Going down the mine

Bitcoin Mining: The basics

Trying to explain what Bitcoin is or how it works can be a complicated enough task as it is, but at some point you have to delve into the minefield of – yes, mining.

Mention the word mining and the uninitiated might conjure up an image of a man with a pickaxe digging for precious metal. Although far from the reality, the analogy of mining for gold can be a useful one when applied to the mining of bitcoin, particularly as bitcoin has a finite supply and people are required to release bitcoins into circulation by effectively ‘digging’ them out of a specially encrypted code.

Take those first groups of young men, all heading for the hills to find their fortune in the gold rush and replace them with groups of Gen Y technophiles gearing up their computers to solve complex algorithms for bitcoins and you start to get the picture.

At its most basic, bitcoin mining is a network of computers, crunching numbers to solve mathematical problems. When they have found the answer, new bitcoins are minted.

If you look into mining in more depth, you have to start talking about hash rates and explaining the encryption algorithm, SHA256, which is used for many online security systems (such as internet banking and email) but in this case has been applied specifically to the security of the bitcoin network.

What these computers are actually doing when they mine is unlocking blocks of encrypted data to release bitcoins. These are released into a bitcoin address and the successful miner gets the private key to access it.

This provides a great incentive for people to mine and the more miners out there, the more secure the bitcoin network becomes. This is because not only do miners help issue the currency, they are also required to validate every bitcoin transaction that takes place. These transactions are confirmed with every new block mined.

However, as the number of miners increases and competition grows, the chances of successfully mining a block independently, goes down. This brings us on to the genius behind the coding for the mining of bitcoin, which is in the elastic difficulty of solving the equations, taking into account how many people are mining at any one time. It was built in to help regulate the amount of currency in circulation. So, as more people mine, the difficulty of the algorithm increases to prevent the market being flooded with bitcoins.

There is a predetermined rate of release for the currency, which means as more bitcoins are mined, the chances of finding new ones diminishes exponentially. A block is mined roughly every ten minutes. At the outset from 2009, one block released 50 BTC, but every four years, the amount halves, hence why the current worth of a block is 25 BTC. This value will continue to halve until all 21 million bitcoins have been mined into existence and this is expected to happen some time around 2040.

The New Mining Boom

As it becomes harder for people to successfully mine independently, bitcoin mining pools have established to amalgamate computing power. When someone in the pool mines a block, members of the pool get a share of the bitcoins, which are allocated proportionately to the amount of work a miner has contributed.

To take the gold analogy further, when there was plenty of gold available near the surface, one man and his pickaxe could have done the job and got a good return for his efforts. As more people got involved, competition would have increased and it would have become harder for one man to get the same reward. The miners developed better tools and then formed cooperatives to pool resources and get a share of the gold at the end.

This increased difficulty has prompted a surge of more powerful computing technology to try to increase the likelihood of successfully mining the bitcoins. From one man and his computer graphics card decoding blocks and earning a few bitcoins to an entire network of miners using specifically designed hardware.

It has become a multi-million dollar mining industry all of its own. A couple of years ago the field-programmable gate array (FPGA) became a step towards a custom mining chip. Now the application-specific integrated circuit (ASIC) miner is one of the latest on the market. One small piece of hardware can be plugged into a computer’s USB port and crunch away. One of these things can be purchased for around 1 BTC or approx. $100. 

At the other end of the market, Butterfly Labs have created powerful speed, encryption processors, which can set you back thousands of dollars.

For some, mining is not cost-effective. Apart from the initial outlay for the hardware, operating costs add up in Internet and electricity bills. As bitcoin is a digital currency, a miner must be online for it to work and with some people leaving their miners operating 24/7, electricity prices can create a big dent in finances. The financial incentive depends on the exchange rates and starts to diminish if the difficulty level reaches a point that the cost to run a mining rig exceeds the value of the bitcoins in return.

The chart below from blockchain.info shows how profit margins have fluctuated over the past year.

The constant hardware developments do mean it is advantageous to upgrade regularly otherwise, your more primitive miner could be slogging away trying to mine a block, which a newer, more powerful model can mine in half the time. The winners in the mining game may well be the companies producing the mining technology rather than the miners themselves.

So then comes the question: why bother mining? For some it is still a feasible way of generating some income and while there are still bitcoins out there to be found in the digital ether, there will remain a dedicated network attempting to release them.

The future success of bitcoin relies heavily on people’s willingness to use it. It is backed by the people; the network of miners, the owners and users of bitcoins; the entire bitcoin community. Everyone who uses it has that invested interest in not allowing bitcoin to fail and for this reason there will always be an incentive to mine. When all the bitcoins are mined, we might be looking at small transaction fees as a way to reward miners for keeping the blockchain going and validating transactions. Currently less than 0.8% of mining revenue is from transaction fees. But that is a good twenty to thirty years away and right now there are still more than 9.5 million bitcoins up for grabs. Grab your pickaxe…

By Louise @ Bitscan

Strength in numbers: Bitcoin and Crowdfunding hand in hand

Stick ‘crowd’ in front of a verb these days and you have created one of the latest buzzwords. Back in the day, crowd surfing was about all there was and that involved (by nature of the act) people you could thankfully see!

Now there is crowdsourcing, crowdfunding and even crowdvoting. The concepts have been around for a few years, with the phrase ‘crowdsourcing’ coined in 2006 by journalist Jeff Howe in his article for Wired magazine.

It was a growing phenomenon then and it remains so today with big brands such as Qantas getting on board with one of their recent advertising campaigns and smaller crowdsourcing projects springing up all over the internet.

With the large audience potential through online communities and social networking, the internet gives these projects exposure and has become an effective way of amassing resources, be that labour, ideas, or revenue, by allowing individuals to contribute as much as they want or can afford to campaigns they wish to support.

Being a digital currency, bitcoin lends itself well to the crowdfunding model and crowd-funded bitcoin projects have started to gain momentum and achieve their targets.

Bitcoinstarter is one such player, acting as a platform for crowdsourced, bitcoin-funded ventures. Launched in April of this year, three projects have already been successfully funded with another two or three about to achieve their goals. To date, upwards of 100BTC have been pledged to campaigns listed on the site and founder, Matt Allen, believes the ease of use with bitcoin is a big selling point. “I’ve always had an interest in crowdfunding and the day I came across bitcoins I knew these two were a match made in heaven,” he says.

Having said that, in comparison to fiat-funded projects, bitcoin-funded ones are still struggling to gain traction.  One of the world’s largest crowdfunding platforms is Kickstarter, which states it has raised over $720 million so far to fund over 45,000 projects.

It is not surprising when taking into account that bitcoin is relatively new on the scene and when the success of these projects is also reliant on the projects' owners making the time and effort to effectively market their goals and spread the word.

“Bitcoin crowdfunding is only successful the more people are introduced to bitcoins and the more people want to spend their bitcoins. We are part of this economy,” Allen says.

He is also hoping to help fundraisers build their profile in online communities with a new feature allowing people to fund projects through Reddit. If a project fails to reach its fundraising goals he adds that Bitcoinstarter has an inbuilt system on the platform for returning bitcoins to pledgers.

Although bitcoin-funded campaigns may still have a way to go before attracting the same interest or scope for virality as fiat-funded projects, people are still asking for fiat currency to back bitcoin-related projects. In the past week, a project launched on crowdfunding site, Indiegogo, raising money for a bitcoin mining project ‘Bitcoin Prospecting’. With ten days left and nothing towards the venture as yet, time will tell whether it will succeed.

What is clear though, is that the ideals of a peer-to-peer community rallying to help each other achieve something bigger fit both the crowdfunding and bitcoin concepts and the fact is not lost that both attempt to eliminate the middle-man and the bank to do this.

By Louise @ Bitscan

UK Firm Drives Home Bitcoin Message

With new bitcoin companies springing up all over the world, Cumbria, UK, a region famed for lakes, fells and Beatrix Potter, can now claim its first bitcoin business.

Fresh on the bitcoin scene, Carlisle based Cumbria Cabs only started accepting the currency a couple of weeks a go after opening a merchant account through Bitpay. The very low transaction fees associated with bitcoin and the reduced risk of credit card fraud both appealed.

“I was attracted by the very low charges for sending and receiving payments when compared with credit cards, PayPal and other online payments,” owner, Alistair Nixon says. “We have had a few problems with ‘Cardholder not present’ payments for taxis.”

With Carlisle being the furthest city in the UK from any international airport, Cumbria Cabs provides a much-needed service for clients from all over the world. With the high number of business travellers as well, bitcoin seemed an efficient solution.

The digital currency certainly lends itself well to a taxi firm’s business model. A company providing a service to so many overseas customers and high volumes of transactions done online or in a car, makes the ability to email invoices, a URL payment link, or even a QR code to a customer’s smartphone, very attractive.

“One of the main benefits for us is the option to accept payments from any currency and from any country in the world, this is great for people flying into the UK and wishing to book an airport transfer with us,” Mr Nixon says.

Despite Cumbria’s sparse population, the picturesque area attracts around 40 million tourists, who contribute more than £2 billion to the region’s economy each year.  It is certainly big business and one, which Mr Nixon believes, many Cumbria firms could capitalise on with bitcoin.

“When business owners realise that they can take bookings and payments from anywhere in the world, in any currency, with a very small transaction charge and fraud risk (compared to credit cards) they will surely want to have that option,” he says.

The vastly fluctuating value of bitcoin in recent months against the GBP and other currencies can put off some business owners and the taxi firm admits it has been a concern. “If we quote someone a price in bitcoin and then the bitcoin price drops sharply half an hour later then we could potentially lose money.”

But always one for bucking a trend, with a strong internet and social media presence (facebook and twitter), the Cumbria cab firm are convinced bitcoin is the way forward and are encouraged by the value and volume of bitcoin transactions, which are currently estimated at over US$34.7 million.

With their bitcoin service barely started, they are yet to have their first bitcoin transaction but they have found it generating a lot of interest on twitter (@CumbriaCabs) and would love to know of any other Cumbrian businesses, who have decided to offer bitcoin as a payment option.

 By Louise @ Bitscan

Bitcoin On The Up Down Under

The cavernous lower ground bar of 1 Martin Place may be the setting, but the Sydney bitcoin community is anything but going underground.

The city hosts two bitcoin meetups with cumulatively now over 85 members. On a weekly basis, they gather to discuss, promote and engage in their vision for bitcoin, with topics ranging from libertarian ideals to the trends, threats and business opportunities surrounding the currency.

The meetups only started happening in mid June but with an initial turnout of around 30 people, and that list of names growing week by week, interest in the community, and the currency as a whole, is flourishing.

The Sydney Bitcoin Users Group is a mixed bunch from those interested in learning to the technical experts and miners, whose depth of understanding on the subject could leave the less knowledgeable of us slightly agog. But they are united by their passion for bitcoin and their vision of promoting it as a viable currency in the wider community. They welcome all new faces and encourage everyone to be able to come and share their views and queries.

Last night’s meeting was a prime example with one member giving a valuable insight into the workings of escrow and multi-signature transactions, while another came with the latest thing in bitcoin mining hardware. There were even bitcoin transactions taking place smartphone to smartphone, illustrating just how easy and efficient using the currency can be.

Organiser Jason Williams describes it as a “bit of an action group”, saying, “We want to take people on the journey from ‘what is bitcoin?’ to ‘I’m happy I’m using/accepting it now.’”

The Sydney West Bitcoiners group, meeting in Granville, boasts 37 members and counting. It is organised by Barry Rahme who says, “We talk about how we can improve the awareness and acceptance of bitcoins in our local community.”

The venue for their meeting is proof that the message is trickling through. Brooklyn’s Pizza Bar, takes bitcoins as payment for their food and drinks.

It is not just the meetups, which are gaining ground. Just last week, the Australian chapter of the Bitcoin Foundation held its first ever meeting via conference call and discussed the direction in which the Australian branch would like to go, as well as affiliation with the US.

Their missions are all well-aligned, with the Bitcoin Foundation stating that “Bitcoin’s technology and community” are their focus and how they want to “help Bitcoin deliver” on its potential.

Of the Sydney meetups, Jason also adds, “It means you don’t just have to talk about bitcoins in isolation with your friends or colleagues. There is a group of pretty smart people who you can share your ideas with, which in turn means we’re growing the community.”

By Louise@Bitscan