In a Ponzi scheme using bitcoins, the Bitcoin Savings and Trust promised investors up to 7% weekly interest, and raised at least 700,000 bitcoins from 2011 to 2012. In July 2013, the U.S. Securities and Exchange Commission charged the company and its founder in 2013 "with defrauding investors in a Ponzi scheme involving bitcoin". In September 2014 the judge fined Bitcoin Savings & Trust and its owner $40 million.
Bitcoin’s first mover advantage, popularity, and network effect has cemented it as the most popular cryptocurrency with the largest market cap. Rivals like Litecoin may have numerous technical advantages over Bitcoin’s algorithm (see more about that here), but they only hold a fraction of Bitcoin’s market cap and their dwindling communities largely consist of loyalists, speculators, and antagonistic anti-Bitcoin buyers.
What separated these survivors from the quitters and the double-downers, Carlson concluded, was simply the price of electricity. Survivors either lived in or had moved to places like China or Iceland or Venezuela, where electricity was cheap enough for bitcoin to be profitable. Carlson knew that if he could find a place where the power wasn’t just cheap, but really cheap, he’d be able to mine bitcoin both profitably and on an industrial scale.
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Gradually, people moved to GPU mining. A GPU (graphics processing unit) is a special component added to computers to carry out more complex calculations. GPUs were originally intended to allow gamers to run computer games with intense graphics requirements. Because of their architecture, they became popular in the field of cryptography, and around 2011, people also started using them to mine bitcoins. For reference, the mining power of one GPU equals that of around 30 CPUs.
During mining, your Bitcoin mining hardware runs a cryptographic hashing function (two rounds of SHA256) on what is called a block header. For each new hash that is tried, the mining software will use a different number as the random element of the block header, this number is called the nonce. Depending on the nonce and what else is in the block the hashing function will yield a hash which looks something like this:
On paper, the Mid-Columbia Basin really did look like El Dorado for Carlson and the other miners who began to trickle in during the first years of the boom. The region’s five huge hydroelectric dams, all owned by public utility districts, generate nearly six times as much power as the region’s residents and businesses can use. Most of the surplus is exported, at high prices, to markets like Seattle or Los Angeles, which allows the utilities to sell power locally at well below its cost of production. Power is so cheap here that people heat their homes with electricity, despite bitterly cold winters, and farmers have been able to irrigate the semi-arid region into one of the world’s most productive agricultural areas. (The local newspaper proudly claims to be published in “the Apple Capital of the World and the Buckle on the Power Belt of the Great Northwest.”) And, importantly, it had already attracted several power-hungry industries, notably aluminum smelting and, starting in the mid-2000s, data centers for tech giants like Microsoft and Intuit.
To cut through some of the confusion surrounding bitcoin, we need to separate it into two components. On the one hand, you have bitcoin-the-token, a snippet of code that represents ownership of a digital concept – sort of like a virtual IOU. On the other hand, you have bitcoin-the-protocol, a distributed network that maintains a ledger of balances of bitcoin-the-token. Both are referred to as "bitcoin."