This Bitcoin Mania Is out of Control

If you don’t understand how to mine bitcoin, try reading this Wall Street Journal graphic. You still won’t understand, but at least you’ll have tried. (Click for larger image.)

If people want to invest in bitcoin, or invent competing cryptocurrencies, or dedicate their computers to “mining” bitcoin by solving computationally difficult puzzles, well, it’s a free country and they can do what they want. As a political-policy commentator, I would never advocate banning such endeavors. As a social commentator, I am moved to ask, are these people out of their minds? What a socially useless activity.

As a economic-development commentator,  however, I must cheer the initiative of Frederick Grede, Michael Adolphe, and other principals of Bcause, a company that aspires to become the largest bitcoin mining operation in North America. The Virginia Beach-based company has raised $5 million in funding led by Japanese financial-services firm SBI Holdings and plans to raise more.

A Wall Street Journal article today describes how Michael Poteat, an engineering student at Old Dominion University, started mining bitcoin four months ago. He purchased 20 “mining rigs,” computers that solve complex equations to generate new coins. The 20-year-old kept tripping the circuit breaker in his house, and he struggled to find a place to accommodate his operations. “It’s just difficult as an individual to handle all the logistics,” he says.

Then Poteat came across Bcause, which provides the infrastructure, security, and electricity to enable large-scale bitcoin mining.  The WSJ elaborates:

Bitcoin miners are rewarded with new coins and transaction fees for performing the calculations that make the bitcoin network tick. The more valuable a bitcoin is, the greater the incentive to start mining. But the more miners who participate, the more computations are needed to earn rewards.

The process can be expensive and cumbersome, requiring specialized hardware and large amounts of power. Such challenges have long prompted miners to share space and resources. Now, companies that harbor mining equipment are fielding more requests than ever. …

Bcause is one of the firms that have sprung up to cater to aspiring bitcoin miners. In an old beverage warehouse in Virginia Beach, the start up is running thousands of rigs for clients from the U.S. to Asia. … Bcause has contracts with clients to house about 60,000 mining rigs and will serve retail clients by renting out spare machines, a process known as “cloud mining.” It has about 5,000 machines up and running, and plans to outfit another site in eastern Pennsylvania.

The profitability of mining bitcoin hinges on the cost of buying the mining rigs — the Antminer S9 is the most popular — electricity, and, of course, the price of bitcoin. Right now, despite a recent slide, the price is still high by historical standards, and bitcoin mining is said to be “insanely profitable.”

As a hosting service, Bcause says it is insulated from price volatility because it doesn’t invest in the mining equipment or the cryptocurrency itself. However, it does plan to build out a one-stop shop for trading bitcoin, including a clearinghouse, and derivatives exchanges.

I confess: I don’t get it. I don’t understand what bitcoin is good for, other than as a vehicle for maniacal speculation. I don’t understand how bitcoin mining works. Maybe there is some social utility from all this fevered activity, but maybe we’re just bystanders to the 21st tech-economy answer to the 17th-century Dutch tulip bulb mania. Will bitcoin become the Next Big Thing, like the Internet, that will revolutionize commercial transactions and transform our lives? I don’t know. Will it crash and burn? I don’t know.

Peter Diamandis, serial tech entrepreneur and founder of the X Prize Foundation, spoke at the Richmond Forum earlier this month. He made the case that technological change is accelerating, driven by the geometric increase in computational power and the growing capabilities of Artificial Intelligence. A colleague of Ray Kurzweil, the author who coined the phrase, “The Singularity,” Diamandis said that technology is rapidly approaching escape velocity in which change will no longer be in human hands. So, yeah, it won’t be long before the robots take over.

Curse you, bitcoin!

In a world in which all the rules are changing, how do we know what to do? Will our skills and knowledge be worth anything a decade or two? What will happen to our pension funds and personal investments as half the companies in any given portfolio is disrupted and rendered worthless? Will there be any work to do, or will robots do it all for us? Will there be any purpose or meaning to human existence?

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16 responses to “This Bitcoin Mania Is out of Control

  1. >>Will there be any work to do, or will robots do it all for us? Will there be any purpose or meaning to human existence?

    This is not a new problem. Kurt Vonnegut wrote about this idea in the 50’s in Player Piano. Recommended reading.

  2. Gee.. Someone is going to give me valuable stuff if I let them run a program on my computer and that process is called “mining” but it does not create anything except more “coins” that don’t represent anything of value like an asset?

    Blockchain technology is going to revolutionize the financial industry… but Bitcoin sounds a lot lot penny stocks…

  3. Bitcoins are currency more than investments. Just like there is an exchange rate between US dollars and Canadien or Australian dollars there is also a conversion rate between bitcoin and US dollars. Plenty of savvy people trade in the currency market, George Soros being one. Playing bitcoin as a currency is just another take on that.

    The real difference is how the bitcoin currency is “minted”. The bitcoin crowd prefers the term mined but I think of it more a minting. The mining / minting is pretty clever in that the miners / minters must also use their “rigs” to validate bitcoin transactions (they get paid a small fee per transaction). So miners get paid twice – once when they create a bitcoin and as they validate transactions.

    I would think that “Boomergeddon Jim” would like the fact that the total nuber of bitcoins is capped at 22 million. About 12 million have been mined / minted so far. No government just printing an unlimited amount of currency.

    As for technology disrupting employment at an increasingly fast rate – bet on it. There is no law of technology or economics which says that technological advances will always create more jobs tan they destroy. That may be what has generally happened but there is no reason to believe what happened in the past will happen in the future. For example, the number of net bank branch openings in the US was positive until about 2009. It turned negative in 2010 and has gotten to be very negative in 2016 and 2017. Internet, iPhones, web based banking have all been around for years. But it took until 2013 for the bottom to start falling out of US net bank branch openings.

    Is there a way to organize society where employment is a relatively minor aspect of society. Yes. Will our politicians make the changes necessary before there is an out and out crisis? Of course not.

  4. Forgetting for a second that there may be an advantage to not having government involved: Isn’t Bitcoin just another fiat currency tied to nothing at all? The dollar worked well, as did early negotiable instruments, when they were tied to gold. In early 19th century, you could redeem the bank note (negotiable instrument) at the bank for x amount of gold. Few did because the paper note was so much easier to handle than the gold. Later the federal government took over from the banks and the dollar was redeemable in gold. Again, nobody bothered. But then the dollar was no longer redeemable for gold (1972?) but was payable in “lawful money”, whatever that is. In my estimation, that’s when the problem started. “When I set a value for currency, it’s worth exactly what I choose it to be worth, neither more nor less” (Apologies to Charles Lutwidge Dodgson)

    • Bitcoin is a fiat currency. But kind of clever. If a relatively large verification fee were charged for each transaction then it would be ineffective to use bitcoin to transact business. However, if the fee isn’t substantial then nobody would want to be the verifier. By allowing the miners to create bitcoins and verify they make enough money at low volume to stay in the game. Once the maximum bitcoin count is reached there will be enough volume to profit on verification.

      The only reason that you’d tie a currency to something relatively useless like gold is that there is a finite amount of gold. That forces the government to limit the amount of currency it creates because there is only so much gold. Bitcoin has a hard limit on the number of bitcoins that can be mined or minted – 22 million. If you trust the system that’s the equivalent of tying the currency to gold.

      Another point (perhaps) in favor of bitcoin is that it isn’t used for fractional banking. Someday I guess it might be but for now … no creating money through fractional banking.

      If Boomergeddon ever comes bitcoin could have some very useful attributes.

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  6. Who decided bitcoin would be “capped” at some arbitrary number? Where did that number come from? Is it based on some real world tangible asset or is it just a totally made up number? Do “we” .. understand it?

    Bitcoin is a crypto currency… yes.. but who decides how many there will be and why – remains even more inscrutable than the Fed and a whole lot less accountable.. It reminds me of the Confederacy printing it’s own dollars that were, in theory, based on some assets… “somewhere’… but in the end.. it was… worthless script… just paper.. now days.. it’s virtual paper.

    And the second part of this is even more troublesome – if the Master ledger… which is added to every time a transaction takes place – and it then has to be replicated to all the computers that are hosting it in the world…. that’s an issue

    Anyone who knows much about computers, networks and databases will confirm that trying to replicate an entire distributed database with a high volume of updates is a tough gig… The world has to this point, evolved to centralized databases that accept and order the transactions on a time-stamp basis.. – the higher power the CPUs need to be… but when you decentralize a database.. it means that every transaction cause a new replicated database .. and that is a problem with a phenomena called “latency”. Take my word for it “latency” is a big problem… it’s basically a time lag in transactions and/or in the concurrency of the file (the database) – which means that a given transaction is not represented at every replicated database at any given time slice.

    Blockchain technology is going to revolutionize smaller scale database ledgers but one giant ledger – replicated on thousands/millions of computers is a “scale” problem… i.e. – the bigger the ledger gets – the harder it is going to be to keep all the copies -up to date – concurrently.

    what this means to the average person is that their “deposit” or their “payment” is not going to happen in real time. Not a big deal for some folks but for others…it’s imperative… think about a check being pulled from an account that does not yet have that required deposit to make that check good.. and for crooks ..it’s a dream come true – to game transactions.

    stay tuned… I suspect the bloom is coming off of Bitcoin and it may well be rough sledding… sorta reminds me of the folks who were buying homes and trying to “flip” them before they had to pay the notes…

    • The story of bitcoin’s inception is like something out of Hollywood. A somewhat random white paper was published by somebody presumably working under a pseudonym. When various techies read the white paper they realized it was, technically speaking, brilliant. Anyway, if you’re interested, this is a good article …

      https://www.wired.com/story/guide-bitcoin/

    • ” …more inscrutable than the Fed and a whole lot less accountable..”

      I can’t agree. Almost nothing is more inscrutable and less accountable than the Fed. How in God’s name does our government allow the Fed to operate without being audited?

      “Anyone who knows much about computers, networks and databases will confirm that trying to replicate an entire distributed database with a high volume of updates is a tough gig… ”

      That was true until 2007 when a team of engineers published the Dynamo White Paper. The “shared nothing”, fully distributed, single node type they defined in that white paper really did revolutionize the database world. When we develop infrastructure with a need for a database that absolutely, positively must scale to unimaginable size (for telemetry data for example) we always use a distributed database – often a Dynamo implementation called Cassandra or a CouchDB variant called Cloudant (for document style storage). Anyone suggesting a centralized database today would be laughed out of the room. Ten years ago it was a very, very different story.

    • To be clear … bitcoin, as implemented, has huge performance issues. I just don’t think those issues are the fault of a distributed database technology. As far as I can understand it is more the protocol being used to communicate than the database being used to store.

      • the “performance issue” is trying to replicate an entire encrypted database every time there is a new transaction which is what a block-chain is.

        In other words you have ONE database the blockchain.. and it gets copied – replicated to all the nodes.

        And everytime a transaction is lodged against it.. it has to be re-copied to the distributed nodes.

        The bigger that database gets – the more time it takes to copy it to the other nodes.

        It will only scale so far – before it cannot deliver real-time performance.

        Delays will start – and the bigger the database the longer it will take to transmit the latest version.

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  8. >>The only reason that you’d tie a currency to something relatively useless like gold is that there is a finite amount of gold. That forces the government to limit the amount of currency it creates because there is only so much gold. Bitcoin has a hard limit on the number of bitcoins that can be mined or minted – 22 million.>>

    I only disagree with two or three of the things you said. 1. When gold was the standard, it was not relatively useless, almost by definition. It has/had its uses over many centuries. It shines and makes beautiful jewelry. You can poo-poo that use for whatever reason, but it reigned supreme for long periods of time. More recently, it was (is?) used in computer circuits. Recyclers love old circuit boards. 2. As we’ve learned, there is not a finite amount of gold, just like there is not a finite amount of oil, despite the assertions of the left through the 70’s and 80’s. 3. Bitcoin has a hard limit until, like gold’s relationship to the dollar, it is allowed to float. Then what? 4. While governments MAY have been limited (is a better description “constrained”?) in the amount of CURRENCY created because of gold, they have never been limited in the amount of MONEY they create. Given the ratio of Money to Currency, I’m doubtful as to the economic effect of the amount of gold, paper currency, Bitcoin or any other kind of currency in circulation. Perhaps that’s why we can safely ignore yesterday’s warning by The William Dudley, NY Fed President, (See https://www.youtube.com/watch?v=PTUY16CkS-k at 4:16) when he said Bitcoin could be a catastrophe. Well..maybe, but probably only for those foolish enough to treat it as an investment.

    Re: “trust”. Psychologically, of course, it’s easier for someone to “trust” gold than something in the cloud. As noted, you can touch it, you can hold it, it shines and makes beautiful jewelry. Where can I put my hands on a Bitcoin?

  9. Amidst all the talk disparaging the speculative logic of Bitcoin, there is the fact that these “mining” computations are so popular right now, and so complex, and so profitable, that they have driven enormous sales of electricity merely to run the computers doing the “mining.” For example, here’s an article about how more of Iceland’s cheap hydro power is going towards Bitcoin mining this year than to power homes. http://fortune.com/2018/02/13/iceland-bitcoin-mining-electricity/ You don’t have to agree with the Bitcoin logic to realize that there is serious money to be made just on electricity sales to these “miners.” And even though that may turn out to be a relatively temporary phenomenon, if the development of “mining” infrastructure can be tied to other future uses (like those data servers already so popular in Herndon?) it could be a win-win for the Virginia communities that snag it.

  10. re: the Fed versus bitcoin in terms of operation and accountability.

    The Fed is a central bank…and we know who they are and we know HOW they affect the money supply. There are disagreements as to whether they SHOULD affect the money supply especially from some but others are fairly convinced that without a central bank – collapses like we saw in the great depression are possible as the economy cycles.

    So we KNOW how the Fed operates and the logic behind how it manipulates , etc.. AND yes.. they CAN be replaced.. and actually Congress CAN change the laws as to how it operates.

    With Bitcoin – we know virtually nothing other than that anonymous “white paper”. Changes ARE made… witness the recent “split” – technically called a “fork”… http://fortune.com/2018/01/23/bitcoin-forking-splits/

    tell me who these folks are that decided to “fork” bitcoin and the why behind it and what the risks are … etc… who are you going to hold “accountable” ?

    Even highly speculative securities – we know who the principles are and we have accountable regulators…

    With Bitcoin – you have none of this.

    blockchain technology will not only survive but revolutionize “transactions”… but crypto-currencies without visible operators and zero accountability are classic outlaw type “securities” and you’re totally on your own and if a stampede ensues… it’s going to look like the 1930’s.

    People who “invest” in Bitcoin are not looking for a nest egg of stable investments for a rainy day or their retirement.. it’s pure 100% raw speculation… where people are ready – have to be ready to dump it all if things go south. They’ve got their added-value and their fingers are on the trigger if they feel they could lose it.

  11. If someone said they would give you coins to “mine”but there was no product that was the result of the mining.. what would be the point?

    Wouldn’t be like paying you to do something that had no end product that had value and would be in demand and purchased?

    and then they said that someday there would be no more coins.. they would be “capped” or “maxed”.. so they’d not be paying any more for doing things that had no value?

    And the rationale for for the concept of capping as well as at what point they would cap is … not known or understood …

    why would you buy such coins? And if you did buy them what would be your expectation of their value longer term? What is it about those coins that would make you believe they would be in demand in the future?

    These are sort of basic questions. If you had 500 or 1000 dollars to invest.. on what basis would you buy bitcoins? what would be your expectation and what “cues” would you be looking at to determine the longer term prospect and sustainability of bitcoin?

    So I join the crowd .. I have no clue what the answers to these questions are but right now I think anyone who buys them is a DANG FOOL unless they are just throwing extra money at it like someone would be buying lottery tickets…

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