Inside the "base" of the pioneers of Bitcoin mining to make money

Following The New Yorker's Joshua Davis "breaks into" the headquarters of Bitcoin mining pioneers during a night in a hotel that costs 10 BTC.

*This is a "monKEY" series about personal financial management through "strange" stories of making and losing money.

If you had 10 BTC in your hand now, what would you buy? A luxury apartment in the city center. A Mercedes-Benz or BMW. In 2011, if you were in the US and owned 10 BTC, you could buy beef jerky and socks online, buy a computer at some computer retailer, or a falafel from a restaurant. 

If Bitcoin can only be used to buy the above “trivial” things, why did the pioneer miners accept to mine this new coin by the time it turned two years old? Joshua Davis - the famous reporter for The New Yorker, decided to find the answer.

Belief in the new coin

One day in late August 2011, Joshua knew he could use Bitcoin to book a room at the Howard Johnson Hotel in Fullerton, California, ten minutes from Disneyland.

“I booked a room for myself with my four-year-old daughter, and received an e-mail from the hotel asking for a payment of 10,305 BTC,” he said.

Joshua himself used to think about Bitcoin mining , which he calls a “lottery” because the system is set up so that the more players there are, the harder it is to “win” Bitcoins.

“At this point, it would be pointless for me to play the Bitcoin lottery. When Bitcoin was first born, my laptop had a chance to win every now and then,” he said. "But now, the computing power of this competition has surpassed that of the world's leading supercomputer."

So, Joshua opened an account at the Bitcoin exchange Mt. Gox and transfer 120 USD. A few days later, he bought 10,305 BTC with the push of a button and easily sent them to the Howard Johnson Hotel.

This is a simple transaction but hides behind a complicated calculation. In 1971, former US President Richard Nixon announced that the USD could no longer be converted into gold. Since then, the value of the dollar has been based solely on people's faith in it.

We believe USD will have value tomorrow, so today we accept payment in this currency. Bitcoin is the same way: you have to trust that the system won't be hacked and that Satoshi Nakamoto doesn't suddenly show up somehow to take it all. 

Once you believe it, what is the actual price of a Bitcoin - $60 or $60,000? - depends on factors like: how many merchants are using it, how many are likely to use it in the future and whether the government will ban it or not?

Joshua and his daughter went to Howard Johnson and met Jefferson Kim, the hotel's 28-year-old general manager, who also started mining Bitcoin two months ago.

“You were the first person to ever pay with Bitcoin,” Kim said.

In the hotel lobby on a hot Friday afternoon, Kim tells Joshua why he joined the ranks of Bitcoin miners.

He was more interested in the idea of ​​money being governed by a set of logical rules, rather than the mysterious conspiracies of the US Federal Reserve. He points out that a dollar today can buy what a five cent coin could buy a century ago, mainly because the government has printed so much money. And he asked, why trust a currency backed by a government that is $14 trillion in debt (as of 2011)?

Kim spent $1,200 on a high-performance gaming computer to mine Bitcoin, and he believes he will make his money back. At the time of speaking, he had only made $400, but "it's fun to be a pioneer." 

He wants Bitcoin to be successful and for that to happen, businesses need to start accepting it. And Kim herself did this with her hotel. However, Kim hid from telling her mother, who actually owns the place, that her hotel is accepting Bitcoin:

“It would be too difficult to explain what Bitcoin is.”

The truth is that even in the early days, most people didn't spend the Bitcoins they bought; they hoard them, hoping they go up in price. Businesses are afraid to accept Bitcoins, because they are new and exotic — and because their value can fluctuate wildly (Kim immediately changed the Bitcoin Joshua sent him to USD to avoid that risk.) , the coin is young and has a number of attributes that appeal to merchants.

Robert Schwarz, the owner of a computer repair business in Klamath Falls, Oregon, started selling computers for Bitcoin to avoid high credit card fees, which he estimates cost him 3% per transaction. 

“One bank called me and said they had the lowest fees,” Schwarz said. “I said, 'No, you guys aren't. That's the new Bitcoin'.”

Because Bitcoin transfers are non-refundable, merchants also don't have to deal with credit card chargebacks from unhappy customers. Like cash, Bitcoin disappears when you part with it.

Mining Bitcoin at the junkyard

Farewell to Kim, Joshua traveled to Glasgow, Kentucky, to see first-hand how Bitcoin mining works. 

In a town dotted with closed factories and a central square lined with empty shops, Joshua visits Kevin Groce, a 42-year-old Bitcoin miner. His uncles ran a garbage hauling business and let him "base" at their facility. Groce's Bitcoin mining den is located near a dirty parking lot, packed with garbage trucks that stink in the summer sun.

“I like to call this activity a new fantasy,” said Groce, laughing. He led Joshua into a dark room with a wall covered in 1.2-meter-tall homemade computers with flashing blue and red lights. The processors inside worked so hard that their temperatures rose to 170 degrees, and the heat spread throughout the room. 

Each system is a jumble of wires and assemblies, with a fan taped to the top. Groce built this rig three months ago, for $4,000. They generate a steady stream of Bitcoins, which are exchanged by Groce for USD, averaging around $1,000/month. He believes his investment will pay off.

Groce splits his time working on his father's farm, repairing laptops at a local computer store and mining Bitcoin. Father Groce did not understand his enthusiasm for the new currency and wanted him to take over the farm.

“If Bitcoin wasn't tied to a bull, my dad wouldn't think much of it,” Groce said.

Groce is engaged and plans to use part of his Bitcoin earnings to pay for his Las Vegas wedding. He tried to explain to his fiancée that they had enough money to do so, but she doubted the profitability of the Bitcoin mining equipment piled up in the room. 

“She used to yell every time we talked about it,” Groce said.

However, he is still proud of the powerful computing center he has built. The machines run non-stop and he can control them remotely with his iPhone. This allows him to cut cigarettes with his father and oversee Bitcoin mining at the same time.

Satoshi Nakamoto knew that competing for Bitcoin rewards would eventually get people to build clusters of powerful computers like this. Instead of wasting that effort, Satoshi designed software that leverages the processing power of “lottery players” to confirm and verify transactions.

When people like Groce try to win Bitcoin, their computers are mined to analyze transactions and make sure no one double-spending. In other words, the operation that Groce was doing in this place was like a bank.

Groce, however, didn't look like the kind of person some big bank would hire. He likes to stay up late at the garbage center and let loose to the music on the guitar. He affectionately names all of his computers, like Topper and Dazzler, and treats them as if they were animals that had just won a contest.

“I grew up milking cows,” said Groce. "Now I'm 'milking' these things."

In the summer of that year, Bitcoin was hacked. Although the hackers were unable to destroy Satoshi's code, they did disrupt exchanges and destroy websites that help users store Bitcoins. The number of transactions decreased and the exchange rate plummeted. Commentators predict Bitcoin will "go to heaven". 

In Kentucky, however, Kevin Groce was as calm as ever. He just added two new systems to his Bitcoin mining operation at the junkyard and plans to build dozens more. Ricky Wells, his uncle and co-owner of a junk business, offered to invest $30,000, even though he didn't understand how Bitcoin worked.

"I'm just a risk-taker and I know this thing is making money," Wells said. "Plus, these are so damn hot, they're going to warm up the whole building this winter."

For Groce, Bitcoin is an inevitable evolution of money. People are using less and less printed money, he said. Consumers need something like Bitcoin to take their place.

"It's like eight tracks going from cassettes to CDs and then MP3s," he added.

Although friends and most relatives questioned his enthusiasm, Groce made no secret of his confidence. He likes to wear a T-shirt of his own design with the words “Bitcoin Millionaire” emblazoned on his chest. He admitted that people mocked him for it.

"My fiancée kept saying I'd rather be just an ordinary old millionaire," he said. “But maybe one day that will happen, if these systems continue to run smoothly.”

Perhaps if he kept Bitcoin until now, Groce would not only become a millionaire, but a billionaire.