An adventure in digital currencies.
Please excuse the vertical video and sound quality. This was an impromptu video that I grabbed quickly at the end of the day.
Why write this?
I recently spent the day in a high security, anti-static, temperature-controlled data center where I watched one of my clients set up the beginning of their commercial Bitcoin mining operation.
Watch the short video and then read on to learn more about Bitcoin.
The basics of Bitcoin
About 4 months ago I started talking to a company that needed help building an online presence for their Bitcoin start-up. They wanted to build a commercial Bitcoin mining operation and to be completely honest, I was totally clueless about Bitcoin.
I had heard of Bitcoin, but I really had no idea what it was. I had a rudimentary understanding of cryptocurrencies and considering my stance on limited government, found myself leery about the thought of a digital currency going main-stream in America.
Being the good capitalist that I am, I went out and dove head first into understand this new technology called Bitcoin. I was interested in not only landing a new client, but in learning more about this thing that has so many people taking sides on the future of money right now. I wanted to learn more about the technology that could revolutionize the world of finance, and forever change the internet as we know it.
I figured that since I regularly mention Bitcoin in my podcasts, and miscellaneously on this website, I should also try and help you better understand Bitcoin. I thought I would take this as an opportunity to give you a look at the new frontier that is digital currency. I ‘ll do so by pointing you towards the resources I used while getting my Bitcoin learn on and then breaking it down in a little more detail.
Listen to this
This is hands down, the best resource I have come across for understanding Bitcoin in one single sitting.
If you are serious about understanding Bitcoin, then this is a great first step.
Seriously, listen to the whole show. They talk about how Bitcoin could disrupt the entire economy while fundamentally changing the way the world thinks about money.
“The combined computing power of all Bitcoin mining operations has exceeded that of the top several hundred super-computers on earth combined.”
– Andreas Antonopulos
How to get involved in Bitcoin
There are a few different ways to get involved in the Bitcoin community.
As A Developer:
Since Bitcoin is an open network of peer-to-peer computing power, there is an opportunity for growth in the form of third-party software applications that will allow you to interact with and use Bitcoin inside the daily life of the average person. You will soon start to see cryptocurrencies and digital dollars being used more and more throughout our favorite apps, as well as being integrated into the payment portals that we are all already used to.
Bitcoin is open source, just like many other online projects,which means that anyone can get into the back end and look at the code, make modifications and otherwise try to improve on the system. This is not to say that you could just go in and change the whole Bitcoin network architecture, but you can definitely find ways to innovate with this new technology.
Much like social media was an evolution of communication and the internet, Bitcoin is the evolution of money and information exchange. We will see software and online applications that allow us to creatively use the technology behind Bitcoin to do everything from eliminating identity theft & simplifying accounting to allowing for a secure form of digital voting.
These concepts might be a little difficult for you to wrap your head around if you are new to Bitcoin and I wont take it too far since this is an entry level article but you should know that Bitcoin is as much an invention as it is anything else. It is an invention of information and is just the first of many digital inventions revolving around the exchange of information that we will see emerge in the next 50 years.
As A Miner:
At this point in time, it would be pretty difficult for you to make it rich as an individual miner of Bitcoin. The main reason is the ever increasing network difficulty but the price barrier to mining on your own is pretty steep too. Bitcoin mining computers are highly specialized machines that are expensive and go obsolete faster than your average computer, typically lasting less than six months. The speed and pace at which people are building these mining computers is overwhelming and it is hard to think that the manufacturers are not the ones who are laughing all the way to the bank right now.
The high price point makes it difficult for anyone without access to substantial financial resources to get involved in mining Bitcoin with any real effectiveness.
This was not always the case though. It’s really the main reasons I find Bitcoin to be so interesting. There are so many people who have made millions in Bitcoin while it was still young that it is truly a new frontier for entrepreneurs trying to find a way in a world of digital currency. However, those days are pretty much over.
What we are seeing is the emergence of large scale commercial Bitcoin mining operations sprouting up all over the world. You even have manufacturers of Bitcoin machines who will mine with their own machines for anywhere from 24 hours to a few months before shipping the units off to their clients to install in their data centers.
It has become next to impossible for an individual to compete with the hashing power of these large commercial operations or the against any number of large Bitcoin mining pools around the internet.
If you still want to get involved as an individual then you can join a Bitcoin pool, or invest in an online mining contract but this is a high stakes game.
The volatility of the market and large fluctuations in the value of Bitcoin make this a very risky investment. Any investment in Bitcoin should be done so with the full understanding that you could lose your entire investment overnight.
As A Consumer:
This is probably the safest and most likely place for the average person to get involved. Don’t believe me?
An excerpt from this article on Mashable – BitPay Now Top-Funded Bitcoin Startup After Raising $30 Million
Those investors included some impressive names. BitPay raised funds from Virgin Group founder Richard Branson, Yahoo cofounder Jerry Yang, Founders Fund, a VC firm started by PayPal cofounder and early Facebook investor Peter Thiel.
So basically, the big boys have noticed. The IRS recently ruled on Bitcoin which gives the currency some level of credibility and now we have some big money players getting into the game.
The next step will be when a major financial institution announces that it is working on a Bitcoin integration strategy and then you will know that this is not a test. It really is just a matter of time before transferring money digitally is as common as sending a text. Whether you want to pay attention or not this “Bitcoin thing” is making a substantial impact on digital commerce and will find a way into our lives moving forward.
Talking with a Bitcoin miner manufacturer
One of the most interesting parts of my day at the data center yesterday was getting to meet Yoshi.
Yoshi was here from China and was helping Digital Mining Investments set up their Ant Miner computers. The stories he told me about fraud in the Bitcoin business and the competitive nature among the manufacturers of Bitcoin mining hardware in China should be enough to scare anyone away from Bitcoin. There are plenty of companies out there trying to do it right but there are always those who want to take advantage of new trends.
He is the one that told me about the manufacturers who run their machines for a month before sending them out to their clients and he also told me about the diminishing return and exponential difficulty of becoming a Bitcoin miner. Since the machines are only good for a few months, the manufacturers of mining equipment are actually manipulating the market by controlling the total available flow of Bitcoin miners.
This is a baby currency but where there is money there is manipulation and Bitcoin is no different. At this point the manufacturers are at a basic level controlling the money supply in Bitcoin and reselling their machines to unscrupulous miners who really have no recourse since most of these manufacturers are based in China.
Yoshi laid it out in plain term that soon the shift would be away from directly mining for new coins (what happens when all Bitcoin are mined?) and then the play would be for institutional control of the Bitcoin network. Instead of mining they would be validating transactions and collectiong the transaction fees. Something that (as we explained earlier in the article) the individual miner would not be able to maintain due to the overhead involved and constant maintenance. The larger organizations can scale the operation and that is what you might see some of the larger hashing operations convert to after that point but that is a lot of speculation in a market that fluctuates so wildly each day.
Yoshi told me that the manufacturers would begin to buy up market share for processing capabilities. Think of Visa’s digital infrastructure. How are all of those transactions handled across a global network? They need infrastructure right? Even after all 21million bitcoin are mined the Bitcoin network will still have to validate all of the transactions that are happening on the system so it will actually be necessary for someone to step in and continue to bear the cost of running these massive computers.
Couple this with the fact that returns are harder and harder to come by for an individual and you can easily see how Bitcoin could become institutionalized and evolve into another household name.
But what about the fraud
Much like any major societal shift, the transition to digital currency is going to take us a while to figure out.
Think about the scams that happened when people first started selling products online.
Think about the phishing scams that were so prevalent when email first came around and how hesitant you were to put your credit card on the internet.
That was all just a few years ago and now we are checking balances online, sending money via text and depositing checks with the flash of a camera.
The American Dollar is used for a large amount of fraud across the globe and some might argue that banks are legally defrauding all of us anyway. Why would there not be fraud in the evolution of a digital currency.
We still deal with counterfeit dollars and people who want to steal and manipulate real paper currency on a large scale so why wouldn’t someone want to do it with Bitcoin as well.
Fraud is fraud, people are people and that is not going to change. Whether we are dealing with cash or a digital currency.
The cool thing about Bitcoin is that it gives us some unique tools to deal with fraud and theft, but those are for another article.
Should you get involved in Bitcoin?
This is a decision you will need to make on your own. Me? I think digital currencies or cryptocurrencies will be a big part of our future whether we like it or not.
As technology evolves and becomes more ingrained into our lives and daily routines, it’s hard to think that we won’t eventually relinquish our grip on a paper currency that is backed by a corrupted government. It’s not like a lot of people trust the dollar right now anyway.
It might not be Bitcoin itself but some form of digital currency will find its way into our lives in the immediate future. I still have my reservations about all of it and I will continue to approach the issue with a healthy dose of skepticism but that skepticism is quickly fading as I learn more and more about the inner workings of what might end up being the most influential inventions of my generation.
Got some thoughts about Bitcoin? Want to ask a question about Bitcoin? Leave it in the comments below and I will do my best to find the answer and get back with an answer.