- Young Kwak
- Mining hardware at Malachi Salcido's Columbia Data Center.
In a gray warehouse tucked behind a tavern off one of the main drags in downtown Wenatchee, Malachi Salcido gets settled in his office, where a wall of computer monitors allows him to split his attention between live feeds of construction sites, photos of his family and websites tracking the real-time value of cryptocurrencies and their exchanges.
He's a master electrician, certified public accountant and owner of a successful design-build construction business. But it's his latest venture — "mining" for Bitcoin — that has people cold calling him, with some flying straight from China or Japan to knock at the door in hopes of grabbing a few minutes of his time.
A mile down the road from his office, in a converted cold-storage warehouse, 1,800 machines with incredible computing power work 24 hours a day at Salcido's Columbia Data Center solving complicated algorithms to earn the digital currency. At the same time, as Salcido watches on the live feed in his office, crews across the river in East Wenatchee are building a new mining facility for him that's five times that size.
With even more sites in the works, the founder and CEO of Salcido Enterprises aims to make his firm the biggest player in Bitcoin and blockchain technology in the country, and, unfortunately for the cold callers, he's not about to build operations for other people.
"You can't hire us to design your facility, to maintain your facility, you can't buy our facility, we don't do it for anyone else," he says. "But it's nuts how many want us to do this for them here in this region."
The "mining" process requires huge amounts of electricity. After the value of Bitcoin spiked above $19,000 in December, the cryptocurrency world turned its attention to Central Washington, which has the cheapest electricity in the entire country thanks to dams along the Columbia River and other bodies of water.
For months, public utility districts (or PUDs) throughout the state have been hounded with requests for power at unprecedented levels: People are asking for 20, 50, 100 megawatts of electricity, with one caller even asking the Pend Oreille County PUD where they could get 2 gigawatts — enough to power more than 1 million homes.
In response to this modern gold rush, many cities and utilities are pumping the brakes as they decide if and how to build out their infrastructure for an industry many people still don't understand and that experts warn could totally collapse. Since mid-February, a wave of Central Washington cities and utilities passed temporary bans or limitations on the operations.
"This is Bitcoin: Wild West 2.0," Salcido says.
For the record, Salcido thinks the moratoriums and interim controls on new digital mining are a good thing: He went through a similar years-long moratorium process with local agencies after he first got in the game in 2013.
And he understands people's skepticism: What if this technology doesn't get adopted? What's the point? After first learning about Bitcoin, Salcido says he saw it going one of two ways.
"This tech will either become nothing — Furby dolls, pet rocks, Betamax — OK? Or it's going to disrupt every industry I can think of, and probably some I can't," Salcido says. "It's either a major market disruptor and major market creator, or it's nothing. It's one of those two. It won't be a niche technology."
He's banking on it changing the world.
- Young Kwak
- Malachi Salcido, founder and CEO of Salcido Enterprises, believes blockchain technology will change how everyone shares data.
While digital currency has been a concept for a few decades, it wasn't until 2009 that Bitcoin was invented, and other cryptocurrencies soon followed.
In a nutshell, Bitcoin was created as a way to exchange value with other people without needing a bank or other intermediary to verify a transaction and avoid fraud.
To do so, a network of machines constantly works to verify the chain of transactions leading up to the transfer of all or part of a coin to someone else. Each time a coin — expressed as a code of numbers and letters — is exchanged, it is encrypted and recorded publicly. After the network verifies that the digital receipt of sorts is the same as the copy they have, they add your new transaction to what's called a block.
Then the machines work to "mine" by guessing the password for that encrypted block. If they guess it, they essentially create new code to add on and make a new block, which is linked with others in a digital ledger known as "blockchain." The reward for that work comes in the form of Bitcoin.
As more transactions are made, it gets harder to hack the system, as someone would have to control more than half of the global network to deceive others into believing that a falsified block matches the other copies of the ledger. There's also less reward for the same electricity, as there are only 21 million Bitcoin possible, and the amount rewarded for finding new blocks is cut in half on a regular schedule. Early miners got 50 Bitcoins for their work. Now they get 12.5, and soon they'll get only 6.25.
But with the price of Bitcoin ballooning from almost nothing in its infancy to thousands of dollars per coin currently, and with other coins like Ethereum and Litecoin gaining in popularity, the prospect is attracting big players.
By the end of this year, Salcido plans to have about 50 megawatts in mining power. In three or four years, he plans to have more than 160 megawatts, and, eventually, he hopes to run 10 percent of the global Bitcoin network.
Salcido likes to tell people not to focus so much on the fact that Bitcoin has value when they're trying to understand his motivations. At the end of the day, his machines are working to build and support a network by writing code.
While his machines work for new Bitcoin, they are also processing transactions on a regular basis and taking a small fee in the form of code. Unlike credit card transactions, which can take 1 percent to 5 percent in fees, the miners take a tiny fraction of 1 percent, making it cheaper for people to pay each other while earning him income.
But the underlying technology, blockchain, is really where he sees massive potential. He compares it to software: There isn't one "software," there are many kinds, with infinite applications.
Blockchain can be used to bundle services that were never bundled before, Salcido says, like a contract, the payment for that contract, and the verification and security for that contract. And other applications are being developed all the time.
Major companies are investing in new ways to use the tech: Maersk, the largest shipping container operator in the world, and IBM announced earlier this year that they'll partner to see how blockchain can be used as a more efficient way to track global shipments; Amazon is exploring ways to use blockchain for financial services; and Starbucks is exploring use of blockchain as part of a payment app.
And with all those applications, someone needs to run the network. That's where Salcido is positioning himself. His strategic goal is to become the major hub for the network on the West Coast.
"This is not just pillaging our power infrastructure for a quick buck," Salcido says. "You're creating a network that will be used as a faster, cheaper, more secure option, that actually is something useful for society. It's not just digging a hole and throwing electrons in the ground."
Even cities are looking into possible applications. Boise is working with a company called ULedger to explore internal business applications for blockchain.
"I definitely want to clarify we're not doing anything related to cryptocurrencies, but we are utilizing blockchain technologies," says Darrin Harris, Boise's chief information officer. "Blockchain is about creating an immutable record, a transaction that has occurred that is immutable. Meaning neither party involved, or any other third party, can really question the validity of that record, because no one can change it or touch it to manipulate it."
Still, for now, the technology isn't mature, Salcido concedes.
"But I don't look at my 6-year-old son and say, 'Boy, he's a crappy pitcher. He can only throw a 30-mile-an-hour fastball,'" Salcido says. "I say, 'When he's a man, he's going to be a great pitcher.'"
Though it's still very new, Salcido argues Bitcoin's blockchain will ultimately serve as a sort of base code, and once applications are developed, "the adoption rate is going to be rapid.
"Then it starts to make sense to people why would we build 40-, 50-year assets, at large expense?" Salcido says. "We know what we're building and we also know that there are a lot of people just out to make a quick buck. But I kind of argue: Don't throw the baby out with the bath water."
But while Salcido fully plans to remain invested in his town, Wenatchee, it's not as clear if the new operators from around the world have similar plans.
- Billy J. Roberts/Department of Energy Illustration
- Annual average electricity rates by utility service territory. The map combines data provided by ABB Energy Velocity Suite and state averages reported by EIA.
Chelan County hugs the eastern edge of the North Cascades, a series of valleys separating its mountain resort towns from the world-renowned apple and pear orchards that grow in number as you head east toward flatter agricultural land in the Columbia River Basin.
On the southern shores of Lake Chelan, the city of Chelan is a popular vacation destination, with plenty of west-siders building second homes there and visiting its resorts in summer and winter months.
But among the tourists and retirees, rogue cryptocurrency miners have started setting up shop in homes and other areas not designed to use the huge amounts of electricity needed to run their machines. The Chelan County PUD recently discovered an illegal setup that started in a single storage unit and eventually took over a chain of units before being discovered, says Chelan Mayor Mike Cooney.
"Really this past year it's come full bore," Cooney says. "There was a little bit of interest two years ago, but hell, nobody knew how to spell cryptocurrency or what it was."
Partly in response to concerns from the utility district, Chelan's City Council passed a six-month ban on would-be legal operations in February.
Simply put, Cooney says he and the council don't think the clean power generated by the dams in their area should go to that type of industry.
"We just felt the amount of power they take, and it's extreme power," Cooney says, "in our minds, it's a misuse of a natural resource."
About two-and-a-half years into what he plans to be his only term, the mayor says he gets two or three calls a week from people interested in setting up operations. They inquire from all over, and he suspects many calls from the Seattle area are on behalf of foreign investors from China and other countries.
But that's not the type of industry they want to prop up, Cooney says. Instead, they want clean, light industry that matches the lifestyle there, maybe something like a backpack or snowshoe manufacturer, or other outdoor recreation business.
Plus, it's already hard enough to meet demand for power to new homes and resorts without getting pushback about electrical infrastructure interrupting views among the steep hills around the lake, Cooney says.
"Nobody wants a substation in their backyard, or the power lines going through their front yard. ... There's enough growth we need all the power we have to go to that," Cooney says. "Now I don't know, 20 years from now, we may look extremely foolish [if] Bitcoin becomes the new Microsoft or the new Google, but I doubt it."
About 40 miles south, the Wenatchee City Council passed interim controls in late March intended to limit mining operations to some industrial and commercial areas while city staff design regulations and the Chelan PUD looks for unauthorized miners.
The utility first realized the need to plan for cryptocurrency miners back in 2014, after early operators started setting up shop. After working through a moratorium, they set rates and fees for users who want up to 5 megawatts of power (enough to power as many as 4,000 Pacific Northwest homes) and started allowing applications in early 2017.
Under those rates, new users have to pay up to a $5,000 application fee, the cost of any new substation, transmission lines or other infrastructure needed to get power to their facility, and an upfront fee, which for a 5 megawatt user is close to $1 million. Plus, the cost of electricity used, of course.
"But with the recent activity we have people coming in wanting a lot more than that: 20, 40, 50, up to 100 megawatts," says John Stoll, the district's customer utilities managing director. "When Bitcoin was $500, I think that was a bit of a gulp. When it was $19,000 it was, 'How fast can I write the check?'"
On top of that, utility staff suspect dozens of customers are illegally mining in their service area, and they've shut down about 20 operations already. They warn that mining without proper service can be dangerous: One residential setup overtaxed its wires, causing them to melt and start a fire that burned what was luckily an empty lot, Stoll says. But it also took out power to three other homes in the process.
"When we design our equipment, we design it with the expectation that it's only going to run at that high peak for a limited time, and then it's going to cool down," Stoll says. "That isn't the case here, and that's why it's critical if someone's going to do it, we know about it."
So the utility has been working with local governments to pump the brakes on mining operations while they plan how to handle new electricity loads while keeping power available for other customers. They know if they build, miners will come. The question is: Will they stay?
- Young Kwak
- Giga Watt is building 20 "Giga Pods" to house miners for customers from around the world.
The Chelan PUD has stopped accepting new applications for cryptocurrency mining operations for the time being, and the city of Chelan's temporary ban will come up for review this summer. Since mid-February, the cities of Leavenworth, East Wenatchee and Wenatchee have also restricted where the operations can be in city limits, excluding them from residential zones.
Instead of a moratorium, the city of Wenatchee passed 12-month interim controls on where operations can locate, as city staff wanted to allow some use while exploring the best ways to update codes, says Steve King, economic development director for Wenatchee.
"We didn't want to shut the door on economic opportunity. We just wanted to make sure it was in the right place," King says. "We see real opportunity [in] having supercomputing facilities here and supporting that technology."
Nearby Douglas and Grant counties are bringing more customers online.
In 2017, the Douglas County PUD had 28 applications related to cryptocurrency, ranging from 1.5 megawatts to 30 megawatts, and the eight projects that are actually moving forward will more than double the county's average load with 128 megawatts of new service, writes the district's public information officer, Meaghan Vibbert.
As of February, the Grant County PUD, which already serves a number of data centers, had 79 such requests for a total 1,100 megawatts of potential new load, which would also more than double their existing load, according to Ryan Holterhoff, a Grant PUD spokesman. The district is now studying how to upgrade its infrastructure and change its rates.
"During this time, Grant PUD is still welcoming inquiries from new customers, yet they will likely experience a delay as we determine how best to meet this demand," Holterhoff says by email. "With that being said Grant PUD is not, and does not anticipate being, out of power. If and when Grant PUD grows through the output of Priest Rapids and Wanapum Dams, Grant PUD has access to other generation sources, such as market purchases."
One of the main risks of operations setting up shop only to leave if cryptocurrency values drop would be stranded assets — all that equipment left behind with no one to serve.
"There's certainly volatility," Chelan PUD's Stoll explains, "and that's one of the challenges and why we've looked at those upfront fees."
So the utility districts all require customers to pay for infrastructure upgrades up front. But the equipment is less of a concern than stranded "hedge," the power a utility could be left on the hook for if they sign contracts for more market power, explains Kimberly Gentle, director of power and risk management for the Pend Oreille PUD.
"If you buy power for their needs and they leave, you have to find someone else to buy it," she says.
Most of the inquiries Pend Oreille has gotten have been for a few megawatts up to about 20 megawatts, but Gentle says one customer asked where in the area they could locate if they wanted 2 gigawatts, an inconceivably large request for a utility whose roughly 8,500-customer base has basically remained unchanged for decades.
"These are the largest inquiries we've seen in 25 years," she says.
While concern about the electricity needed to mine cryptocurrencies has been a large focus for Washington agencies, the digital currencies themselves have raised red flags with governments and companies around the world for several years.
They warn that the digital currencies and decentralized markets where they are traded are highly unregulated, and some worry about how they could be used to fund criminal enterprises or cheat people out of their investments.
Bitcoin first gained infamy with its ties to the Silk Road, an online black market run on the dark web where all sales were conducted in Bitcoin. The founder of the site, Ross William Ulbricht, is serving life in prison for crimes related to the Silk Road, ranging from drug trafficking to money laundering.
Google and Facebook both announced this year that they'll ban ads related to Bitcoin and cryptocurrency, citing policies against ads for financial products associated with deceptive practices.
In January, Alaska and Idaho both warned people to be extremely cautious when investing in cryptocurrencies, which are not controlled or insured by central banks or governments. Idaho's finance department warned that the highly volatile markets may be tempting to unsuspecting investors even though they come with a high risk of fraud.
Those markets are already moving large amounts of money. At one point during the writing of this article, more than $7.1 billion in Bitcoin had been sent in the previous 24 hours, and one Bitcoin was valued at $6,749.61, according to bitinfocharts.com. A week before, it was valued closer to $7,400. Three months before, it was at $16,784.
Aside from concerns about people purposely inflating the value of cryptocurrencies, making them look favorable on markets so they can quickly turn around and sell them for a profit, agencies also warn about Initial Coin Offerings, or ICOs.
"Unlike an Initial Public Offering (IPO) when a company sells stocks in order to raise capital, an ICO sells 'tokens' in order to fund a project, usually related to the blockchain," the North American Securities Administrators Association wrote in January this year. "The token likely has no value at the time of purchase. Some tokens constitute, or may be exchangeable for a new cryptocurrency to be launched by the project, while others entitle investors to a discount, or early rights to a product or service proposed to be offered."
The Securities and Exchange Commission is starting to bring charges against people offering ICOs without registering them as a security or promising something they can't deliver.
At the start of April, two creators of an ICO called Centra Tech were arrested on federal securities-fraud charges. The SEC alleges they raised more than $25 million claiming they'd help people spend any type of blockchain currency anywhere that takes Visa or MasterCard, but they never had partnerships with the major credit card companies, according to a copy of the federal complaint, filed in New York and posted online by Ars Technica, a website that covers technology news.
In a February lecture, Agustín Carstens, general manager for the Bank for International Settlements, which helps central banks address stability issues, warned that cryptocurrencies pose a risk to financial stability, while conceding current payment systems could be improved.
"Novel technology is not the same as better technology or better economics," Carstens said, according to a press release from the financial organization. "That is clearly the case with Bitcoin: While perhaps intended as an alternative payment system with no government involvement, it has become a combination of a bubble, a Ponzi scheme and an environmental disaster."
But those who've invested in the technology most in Central Washington argue that they're OK with regulations, that the technology actually makes it easier to trace criminal actors and they believe cryptocurrency has the potential to change their community for the better.
- Young Kwak
- Denton Meier and his partners are remodeling a former funeral home — including the embalming room pictured above — to house their tech companies and hope to mine for Bitcoin in the basement.
CHANGING THE VALLEY
The number of people jumping into cryptocurrency mining in the Wenatchee Valley and beyond has ballooned not only due to rogue operations, but also thanks in part to above-board companies like Giga Watt, one of the largest mining-related companies in the region.
Rather than mine for cryptocurrencies itself, Giga Watt leases out space and power for mining machines in sites throughout Central Washington, maintaining the hardware for clients from around the globe with a staff of more than 60, says Drew Behrens, Giga Watt account manager. They also sell miners that they've designed.
From the windows of the Giga Watt offices at Pangborn Airport in East Wenatchee, snow-covered mountains paint a scenic backdrop to busy construction sites below. In just the last few months the industrial land has changed dramatically, as fields have been replaced with massive cryptocurrency projects.
On a 9-acre site just across the street from where Salcido Enterprises is building a new 10 megawatt facility, Giga Watt has crews constructing 20 trailer-sized buildings it calls "Giga Pods."
Each small building will use about 1.5 megawatts of power to run hundreds of machines mining for different cryptocurrencies, Behrens explains. The small design ensures hot air quickly flows through fans to the outside more efficiently than at larger data centers.
The company preleased this space with an ICO token offering last May, he says. In exchange for the tokens, their customers were able to secure space in the facility rent-free for 50 years.
"It's literally the cheapest solution to host your miners in the world if you go through our watt program," Behrens says.
Not all the players in this burgeoning industry are gigantic yet.
Several miles away from the airport, Denton Meier is bringing an old funeral home in downtown Wenatchee back to life. Meier and his business partners, who own the quickly growing information technology companies Legwork PRM and Firefly, are remodeling the building to house their growing roster of employees. But they also see potential to earn digital currency here with a relatively small cache of miners.
As construction workers upstairs rip walls down to the studs and shovel scraps from the demolition into wheelbarrows, Meier walks into the large basement room — down the hall from where bodies used to be stored — where he envisions racks for hundreds of mining machines.
To be more environmentally friendly and efficient, he and the other owners are working with their architect and engineer to design a way to capture the miners' heat to warm the building in winter, and maybe even keep the sidewalks and parking lot clear of snow.
"Since money is being spent on heating anyway, and we have a built-in heater that is then generating income in another way," Meier says, "it made the whole thought of the building more financially viable."
He sees cryptocurrency mining as a way to supplement income for virtually any business and support employment in the area. For example, if his miners make enough, he could offer better retirement plans with the proceeds. Maybe someone else could use them to earn enough extra money to fix up empty storefronts downtown while keeping rent affordable for small businesses.
"I would love to see that every building that could in the downtown core utilize that," Meier says. "Building a strong downtown core, it just enhances the community as a whole, and I love that, versus some data farm that's just out in the middle of a field somewhere that only takes a few people to run."
City leaders seem receptive to the idea, too. But it's not clear if Meier's application will be tied up with the recent moratoriums or not. As is, their plans are in something of a gray area right now, he says. Either way, he and the other owners are including some basic infrastructure for the machines in the hopes they'll eventually get approval for maybe up to two-thirds of a megawatt of power. He has faith Bitcoin will catch on.
"At this point, my feeling is it's too big to fail," Meier says of cryptocurrency. "There's too many players involved with too much money for it to fail at this point. Although it could."
Unlike Meier, Salcido doesn't believe small operators should get into mining at this point. As he sees it, the network needs reliable businesses with long-term strategies to build out the infrastructure necessary to keep it running.
And should his gamble on blockchain changing the world be wrong and Bitcoin go the way of Dutch tulips — which spiked in value during a speculative buying frenzy in the 1600s — Salcido points out that he'll still have land and power that can easily be converted to traditional server farms like those that power the data-dependent lives people already lead.
But he has faith that as dependency on technology increases, and people's conception of privacy changes, a decentralized network will be needed to efficiently and securely complete daily tasks.
"We have a technological reality that we are in and are creating at a faster pace than anything else we've ever created in the history of the human race," Salcido says. "We are there. If we are going to survive to technological adulthood as a people, your notion of your data and your privacy are going to look different. ... Blockchain solutions are going to enable this on a whole other level." ♦
ABOUT THE AUTHOR: Samantha Wohlfeil covers social services, the environment, tribes and other issues for the Inlander. Before joining the paper in February 2017, she worked as a political reporter at the Bellingham Herald in northwest Washington.