Where do Bitcoins come from?
Bitcoins are created in a process called mining, where a computer repeatedly works through a series of calculations that are designed to be difficult to solve, but to lead to a specific answer. In technical terms, the miners are looking for a number that, when hashed, produces a result with a specific number of consecutive zeros in it. Don’t worry if you don’t understand what hashing is: you don’t have to know about that to mine.
The miner that finds the right answer to these calculations is given a reward for their hard work: 25 Bitcoins. This process is called solving the block. Once the block has been solved, the process restarts, and the miners start looking for the next solution. This process runs repeatedly, with an average of one block being solved (and thus 25 Bitcoins being created) every 10 minutes or so. You can see the blocks being solved here.
Can I get rich mining Bitcoins?
The short answer is No, unless you started some time ago. The long answer is more complicated. Solving an odd math puzzle might sound like money for nothing, but there is a real cost involved: the cost of the computers that do the solving, and the electricity they use. When you start running your computers at high speed 24/7, your electricity bill goes up.
A puzzle that gets harder the more you try and solve it: from kH/S to MH/s to GH/s.
That sounds pretty simple so far: computers are good at crunching numbers, and an average computer can run several thousand of these calculations (called hashes) a second. But there is a catch: to restrict the flow of new Bitcoins, the difficulty of solving the block to find the Bitcoins changes regularly. One of the factors that controls this change is how much computing power was used to solve the last few blocks. This means that the more computing power people throw at the problem, the harder it gets. This happens by increasing the number of consecutive zeroes that are required to solve the block. This has created a cycle that makes Bitcoin mining unprofitable for most users.
When Bitcoin started out, most people were using the CPU of their computer to run the software that did the math. These CPUs could do between 2 and 5 thousand hashes a second, so the typical speed was about 2 to 5kH/s (kilohashes per second). However, in 2010, miners realized that these calculations could be done by another part of the computer, the Graphics Processing Unit (GPU) used to create the graphics for computer games. With some tweaking, the GPU of a high-end graphics card could run these calculations much faster, because they aren’t that different to the ones used to render games. A high-end graphics card could do upwards of 500,000 hashes a second, or 500 kH/s (kiloHashes per second). If you put multiple graphics cards into one computer, each card could run these calculations separately, so you started to see people with miners that could do over a million hashes a second, or 1 MH/s (1 MegaHash per second). Shortly after that, several companies adapted Field-Programmable Gate Array (FPGA) chips to run the task, which had similar speeds as GPUs, but used less power.They then sold these devices to Bitcoin users, who ran them to mine more Bitcoins.
This lead to the rise of so-called mining farms, where Bitcoin users would buy multiple computers, each with multiple graphics cards, and set them all running the software that crunches the numbers, looking for Bitcoins.
Bitcoin users also got together to pool their efforts, forming Bitcoin Mining Pools like Eclipse Mining Corporation or 50BTC where the rewards would be shared between members, divided up by how much processing power they contributed.
Here come the ASICs
This changed with the emergence in 2011 of Application Specific Integrated Circuits (ASICs), which are computer chips built purely for the purpose of mining Bitcoins. Because finding Bitcoins is all they are built to do, they are much, much faster than GPUs and FPGAs: a ASIC miner like the KNC Jupiter can crunch through an incredible 550 GH/s (GigaHashes per second) . That is a thousand times faster than a typical GPU and over a million times faster than a CPU. These devices are not cheap, though: a KNC Jupiter will cost you about $5000.
See the difficulty climb
With ASICs becoming widely available in 2012 and 2013, the amount of computing power used to mine Bitcoins increased at an incredible rate, as you can see on the graph below.
The numbers are staggering: the Bitcoin network had a total hash rate (the combined power of all of the computers looking for Bitcoins) of about 22,625 GH/s in October 2012, but this rose to a peak of 1,900,662 GH/s in October 2013: an increase of over 84x. This is even more incredible when you consider that the network hash rate only passed 1 GH/s in August of 2010.
As I mentioned earlier, as the amount of computing power applied to solving a block increases, the difficulty of finding Bitcoins increases to match it, and the difficulty has increased in a similar way.
Mining is now expensive, difficult and mostly unprofitable
So what does all this mean? The bottom line is that mining for Bitcoins is now very difficult, requires a lot of computing power and won’t be profitable for most people. Especially because the ASIC miners are still selling well, so the network hash rate keeps increasing, and the difficulty of solving a block increases to follow. This trend shows no signs of changing.
Let’s take an example: If you buy the KNC Jupiter ASIC miner that I mentioned earlier, this will cost you about $5000. That can do about 550 GH/s, and uses about 640 watts of power. A rough calculation shows that at the current difficulty, this could find one block per 17 days, so you would make approximately $6000 in the first month of mining, and you would break even in about 26 days.
That sounds great, except KNC says that a Jupiter bought today won’t ship until November, by which time the difficulty rate of Bitcoin will have increased in response to the ever-rising hash rate. If we assume that the miner is actually delivered then, the difficulty will have increased in the meantime. If it does so at a similar rate to how it is increasing now, the same hash rate of 550 GH/s will take 33 days to find a block, and would take 80 days to break even.
This is assuming that the miner does ship in November: these devices are complex to build, and many people have ordered miners, only to have the shipping date repeatedly pushed back for months. And as the difficulty continues to climb, the miner produces less and less profit. Eventually, it costs more in electricity to mine the Bitcoins than they are worth. My numbers were calculated using a mining profitability calculator from The Genesis Block. The reward for solving a block is also falling: it was cut from 50 to 25 Bitcoins in 2012, and is scheduled to fall to 12.5 sometime in 2014.
A cynic might say that the only people making money out of mining Bitcoins at the moment are the people selling the ASIC miners, and that’s probably not too far from the truth: the returns from buying a Bitcoin miner now are minimal or none. Bitcoin is a classic case of early adopters making the big bucks (by buying ASIC miners when they first came out on 2012 or early 2013), while those who come in later make little or nothing. Perhaps it is not surprising that it has been called the 21st century gold rush.
To put it bluntly: the Bitcoin mining gold rush is over, because the mines are now deep, dark, and you are unlikely to come out with much of a profit.
So why are people still mining Bitcoins? Some are doing it because they bought the equipment early enough that they have made a profit doing so, while others are doing it because they believe in Bitcoin for political or philosophical reasons. And some are doing it because they are betting that the value of Bitcoins will continue to rise, which is what we will discuss in the next FAQ.
This is the one in a series of Frequently Asked Questions (FAQ) about Bitcoin and other crypto currencies. Do you have questions on Bitcoin and other crypto currencies you want answered? Post it here as a note and we will answer it if we can.