The cryptocurrency gold rush is heading for the cloud
Benjamin Gorlick was 4 years old the first summer he spent at a gold mine. His father shared rights to a mountainside claim near the tiny town of Hope (population: 192), located on the Kenai Peninsula in south-central Alaska. Every summer until his early teens, once the ground had thawed, Gorlick and his family would load their pumps, compressors, and pressure hoses onto ATVs and head into the wilderness to tear through rocks and mud in search of fortune.
After majoring in computer science, Gorlick followed his father’s lead and started a business selling mining equipment systems to oil and gold companies. He reckons he traveled to almost every oil- and gold-mining facility in his home state.
Then, last year, an old college friend called him out of the blue to talk about another way to mine for wealth, only instead of pick axes and sluice boxes, this method called for high-powered computers running hot around the clock. In school, they’d been video game buddies, so the friend knew Gorlick had the right kind of hardware.
Gorlick took the advice but soon found his own computers insufficient for the task at hand. To make as much money as possible, Gorlick knew he had to assemble more computing power as fast as possible. All day, he’d run his real-life mining equipment company, and then he’d come home and build mining computers until 2am.
“My wife is going, ‘What the heck are you doing? You should go to bed,’” he recalled.
But Gorlick would quickly graduate from the late-night hobbyist phase. In about six months, he’d find himself at the forefront of the Bitcoin mining phenomenon, running a multimillion-dollar business from Austin, Texas, with a man he met over the Internet.
A villa in Bali, a Lamborghini, Sacramento Kings merchandise, plane tickets, Subway sandwiches, a manicure in Hollywood, and the full catalogue from Overstock.com or Tiger Direct: These are just a handful of the growing list of items purchasable with Bitcoin, the booming cryptocurrency. That's despite the fact that many people still don't even know what it is, much less whether it counts as money. Warren Buffet and the IRS say no, though many believe it will eventually be more stable than the dollar and used with equal or even greater frequency than fiat currency.
This much is indisputable: Back in 2008, Bitcoin was just a design concept for peer-to-peer electronic transactions facilitated by cryptographic proof, presented in a paper published by mystery person/group-of-people Satoshi Nakamoto. In January 2009, the first bitcoins were released.
Nakamoto's program works by using a cryptographic algorithm to release digital “coins.” There is a finite number of bitcoins (21 million), and presently about 12 million are in circulation. By getting your computer to solve hard math (verb for this: “hashing”), you can acquire coins, but the more computers working on the algorithm, the more difficult it becomes. Coins are released about every 10 minutes, and all coins will be in the market by 2140.
Back in 2009, when Bitcoin was first introduced, it was possible to mine bitcoins with just a desktop computer. Early adopters were mostly tech-savvy folks, often with a libertarian damn-the-government-and-its-endless-money-printing philosophical bent.
Today, however, the lure of a quick return on investment is chumming a broader swath of profit-seekers, except instead of gold pans and sluice boxes, miners are spending thousands of dollars high-powered machines, fans, and cooling units.
These guys (they’re overwhelmingly male) are spread all over the world. Many join mining pools that combine the power of many miners’ computers and divide returns among members. These are college kids with rigs stored in their frat houses, suburbanites who’ve built backyard sheds to house computers, or just people who believe this is the future of digital transaction and want a slice of it. I talked to a 24-year-old business manager who keeps a warehouse in eastern Washington full of mining hardware. Then there was a Canadian stay-at-home dad who’s invested more than $50,000 in computers.
Like any gold rush, there will be winners and losers, and big bets made too late might prove painful. Another miner I spoke with bought his rigs with his family’s last available credit line. And another laid out $6,000 in grad-school loans and credit card debt to get going.
And while you’re not going to drown in a creek or fall down a dark shaft, crypto-mining is not without physical peril: Back in 2011, a miner posted to the forum Bitcointalk that he went to sleep near his machines and—despite fans on full blast—suffered severe heat stroke resulting in minor permanent brain damage.
In January 2013, Emmanuel Abiodun, a British computer programmer who built risk management and trading systems for HSBC, started mining Bitcoin at his home in London. He had friends who were interested in mining but didn’t know enough about computers to get into it themselves.
This prompted Abiodun to look into ways to make mining scaleable. Plus, his wife, pregnant at the time, didn’t like the heat and noise from his mining rigs and was worried about the fire risk of having them running all the time. He needed to take the mining elsewhere.
In February, Abiodun started Cloud Hashing, a business that sold pre-order contracts for mining systems. Buyers could rent the power of Cloud Hashing’s computers and eliminate the need to personally maintain power-sucking machines that require noisy cooling fans and smell like ozone. At first investors were just family and friends. Abiodun opened a website for the venture in April.
That’s how he eventually crossed paths with Benjamin Gorlick, who discovered Cloud Hashing while using a chat channel on a mining website and was scrambling to build computers at home in Anchorage. Despite the 4,500 miles separating them, the two had a lot in common: They were both barely in their 30s and had promising careers. They’d each come into Bitcoin mining relatively late and were trying their spouses’ patience with the loud, hot computers planted in their homes.
Over the course of a four-hour Skype call, they struck a deal: Gorlick would invest in Cloud Hashing, and his years of experience negotiating with manufacturers would help their company acquire the necessary equipment. If you “mine’” with Cloud Hashing, the work you have to do is as simple as giving them a credit card number and your Bitcoin wallet address so they can deposit the earnings they mine for you. Initially, the company relied on customers willing to pre-order for the capital necessary to purchase hardware.
For the first five months of their partnership, the two ran the company together over Skype and still maintained their day jobs. By June, they had 500 contracts. By September, 3,500. Abiodun and Gorlick still hadn’t met in person, but client demand was already exceeding what the two could keep up with over email. People wanted to lease larger amounts than Cloud Hashing could offer.
In October, their first mining center was fully operational in Iceland (chosen for low energy costs). Abiodun’s initial $15,000 investment snowballed into $15 million worth of hardware in little more than a year. In October, Abiodun left his job at a bank. And in November, Gorlick left Alaska and moved to Texas to head up U.S. operations. A second facility opened near Dallas in late January. Both are outfitted like fortresses, with guards and multistep security that includes biometric scanning.
Cloud Hashing’s customer service and administrative staff, meanwhile, occupy a small office in a north Austin business complex; the space is directly across the hall from Cointerra, a manufacturer who supplies a large portion of their hardware. Cointerra will be 1-year-old in May and has already sold nearly 6,000 mining rigs for roughly $35 million.
Bitcoin is the only currency Cloud Hashing mines, but there’s a whole, zany, boom-and-bust ecosystem of alternatives, known collectively as altcoins, that others around the world are hashing. Chief among them is Litecoin, which has made improvements on the Bitcoin model, such as a faster transaction time. Many altcoins make their debut and departure in pump-and-dump fashion, an early value spike followed by sudden and precipitous dive.
The thing that sets Dogecoin apart is its miners’ sense of community. Where Bitcoin forums have a reputation for aloofness, Dogecoin's are conspicuously welcoming to newbies. The community has funded headline-grabbing charity ventures. The Jamaican bobsled team made it to this year’s winter Olympics thanks in part to a $30,000 boost from the Dogecoin community. And somebody sent $10,000 worth of Dogecoin via Twitter to the Doge4water fund to top off its $30,000 goal for clean-water access in Kenya.
Jay Cortes is a prime example of Dogecoin pluck. His apartment is adorned with alternating multicolored mood lights that give the place a clubby vibe. When you step inside, it’s warm and sounds like someone is drying their hair, but Cortes lives alone, and the noise is just his two mining rigs that live in painted milk crates, illuminated by black lights (“for visual effect,” he clarified). The machines hash away, 24 hours a day, building up his store of Dogecoin, Litecoin, and whatever else strikes his fancy; he’s mined Mooncoin, CasinoCoin, and FedoraCoin too.
Cryptocurrency mining and trading is Cortes’s full-time endeavor. He lives in Austin, Texas, but grew up in Taxco, a silver-mining town south of Mexico City. Perhaps unsurprisingly, his grandfather was a silver miner and his father is a silver jeweler.
Cortes says his upbringing taught him to think of cryptocurrencies like precious metals. He says he spends a minimum of 15 hours a week reading cryptocurrency news in order to buy and sell profitably. He hired his younger brother for a bit of work, and they agreed Cortes would pay him in Dogecoin. He recently put his 2012 Kawasaki Ninja up for sale, and says he’d like 8 bitcoins for it.
“I don’t think much in dollars anymore,” he said.
This spring, Cortes plans to expand his mining setup beyond the confines of his spare bedroom; he’s looking into office space and envisions a mining apparatus with plexiglass walls and LED lights, sleek and futuristic.
There are two things people tend to agree on when it comes to the future of cyrptocurrency. Digital currency is useful in eliminating expensive intermediaries (Visa, Mastercard, Paypal, or a slow, expensive overseas bank transfer) for peer-to-peer payments. The Bitcoin transaction fee is minimal compared to the 3 percent credit card companies take from merchants.
And Bitcoin’s block chain technology, essentially a decentralized record system, could have novel applications. It could be used to issue domain addresses, or as a kind of copyright verification system.
Whatever the unknowns, the networks are sustained by a mushrooming profusion of super-fast computers that guzzle electricity like gym rats chug Gatorade. And that power and machinery comes courtesy of an eager army of futurists who are happy to foot the bill, all for the reward of coins forged of complicated computer code.
“I see myself in five years buying everything in cryptocurrency,” Cortes responded when asked where he saw things headed. “I see myself next year buying a Ferrari with Bitcoin.”
When I visited Cloud Hashing's Austin offices, Abiodun wore a French-cuff button-down and dress shoes pointy enough to give him away as not American, even if the London accent hadn’t. Gorlick was traveling at the time, and Abiodun was only in town a couple weeks. He’s still based in the U.K. but comes to the States to meet clients. He was also suffering a head full of allergies brought on by the pollen of the Texas Hill Country, not that he’s seen much of the state besides office buildings, as he works 18-hour days.
“We increased capacity by 10-fold in the last three weeks,” Abiodun said during our sit-down. When it began, Cloud Hashing offered contracts for as low as $250; today their cheapest contract is $999, and many of their customers are investing sums in the hundreds of thousands. Their biggest contract so far was for $1 million. Presently, their average customer is between age 30-50 and makes between $115,000-200,000 a year, according to Abiodun.
As of mid-March, Cloud Hashing’s mining pool comprised about 6 percent of all Bitcoin mining activity. Abiodun’s goal is to be at 15 percent, but mining is a computer-power arms race, at the moment, that keeps everyone growing slower than they might like.
Few big-time miners are as open to publicity as Abiodun and Gorlick. Some who are mining for themselves choose anonymity as a security measure, others I spoke with were wary because of developing tax implications. Cloud Hashing is aiming for the mainstream, so it’s crucial to distinguish itself from the imploding exchanges, hardware scams, and hacker heists that continue to plague the crypto market.
“Trust is a major factor, and we’ve been around a long time,” Abiodun said, then laughed. Cloud Hashing’s website went up last April, and Abiodun only quit his other job half a year ago. He adds, “Well, in the Bitcoin sphere, a year is a long time.”
Illustration by Jason Reed