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Originally published by The Spinoff
Two local lads have been mining bitcoin for a decade. Josie Adams asks them why they still believe – and how they answer criticism about mining's environmental impact during a global climate crisis.
In 2016, shoppers at Queen Street's The Strand Arcade had clammy feet. The ground was hot and making a rumbling noise. In a basement underneath the building, 250 1,350-watt Asic machines, plus a bunch of Mitre 10 pedestal fans, were plugged into the wall. Hotel guests across the road complained they couldn't use the microwave. The transformer was drawing the power of half a block of Queen Street.
The two young and sweaty guys responsible for this ruckus in downtown Auckland were in their fifth year of mining bitcoin.
Carl and Matt* had spent all the money they had on these mining machines, large rectangular bundles of microprocessors, which were $4000 each. The men didn't know it yet, but in a couple of years they'd lose all their money – again.
In 2018 the price of bitcoin crashed, and their holdings crashed with it – from around $3 million to $125,000. They had nowhere to go and no money to do anything anyway – but that wasn't the first, second, or final straw for these two aspiring bitcoin millionaires.
The infamously electricity-hungry bitcoin is a kind of money, but digital. Mining bitcoin is sort of like mining gold but instead of pickaxes hitting rocks, computers solve puzzles. When the bitcoin network reckons the computer's done enough it rewards it with a bitcoin block, a big chunk of bitcoins. This is why bitcoin mining is also called "proof of work" – the computers prove they've done some work, and get a reward.
Bitcoin enthusiasts like Matt and Carl believe they can return power to the people by taking finance out of the hands of central banks and governments. The first bitcoin ever mined came with a message from its creator, the mysterious Satoshi Nakamoto. The message was a news headline that spoke to the coin's purpose: "The Times Jan/03/2009 Chancellor on brink of second bailout for banks."
It was an ideology a young but already jaded Matt could get behind. He began his career as an apprentice at Goldman Sachs, where he learned how companies invest and source funds. "I got an overview of how it actually works, and came to believe it's not right, what they tell you."
He came to understand the traditional standard for borrowing money – that loan money is based on gold – was no longer practised. "That was all dropped in the early 1970s. A bank doesn't actually need gold. They can inflate the price and invent it, pretty much. It's not real.
"It increases inflation, which is pushed out onto the masses, which isn't really fair. And that's where my interest comes from."
Matt started mining in 2011 alongside his business partner Carl after reading about this new "bitcoin" invention on web forums. "There was something called 4Chan, which told us it was going to tens of millions of dollars. There's an author called Hal Finney, and he was saying it's going to US$30 million in 30 years."
In the early days – the digital equivalent of a gold rush – each bitcoin block held 50 bitcoins. It was a great time to be a miner, if you held onto your winnings. But it was the wild west, and Matt and Carl lost around 70 coins to scams. Those would now be worth almost $4 million. They were operating out of their houses, buying whichever graphics cards the internet told them to buy. Some of them turned up, some of them didn't. "We didn't know what was real," says Matt.
They thought they'd been scammed again when they bought their first Asic – Application-Specific Integrated Circuit – miners, which didn't turn up for nine months. When they finally did, the lads needed somewhere to put them. A mysterious, wealthy benefactor offered them The Strand's basement in 2015 after hearing their vision for a brave new digital world.
Turning The Strand into the sauna was unpleasant, but the extremely tangible heat and power suckage only bolstered Matt's belief in bitcoin as alternative currency – it was much more real to interact with than some magicked-up numbers on a central bank server. "You need power, you need a machine, you need quite a lot of knowledge on how to disperse heat," he says. "It's an actual, physical thing, to create the coin."
That "physical thing" has to involve electricity, and this is where the environmental criticisms of bitcoin come in. In March, the power use of the bitcoin mining network was estimated to be 129 terrawatt-hours. That's somewhere above the power use of Norway and below the power use of the State of New York. But, says an optimistic Matt, that power doesn't need to come from fossil fuels. Their Thailand mine uses solar power, and he thinks New Zealand miners have the opportunity to use hydroelectric power.
"Tiwai Point could be a mining city, and we could attract these miners from China and overseas to come here, because it's got its own hydroelectric dam that supports it."
Three years after being kicked out of The Strand, Matt and Cal remain unstoppable forces up against the immovable object that is the traditional finance system. After Auckland Council gave them the boot, in 2019, they set up a 1,200-machine mine in Thailand. This month they're sending more machines to colder pastures: an old woollen mill near Dunedin.
Matt sees the recent mining crackdown in China as an opportunity for New Zealanders to get involved in the industry. More than half the world's bitcoin is mined in China – or was, until the past couple of months. "It's dispersed the power of mining," he says. "It's given us all a chance to start." Even though the price of bitcoin and mining gear has skyrocketed, he says there's still room for new blood.
"Four [gaming] laptops are worth $10,000 – they can earn you US$7 a day, so you can earn $120 a week just sitting there. It costs the same amount of power as just having it on." As he speaks, a singular laptop is humming away running a mining programme called NiceHash, which he recommends for beginners. Power usage varies from laptop to laptop, but the kinds used for gaming (and mining) generally clock in at about five or six times as energy-intensive as a standard little lappy.
Matt and Carl have now gone full-time, setting up an office at Smales Farm's B:Hive on Auckland's North Shore. Here, they've expanded the business by starting up workshops, teaching people about what bitcoin is and how to get involved. At the moment they're educating residents of the retirement home across the road, who want to do more with their life savings than buy bonds and Fonterra shares.
They're also expanding into app development, so other businesses can get involved in the future of financial technology. They're early adopters of what's becoming known as the "decentralised web" – an internet and economy driven by technology like bitcoin, that operates without central banks or governments. And they expect the rest of the world will catch up soon.
"We think there's still going to be a disruption of the current financial system," Matt says. "Inflation will go up, so everyone thinks they've got all this money, but costs have to rise to pay for it, and that's just invented. We believe it's going to be a huge bubble, and we're in that bubble now."
With more than 4,000 coins in existence, it's hard not to think of cryptocurrency as a bubble, too. Will bitcoin survive? Will miners survive? "We think bitcoin is going to be more of a store of value, like gold," says Matt. "Only 21 million will ever exist." The last bitcoin will be mined around the year 2140, after over a century of block reward halving.
Despite all the promises of less power-intensive mining, it still hasn't happened. And in Matt's view, that's perfectly in line with bitcoin's founding philosophy: work must be done to get a coin.
*Surnames removed due to privacy concerns.
The industry faces challenges but hopes to bring newcomers and veterans together.