Bitcoin, the world’s first decentralized, open source electronic currency, is beginning to turn heads. Right now the virtual money is trading at around nine dollars USD in real money. It’s also considered by some to be the most dangerous project on the Internet.
Unlike the various virtual currencies that have found traction (and attracted some controversy) in the world of massive multiplayer online games, where they’re used to purchase virtual farms or weapons for slaying Orcs, Bitcoins have a more serious glimmer. They rely on a novel mechanism – developed by a Japanese computer science student – by which value is accumulated through peer-to-peer networks. They can’t be forged or stolen, nor can their value be artificially inflated; transactions based on them are untraceable (cue the bad guy James Bond music).
Some people think it’s a load of nonsense; others say Bitcoin has the capacity to topple governments. Bitcoins are already being accepted by a variety of websites spanning markets like gaming, music, electronics and more. Others, meanwhile, are simply using them to sell drugs and buy prostitutes, among other things. Regardless of how they are used, one thing’s certain: Bitcoins have certainly got a lot of nerdy people talking.
To get a better understanding of how these things are made and what they can do, I sat down with a Bitcoin miner. Our subject – a system administrator at a college in the New York area – has turned his school’s computers into a server farm to get more buck for his bang, so to speak. Because of the nebulous legal and ethical nature of his scheme, he asked to remain anonymous.
How did you hear about Bitcoins?
I read an article online about how you can make money just by running software on your computer. You can make this fake digital money and then convert it into real money and I said, “Alright. I’ll do that.”
You work at a school, and your job is IT Director essentially?
Yeah, so I have access to the root account of a lot of the computers in a lot of the labs. I figure this summer, when the computers aren’t being used, I’d basically have my own little server farm.
Now explain what you are doing with the computers and Bitcoins?
On the computers there’s a Daemon that runs at startup that basically calls a specialized script; each of the computers has its unique username and password, logs into a server, gets a chunk of mathematical work to do, and reports back when it has a solution.
And how many computers do you have running it?
Right now I have it on about 15. I haven’t decided yet whether or not to to scale it up to the maximum I could do, which is about 60.
Is that illegal?
Well, Bitcoins are legal. Using the computers to do this? I am pretty sure that’s a grey area. I’d be hard-pressed to tell you which law I was breaking. I am pretty sure my employers wouldn’t be thrilled if they found it though.
Do you think they would even understand what was going on?
Most likely not.
Before we start getting technical about the whole process, could you talk about who uses Bitcoins, from what you understand?
That honestly wasn’t something that concerned me. It was more the fact that this is a digital currency I can make that, a couple months ago, was worth seven cents a unit and is now worth seven dollars a unit.
There’s an online Bitcoin exchange, where you can see real time value of Bitcoins and I can tell you it was higher today then it was yesterday.
Ok, so get technical. What is it? How does it work? Pretty much tell me everything you understand about it.
Alright, I don’t understand all of it. I’m not sure anyone really understands all outside of the people who made it. So, it’s a digital currency, a record of it is kept but otherwise it’s completely anonymous. It’s peer-to-peer, so there are no central servers, it’s basically un-hackable and it really can’t be shut down, because there is nothing to shutdown, it’s just software running on people’s computers.
What anarchy looks like
What type of software do you use to make Bitcoins?
To get or receive a payment you have to have the Bitcoin application running, or you could subscribe to a service that could have the application running for you. Basically Bitcoin relies on cryptography, so it’s a mathematical problem that can only go one way. I send money to you, both of our addresses are attached to the Bitcoin and randomized to keep things anonymous, and I can’t spend that Bitcoin again, because when I send the transaction, it goes out to all nodes on the network and they’ll all know that I’ve already spent that Bitcoin.
Then the transaction records between customer and merchant get added to a long transaction register which then goes on to become a “block.” And that’s where the mining comes in, which is how you make the actual Bitcoins. Mining is essentially a brute force hack. When you’re making Bitcoins, you’re “solving” the block. The block is a long transaction register of Bitcoins. They are all put through this mathematical equation that can only be solved one way. The only way to solve it is basically to hack it
Now who makes the block equations?
The users do. Every time a transaction is done it adds to the end of the block.
So trading Bitcoins creates more Bitcoins?
Not quite. Solving blocks creates more Bitcoins. Trading Bitcoins creates more blocks.
What does a user have to do to actually install the software and what happens after it’s installed?
I actually realized that I left out a very key point. You can download the official Bitcoin software and just click a little check box that says “generate coins.” From there your computer will try and solve a block. And if it solves the whole block, you get 50 Bitcoins. But, depending on the speed of your computer, it might take you a year or longer to solve a block. There is a service called “pooled mining,” which splits up a bunch of these problems into little tiny problems and then everyone in the mining pool splits the reward based on how much they helped.
Like how BitTorrent breaks up movies with various users seeding them and then you download a full package?
Similar to that. It’s more akin to how a big production company may have a render farm set up for a feature film or something. They can send out a frame and it’ll go out to a bunch of computers simultaneously, as opposed to one computer trying to do all the work.
So basically the Bitcoin economy is based on processing power and access to processing power? To be rich in Bitcoins, someone would have to have a server farm by himself making Bitcoins.
Yeah. With a server farm you can theoretically generate blocks faster then anyone else.
How long can this exchange go on for? Is there a limit to the amount of Bitcoins that can get made?
There is a theoretical limit of around 21 million Bitcoins, but blocks will still have to be solved to verify every transaction. There is a function for transaction fees that’s supposed to sustain the network from that point.
So it’s a currency that’s rewarding users for making more of it, which then, through the exchange, creates the process that makes more of it?
That’s really genius.
It’s really devious. Since it can’t be stopped and because it’s completely anonymous. There was a site that was basically an eBay for drugs where you could pay in Bitcoins and none of the transactions could be traced. I even saw a service where you could mail in cash in an envelope and have it converted into Bitcoins.
That’s the nerdiest drug dealing I have ever heard of.
There was an article I read saying that Bitcoins had the potential to destabilize the world economy. But it was referencing someone paying for a prostitute with Bitcoins on his iPad.
What do you hope to use the Bitcoins for when you make enough to use them?
To be honest, and at the risk of being boring, I just want to trade them for cash. The way I see it, if the value keeps going up, then my investment is pretty sound. I mean, Bitcoin raised its value by a factor of 100 in the past three months. I don’t know if it’s going to do that again, but if it did, the one Bitcoin which I made today which is now worth 7 dollars will be worth 700. At the current trading prices, if i set up the software on all of the computers I have access to, I could be making about 35 hundred a month.
And if it did make another jump, that could be worth a ton of money.
Right. Right now I’m making a Bitcoin about every five days. That’s not a lot of money, but it means that at the end of the year I’ll have around 50 to 60 Bitcoins.
A Bitcoin mined through distributed computing is a Bitcoined earned
Where do you think this whole Bitcoin thing is going?
Really, it’s either going somewhere or it’s going nowhere. People may find it too impractical and that not enough people are running it, or nobody is accepting them and it just becomes an erroneous currency that doesn’t really have any value. The problem is it’s value is how much people want it. If nobody wants Bitcoins, why would you accept Bitcoins? Or it goes somewhere and it becomes a competing currency in the world market. The third option is that it’s made very illegal with very stiff fines.
The third option seems very likely.
It wouldn’t surprise me if it became prosecutable to the level of LSD, where it constitutes treason.
That seems plausible.
I’m not too sure about that.
I don’t know. I mean you’re in a competing economy that has no bearing, well I guess a tiny bearing, on the U.S. economy.
Theoretically if you were just somebody who buys Bitcoins – mining is something different – but if you were just to buy Bitcoins because you see the market value going up, you’re the same as a forex trader. Your just trading in a foreign currency exchange. You can go buy euros and sit on them if you think they’re going to out-pace the dollar. The benefit for me is, I don’t actually have to buy the Bitcoins, I can make them through this very obscure cryptographic process.
Do you think Bitcoin as an economic system is a smart idea because it kind of regulates itself?
Well I can’t tell, there are two schools of thought on the subject: one, when the Bitcoin currency tops out at 21 million, the whole thing is going to be subject to massive deflation and the Bitcoins are going to go up so much in value that no one is going to want to spend them, and the whole Bitcoin economy is going to collapse. The second idea is that the Bitcoin unit will become too valuable to spend on a product—move the decimal place over a spot, start trading in micro Bitcoins and call it a day, because the system goes out to like eight decimal places.
Because all the guides on this are wikis,, there’s competing opinions on everything. It’s weird because, in a sense, it’s almost like A.I. I don’t think the people who created it know exactly where it’s going and it’s one of those things that was created but now exists independently of its creators. They can’t say, “oh we don’t like this” and shut it off. There is nothing to shut off.
Kind of like the Internet.
Well with the Internet, you could take out a couple key nodes and it wouldn’t exist anymore. With Bitcoins you would have to call everyone who is using it and say, “you can’t be using this anymore.” Say everyone stopped using Bitcoin but I had Bitcoins and you had Bitcoins. We could be the only people using the software online and I could still send them to you. I mean, it would take forever for the block to be formed but that’s another story for another day.
Where was Bitcoin first talked about? As far as you know?
The guy who invented it, Satoshi Nakamoto, wrote a technical paper on how it would work and it seems to be the first implementation on this concept of cryptocurrency, which is currency based on cryptography. I think, but I am not sure, it was first written about on a cyberpunk mailing list in 1994, which does seem like something out of Blade Runner. It’s like the concept of credits, only it’s not controlled by the government. It’s not controlled and it’s not controllable.