With all the coverage Bitcoin receives in the news, many are becoming familiar with this fledgling form of virtual money. It seems there has been so much attention surrounding whether or not it will become an established and widely accepted form of currency, or if the frequent price fluctuations and scandals that are connected to the bitcoin are enough to eventually make it dwindle away. In the midst of so much speculation, one of the most interesting things about this currency’s system is being ignored: Where do Bitcoins come from in the first place?
- 10 scary facts about Bitcoin
Just because you can not hold a bitcoin in your hand, does not mean it is just an imaginary money. Bitcoins can not be just magically created at will; “Hmm, time to make some more bitcoins”. That isn’t how it works. Although this form of currency isn’t under regulation, and doesn’t get printed at a mint, there still must be something to limit it’s production, or it wouldn’t have any value. Amazingly enough, they’re the products of complex software algorithms.
Hundreds of people have realized the opportunity to contribute their own computing powers to help solve these algorithms, and guess what? Every time they do it successfully, they are rewarded with a block of bitcoins. This is called “mining”, and some people have figured out how to make it pay off, big time.
Truly racking up the bitcoin is going to take persistence, patience, and ALOT of water cooled computer hardware. At least, that’s the way Eric ( name changed to protect identity) did it, and with the amount of the virtual currency he has accumulated, it seems he knows what he’s talking about. At last check, his wallet had a net value of Nearly $191,000,000! (2500 bitcoins)
He started mining just three years ago, in 2010. He even gave up his high wage position as a software engineer to focus on his efforts in bitcoin mining. As you can imagine, its a decision he doesn’t regret.
Mark didn’t get into bitcoin mining just to turn a profit though, that was just an “extra benefit”. What is really interested in is watching bitcoins journey to become a sturdy and established currency. He even passed on cashing in his savings when the exchange rate for the bitcoins could have scored him a hefty $655,000. When asked, he says he doesn’t plan to cash out any time in the near future. Right now he’s enjoying watching the way their trade values change from day to day.
As bitcoins are growing more widely accepted as a viable payment and trade method, many people are beginning to think about getting into bitcoin mining, thinking that anyone can become rich by installing some software on their computer and sitting back to watch it do all of the work. This is not the case. To be a success story similar to Eric’s, it is going to take a considerable investment to get started, as well as high levels of dedication.
Doing the Math when it Comes to Bitcoins
One must understand Bitcoin itself before trying to jump right in to mining. The currency can plummet one day, then sore back up to an all-time high the next. Much of this has to do with the fact that it is a decentralized form of money, and isn’t tied to any particular economy.
Bitcoins were first introduced by Satoshi Nakamoto (pseudonym) . He develop the bitcoin mining software, which runs on the Nakamoto algorithm, which is named after him. The algorithm does its job by searching for a particular chain of code, nonstop, 24 hours a day. When, finally, the code is found, the miner responsible is rewarded with a block of bitcoins. Just how many bitcoins are in a block? The answer to that changes with the times. If you were to discover a code and receive a block now, you would be looking at 25 bitcoins. Four years ago, you would have gotten 50. The amount of bitcoins in a block is cut in half every four years. Due to this, mining is becoming more difficult to make a profit on as time the time passes.
At this point, there are approximately 11.4 million bitcoins that have already been found and entered into circulation. It is estimated that in the year 2140, that number will reach 21 million, which is the limit set by the algorithm to ever be in circulation. That leaves a little less than 10 million that are out there, waiting to be awarded right now.
When Eric first began his bitcoin mining journey three years ago by reading about it in an on line forum, his interest was immediately sparked. He was excited to learn more about this new form of virtual currency.
After he had learned enough to understand exactly how Bitcoin operated, he was confident enough to get involved. He could have taken the easy option of simply purchasing the bitcoins with cash, but he was more interested in giving mining a try. He soon found that if he was going to do it right, he would need to invest in the right PC gear.
Bitcoin was just starting out, and at the time (2010) miners could rely soley on their home PC and some software to do the mining. This is the way Eric started out, but it wasn’t long until he decided that he was going to make some updates to his desktop computer that would optimize its mining capabilities.
The first change he made was to install two ATI Radeon dual-GPU cards. He discovered that by using the GPUs on the cards, his computer could mine up to 100 times faster. It was now that the bitcoins started coming in. From that point on, he would continue to make investments to boost his mining powers even further. The more bitcoins, he made, the more he could afford to invest. At this point, he estimates he has sunk at least $50,000 into his system, in the form of:
- graphics cards
- Circuit Boards
- water-cooling for pumps, tubing, radiators, etc.
- Not to mention, electric… It takes a lot of power to run a rig this big.
As you may have guessed, there are two main problems associated with this sort of intense GPU mining.
- Power Consumption- If you are mining on the same scale as Eric, you can expect a whopper of an electric bill. As a group, it is said that miners go through as much as 3,176 megawatt hours of electricity every single day. Eric found it tremendously helpful to obtain a commercial license to power his residence.
- Heat Generation- Figuring out away to overcome the heat his rig was putting off was a little trickier, but Eric came up with a pretty ingenius and creative solution. He started experimenting with pumping water from the swimming pool in his backyard through a radiator to cool his system off, and it worked pretty well.
As time passed on, Eric worked up to including four powerful PCIe graphic cards in his system, which are constantly running the Bitcoin algorithm at an amazing rate. His system was optimized for the task, but he knew that there was another way to maximise his chances of getting Bitcoin rich: Too always operate within a mining pool, so that’s exactly what he did.
A mining pool is a group of miners gets together to combine their computing powers to increase the odds of finding a block. When the lucky moment strikes and they finally do come across a block of bitcoins, pay off is for everyone that is part of the pool. How much each member gets depends on the specific pool that he or she is a part of. Some will distribute the bitcoins based on the role you played in solving the algorythm, while others will simply divide them equally among the group.
According to Eric, it can be hard to know if you are always being paid enough for your work. He found himself jumping from pool to pool for a while, curious if one was any better than the other. In the end, he says he doesn’t know if it really makes much of a difference.
Eric’s innovative PC system and it’s amazing rate of output definitely played a major role in the fact that he was able to make such an enourmous proffit by mining bitcoins, but it might not have worked had he waited until now to try and use it. In fact, another method of bitcoin mining has been developed, which has made his system practically worthless now in 2013 – ASIC miners.
ASIC miners, or Application-specific integrated ciruits, are taking bitcoin mining to a whole new level. It’s what they were created for, and they are really good at their job. Eric’s GPU operation and others like it were impressive, but ASIC mining rigs are smaller, much faster, and won’t do nearly as much damage to your bank account when it’s time to pay the energy bill.
Luckily, Eric had a headstart on the ASIC miners, which didn’t come out until Bitcoin was aready becoming popular with the general public, being feautured on the pages of such magazines as Forbes and Vice. Now, the ASIC hardware is a hot commodity. Where it can be found, it is selling fast.
It may be a little difficult to get your hands on ASIC miner, but if you do you are almost guaranteed to find it well worth it. Some experience payouts within the first few days that are big enough to cover the cost of the hardware, which can run as high as $20,000 !
How will mining change in the future?
You can see that the world of bitcoin mining is a constantly changing one. More and more individuals are turning to it in hopes of making a profit everyday, but unfortunately, their efforts may be in vein or not very fruitful. Even with the best ASIC miner money can buy, chances are you are too late to get in on the real bitcoin making action.
Eric, who was quick enough to get in the game whie it was still fresh, has this advice for those who see themselves as prospective miners: “Unless you started mining early, you’re going to fail.” there is a lot of truth in this advice. The amount of competition now is unbelievable. This isn’t the only reason. Turns out, bitcoin mining is supposed to get harder is time goes on.
For one thing, the algorithm is designed to award a block of bitcoins every 10 minutes, no matter how many miners there are. Plus, the block size itself is cut in half every four years. It is at 25 now, but when Eric got his start, it was 50. In short, the payouts are not only becoming less frequent, but they are also getting smaller.
The mining pool has become so big, the new technology so impossible to compete with, that Eric has finally decided to take the sidelines when it comes to bitcoin mining. He has returned to his job as a software engineer and has put his GPU mining rig on the market. He considers it more of a temporary break then a retirement. He says maybe one day, he will end up purchasing an ASIC miner, when they are more readily available. However, at that time the return on investment will be nowhere near what it is now.
One may ask if it is wise to invest so much time and money into a type of currency that hasn’t proven it will always have value. According to economic historian Garrick Hileman in a statement to TechHive, it is too early to tell which alternative currency will become the dominate medium-to long-term player. He says that he believes over the long term bitcoin offers more potential as value to be stored, rather than becoming a common medium of exchange. A big reason for this is that the supply will eventually be capped, and there is a high likely hood of it being hoarded.
According to Eric, there is something that bitcoin has to offer that other currency types don’t. Because it is decentralized and not controlled by any government, it could prove to be a valuable hedge against bad economic times in your countries economy, should there be any.