THE BLOG

Miner Mike, the Bitcoin Minter

04/27/2013 06:07 pm ET | Updated Jun 27, 2013

A couple of days ago I met a mysterious hacker in a coffee shop near Google's Manhattan office and entered into the dark underworld of bitcoin trading. Well, actually it was a sunny day and buying bitcoin was a totally above-the-board process. And the "mysterious hacker" was my buddy Mike who has worked with me in a couple of startups and fellow MMO player (He is an excellent tank).

In 2009, Mike was getting into bitcoin and I remember him explaining the whole concept to me: A virtual currency managed by a peer-to-peer network open to anyone with a computer and uncontrolled by any bank or government. The ultimate self-regulating economy, based on a pure form of money that resists manipulation by both well-meaning and evil-doing centralized authorities alike. That's the theory and some anonymous hackers had written bitcoin as open source code to put that theory to a real-world test.

2013-04-27-bitcoin.gif

Back then Mike and I met virtually on Sunday nights to raid in the World of Warcraft. To me it was the nerds version of playing pickup basketball. To Mike it was also a chance to play with virtual economics. In additional to battling monsters Mike was great an earning WoW gold, the in-game currency that the game's developers use to keep players playing the game. While I was perpetually poor in-game, Mike amassed a fortune of WoW gold, good for buying virtual armor and weapons, by finding raw resources, like simulated ores and artificial fish, and selling them on WoW's auction house. Like a real economy the WoW economy ran on principles: Buy low, sell high, corner the market on a commodity, and place bets on what is going to be hot. If you want to learn how to work the stock market I can think of no better place than Blizzard's World of Warcraft.

There are a couple of drawbacks to WoW's auction house that bitcoin fixes: It takes a tremendous amount personal time to mine raw resources in WoW; you can't buy real world items with WoW gold; you can't convert WoW gold into dollars (not legally and not without exploiting other players); every once in awhile Blizzard updates the game and changes the rules of the economy and you have to start over. I have a friend who used to work at Blizzard in their equivalent of the U.S. Securities and Exchange Commission. It was a serious job that involved tracking hacked accounts, detecting fraudulent transactions, and fighting gold farming (selling in-game gold for legal tender).

Bitcoin doesn't need a SEC, it doesn't need a centralized authority to control it, and it lets guys like Mike mine without having to spend hours pressing keys inside a virtual 3D world. Bitcoin is self-regulating based on the rules designed into it's software. The bitcoin code is available on Github and anyone can revise it but bad bitcoin code is automatically detected and rejected by other bitcoin peers (a server running the bitcoin software in a peer-to-peer network).

It's very temping to jump into bitcoin now because the coins are worth about $130 each. But like shares of stock on the NASDAQ the value of bitcoin is going to fluctuate. There is no guarantee that bitcoins will increase in value. At a high level, I don't know if bitcoin is really worth anything because as soon as you try to figure out if any currency is worth anything you start questioning the basic assumptions of life as we know it. I'd much rather let philosophers and economists crack those nuts. To Mike bitcoin is a game, like World of Warcaft without dragons or trolls, but with the potential to change the world of humans.

You and I can't do what Mike did with bitcoin because he started early and the game was different back then. Mike is a system administrator and always has several servers running at home and in the cloud managing his applications, websites, and whatnot. In the early days of bitcoin Mike downloaded bitcoin software from Github and started mining bitcoins. Once the software was up and running he just let it calculate in the background in the same way that Seti@home looks for alien civilizations. Mike doesn't buy bitcoins, he mints them. In the beginning he was getting as many as 50 bitcoins a month for only $15 a month in server costs. Back then bitcoins weren't worth much and Mike was losing money mining them. Why didn't Mike put his money into a 401K or into shares of Apple computer? (Apple was trading at $139 a share back then!)

Because Mike was mining bitcoin for fun and as a means to contribute to a grand experience in "free as in freedom" currency. Mike knows how economic systems work. He saw bitcoin not as an investment but as a chance to "draw his own Monopoly money." Mike sees our current monetary system, with all its good and bad points, as a "distribution problem." Mike explained it to me this way: Currently we put money into our economy starting at the top: Governments print money which goes to banks, which wealthy people borrow or buy and distribute down the economic latter as payments for services and credit. Mike sees this as an inefficient distribution algorithm based on the tradition of minting gold coins for royalty. This algorithm needs an upgrade as it concentrates power, guarantees inflation, and puts governments under the heel of the rich. I have to admit Mike is on to something. We can learn a lot from looking at an old problem in a new way and it's unlikely that if you or I go to the Whitehouse and demand a bailout that we would be deemed "too big to fail."

But we can't cash in with the bitcoin bandwagon because, as Mike noted, over time the engineers of the bitcoin have made them harder and harder to compute. The goldrush days are over. While Mike still mines bitcoins, he's generating fractions in the same amount of time it used take to calculate dozens. But I wanted to get in the game anyway, just to taste it. I downloaded a bitcoin wallet for my Android phone and traded a cup of coffee and a twenty dollar bill for 0.16BTC worth of virtual money. The android app was free and uses a QR code for identification. Mike used his Android phone's camera to get my bitcoin wallet's virtual address and execute the transfer. A tiny fraction of BTC went to the wallet's developer to pay for "transaction fees." The transfer took 15 minutes as it was verified by other random anonymous peers on the bitcoin p2p network. The Federal Trade Commission and the IRS were not consulted.

The big problem I see with bitcoins isn't how to value them or regulate them. It's how bitcoin wallets are tied to physical devices. If I lose my phone I lose my bitcoin wallet. Mike backs up his bitcoin wallets because you never know when a computer or phone is going to crash or walk away. This weekend Mike found an old laptop with 50BTC on it that he forgot about -- that's about $7,000 at current exchange rates. Over time bitcoins will start to disappear no matter now conscientious we are with with our backups. Because of the way the bitcoin software is currently designed that lost value is lost forever. If we were to all jump on the bitcoin bandwagon we could run out of available money with which to represent the value we create.

Ultimately Mike is having fun with his bitcoin mines and sees the whole thing as a proof of concept. He bought a fancy camera from a bitcoin store and is investing some of his windfall in real financial instruments as bitcoin will raise and fall on the irrational exuberance of just about anyone. He thinks the value of bitcoins skyrocketed because of the Cyprus bailout and will continue to be unstable.

It's the next version of bitcoin that will be potentially very beneficial or devastating to those of us who are not miners like Mike. A government could decide to create a bitcoin 2.0 where women are paid as well as men, risky financial instruments are not possible, and where wealth can not be accumulated in obscene amounts. But that might not be your version of utopia. So you can create your own bitcoin 2.0 that creates an economy that makes you more comfortable. One thing is certain: Those nerdy folks playing online games? They are living in our economic future.