grocery store. The transaction would appear in your friend’s bitcoin wallet almost instantly, and would be spendable in roughly 30 minutes. If you used Viacoin, the funds would be spendable in about two minutes. The transaction fee is in the neighborhood of three cents, no matter how much you’re sending, and it winds up being paid to the lucky miner who solves the next block in the chain which contains your transaction.
Think about this. The ability to send any amount of money to anyone in the world without leaving your home, without talking to a bank teller, without paying a number of intermediary companies an assortment of fees, and without significant delays. This is a big deal. It’s the financial equivalent of sending an email as opposed to mailing a letter through the postal service. You have complete control over every aspect of it. You don’t need to rely on a brick-and-mortar corporation to accomplish the task. You don’t need to buy a stamp – or pay a percentage of your transfer to a couple of banks. There is a good chance that at some point in the nearish future, government-backed currencies, banks, and companies like Visa, Mastercard, and so on might be a lot less relevant, struggling to reinvent their business models in the same way the recording industry, the film industry, and the publishing industry have had to thanks to the internet. The way blockchains work means the entire bitcoin (or whatever digital currency) network comes to agreement in a matter of seconds (or minutes) about the validity of a transaction, and all transactions are stored permanently in a public ledger which is duplicated many times over around the world. Cloud money. Near-instant, borderless, and outside the control of corporations and governments who would normally stand in the way of large financial transactions in order to take a cut or otherwise exert control over individuals for the purposes of profit, power, and in some cases censorship.