Simanaitis Says

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THE BITCOIN SAGA CONTINUES

THERE’S NOTHING SIMPLE about the virtual currency Bitcoin. And there’s one helluva saga evolving. “The Satoshi Affair,” by Andrew O’Hagan, occupies 17 oversize pages of the London Review of Books, June 30, 2016. What’s more, there is the Sunday Business section of The New York Times, July 3, 2016. Its lead story is “The New Bitcoin Superpower,” by Nathaniel Popper, with subhead “Chinese companies have quietly asserted control over a virtual currency that was created to transcend borders.”

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I am fascinated by Bitcoin’s mathematical nuances, its international ramifications and its personality intrigues. Here’s a brief collection of nuggets, at least of matters I believe I understand a little. (How’s that for a disclaimer?)

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By background here at SimanaitisSays, my introductory foray was “Brother, Can You Spare a Bitcoin.” Then “On the Virtues of (Highly Selective) Connectivity” pondered the privacy aspects of linking persons and things. “The Ulbricht Caper,” a continuation of this theme, concluded by noting Mr. Ulbricht is serving two life sentences sans possibility of parole.

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Stripped of its complexities—and there are plenty—Bitcoin is a person-to-person network of payment using open-source electronic means. The deviser of this computer network back in 2008 had the pseudonym Satoshi Nakamoto. Maybe this represented a group of computer/economics nerds, maybe an individual, a phantom in either case.

The London Review of Books article and earlier citations in Gizmodo online and Wired magazine have identified Satoshi Nakamoto as Australian Craig Steven Wright. As its deviser, Wright holds a key to controlling the movement of immense wealth.

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Craig Steven Wright, the author of the original Bitcoin proposal made public in 2008. Image from the London Review of Books, June 30, 2016.

Being open-source, Bitcoin software is to financial transactions as the Linux programming language is to computer operating systems. Such software is freely available and can be modified by consensus and passed on.

All one needs to play is a huge—and I mean huge—bank of computers. Bitcoin miners, as they’re known, vie with each other to offer the most efficient, i.e., quickest, transfers of the virtual currency’s ownership.

Wright is never far from his laptop, though his real hardware is in Panama. Other Bitcoin server farms are located where there is cheap electricity; this, to run the banks of computers and air conditioning to keep them from melting down from the heat generated by their operation. Locations cited in The New York Times article include the U.S., Iceland (with its rich geothermal energy) and China.

Though late-comers to the game, Chinese entrepreneurs have taken to the virtual currency big time. So far, 42 percent of Bitcoin transactions this year are completely within China. In April, it was calculated that Chinese “mining” controlled more than 70 percent of Bitcoin’s world action.

With Bitcoin’s open-source philosophy, this gives these Chinese entrepreneurs a heavy say in the currency’s evolution. For example, Wright’s original philosophy set an overall cap of seven Bitcoin transactions per second, thus limiting the number of Bitcoins in circulation. In a sense, it was a virtual version of how to avoid Gresham’s Law, in which bad money drives out good.

Chinese Bitcoin entrepreneurs currently agree with this philosophy, in part to enhance network security. By contrast, American investors prefer the idea of expanding Bitcoin. As noted in The New York Times, they want it to “process more transactions and compete with the PayPals and Visas of the world.”

There’s also the complex interaction of Chinese authorities and its entrepreneurs. For example, some say that the latter prefer Bitcoin for its anonymity of the movement of money. Entrepreneurs have evolved from Bitcoin traders, speculating in the virtual currency, to Bitcoin miners owning and operating the computer banks handling transactions.

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A Chinese server farm, an assemblage of computers dedicated to processing Bitcoin transactions. Image by Gilles Sabré/The New York Times, July 3, 2016.

Chinese server farms concentrate computer centers near a coal power plant or a hydroelectric dam to guarantee reliable and inexpensive electricity. One such facility cited in The New York Times uses about 8 megawatts of electricity, enough to power a small city.

What’s more, one Chinese entrepreneur has learned from the history of the U.S. gold rush: He’s into the construction and sales of server farms. In the gold country, the real fortune-builders weren’t prospectors and miners; they were the people selling picks, shovels and Levis. ds

© Dennis Simanaitis, SimanaitisSays.com, 2016

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