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A Guide to Bitcoin Mining - How to Quite Literally Print Money

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Why Someone Bought a $1,500 Bitcoin Miner on eBay for $20,600?

With the price of bitcoins skyrocketing, mining is suddenly big business, so enticingly
big that one wannabe miner was willing to pay a 1,333 percent premium to get
his (or her) foot in the door of this wildly lucrative bitcoin bonanza.
Ladies and gentlemen, welcome to the bitcoin gold rush.

The craziest part? This wasn’t an auction for a physical, working, ready-to-ship bitcoin
mining machine from Avalon, which claims to be the first to develop turnkey, bitcoin-specific
mining computers for sale. For $20,600 (bidding started at a reasonable $500), the lucky
winner only received a place in line and the promise that an actual (pre-ordered) miner
will be delivered sometime next month. If that sounds ridiculous, well, it’s because it
quite possibly is.

But clearly there are bitcoin-savvy folks betting that paying 13 times the price of
a machine will actually pay off. How did we arrive at this maniacal juncture? Was it
greed? Stupidity? Or simple mathematics? For the full story, we’ll have to start from the top.

But here’s the kicker. Built into the model is a “difficulty” metric, which is recalculated
whenever 2016 blocks are added. As the speed of mining goes up (as more processing power is
added to the system), the difficulty will increase proportionately to compensate in order to
maintain the rate of one block every 10 minutes. What this means is that your ability to mine
bitcoins isn’t necessarily about absolute computing power, but rather your computing power
relative to other mines. Of course, in the end, that still means you’re going to want the most
powerful hardware possible if you want to maximize your mining ability. But it also means that
if you don’t keep pace, you’re going to be left behind. Which brings us to...

A brief history of mining hardware

Back in 2009, when Satoshi Nakamoto first birthed bitcoin, mining difficulty was relatively low,
which meant that anyone could download the software and more or less start mining with only their CPU.
The next logical step was the GPU, dedicated graphics chips usually reserved for gaming. A graphics
card from the likes of Nvidia or ATI offered a significant boost over Intel and AMD CPUs. For about
$150, you could buy an off-the-shelf graphics card and start a fairly profitable mining business in mid-2011.

As more miners joined the party, difficulty increased, making the profit to power consumption ratio
unpalatable for those used to a higher rate of return. Bitcoin's price collapse in July of 2011 only
exacerbated the situation. Even if you believed in the future of bitcoin, if you spent more on your
electric bill than you made from mining, you were better off just buying bitcoins. This initiated the
advent of FPGA, or field-programmable gate array, use in mining. That's a mouthful for the technical
layman, but all you really need to know is that these add-on cards, which cost in the hundreds of
dollars, offered comparable mining performance to GPUs while using way less power. Better energy
efficiency meant higher profit margins.

The endgame, however, was always going to be the ASIC, an application-specific integrated
circuit–in other words, a chip designed from the ground up for the specific purpose of mining
bitcoins. The result is a system that is not only incredibly powerful compared to anything else,
it’s also exceedingly energy efficient. ASIC also represents the theoretical limit on the
hardware capabilities of mining equipment. Sure, you could keep shrinking the die-size of
the chip so that it uses even less power, but even that road eventually ends. It’s simple
physics: things can only get so small. Until quantum computing arrives–if it ever does–for
bitcoin miners, using ASICs is the way to go.

Where we are today

Remember, the ability to mine bitcoins is based on relative computing power. As such, whoever
got their hands on those first ASIC machines–which are roughly 50 times more powerful than the
next best thing–would quite literally print money. That lucky man was Jeff Garzik, who was
incidentally pushed to the front of the queue by Avalon for being a core bitcoin developer. It’s
an open source project after all. (The other unit went to the Bitcoin Foundation.)

Garzik made back the cost of the $1,299 ASIC bitcoin miner in about a week.

Which finally brings us back to our exuberant eBayer, the one who paid over $20,000 to cut in
line and join the other batch two early birds. Is the worm really worth an $18,500 premium?
Only time will tell. But if the price of bitcoin continues its meteoric rise, he too, will
eventually mine his money back, sooner rather than later. Under current conditions, he'll
break even in 50 days, with daily revenues of $434.12, according to BitcoinX.

Remember, the ability to mine bitcoins is based on relative computing power. As such, whoever
got their hands on those first ASIC machines–which are roughly 50 times more powerful than
the next best thing–would quite literally print money.

by Alec Liu

We do know however, that he'll be in for some stiff competition and with it,
the reality of diminishing returns as more ASIC units flood the system. Butterfly
Labs–rumored to have sold over 20,000 pre-orders as of a month ago–is expected to
start shipping in May or June. Still chugging along, Avalon revealed it would
start taking orders for batch three in the next few days.

This time around, one of the 600 Avalon miners will cost
~75 BTC (the batch three price of the systems will be
calculated so that break even point will be 30 days, once
the difficulty resets), which comes out to over $5000
with bitcoins trading at ~$70.

How bitcoin mining works

In order to keep a record of everything, bitcoin has a ledger known as the “block chain,”
a shared database of all successful transactions. Every transaction that occurs must be
broadcast to the bitcoin network and everyone connected to the bitcoin network has a copy
of the block chain. The purpose of bitcoin miners is to verify these transactions and then
add groups of transactions, called blocks, to the block chain. This process occurs roughly
every 10 minutes. For every block added, the successful miner receives a certain amount
of bitcoins for his troubles, plus transaction fees. You get 25 bitcoins for every block
mined. Anyone can technically become a miner. The software is ready to download, all
you have to do is contribute raw computing power, which means your main recurring
costs are electricity bills. If you solve the next block, the spoils are yours. The more
processing power at your disposal, the greater your mining ability.