Tech and Science

Inside Austin’s Bitcoin Underground

Inside Austin's Bitcoin Underground

AUSTIN — On the second floor of the Littlefield Building at the corner of Congress Avenue and Sixth Street, there’s a clubhouse of sorts for Austin’s Bitcoin supporters. The retreat sits at the intersection of two worlds – the majestic thoroughfare leading to the Texas State Capitol and the iconic, if infamous, array of bars, restaurants and live music that define the capital’s party atmosphere. It’s an apt metaphor for space itself.

The Bitcoin Commons is many things at once.

By day it functions as an open, neon-lit co-working space for the more entrepreneurial Bitcoin operators, but by night it moonlights as a safe space for underground meetings of the industry’s miscreants. Conferences are held there periodically, attracting a mix of attendees ranging from venture capitalists to armed preppers living entirely off the grid. And on some afternoons, when happy hour begins, the kitchen in the back is upgraded with a stowable bar.

“We also fund developers and help them advance their projects,” said Parker Lewis, one of the House of Commons trustees and author of a new book about Bitcoin called “Gradually, Then Suddenly.”

“We help advance Bitcoin through education and the actual development of the currency network, codebase and applications,” said Lewis, widely considered one of Texas’ de facto Bitcoin ambassadors.

Francisco Chavarria was born in Mexico City and spent time in Salt Lake City, but three years ago he moved to Austin to be part of a community of like-minded thinkers. His company Yopaki, a Bitcoin neobank focused on the Latin American market, just won first place at a hackathon in the House of Commons.

“If you talk to other builders in the competition, there’s a lot going on here,” Chavarria said. “There’s definitely a feeling of, ‘I don’t need other people to lose for me to win.’ There really is a relationship and collaboration for Bitcoin to be successful.”

“Right now it feels like we are all winning based on price, but those of us who built in the bear market know it,” Chavarria added.

Austin’s Bitcoin Commons regularly hosts meetups and conferences for the city’s Bitcoiners.

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Whether bear or bull market, Bitcoiners flock to Austin due to a combination of crypto-friendly policies, abundant renewable energy, and an ever-expanding network of some of the smartest developers and miners in the world. And even in price doldrums, they typically bring the same level of enthusiasm to the conversation – although Bitcoin’s recent string of record-breaking price moves has done much to boost morale.

March, Bitcoin hit several new all-time highs as traders’ enthusiasm for the digital asset space surged. Much of this price rise has to do with record inflows into newly launched spot Bitcoin exchange-traded funds in the US, led by the world’s largest asset manager Blackrock and its $15.5 billion iShares Bitcoin Trust, which have contributed Solidifying Bitcoin’s place as an enduring asset class.

Together, these spot ETFs have raised around $60 billion, and in some cases they have broken records for ETF inflows overall.

“The biggest driver is certainly ETF flows, which have exceeded the expectations of all but the most optimistic experts,” Castle Island Venture’s Nic Carter said of Bitcoin’s record price moves this month. “And these blockbuster inflows occurred before the major news outlets, asset managers and RIAs actually approved the ETF for their clients.”

Carter added that new liquidity from Asian markets is also coming into Bitcoin through two main routes: Bitcoin’s version of non-fungible tokens, known as ordinals, as well as Bitcoin-issued coins, called BRC20 tokens.

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Underground vibes with an open bar

Over the past 20 years, Austin has emerged as one of the country’s leading technology hubs, a trend accelerated by the Covid pandemic, which caused industry leaders to migrate en masse from California.

“Bitcoin was founded in 2009. A lot happened after the financial crisis. “Austin was already becoming a tech hub, and you know, Bitcoin is just the logical home,” said Lewis, who leads business development at Zaprite, a Bitcoin-based financial services company.

It helps that Texas is a libertarian-friendly state that actively supports free market policies. It has proven to be a big draw for a group of people who view Bitcoin as a way of life – a currency network that is decentralized and borderless, not subject to central banks or governments.

Austin’s “Bitcoin Commons” attracts an eclectic mix of people, including venture capitalists, Bitcoin miners and programmers.

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Many hardcore Bitcoiners ironically use the term “maximalist” or “maxi” to describe themselves. Although there are Maxis in Texas in a professional spectrum ranging from venture capitalists to miners, programmers, corporate executives and general techies, the diverse tribe has some commonalities. Many are family-oriented, patriotic carnivores with a distaste for government overreach and a strong belief in the right to bear arms, among many other personal, individual freedoms.

Bitcoin’s eponymous Austin hideout, decorated with the Texas state flag and Bitcoin memorabilia, has adopted Chatham House rules for many of its events to protect the identities of those who converse within its walls. One such meeting is the monthly BitDevs (short for Bitcoin Developers) meeting, where Bitcoin developers, investors and Bitcoin curious people are welcome as long as no pictures or videos are taken.

Topics at these meetings range from detailed discussions about code to concerns that the Microsoft-maintained GitHub could pose a larger existential threat to the Bitcoin network, since much of the development work and conversations between programmers take place on that platform. At one of these meetings, the moderator of the two-hour session asked the room who was running a Bitcoin node. More than half of those present raised their hands.

After attending several BitDev meetings in Austin over the past three years, some common talking points have emerged, including a focus on identifying threat vectors to the network and brainstorming workarounds. Beyond the software, there are also concerns about hardware vulnerabilities, as the ASIC chip used in Bitcoin mining rigs is manufactured in China, a country that has proven hostile to the crypto sector in recent years.

The “Bitcoin Commons” acts as a kind of clubhouse for the city’s Bitcoin believers. It offers a mix of programming, including conferences and hackathons, and hosts a co-working space during the day.

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VCs are returning to Bitcoin in droves

The House of Commons hosted a hackathon, BitDevs, and a day-long conference called “Bitcoin Takeover” on the sidelines of the annual South by Southwest tech festival, which featured virtually no crypto programming this year.

At these numerous gatherings, there was a new interest in talking about the burgeoning ecosystem of projects building on the Bitcoin blockchain, which began to intensify with the January 2023 launch of ordinals – Bitcoin’s version of non-fungible tokens.

An underappreciated driver of Bitcoin’s recent rally is new programming innovations that could allow it to catch up technologically with Ethereum. These advancements include strengthening the Bitcoin ecosystem with tools like smart contracts, which are programmable pieces of code that help cut out middlemen like banks and lawyers from transactions. This makes it easier for developers to create products and applications for consumers.

BitVM, for example, has a promising plan to do just that. Ultimately, the company is seeking to introduce smart contracts to the Bitcoin network, which has helped spark a resurgence of interest in Layer 2 technology, i.e. startups building on Bitcoin’s base chain.

“I have never seen business execution in the Bitcoin space develop so aggressively in my entire career,” Carter tells CNBC.

In fact, VC appetite for these second-tier Bitcoin projects has increased in recent months.

PitchBook says that in the fourth quarter of 2023, for the first time in almost two years, transaction value in the crypto sector increased, reaching $1.9 billion – an increase of 2.5% quarter-on-quarter. Although it is still far from the 2021 peak of $31 billionFunds increase interest and confidence in the area.

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Grant Gilliam worked in private equity in New York for 15 years before moving on to running a business Bitcoin VC fund called Ten31. This investment platform, which focuses solely on Bitcoin, has invested a total of $125 million in equity since its launch five years ago. More than $100 million was staked during the bear market over the past two years.

“We invest across the Bitcoin ecosystem and on all issues that matter,” Gilliam told CNBC. “Anything relevant to Bitcoin infrastructure is what we like to call the tips and scoops of companies developing products and services for Bitcoin holders.”

Gilliam, who has spent several years commuting from New York to Austin every month for the BitDevs meeting, said some of the second-tier Bitcoin investments are more hype than substance, but he is still optimistic about the overall deal area.

“There’s been a lot of L2 hype lately, mostly driven by the ordinals and inscriptions, developments or innovations, if you want to call it that,” Gilliam said. “There’s a lot to do at the moment, but we haven’t focused on it that much. We firmly believe that atomic numbers will prove to be a passing fad.”

Gilliam says Ten31 is focused on building blocks of the ecosystem, such as companies that offer financial services, which could be securities trading and lending, or projects that are working to scale the Lightning Network.

Lightning, the second-tier payment technology designed to realize Bitcoin’s original vision of being peer-to-peer cash, continues to struggle with the problem of scaling. Developers tell CNBC that a lot of technical work is still needed to close this gap.

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Country halving Bitcoin

“Numbers are increasing” is a big mantra among Bitcoiners, but as the community evolves, so do considerations about the coin’s price.

“The price is really a result of a lot of input from people who are developing tools to make Bitcoin both safer and more useful,” Lewis said. “Price is the best indicator that more people are coming to the conclusion that Bitcoin is money and a better store of value, so it is very relevant.”

Every four years, Bitcoin experiences a market-making event known as a halving. This halves the production of new Bitcoins, and this typically happens before a sharp rise in the price of Bitcoin.

When China banned the practice in 2021, miners from around the world flocked to Texas, attracted by abundant renewable energy and a grid that accommodates flexible power buyers – both ideal conditions for miners.

However, in April, these Bitcoin miners’ profits will be cut in half.

For some, it could be an Armageddon-level event. Others have prepared for the impact by replacing their fleet of machinery with more efficient drilling rigs. The rise in Bitcoin prices has also helped provide some of these companies with a buffer in their profit margins.

West Texas miner Jamie McAvity has 60 megawatts at his mining site. It operates on a portion of the grid that is 90% powered by a mix of solar and wind energy.

“If you’ve been at it for more than one cycle, you’re at a point where you can resist the halving to the best of your ability,” McAvity told CNBC at the Bitcoin Commons in Austin.

McAvity, who previously worked as a trader at the New York Mercantile Exchange for ten years, added that ETF flows have helped change the price dynamics for the world’s largest coin.

“Spot ETF inflows are so massive that a reduction in the available supply of newly mined Bitcoins from 900 to 450 will likely be insignificant in comparison,” he said.

“But who knows, ETFs could cool off for a while and it is hard to credibly say that a reduction in supply will not change the market price equilibrium, because that is a fundamental principle of market economics,” he added.

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Altcoin mania

Ten minutes walk west of Bitcoin Commons is the Austin Proper Hotel, a five-star hotel whose lighting is intentionally dimmed to create a specific mood. Here, the Boys Club, a popular and vibrant women-led organization that describes itself as a “social collective bringing new voices to the new internet,” hosted its own crypto conference on the sidelines of South by Southwest.

Boys Club is aimed at a more blockchain-agnostic audience, where the focus is less on the exclusivity of a coin or chain and more on adopting the best features from across the ecosystem to solve real-world problems.

CNBC caught up with Micha Benoliel at the one-day summit. Benoliel built Nodle, a decentralized wireless network that is now busy using blockchain to combat AI-powered deepfakes.

“Blockchain is the only way to create a record that is immutable and proves the time that that photo or video was taken, and also helps you prove the location and other elements that support that evidence.” “It “So it represents a truly immutable proof of authenticity,” he said.

The Boys Club hosted its own Austin Summit on the sidelines of SXSW with programming on the new internet, crypto and digital culture.

CNBC

The one-day pop-up event gathered more of a Web3 audience to talk about everything from the latest trends in tokenization to the resurgence of on-chain meme culture.

Similar to other bullish moves in Bitcoin price, some altcoins have seen a meteoric rise alongside blue-chip names in the crypto space because they are seen as a comparatively cheaper buying option.

Dogecoin, a meme coin that started as a joke, now has a market capitalization of nearly $25 billion, making it one of the top ten most valuable cryptocurrencies in the world. Boden, a coin named after President Joe Biden, saw a surge of more than 800% within six hours of Super Tuesday, and the newly popular DogWifHat is collectively worth more than $2 billion.

Typically, this is the trigger for the peak of a bubble, but analysts say this bull market is different from previous cycles despite the stormy conditions.

The price of Bitcoin is cyclical and experiences a price increase approximately every four years. Each time the price floor is higher. What is also a departure this time is the fact that institutional money is present in a way that it was not in previous bull runs.

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The fundamentals of the crypto market also play a big role.

In a note from JPMorgan on March 15, analysts acknowledged this etherthe world’s second largest crypto token by market cap because it is a key driver of crypto’s recent gains, among other things CoinbaseThe share price rose. Ether is up nearly 50% so far this year, recently breaking through the $4,000 price mark and outperforming Bitcoin’s returns, before we cut back some gains.

“While the focus of the cryptocurrency market has been on the net new money inflow into US spot Bitcoin ETFs and the positive impact on Bitcoin token prices (here the spot Bitcoin ETF and its final launch in January has hit the crypto ecosystem advanced in recent months). ) we also see the impact of the ETH appreciation as particularly significant,” wrote JPMorgan.

For the crypto sector in particular, regulators in the US continue to be a general problem amid reports The Securities and Exchange Commission is investigating crypto companies built on the Ethereum network.

Still, many in the industry, including programmers and investors, remain optimistic.

Ethereum, the blockchain that underlies Ether, underwent a major modernization on March 13 called Dencun. Developers told CNBC that transaction fees are expected to be reduced by up to 90%. This is a game-changer not only for the end users, but also for the programmers who create apps based on Ethereum.

Base, crypto exchange Coinbase’s Homemade Layer 2 network, is based on Ethereum and allows developers to more easily create decentralized apps. Coinbase Head of Base Jesse Pollak believes this will open the door to applications in both the gaming and decentralized social media spaces, as these types of programs are no longer nearly as costly to develop.

“What is happening with Dencun is that we will be creating a whole new type of storage on Ethereum that is specifically designed for Layer 2s like Base,” Pollak told CNBC.

“This means that we currently pay a lot for Ethereum and will pay a lot less, which will reduce fees for everyone. Because Ethereum is basically going to build a product specifically designed for us,” Pollak continued.

Chris Dixon, head of crypto at venture firm a16z, echoed this sentiment, pointing out that part of their portfolio is focused on these startups.

“The core idea is that building a social network, a game or a financial service on the blockchain brings all sorts of benefits, as the money and control flows to the users and developers who access the network, as opposed to the companies that control it,” Dixon said. “Just as steel was a better way to build bridges and buildings than wood in the Industrial Revolution, blockchains are a building material.”

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