Bitcoin, the newly buzzy digital currency, can be a bit confusing to the uninitiated. It’s money that…grows out of your computer? As an asset, is it best compared to gold, or Beanie Babies and POGs without the carrying cases?
It’s a total wormhole, but you will: 1) dismiss it, 2) follow it for a laugh, 3) think “This isn’t supposed to work, but maybe it’ll work for me” and 4) become a bitcoiner.
Bitcoins exist as computer files. Analagous to cash, if the file is destroyed, so is the money. Transactions are pseudo-anonymous.
You can store coins in a virtual wallet on your computer or entrust them to an online service. Some expert users advise to never store locally (you’ll get hacked or lose them); others advise never to use an online wallet (they’ll get hacked or lose them).
To get bitcoins you either buy them, trade something for them, beg for them, steal them, or make them yourself in a process called mining that is less laborious than it sounds (don’t know why ‘minting’ never caught on instead).
How to mine
Bitcoin mining requires throwing your computing power towards solving mathematical problems that mint new coins (while recording all of the transactions across the bitcoin network, telling everyone who owns which bitcoins). The system was coded so that bundles of new coins are rewarded to one lucky miner whose computer unlocks a new block on an average of every 10 minutes.
Over the years, the rewards (currently 50 coins per block) get smaller, and the incentive to mine switches to collecting small transaction fees and keeping the network secure by verifying network transactions. Also over time, the difficulty level of the mathematical problem re-adjusts based on the addition or subtraction of network power. This figure is, for reasons unsure, called “the difficulty level” – which started at 1 and is now 1.89 Million.
In the beginning, miners were able to solve blocks easily with any normal computer. With the difficulty level so low, it was common to produce hundreds or thousands of coins weekly, although they traded at a penny or less each. Since the coins had little value, they were freely given away as tips and experimented with. In May 2010, one miner actually struggled to get someone to send him two pizzas delivered to his door for 10,000 bitcoins, then worth $40. At the recent price of $9/BTC, those coins are now worth $90,000.
Many of the OCs (Original Crytographers) are still sitting on the majority of their stash, regularly using their coins as payment for goods and services (so, ten points for trickle-down theory). Others mined hundreds of coins before dropping out, reformatting their hard drive, and regretting it later. Word of bitcoin spread through a cryptography mailing list and appealed to many of a libertarian bent. Many of these early adopters are still around on the development team and have a genuine desire for bitcoin to succeed.
If you are thinking about giving your standard issue desktop a crack at mining while you are asleep, stop thinking about it. You will be lucky to receive 1/1000 of a coin over those hours, less than you could get instead for free from various sites.
At present difficulty levels, you can only reap significant rewards by mining with the newest generation of expensive graphics cards. GPU mining on just one card will create something like 100x more coins than with a CPU, and it’s the only option if you want to cover the cost of electricity.
The good news is that to begin bitcoin mining, you don’t need to be a mathematician or a problem-solver at all. You just have to have an account at Newegg and a passion for spending all of your excess money.
To put together a mining rig, one spends as much as possible on graphics cards and power supplies, and as little as possible on a processor, motherboard, memory, hard drives and personal hygiene. Anything less than $700 in your mining rig and you’re kidding around. Anything over and your parents (you’re doing this and paying rent?) will notice you’re up to something. The mining contraptions you build can be as wild as you like; just keep in mind that it is very important to dissipate the heat they produce.
Miners also pretend to first get used to, and then actually prefer the extra heat and vuvuzela-like noise being spawned from their computers. If the power gets knocked out and they are forced to go to sleep without their beloved drone, they get nightmares that their wallet was accidentally erased.
The shifting market
Bitcoin miners frequently branch out into other fields when they feel that others aren’t doing their part to make bitcoins more expensive again. Speculators came on board in droves with pimped-out machines to make a quick buck this spring, pushing the price per coin from $1 in February to $30 in June.
Coin hoarders love this, since they are eager to make a return on their investment. Some will start their first website, or their first online store; others day-trade on the exchanges, or make a bot that day-trades for them. Some become “ideas men”, pitching business plans to more talented people who will accept a small percentage of the profits in exchange for doing a large percentage of the work. The beauty of bitcoin speculation is that you can choose whether you want to be a blue-collar or white-collar worker – it’s all in the mind, just like the value of the bitcoins.
But now miners have to adapt. Since competition made the difficulty level astronomical, they’ve overwhelmingly joined “mining pools” that hand everyone a consistent small amount of bitcoins proportional to the amount of power their rig contributes, rather than mining solo until they find a block (which could now take months or years). This is somewhat similar to choosing annuity over lump-sum payments after winning a lottery, except that lotteries pay in actual money.
Some miners on the Bitcoin Forum have gone on the offensive, trying to orchestrate a voluntary price-fixing on the exchanges and even a “strike” (missing a perfect chance to coin the phrase “going gelt”) where miners agree not to sell new coins to speculators.
Naturally these efforts fell apart as bitcoin miners are unable to trust each other, along with: mining pools (for fear the pool could grow to represent over half of the total network power), the lead developers, each and every exchange, each and every online wallet, and even Bitcoin’s creator, Satoshi Nakamoto (who grabbed his fedora and walked out of the joint at the end of last year).
Hazards of mining
A lot of miners’ mistrust is well founded. Hackers have developed wallet-stealing malware, the third-largest exchange (Bitomat) accidentally deleted their own wallet worth $250K after storing it and its backups on (ephemeral) Amazon cloud hosting, and mybitcoin.com proved true to its name as the owner of the largest online wallet seems to have taken everyone’s coins (again, hundreds of thousands in USD). Even haters tend to acknowledge that bitcoin is a very secure technology – but the community just makes it hard on themselves with what seems like endless “teachable moments”.
The general paranoia is also realistic. An Australian Broadcasting Company employee was reportedly fired for stealing company resources after he turned their idle computers into a bitcoin mining network. Large mining rigs at home aren’t safe either — they resemble pot-growing operations to the authorities, as both have prominent heat signatures from the air and spike the electricity bill. There have already been reports of DEA raids where confused officers found only computers and cheese puffs, but charged the raidees thousands of (real) dollars for the inconvenience.
Miners don’t get along with many of their fellow custom-riggers. While advanced graphics card setups usually mean high-end video games, running one on an active bitcoin miner would crash the system. Minesweeper, a fan favorite, is safe to run on an active mining rig. But many miners actually disconnect their mining computers from a monitor after they have set them up. The fact that bitcoin miners aren’t playing video games with their insanely tricked out computers pisses many gamers off — “If I had a big rig like you, I would use it so much better – you don’t deserve to have such a huge rig!”
And of course they don’t like each other either. While everyone knows additional bitcoiners entering will help keep up demand and bolster the bitconomy, miners self-servingly want less brethren, not more, so that they can produce more coins. So when they see new miners come online, it’s “Welcome to the club … jerkwad.”
Bitcoin mining is also not without its health hazards, as recorded on my site Bitcoin Mining Accidents. The most significant such accident is the miner who sustained brain damage from heat, although minor nicks, cuts, burns and fumes are reported regularly. As I’ve advised on the blog, if you build a rig, you should purchase a fire extinguisher, wear flame-retardant clothing and check for grounding faults.
If you’re still considering joining the bitcoin scene (even just to bug the existing miners), it makes sense that you’ll be unsure of whom to trust with your money. Just remember that the industry-leading bitcoin exchange, constantly converting your USD into BTC, is the power company. And be sure to put your bitcoin wallet address in your signature on everything you write on the internet – you might get tons of donations!