Data Management Blog: Bitcoin - is there any "there" there?


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Bitcoin - is there any "there" there?

Reading quite a bit recently about the technology that is popularly known as Bitcoin.  The use of block chain computing power to solve mathematical problems in return for money, to put it bluntly.  Article after article spoke to how this can be a trans-formative technology.
Fair enough.  Time to investigate and see how it is supposed to make people money.  I thought of 2 angles to try out.  First, the easiest is to think of it technologically.  And use computing power to test out how things work and how useful it proves.  Seems the things to do are setting up a wallet (after all I need a wallet to store all my major bucks right?).  Then start "mining" the math to create my way to wealth.  I installed Bitcoin Core wallet for windows.  Installed and seems to be about what I expected and read about.   Next I installed GUI Miner which is a client that does the computing. So if I'm mining for bitcoin gold, where do I land my first shovel?  In order to find a place to squat and stake a claim, its best to follow someone who knows.

So enter Slush Pool.  Pools are ways of aggregating computing power with a shared reward. Slush's Pool claims to be the world's first mining pool.  Its at least a place to start.  Soon I'm set up with a wallet and I'm using GUI miner to mine coins in Slush's pool.  So I sit back and let my computer make me money, right?!  Seeing the early returns, it's clear that it will take a very long time to make any money this way.  Can I reduce my overhead to maximize my margins?  

Researching pools, one quickly gets into issues of governance.  The competition to attract miners leads to claims of transparency and low cost pool providers.  (An interesting view that money creates government instead of the other way around. :) )  Being an advocate of a Vanguard investment philosophy, I view the strategy of keeping overhead low and I'll beat the higher cost guys most of the time without even trying.  But it becomes apparent the global nature of this setting.  I'm not only choosing a pool that may claim to have low overhead fees, but my mining efforts are competing against third world cost structures.  Calculators spring up to tell you how your costs affect your mining potential.

In fact, in mining, the calculations of benefit soon become a discussion of your electricity rates.  Since coins are minted using computing power, one needs to factor in electricity costs in your potential profit margins.  But since "1"s and "0"s do not recognize borders, my first world electricity costs quickly mean I'm competing against inherently cheaper places around the world.  This means I'm starting to sour on raw mining for profit.  The margins simply aren't there unless I can employ an armada of machines at third world electricity rates.

So I've learned about the technology that makes it work and I've learned that the mechanics of mining mean one will never get rich that way and this task is better left to low overhead miners.  What about a more philosophical or entrepreneurial view?  (Meaning I want to own my own pool.)  Where is the opportunity to put this technology to something different or in line with goals.  Can it be leveraged to solve a bigger problem?  I'd like to see this applied to something useful like fighting malaria or some kind of important goal.  Pools to simply make money are obvious and already exist.  Another one won't stand out.  Creating a pool that attracts investors (miners) for some motivation other than simply making money might do the trick. Indeed some of the pools are motivated by philosophies that attract a certain motivated miner.  This remains my landing point in this story. 

I'm left intrigued with Bitcoin (and the underlying block chain technology) even if I've not found a path to riches nor used it to solve a bigger problem.  The fact that it is making some inroads to mainstream usage and acceptance means it isn't a fad.  The technology is interesting and I can understand the attraction.  So there is some "there" there.  I'm just not sure where this fits into my strategies as yet.  Perhaps you'll find me next announcing a new mining pool that will plow all profits into fighting malaria.

© Copyright Paul Kiel.