Bitcoin mining

Echoing Samuel Brannan back in the California Gold Rush, the real money being made in Bitcoins today is by people selling the mining equipment (Image source: Discovery Channel)

Bitcoins keep hitting the news these days; whether as the crypto-currency of choice for nefarious Internet dealings on recently busted Silk Road, or as a highly volatile form of digital money whose consumer-based valuations fluctuate wildly, lately skyrocketing to the point that some economists say they are a bubble about to burst.

Selling to the Miners

But now it turns out the real money in Bitcoins isn’t in the virtual money itself; it’s in the computer equipment – getting continuously more sophisticated – to “mine” the Bitcoins that the real money lies. Here’s a little background:

Bitcoin transactions rely on computer networks that are able to untangle complex math formulas in order to clear transactions and ensure the virtual coins are the genuine article.  These networks then generate new Bitcoins once these math problems get solved, which are forwarded to those who operate the systems themselves. Naturally, the more coins get created, the more difficult these cryptographic equations become, which also helps to hedge inflation on the currency.

One such person who operates these systems is 27-year-old Aaron Jackson-Wilde, who paid some $2,000 for his setup, which is run by highly specialized computer chips. These chips are specifically designed to both operate and maintain his Bitcoin network, while simultaneously producing a little reward money in what has come to be known as “Bitcoin mining.”

Trying to Turn a Profit No Easy Task

The hope of these “miners” – much like their namesakes of old – is to make more in Bitcoins than they end up spending to “mine” – no easy feat when some of these setups can run as much as $20,000 or more, not to mention the electrical costs involved when all this machinery is humming 24/7/365. Right now, the coins are at an all-time high of the equivalent of $200; that’s vs. $12 per coin only last year at this time. So money is there to be made for the savvy few.

But just as with the California Gold Rush, the more miners jump in the fray, the harder it gets to actually make money mining. Because of the recent dramatic spike in Bitcoins’ value, more and more miners have gotten involved, who in turn have gotten more powerful chips, significantly upping the workload overall on the Bitcoin network.

This overload, in turn, then drove up the complexity of verifying each transaction made using the cryptographically transmitted data, and that is making it harder and harder for miners to recoup their mining gear investment costs. Andreas Antonopoulos, a digital currency entrepreneur in San Francisco, explains: “Bitcoin makes silicon perishable. Your mining rig rots away in front of your eyes every day you have it.”

Back in the real Gold Rush days, it was men like Samuel Brannan, Levi Strauss (yes, the jeans guy) and Phillip Armour (who went on to become a famous meatpacking magnate) who were just a few of the equipment and service providers who made far greater fortunes off of the 1849 rush than anyone who actually discovered gold. And it appears not much has changed in that arena.

“It’s the guys who sell the equipment who are making the money, not the Bitcoin miners,” said Jackson-Wilde, who works days as manager at a motorcycle battery company.

In fact, one such manufacturer, CoinTerra, estimates that the market for Bitcoin mining chips could reach as high as $100 million per year for the next three years alone, based on current valuations.

Experts in the mining field expect some 1.4 million new Bitcoins to be created by the technology during those same three years, which will amount to some $280 million per year if current exchange rates stay fairly stable. Since Bitcoins’ initial creation back in 2008, about 11.9 million Bitcoins – valued at $2.4 billion in recent exchanges – have been minted.

WHERE DID BITCOINS COME FROM?

Bitcoins first started circulating via the Internet in 2009 after that initial conceptual introduction by someone presenting under the pseudonym of Satoshi Nakamoto. It quickly became a popular form of “antimoney” – what was perceived by some as a viable alternative to bank-backed national currencies, due to its theoretically untraceable source. Its value is based solely on what its users perceive it to be at the moment. It is currently considered the preeminent form of digital currency.

While the cryptocurrency has attracted plenty of attention from the law – the FBI recently seized and shut down the Silk Road website, which  used the monetary form for all its many illicit transactions – it’s also been skyrocketing in value lately and is now attracting the attention of some legitimate investors, some of whom see the coins as becoming a serious force in e-commerce.