Carroll County Times

Good Money? Bitcoin mining and the future of money, part 1

Michael Williams, of Westminster, is a miner, but you won't find him covered in dust or swinging a pickaxe. In the past six months, his small scale mining operation has rewarded him with half a dozen precious coins, each currently worth three times the value of an ounce of silver, and roughly half that of an ounce of gold, but those coins are made of nothing but numbers.

Williams mines Bitcoins, an entirely digital form of currency whose value is based on the fact that certain kinds of mathematics are difficult, rather than the faith and credit of any bank or nation. In fact, Williams said, that is the point.


"The Bitcoin developers were trying to create a decentralized currency to, in some form, go against what the governments had," Williams said. "[Government] currencies are open to manipulation. This was an open source attempt to make things more fair to everybody."

Bitcoin users download software called a Bitcoin wallet to store their Bitcoins and to make transactions, which include everything from transferring money to other individuals as one would with a check or wire transfer, to paying for products online or in person as with a debit card. Instead of those transactions being facilitated by a series of banks, Bitcoins are issued, and all transactions processed, by the very users that make up the Bitcoin network, according to Nicolas Christin, assistant professor of electrical and computer engineering at Carnegie Mellon University.


"The very intriguing aspect of Bitcoin is that it is completely decentralized. The trick is instead of having a central bank that will vouch for or produce the currency, there is a distributed consensus among the participants in the Bitcoin network," Christin said. "You me and everyone else on the network is consensually taking the place of the central bank or mint."

All Bitcoin transactions are recorded in a public ledger, called a block chain, and miners, like Williams, use their computers to process and verify those transactions just as a bank would a verify debit card purchase. As a reward for verifying a chunk of transactions, miners are given new Bitcoins - as if literally dug out of a mine or created in mint - for their service and the transactions, including the miner's payment, according to Christin, are recorded in the public ledger.

Before a miner can add to the ledger and receive their reward however, they must use their computer to solve a difficult cryptographic puzzle in order to prove they have actually processed the transactions they claim, a concept Christin said is called proof of work.

"Everyone is recording their transactions in a giant ledger, but you have to make sure it is agreed upon by everyone in the network," Christin said. "The way this is done is by solving the cryptographic puzzles. What this is going to do is ensure that it takes a certain amount of time to verify transactions. It takes time and because it takes time, there is value to the Bitcoins."

The result is that miners function simultaneously like an international wire service, a national mint and a gold mine, an analogy made a little more exact by the fact that Bitcoins, like gold, are limited: The maximum supply of 21 million Bitcoins is scheduled to be in circulation by 2140.

"We have already produced more than half of the Bitcoins that will be in circulation," Christin said.

As of press time, there were roughly 12.5 million Bitcoins in existence, with a total market capitalization of more than $8 billion, as reported by

. Of those, Williams has mined 6.4 Bitcoins, which at the exchange rate at press time of $643.84 to one Bitcoin, are worth $4,120.57.


A self-described computer geek, Williams was attracted to the underlying idea behind Bitcoin and began mining last August out of a desire to get involved, rather than as a business plan.

"I've done SETI [the Search for Extraterrestrial Intelligence] every since I heard about that. I like to take part in any sort of cooperative, open-source activities I can find," Williams said. "Once I found out I could actually take part in the banking system part of it, and that I could actually make money at it, I had to take part. It turns out I am pretty good at it."

Not everyone that uses Bitcoin is a miner. According to Andrew Miller, a Ph.D candidate at the University of Maryland whose research is focused on Bitcoin, anyone can download a Bitcoin wallet and acquire Bitcoins through various means, including simply purchasing them with cash.

"There are lots of people who will meet in public places where there is Wi-Fi or 3G access and trade Bitcoins for cash," Miller said. "You can also just ask someone to give you Bitcoins, there is nothing stopping you from receiving Bitcoins as a gift. There are websites where you can trade services for Bitcoins and it's really popular on [the website]

... People can reward witty comments by sending someone Bitcoins."

Such users might then use Bitcoin to transfer money or make a purchase from someone across the globe, buy a cup of coffee if they happen to be lucky enough to live near a cafe that accepts Bitcoin, according to Williams, or simply hold on to the Bitcoins as a hedge against the dollar in the way many other people hold gold.


While he has made some purchases with his Bitcoins, mainly computer hardware and Internet hosting services, Williams is more interested in holding his coins for the long term, as a store of value.

"The price of Bitcoin fluctuates too much for anyone to properly buy with it, but that doesn't stop people from trying to play the ebbs and flows of Bitcoin prices and some are very good at it," he said. "I am less interested in spending my Bitcoins than I am in holding them and watching the prices. If it seems like the price is dropping steadily for a certain period of time, I will begin to fractionally sell off that coins as I don't want to be left ... holding non-valuable coins."

The volatility of Bitcoin prices that Williams said make it difficult for making purchases is just one reason why some experts believe the digital currency is nothing more than a speculative bubble and despite the apparent appeal of earning money simply by running an app on one's computer, Bitcoin mining is not as easy as it may at first seem.

will examine the challenges and future outlook of Bitcoin and miners like Michael Williams.