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So what is bitcoin mining anyway? An explainer

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Bitcoin mining is officially a big deal in the North Country. From Plattsburgh to Tupper Lake, Rouses Point to Massena, dozens of bitcoin mining companies are prospecting for the North Country’s relatively cheap electricity. And they’re promising hundreds of jobs.

But why? What is bitcoin mining and why are high-tech companies wanting to set up shop here?

Here are a few things to know about the emerging technology:

This is what bitcoin miners look like at Digital Skynet Ltd. in Massena. Photo: David Sommerstein

Bitcoins don’t exist as actual ‘coins’. But they do have real value.

I was asking people in Via Main diner in Massena recently what they thought about bitcoin mining companies wanting to move into the area. Mearle Binan had a much simpler question. “I can’t take the bitcoin to the grocery store,” she said. “So I don’t know what the bitcoin is all about.”

No, you can’t take them to the grocery store, in part because they don’t exist in the material world. They’re just digital – 1s and 0s. And there are 1,500 other coins like bitcoin, collectively called cryptocurrencies. Because it was the first, bitcoin is commonly used to refer generally to all of them.

An anonymous computer programmer who goes by Satoshi Nakamoto had the idea to create an international currency without borders, without the backing of banks or central governments. That way people could exchange money with anyone anywhere in the world. Nakamoto wrote the first computer program, if you will, that created bitcoin in 2009.

Today, there are only a handful of companies that accept bitcoin as currency – in other words, to buy things. A bitcoin conference famously had to stop accepting bitcoins! Mostly, cryptocurrencies are used to speculate, to trade, like on the stock market.

Bitcoin miners are computers that do what banks traditionally do.

So if bitcoin is a currency without banks, who makes sure the transactions are legit? If I write my daughter’s babysitter a check for $40, my bank is going to make sure I have that money in my bank account, and her bank is going to add that $40 to her account when the check clears.

In the digital currency world, thousands and thousands of computers all over the world track each time a bitcoin is bought and sold. Together, they create a sort of accounting ledger for each bitcoin. The ledger is called a blockchain. The computers are called bitcoin miners.

Bitcoin puts its faith in math instead of governments.

Bitcoin transactions are documented through an intentionally complicated system, says Alex deVries of the Netherlands, who writes the influential blog, Digiconomist

Each time a bitcoin is bought or sold, all these thousands of computers – the miners – enter what deVries likens to a lottery to be one who documents the transaction. But instead of sixty numbers like the New York lottery, there are billions of possible winning numbers. “In this lottery, every miner is generating a huge amount of numbers every second of the day trying to guess the winning number,” says deVries.

The miner that guesses the magic number documents that bitcoin transaction in the blockchain. And the miner’s reward is…[drum roll]…bitcoins. They earn 12.5 bitcoins per transaction, which at this time of writing is worth about $91,000. The computers are called ‘miners’ because they’re basically digging in cyberspace for money.

The system is intentionally complicated to maintain security and prevent hacking. No one’s in charge and no one computer can take over because of the complex lottery algorithm baked in.

Bitcoin mining uses enough electricity to power Algeria

Anyone can become a bitcoin miner, from companies with huge warehouses full of computers in China to college students in their dorm rooms. You can buy a USB bitcoin mining device for $50. (It probably will cost you more in electricity to run it than you’ll make in profits, though.)

To run all these thousands of computers vying to guess that magic number, it takes tons of electricity. The more computers you have, the better chance you have to win the lottery and get those bitcoins. So deVries says the result is an energy-intensive computational arms race. “What happens is they are adding new machines to the network,” says deVries, “and those machines, they are energy-hungry monsters, consuming a huge amount of energy.”

No one knows exactly how much energy, because no one knows exactly how many computers are out there mining. But Alex the Digiconomist has crunched numbers and he estimates all the bitcoin mining right now is using more electricity than the entire country of Algeria. (You can read how deVries arrives at his estimates here, and a critique of his methods here.)

Bitcoin mining companies will go wherever there’s cheap electricity

Because bitcoin mining consumes so much electricity, mining firms are combing the globe for the places with the cheapest power (and the coolest temperatures — those computers generate lots of heat).

And that’s where the North Country comes in. We have cheap electricity. It comes from the hydropower dam on the St. Lawrence River. Many of our towns get reduced rates. And so, dozens of bitcoin miners want to come here – to Massena, Plattsburgh, Rouses Point, Tupper Lake. That could be good for the economy if they create jobs, pay taxes, and invest capital. But it could also cause electricity rates to spike for people like you and me.

Economic developers are trying to figure out if the bitcoin mining boom represents the opportunity of an emerging industry, or a bust waiting to happen.

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