One of the most ingenious aspects of Bitcoin and all the other cryptocurrencies has to do with the way it is put into circulation. With the current fiat monetary system, the way money is put into circulation is through banks at various levels right up to each country’s central bank issuing loans to customers at various levels right down to Joe and Mary Homeowner needing a mortgage or Motorcycle Mike needing a vehicle loan. More money is loaned out than what any of the banks have which is a great deal for the banks (they essentially create money out of nothing and get it all paid back with interest), but this tends to be a bad deal for Mike, Joe and Mary because not only do they have to repay their loans with money they had to go out and earn (usually by working at jobs), but over time that earned money gradually loses its value through inflation.
The deck does seem to be stacked in favor of those at the top of the banking system, which is not surprising considering the ones at the top tend to make the rules in such a way that they get to stay at the top. But you can’t have just everybody issuing loans out of nonexistent money either because then the value of the entire currency will go down to zero.
Bitcoin is brought into circulation by mining. It’s not dug out of the ground; it’s “dug” out of computers. At the very beginning, someone or a group of someones who are very good at computer programming wrote a program which locked up a limited number of Bitcoins (just under twenty-one million) inside a bunch of blocks. Then computer nerds across the world started trying to break open those blocks by programming their computers to solve the riddle locking each block. I know this is oversimplified but the main point is that the one who created Bitcoin did not take them all for himself. He (or they) have to dedicate their computing power to solve the problem that breaks open the blocks to get at the Bitcoins just like everyone else.
That whole process of breaking open blocks and “generating” Bitcoins is referred to as mining. Unlike a fiat monetary system which favors banks, the Bitcoin system tends to favor the computer geeks, the programmers and the ones who know how to build and use hardware. In general it favors anyone who has a computer and is willing to get it to run the mining script while connected to the Internet.
Theoretically, anyone with a computer can set that computer to work mining Bitcoins. When I first learned about mining I thought that sounded pretty cool. I have three working computers in my home. Since I am not a computer geek I went with a mining method which seemed straightforward. I registered an account on Bitcoinplus, downloaded the latest version of Java, then hit the “generate” button to start the computers cranking. Within a few minutes I had “generated” 362 satoshis, or 3.62 uBTC. Not very much, I thought, but surely after a few hours or days, my generated Bitcoin balance would start to add up.
What I’d discovered was some kind of general mining pool, where all the computers involved share the work and the profits. With so many computers around the world trying to open the same blocks, the Bitcoin algorithm automatically adjusts the difficulty level to allow blocks to be opened at a consistent rate. This means the more computers there are mining, the more difficult the mining will be. This is actually a very important concept, one I did not have a clear grasp on when I first started “generating” Bitcoin in that pool.
When Bitcoin mining first started–sometime in 2009–it was a novelty and certainly had not reached the mainstream as an accepted currency. Computer geeks had fun mining and accumulating all those coins they’d generated, but they weren’t worth much to the rest of us.
As Bitcoin became more accepted as an actual payment system which was bound to happen because it’s so much easier and cheaper to send Bitcoins around than make payments with Paypal, then the value of Bitcoins in terms of national currencies started to go up. Several months ago, the price of one Bitcoin was $265 for a brief period of time before it crashed back down to around $90.
That’s when mining got to be much more interesting for people, especially people who knew how to build hardware. Earlier this year, a new kind of computing chip called an ASIC (for Application Specific Integrated Circuit) was developed. This computer chip is built specifically to mine Bitcoins and isn’t much good for anything else. It’s a weird example of how money fuels technology development. Who in their right mind would spend hundreds of thousands of dollars inventing and manufacturing computer chips that do nothing else but mine this cryptocoin which doesn’t physically exist but is made up of a bunch of computer coding? Anyone who’d try it would be crazy… until that physically nonexistent cryptocoin can be traded for $90. Then the one who tries it is suddenly a genius. Not only that, he’s in a race against several other companies to be the first to start mining with his brand new ASIC.
If you read the now 500 page long Bitcoin Forum thread about ASIC Miner, you will really feel the intensity of the race between ASIC Miner, Avalon and Butterfly Labs over who would be the first. Reading about the inevitable delays in developing something new is almost painful.
I’m not sure who won that race as I’m only on page 70. I do know that Bitcoin miners started using ASICs in February or March of this year. Now ASICs are for sale everywhere and it’s pretty much become a situation where if you aren’t using ASICs to mine with, you might as well pack it up and go home.
With ASICs on the scene, the amount of collective computing power dedicated to Bitcoin mining has grown exponentially. So has the mining difficulty. I’ve seen forum posts talking about difficulty level jumping by over twenty percent every two weeks! Now that the difficulty is so much higher than it was two months ago, my three computers working away to generate are performing rather poorly.
Here’s what it looks like to me, a non-miner other than having my regular desktop generating on the Bitcoin Plus website. I’ve had my computer generating for several months now and I’ve accumulated a little more than 0.0037 BTC in my account. I actually want to quit but the minimum send amount is 0.01 BTC, so my plan is to generate until my balance hits 0.01, send myself the entire amount and then call it quits. I bet my electric bill goes down when that happens. Meanwhile, because the difficulty level keeps rising, the number of satoshis my computer will generate each time there’s a payout keeps getting lower and lower. It is now at 113 satoshis. It is going to take forever for that darned balance to finally reach 0.01 BTC!
I know I should just walk away from the mining attempt and the balance and be done with it. I earn more BTC in one day writing for the Devtome than I will generate even if I do hit the payout threshold of 0.01 BTC. But I have a really hard time walking away from 0.0037 BTC that I (er, my computer) worked so hard to generate. So I keep my computer cranking away until I finally decide to walk away from some slightly higher balance or the website owner decides to reduce the payout threshold, which I think is unlikely. Maybe I’ll come up with a solution that will work for me. Or maybe not.
Mining with ASICs has caused quite a lot of virtual hand wringing because in such a short time it went from a situation where pretty much anyone with a computer could mine small amounts of Bitcoins (and be part of putting Bitcoin in circulation as a currency) to a situation where you have to invest a few thousand dollars into some serious and dedicated mining hardware to even have a chance. Not only that, you are going to have to constantly be upgrading your hardware as the difficulty level will continue to increase. The ultimate virtual keeping up with the Joneses.
Now it’s the professional miners who get the primary benefit of putting new Bitcoins into circulation, and people are complaining about that… as if mining were the only way ordinary people can get their hands on Bitcoins.
Now that I know more about mining and what it takes, I know that I do not aspire to be a professional miner. I just can’t bring myself to go out and buy hardware dedicated to mining. I’m not a computer nerd–I’m one of those people from the mainstream learning about Bitcoin and thinking it’s really cool. I can just imagine the conversations that would go on in my living room if that’s where I chose to set up a mining rig.
Love one: “Is that some kind of new computer?”
Me: “Yes–it’s a new computer.”
Loved one: “That’s a strange looking computer. It doesn’t have a screen.”
Me: “It’s a very specialized computer.”
Loved one: “Oh really? What does it do?”
Me: “It’s a mining rig. It mines Bitcoins.”
Loved one: “Bitcoins? What are those?”
Me: “A type of cryptocurrency.”
Loved one: “A crypto-what?”
Me: “It’s kind of like money, but it only exists in a computer system, and people mine them with their specialized mining rigs.”
I suppose I could end the conversation on a good note by explaining how these cryptocoins are actually worth about $90 apiece. Still, I just can’t bring myself to go through with it. I’m not cut out to be a miner. Really.
Fortunately, mining is only one way to get Bitcoins, and by far not the easiest way. There are so many ways ordinary people like me can get Bitcoins as detailed in my article What’s so great about Bitcoin?. One could also start an ordinary business and accept payments in Bitcoin. One could simply buy them. The list goes on.
It’s actually a major strength of the Bitcoin system that there are so many ways to acquire Bitcoins. Not everyone can be miners. Specialization is a healthy sign that Bitcoins are now a part of an actual economy and not just some computer programmers’ hobby.
Incidentally, not long ago, people were complaining on the Devcoin thread about how the Devcoin bounty system highly favors writers because of the Devtome. I read that complaint and had to smile to myself. Finally, there’s something out there which favors something I’m good at. It’s my lucky break. Mining was a lot of people’s lucky break. My lucky break is something different. And I guess the way Devcoins are generated, I’m sort of kind of mining them 😉 At least my wallet tells me I’m generating large numbers of them at a time.
The answer to the question of whether or not to get involved in Bitcoin mining is different than it was six months ago. I don’t recommend it unless you first become fully informed about the ins and outs of mining, including ASIC technology, difficulty levels and all the math involved. I wish I’d never started, but as they say, hindsight is always 20/20, and it’s another learning experience.
Read To mine or not to mine? on the Devtome!