Cryptocurrencies: the new gold rush
TO REACH Enigma you first have to fly to Iceland. Next from the capital, Reykjavik, you drive along several roads until you reach a dirt track. It’s then a rough ride for a few kilometres until you arrive at three nondescript white warehouses. The warehouses are on a volcanic plain surrounded by what looks like a fencedoff building site with earthworks, prefab offices and stacks of building equipment. Given the value of what’s inside the buildings, I’m surprised there’s no sign of armed guards or any security.
“Ha! Don’t worry, they’ve seen us already,” says Marco Streng (28), the charming founder and CEO of Genesis Mining, the company that owns the warehouses. Long before we reached the threshold of the Enigma plant we were picked up by cameras and monitored by motion sensors.
“This place is very sensitive,” he adds. “People even look at geothermal maps trying to find places like this. Not everyone on the planet has the best intentions. Some people want to break in. Others want to hack it or steal the machines.”
Has Marco had any problems? “A lot of hackers trying to break into the system.” What about unscheduled visits by strangers in black? “Er, no, not really, luckily. There have been kidnappings of cryptocurrency people. So I need to be careful.”
Cryptocurrency mining, which is how Marco makes his money, is a weird business. For a start, it has nothing to do with digging holes. The phrase is computer jargon for the process of creating digital money such as bitcoin – the virtual currency that hit the headlines last year when its value shot into the stratosphere and made some owners millionaires or even billionaires.
Secondly, creating or mining cryptocurrency doesn’t involve a bank or pieces of paper.
Bitcoin was devised by Satoshi Nakamoto, a pseudonym for what’s believed to be a business-savvy mathematician or a group of mathematicians.
In order to generate a new unit you have to use a special high-powered computer – or, in the case of Genesis Mining, tens of thousands of them. This is one of the reasons why Enigma’s warehouses are based in Iceland: the company needs cold weather to prevent the computers overheating.
Eighteen months ago Marco Streng put thousands of computers inside a heavily guarded base in Iceland and started ‘mining’ for bitcoin and other cryptocurrencies. Now, aged 28, he owns one of the fastestgrowing companies on the planet
The country also offers cheap electricity, a vital prerequisite if the industrial-scale operation is to remain economical. At the moment Genesis is more than economical: this time last year the company had 500 000 customers; today it has two million. It’s the largest player in the fastest-growing sector of the world economy and everybody is trying to replicate its success.
“We’ve started a gold rush,” Marco says. “Everyone wants to get into crypto-mining. It’s so profitable.”
He nods towards an adjacent building site where a crane presides over the skeleton of a large warehouse. “Competitors,” he says. “KPMG has told us there’s a ‘Genesis Mining model’ – people come to them and say they want to do exactly the same as us.” It’s quite an achievement.
MARCO, the son of a German winemaker, was a maths student at the University of Würzburg (and former maths champion of Germany) when he heard about bitcoin in 2011. Breaking every piggy bank, he plunged all his student cash and money borrowed from his mother to set up a small mining rig in his student dorm.
The actual process of mining sounds baffling but put in simple terms a rig comprises a number of computers, which process thousands of bitcoin payments and add them to the “blockchain” – an online ledger of every bitcoin transaction – and for providing this vital service the miner is given newly minted bitcoins. At the time of Marco’s introduction to bitcoin, crypto prices were just beginning their dizzy ascent.
In 2013 bitcoin value soared from $100 (about R1 200) to $1 000 (R12 000). “The market went crazy,” says Marco, who now lives in London. “I stood in my room and thought, ‘This is unbelievable. This machine is so profitable.’ ”
Seizing the moment, he and two partners decided to scale up. They alighted on a small village in Bosnia where power was cheap. In order to discourage local farmers who were curious about this great smoking, steaming warehouse in their midst, Marco announced it was a laundry.
“Why does a laundry need guards outside?” the farmers asked. Within six months Genesis had outgrown Bosnia and relocated to Iceland. Once again they could barely cope with demand.
(From previous page) Within two years Genesis scaled up again to build Enigma in 2015. Now Genesis is building seven more mining operations around the world, each one of which is on a scale that dwarfs Enigma.
The company offers computer power to anyone who wants to mine cryptocurrencies; so instead of buying scores of computers and doing it at home, a customer can simply log on to Genesis’ website and pay to use its enormous mining rig in the online “cloud”.
“When we set up Genesis most of the miners were either hobbyists or largescale miners,” Marco explains. The trend was towards large-scale mining in places where electricity is cheap. We saw that the home-grown miners would lose and the large ones would win. And we thought, ‘How sad.’ This would centralise the sector when the whole point of crypto is it decentralises systems.”
He says the beauty of Genesis is it makes it possible for anyone to mine.
“You decide how much computing power you can afford and you buy it for a given amount of time. Every day you receive your mined coins in the form of bitcoin or whatever cryptocurrency you want. Every day you get your coins mined that day added to your [virtual] wallet.”
What will £20 (R340) get me? “That depends on the market and on the price.” But each bitcoin is now worth about £6 770 (R115 090).
Can I buy fractions of a bitcoin? “Bitcoin is divisible to eight decimal places,” Marco says. “You can mine pennies in bitcoin. But to be clear, you’re not buying bitcoin from Genesis. You’re buying the computer power with which to mine the coins.”
Genesis’ two million customers range from large institutions, which buy millions of dollars’ worth of computer power, down to people in developing countries where $20 (R240) represents a lifetime’s savings. The rules of bitcoin state that only 21 million bitcoins can be mined ever – a number it’s expected will be reached by around the year 2100 – and there’s also a limit on how many can be produced each day.
Currently it’s 1 800 but the total is decreasing over time. This is because the difficulty of producing bitcoin and the amount of computer power required increases exponentially. Marco whips out his calculator.
“So in 2018 the present value of bitcoins that can be mined is 365 times 1 800 bitcoins; that’s 657 000 bitcoins. If each bitcoin is worth $15 000 (R180 000), that’s $10 billion (R120 billion) of bitcoin generated in 2018 if the price stays constant.”
The growth of the sector has been explosive. From 1 January 2017 to 1 January 2018 bitcoin rose 13-fold, Ether 87-fold and another currency, Ripple, 300-fold. But there are many sceptics who believe there’s nothing behind its rise but pure adrenalin – it’s difficult to spend bitcoin anywhere, the payment technology has often been clunky and slow and it has associations with the criminal underworld, which has long used it to buy drugs and weapons on the dark web.
I ask Marco how long it takes to mine one bitcoin. “That depends on how many miners there are in the market and, critically, how much computer power you have. The entire network of miners together produce about 12,5 bitcoins every 10 minutes. So if you operate 10% of the network, in 10 minutes you’ll produce around 1,25 bitcoins, which is about $18 000 (R216 000).”
THE doors to the Enigma warehouse are flung open. I’m struck by a wave of heat and the roar of tens of thousands of computers whirring away inside. Running the length of the warehouse are two large walls of racks of computer processors connected by a cat’s cradle of wires and cables. The noise of a crypto-mining farm is the aggregated din of thousands of small fans cooling the processors.
Considering one computer costs about £1 000 (R17 000), Genesis, which has “tens of thousands” of these machines, must have spent at least £10 million (R170 million) on hardware. Above me, large holes in the roof are fitted with great turbines like aircraft engines. Cool air is sucked in from outside, filtered for dust and passed over the racks of processors then drawn out of the holes in the roof. Marco turns up the turbines to show how in warm weather the hot air from the processors is helped on its way. The terrifying roar sounds like an aircraft about to take off.
We approach the racks, the brains of the operation, many millionfold more powerful than your average laptop. “These are the computing cards and you have here the control boards, which control the computing,” Marco explains. “In those cards is where the big computation is done.”
What sort of calculations are we talking about? “Enormous numbers. If you add computing power from each of the processors here you have more computing power than the world’s No 1 supercomputer.”
The bitcoin blockchain solves something that’s never been solved before. It’s able to create a ledger where every participant in the market can trust the
‘The louder it is the more computing power is being used up and the more coins are being generated’
ledger but without having to trust one another. There’s a big difference between a blockchain and a centralised system like for example a credit card company.
A credit card company has a centre somewhere that validates transactions. A centralised system is a much cheaper process to run than the mining process. But, and this is the critical point, you have to trust one entity: the company.
And because it’s run by one company it’s vulnerable to being hacked or attacked in some way. So it’s not a stable system. Satoshi’s fundamental idea was to create a system that’s completely decentralised and where you have a lot of validators who validate the transactions.
“Going one step further, these validators don’t even need to trust one another. What you have is an ecosystem where everyone can be anonymous. No one needs to know anyone else and no one needs to trust anyone else but everyone can still rely on the underlying ledger on the blockchain. This is fundamental,” Marco says.
“In any sector that relies on a critical element of trust, we can knock it out now with blockchains – this is especially important at a time when so many companies are being hacked. Genesis is involved in cryptocurrencies but more fundamentally we’re building blockchain infrastructure itself. We don’t know what it will bring, just as we didn’t know what the internet would bring.
“One thing you can’t emphasise enough is blockchain breaks the boundaries and borders of the world. Some sectors have stagnated into an equilibrium, which isn’t necessarily fair, where there’s a divergence between rich and poor. For example, in Africa we see people who have no possibility of getting bank accounts. If people can’t use banks, how can they have a chance? And no one cares about it.
“If there’s no real revolution nothing will stop that. But blockchain can. I can send money to a coffee farmer in Africa and there’s no one in between who can stop that.”
I ask Marco what his electricity bill is. “Every month we’re spending multimillions of dollars just to cover electricity bills. Here in Iceland it’s not too much but on a global scale our power consumption exceeds the dimensions of several power plants.”
Does that not result in inflation in electricity prices in Iceland, causing problems for the locals?
“Well, no. What we have here is power that’s coming from the ground, from nature. [The Enigma facility draws on the output of several local geothermal power stations.] There’s more than plenty. I take the opposite view: we benefit the local economy. We’re using the power that’s sitting on the ground and turning it into value. In the end the country earns money from that.”
Indeed, even before crypto-mining took off Iceland wanted to use its cheap electricity to power data centres. The advent of crypto-mining has somewhat overtaken that ambition, although fundamentally they’re the same business. A crypto-farm is essentially a data centre.
When he comes in here and looks at this and hears the noise and feel the heat, what does he think? “I love it,” Marco replies. “The louder it is the more computing power is being used up and the more coins are being generated and the more money it makes.”
He has little time for anything else other than Genesis.
“This is my life,” he says. “The company is my life. Seeing this whole economy grow is great and it being just in its infancy is even greater. We’re shaping it from the ground up. At the beginning we were such a small group but now so many people are talking about us.
“It’s important to follow your passions because passion is something that’s intrinsic and makes you feel excited and guides you towards something that might be the purpose of your life. And I was following that when studying maths. I would’ve become a maths professor. But then crypto came and it took me here.” S