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Cryptominers in Houston spin virtual currency with video cards

Walk in the front door of Anne Pedigo's house on a warm Houston day, and the experience is much the same as at any other suburban home: the blast of air conditioning makes you glad you're inside. But turn the corner into the room where she and her son are mining digital currency, and it's different weather indeed.

The room, previously a home gym, is easily 15 degrees warmer thanks to the heat thrown off by computers spinning gold from virtual straw.

In the room are 26 high-end graphics cards - the kind you'd expect to find in a sweet gaming PC - arrayed in four metal-and-wood cube frames. Instead of blasting monsters on big monitors, these cards are performing complex mathematical equations and cranking out cryptocurrency similar to the bitcoin that has generated so much public interest over the past several months as its market value has soared and stumbled.

"We make about $1,500 a month," Pedigo says. "Once I pay off the video cards and cover my electric bill, the rest is profit."

Welcome to the world of cryptocurrency mining. It has become so popular that it has resulted in a shortage of video cards and jacked up electric bills for those who participate. Pedigo says her bill has risen about $100 a month since she started mining. In fact, cryptomining is using so much electricity that some are concerned about what its energy demands will do to the environment.

Anne Pedigo builds and sells computer rigs, monitors and rig frames for cryptocurrency mining.
Photo: Yi-Chin Lee, Houston Chronicle

As prices for virtual money with names like Ethereum, Monero, Litecoin soared, so did the practice of ginning up cryptocurrency coins using some of the most powerful processors on the planet. Recent price gyrations - from a high near $20,000 for bitcoin in mid-December to a low just above $6,000 last Monday - may have made traders anxious, but many cryptominers haven't sunk their own investments into it, other than the cost of their mining equipment and their time.

They remain believers.

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Pedigo is not only mining the so-called alt-coins, but she's also empowering others to do the same. Last summer she and her 26-year-old son Edward Waltz began building and selling the poplar-and-angle-iron frames used for the arrays of video cards required for the cryptomining rigs.

It began with a single Craigslist ad, with the goal of providing Waltz, a stay-at-home father, with some spending money.

It has since blossomed into a full-blown business, in which the family delivers as many as 40 frames and sometimes fully built rigs on any given weekend. They charge $65 for a frame that holds six video cards, and $90 for an eight-card frame. If you bring the video cards, system board and power supply, they will assemble the whole thing and get it running for an additional charge.

The family has regular customers, such as a retired San Antonio military officer, who travel from afar.

"He doesn't think he'll be able to get a real job now that he's retired," Pedigo said. "So this is a way for him to make some money."

Photo: Yi-Chin Lee, Houston Chronicle

Key for these stay-at-home miners are graphics processing units, or GPUs, the chips that make the realistic graphics seen in modern computer games. Generating those images is a mathematically intensive process, and it turns out that GPUs are also perfect for handling the mathematical equations used to mine crypto.

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Demand for high-end video cards for use in cryptomining has made them hard to buy in Houston and elsewhere. Walk into any computer store, and chances are the shelves are bare. Available cards have become much more expensive - to the delight of accountants at the companies that make them but the annoyance of gamers who just want kill Nazis in "Wolfenstein III."

Pedigo, who recently added more cards to her collection of mining rigs, said stores like Micro Center now limit the number of GPUs an individual can buy. The store won't sell more than two per person, so Pedigo brings a friend with her when she needs more than that.

A Micro Center spokesman confirmed that it limits such sales.

"Speaking with other buyers, they noted that cryptocurrency miners purchase video cards and power supplies, but not much else," Micro Center spokesman Ed Lukens said.

"I have been trying to buy a specific (video) card for well over a year with no luck from any sellers," added Keith Kirkendall of Houston in a Facebook Messenger interview. He regularly checks both Amazon and Newegg, a national site that sells computer components to see if any are available. He's willing to pay about $400.

"You can get one on Amazon if you want to spend $800, though," he said. "I'll stick with my old (card) a while longer, I guess."

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Given that the cost of video cards that once sold for $250 or $300 are now going for two and three times that, building a cryptomining rig is a pricey endeavor. Six $500 video cards will run you $3,000. Then there's the system board that ranges between $100 and $150. A power supply with enough muscle to handle it all adds another $50 to $100. Bolt all this into Pedigo's $65 frame and you'll have spent more than $3,300.

Yet the typical crypto rig used to mine Ethereum, Monero, Litecoin and other alt-coins is a fairly rudimentary computer. Multiple video cards - Pedigo's systems have six or eight - are lined up in the open frame cube, each plugging into a main system board on the bottom of the rig. A power supply sits next to the board, and an Ethernet cable connects the rig to the internet and the network involved in mining the currency.

What happens next is complex. Understanding cryptocurrency and the technologies that support it is not easy. Even experts queried for this story sometimes admitted they didn't completely grasp one aspect or another.

But it helps to think first about the way more traditional electronic financial transactions are handled.

When you pay for something at a store or online with a credit card, multiple entities are involved. There's you and the merchant, of course. There's also the company or bank that issued the card you're using; your bank, as well as the bank of the seller; and possibly another party helping to make the transaction simpler, such Apple when you purchase an item using Apple Pay on an iPhone.

Governments are also involved. They stand behind the traditional currency in the transaction. They also provide regulatory and enforcement protections, making sure everyone involved behaves.

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These virtual currencies have a value, economists say, for the same reasons "real" money does — people are willing to trade goods, services or other currencies, such as dollars for it. Cryptocurrencies can be traded on exchanges for traditional currency, such as dollars.

In fact, buying and selling cryptocurrency can be as simple as downloading a smartphone app — Coinbase is a popular one — and connecting it to a banking account. (However, some banks have quit allowing crypto purchases via credit card.)

If a merchant is willing to accept cryptocurrencies, they can be used to purchase goods and services. Houston restaurant magnate Tilman Fertitta has said he's considering accepting bitcoin at his properties. And rapper 50 Cent recently discovered he had millions of dollars when he remembered he owned bitcoins he'd accepted years ago in payment for one of his albums.

Cryptocurrencies were conceived to streamline this process, trimming away some of the parties in transactions. In libertarian fashion, banks, credit card companies and governments aren't needed. The security of the transaction is handled via a type of electronic ledger known as a blockchain. Your transaction is added to the ledger to provide a permanent, secure and anonymous record.

Just how the transactions are added is where cryptocurrency mining comes in. While the various flavors of currency have their own individual quirks, most work like this:

Connected to the network for a currency are millions of mining devices. Each one is racing to solve a complex mathematical equations that are programmed into the software that oversees the network. The equations are based on variables in the blockchain ledger itself, and as the ledger grows the calculations become more complex and require more computing power to solve. The first machine to do so gets a financial reward - a piece of the cryptocurrency. Eventually, the miner creates a whole new "coin."

And this is how, for currencies such as bitcoin and Ethereum, new coins are created. There are a limited number of coins that can be generated, which provides scarcity, which in turn makes the currency more valuable.

But there's a catch. As more people hop onto the network to get into the mining game, the complexity of the mathematical equations to be solved gets more difficult. That can slow down the transaction process.

Bitcoin, the original cryptocurrency, now takes about 20 minutes to complete a transaction. That means you'd be waiting a long time if you tried to buy a Starbucks Flat White with bitcoin.

Because of that, bitcoin is considered more of an investment than spending money. And that is starting to draw the attention of regulators and the ire of critics.

Dan Wallach, a Rice University computer science professor and an admitted skeptic on cryptocurrencies, said the increasing difficulty of the math equations as the mining network grows means people who come to the game late will make less money than those who started early.

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"It has all the hallmarks of a Ponzi scheme," Wallach said. "People who got in early make money off the people who got in late. The people who got in late don't realize they are being had."

Mining isn't the only way to acquire cryptocurrencies - you can also trade them on exchanges, or use those to convert digital currencies to traditional ones, like dollars. Which works better?

"They are two different strategies, and both are sound," said Camden Dore, an economist and senior associate at Sutton Stone, a consulting firm that helps businesses work with cryptocurrencies.

Kyle Walton works on a cryptocurrency mining rig inside the Snapstream offices. The rigs use high-powered video cards.
Photo: Mark Mulligan, Houston Chronicle

Individuals who mine are at a disadvantage compared to big mining operations that use thousands of high-powered processors in sprawling installations, he said.

"They're working at a large scale, and they are going to be the most successful at mining more coins," Dore said. For most people, buying crypto outright is the simpler approach.

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Bitcoin, considered the father of cryptocurrencies, is no longer mineable with video card rigs. It now requires a specialized processor known as an application-specific integrated circuit, or ASIC. There aren't many makers of them, though South Korean electronics giant Samsung last week said it had begun manufacturing ASICS.

For now, most crypto miners are focused on Ethereum, the coins of which are known as ether. At this writing, one ether is worth around $800. Bitcoin, by contrast, is trading around $8,000, but about six weeks ago it was closing in on $20,000.

It never made that milestone, tumbling on a slew of bad news - big banks blocking customers from buying crypto with credit cards; Facebook refusing crypto-related ads; government regulators pondering whether virtual currencies should be more regulated; a $500 million theft of crypto from a major Japanese exchange.

For now, that doesn't faze Charlie Yates, a 15-year-old student at Post Oak High School who had been dabbling in mining since he was 11. He started out by putting a single, high-powered graphics card in his own computer, then running mining software when he wasn't playing games.

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"I mined bitcoin back when you could mine it on a computer," he said. "I didn't make any money on that."

Now, he says, he's co-opted his father's and sister's computers and enlisted them in his Ethereum mining operation. He also does some cryptocurrency trading, and recently was able to convert a decent sum of dollars for a teen.

"I cashed out and bought a pair of earbuds I really wanted. They were $700 and had a built-in subwoofer," Yates said.

Rakesh Agrawal, founder and chief executive at SnapStream, the company that enables customers like "The Daily Show" to search video clips for its stories, has gone all-in on cryptomining. In fact, so have many of his 30 employees.

Cryptocurrency mining rigs sit in a server room inside the Snapstream offices.
Photo: Mark Mulligan, Houston Chronicle

Wander through SnapStream's offices just west of downtown and you'll see mining rigs in many of them. Lined up against a wall in a common area are eight shipping boxes that each once held 10 high-end Nvidia graphics cards. Those cards have now been installed in dozens of rigs running at SnapStream and at Agrawal's home.

"I am in a verbal arm-wrestling match with my wife over putting one in the living room," he said. "I told her, 'No one sleeps in this room.'"

He envisions a conversation starter when guests visit; she fears an eyesore.

Agrawal's mining journey began when he began a guest speaker program at SnapStream last summer, and the first invitee came to discuss cryptocurrency. He was already familiar with bitcoin, having bought some back in 2014. The first rig in the office was built last August, and he now has 90 graphics cards whirring away in 16 different rigs.

In total, there are 20 rigs mining crypto in the SnapStream office. Agrawal buys his rig frames from Anne Pedigo in Cypress, and recently loaded up his car with 14 of them.

But all of this may soon be for naught. The currency all these folks are mining on the Ethereum network will soon change the way it is generated. The process of mining is known as "proof of work" - as a miner, you've worked to help build the blockchain, thus are rewarded. But Ethereum will soon move to another approach called "proof of stake."

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This approach allows members who already own a stake of ether coins to be involved in handling transactions, which in turn will get them more coins. That means the rigs owned by Ethereum miners worldwide will be useless for Ethereum. Agrawal said the switch is expected to take place in about 19 months.

There are several reasons for switching to this, not the least of which is the incredible amount of electricity that cryptomining requires. In December, the Bitcoin Energy Consumption index put the amount of energy required to mine just that cryptocurrency at the same amount used by the entire country of Denmark annually.

Agrawal, the Pedigo family and Yates all say the same thing when asked about the switch to proof of stake. They'll switch to mining another currency, even though it may not be as profitable right away.

"This may not be the currency that survives into the future," Agrawal said, "but it definitely is the future."


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