Bitcoin Mining Rigs

Remember when I asked if you ever thought you were late to the party in the Welcome message? Whatever I feel about coming late to Bitcoin in terms of investing – or should that be gambling? – I feel I’ve pretty much missed the boat on Bitcoin Mining.

Bitcoin Mining

You may wonder how new Bitcoins come into existence since they’re not tangible items like the coins in your pocket/purse. Bitcoin is a virtual currency and some complex math is performed by computers to solve equations. And if a result is found and verified, then Bitcoins are awarded to the person who “mined” the answer.

Mining is the process of adding transaction records to Bitcoin’s public ledger of past transactions. This ledger of past transactions is called the block chain as it is a chain of blocks. The block chain serves to confirm transactions to the rest of the network as having taken place. Bitcoin nodes use the block chain to distinguish legitimate Bitcoin transactions from attempts to re-spend coins that have already been spent elsewhere.

Mining is intentionally designed to be resource-intensive and difficult so that the number of blocks found each day by miners remains steady. Individual blocks must contain a proof of work to be considered valid. This proof of work is verified by other Bitcoin nodes each time they receive a block. Bitcoin uses the hashcash proof-of-work function.

Mining is also the mechanism used to introduce Bitcoins into the system: Miners are paid any transaction fees as well as a “subsidy” for newly created coins. This both serves the purpose of disseminating new coins in a decentralized manner as well as motivating people to provide security for the system.

Bitcoin mining is so called because it resembles the mining of other commodities: it requires exertion and it slowly makes new currency available at a rate that resembles the rate at which commodities like gold are mined from the ground.

The Bitcoin “Difficulty” Factor

When Bitcoin launched, miners were awarded 50 Bitcoins for each of their successful mining attempts. So in 2009/2010, mining was easy. Anyone with a standard PC could do it and the computer’s CPU was used to run the calculations. However, Bitcoin has a Difficulty Factor built in so that when a certain level is reached, the difficulty is increased – it rises to compensate for the increase in the number of miners and pushes the rate of block creation back down. This means that as time goes by, it becomes more and more difficult to mine Bitcoins.

Graph showing the rise in the Bitcoin Difficulty Factor up till August 2013 (it’s still rising). Click the image for a larger view

As well as that, the number of coins awarded to a successful mine is halved at certain points in this whole process. Currently, 25 Bitcoins are awarded to successful mining operations. In 2016 or 2017, that will drop to 12.5 coins. The difficulty is currently rising sharply, about 20-25% every 2 weeks!

The difficulty depends on the total amount of computational power in the network. Simply put, the more people (or hardware) that is mining Bitcoin, the higher the difficulty becomes. Since there is no way of telling how fast and how much difficulty will rise in future, this is the speculation part in Bitcoin mining. There are people attempting to estimate how much the difficulty will rise based on pre-order queues (for mining contracts and mining rigs) and the increases in recent months, but they are just that: estimates.

Whether it’s worth joining the Bitcoin mining process depends on the difficulty development, what you are investing and what you’ll get in return for these investments. It’s not a simple process, but there are some tools that will help you. One of the most complete ones is the mining calculator by TheGenesisBlock as it projects your ROI by considering month-to-month difficulty increase, initial investment, consumed power and the hashrate of your equipment.

How The Difficulty Affects Miners

Once the Bitcoin difficulty factor reached a certain level in 2011, CPU mining became unprofitable and people started to switch to GPU mining. GPU’s are found on graphics/video cards, so high-priced video cards were pressed into service to run the mining software. These “mining rigs” were quite profitable at the time, some using more than one video card at a time to improve mining efficiency. However, these rigs tended to run hot, so needed extra cooling and they weren’t light on the electricity either.

Again and again, the Bitcoin difficulty increased (roughly every 2 weeks) so bigger and better rigs had to be built. But even factoring in the costs of building a dedicated rig and the electricity it sucked down, Bitcoin mining was still profitable.

Two things stopped people from mining using their own equipment:

1. GPU mining was becoming more expensive (equipment-wise) and with the continued rise in Bitcoin difficulty, it was taking longer and longer to have a successful mining operation – so rising costs and longer mining times cut into profit percentages.

2. The price of Bitcoin crashed in late 2011 – that just made it uneconomical for most miners to continue, at least as one-man operations.

The Rise of The Pools

Mining Pools also started to appear in 2011. Instead of one miner running his rig to get all the Bitcoins for a successful mine, pools were like a distributed computer project where each miner would solve a portion of the over all math problem. This lessened the load and expense for any one miner. If a pool was successful in a mining operation, then the awarded Bitcoins would be divvied up between all the active miners in the pool according to what percentage of the work each did. So there were no big windfalls of coins for any one person but it meant that miners could earn a couple of Bitcoins (maybe more a couple of years ago) per month, virtually guaranteed.

Where Mining Is Today

Well, as the Bitcoin math difficulty continued to increase from 2011 to 2013, even GPU-powered mining rigs became unprofitable. The expense of running them outweighed the amount of Bitcoin mined. Dedicated mining rigs that did nothing but mine, appeared on the market, selling for $2,500 and upwards, so an expensive initial cost. While these rigs were still profitable (and some still are), the Bitcoin earnings would pay off the initial outlay in 3-4 months and from there on out it was all profit. Less the running costs of course. And the assumption that the equipment would continue to work (any hardware can fail for a variety of reasons).

Mining Contracts

A new technology called ASIC (Application Specific Integrated Circuit) made an appearance after GPU mining became unprofitable. These are dedicated chips that do only one thing: mine Bitcoins. They are useless for anything else.

A current ASIC mining rig

Shelling out $2,500+ on a dedicated bit of kit is a big ask for a lot of people. Plus, because of the Bitcoin difficulty level, even ASIC powered mining rigs would become outdated pretty quickly and miners would end up with an expensive brick that no one else would want further down the road and a brick that they couldn’t sell to recoup some expenses. And further down the road isn’t that far. ASIC mining started with 65nm chips a few months back. Now the technology has moved onto smaller 28nm chips. These are pushing the boundaries of current chip production technology.

So Mining Contracts started to appear. These were much more affordable, ranging (current pricing) from $48 for a 1 Gh/s machine to $1000 for a 20 Gh/s machine. Gh/s (Giga Hashes per second) is a measure of how many operations a machine can do per second (the higher the value, the better). People interested in mining Bitcoins could purchase these more economical contracts rather than buying a hardware rig (which are increasingly harder to source as there’s such a demand for them).

Industrial-strength Bitcoin mining

So we’re now in the era of Company/Corporate Bitcoin mining. Companies buy up huge swathes of Bitcoin mining rigs and then parcel off the machines to clients via mining contracts. These companies make their money from service charges rather than Bitcoin mining itself, though they may engage in that too.

Most of these companies seem to require their clients to reinvest earned funds back into buying newer equipment, somewhere in the 20-30% range. The argument is that by doing this, the mining machines remain as effective as they were so their hashing capabilities keep pace with the rising Bitcoin difficulty.

Some companies offer 2 year or indefinite contracts. My feeling is that it’s not worth going for a contract that’s longer than a year. “Indefinite” basically means until the hardware reaches a stage where it’s no longer profitable to run and with the ever-increasing Bitcoin difficulty factor, that probably won’t be much more than a year anyway.

When I was researching Bitcoin mining, I found a lot of contracts were being pre-sold. So these were for machines that would go live in April 2014 rather than being for machines that would be up and running the day you took out your contract. Why March/April 2014? Why so far out? 5 months is a long time in the land of Bitcoin…

Well, it’s the Bitcoin difficulty factor again. It’s going to take a significant leap around March/April 2014 which means that today’s ASIC-powered mining rigs may become unprofitable to run in less than 6 months. Nearly everyone’s waiting for the next generation of rigs to appear. And, because there’s such high demand, there are long waiting lists. So, even if a contract says it will kick off in April, that might not actually be the case. if there’s any kind of hold-up in the chain, those mining starting dates could be pushed out by weeks.

Why Is Mining Becoming So Difficult?

Bitcoin Mining Rigs

There will only ever be 21,000,000 Bitcoins, Over 12,500,000 have been mined to date. The creator of Bitcoin, Satoshi Nakmoto, set a final date for when Bitcoin would be mined: 2140. I initially thought that was a typo and he meant 2040. But no, 2140 is the estimated year when the final Bitcoin will be mined.

Half the Bitcoins have already been mined in the space of 5 years. It will take 126 years to mine the other half. That increasing difficulty factor, built into the Bitcoin system from the outset means that more and more computing power will be required to mine Bitcoins. It will also take longer for each successful mining operation to run. And again, as time goes by, fewer coins will be awarded to each successful mine.

Moore’s Law states that the number of transistors on integrated circuits doubles approximately every two years. Computer power is closely allied to that. Even if we take it that computing power doubles every two years, Bitcoin mining appears to be reaching a stage where advances in computing power are being overtaken by the computational difficulty in the Bitcoin mining problems. My guess is that there’s just a couple of years left in the dedicated mining business and after that, mining will be done by all the computers around the world that use Bitcoin so, and this is a complete guess, Bitcoins will then be randomly assigned to individuals or maybe they’ll be assigned to all users, with each getting a tiny fraction of what’s found.

The peak time for mining Bitcoins was around June 2011. That said, there’s never going to be a better time to get into Bitcoin Mining than right now (because it just gets more and more difficult from here on out!)

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