R: So. In this podcast, we decided to talk about Bitcoin mining. In our last podcast about Bitcoin, we just kind of generally introduced you to the idea of Bitcoin, the benefits that we think it has and the potential for the value of the Bitcoin to go up in the future. So, you should probably listen to that one first if you want to. That’s kind of like a part 1.
K: Yeah. If you haven’t heard it yet, definitely listen to that.
R: So, this is part 2. We’re going to talk about what we think is equally interesting to Bictoin itself as a solution for people. We like the mining side of Bitcoin, which is basically where...it’s kind of like mining for gold. Obviously, we compared Bitcoins to gold in the past, in the last episode. And we’re going to do it even more here because...
Kevin, why don’t you explain kind of how the technology side of the mining works?
K: Alright. I’m going to try to give a brief overview of this. So, basically, alright. So, Bitcoin is an online payment system that’s decentralized. So, basically, when you’ve got money in Bitcoin, basically, what you have is a wallet file, which is really just a file that...imagine that it has your coins in it, alright? Your coins are sitting on this file.
So, the one concern, the problem, obviously, that the entire Bitcoin network is created to prevent is to prevent you from spending those coins twice. Because if it was just a file and there was no auditing, then I could send that file to Bob and pay him my 5 bucks. Then I could send that file to Alice and pay her 5 bucks. So, they got double spent.
Alright.. So the idea behind the whole Bitcoin network is to prove that whenever the first time something gets spent, that’s the real spend. And if you see that money trying to get spent again by the same person who doesn’t have it anymore, that’s invalid.
So, basically, the idea behind the Bitcoin network is it builds a time stamp
That transaction will be considered invalid. Alright, so now, how do we do this? Because it’s a distributed network, there’s no central clock, there’s no central database. So, transactions are happening at different points and their kind of filtering their way into the network. Kind of the way Bit Torrent works.
So, if I make a transaction, Bob’s computer might not know about it for at least a little bit of time. So, we have to prove which one happened first. The way that we do this, or the way that Bitcoin does this, is what’s called a cryptographic proof of work problem. So, what we basically do is we take the entire history of all the transactions that have ever happened and we basically run them through a formula that spits out a number.
The number is basically random, but it’s deterministic based on all those previous inputs. So, that number will be the same if all those other inputs were the same. So, if somebody tried to change a transaction that happened in the past, that would cause a different number to get spit out when I run this calculation and we would know that it’s wrong.
So, basically, I’m going to try and fast forward here. So, basically, what Bitcoin does in order to keep things secure is Bitcoin is constantly...people’s computers are constantly running this mathematical calculation, trying to determine this hash value for the current, what’s called, block chain. The current block chain is basically the history of all transactions.
And to accept the new set of transactions, like the transactions that have occurred in the last 10 minutes into the block chain, we have to find that hash value that satisfies the formula based on all the previous transactions and the new ones. Basically, it’s written...the algorithm is designed as such there’s a lot of potential answers that could be the answer, but based on the size of the Bitcoin network, there’s something called a difficulty that specifies exactly how many of those could be considered correct. And it’s basically designed such that, we want to make it so that approximately one miner every 10 minutes will be able to get that answer and continue the block chain.
So, basically, what happens is thousands and thousands of people have set-up computers that are constantly crunching on this calculation to try to create the next block, which kind of solidifies the transactions over the last couple minutes in the chain.
R: To prove that everything that just happened was actually happening, not fraudulent or anything like that.
K: Right, exactly. And you can’t cheat because once that guy creates that block, you need that information to create the next block.
R: Right. That’s a lot of information. That probably didn’t make sense. I thought it made sense, but, yeah...a lot of info.
So, basically, the bottomline is all of these people are donating their computer processing power to solving these problems. And, so, in exchange...so, now, you say, why are these people donating their computer processing power to solving these problems? And so, in exchange...so now you say, why are these people willing to donate their computer processing power so that this network can be running? Is it just because they like Bitcoin? Well, possibly. I’m sure some people do it for that reason. But a more realistic way to get people to donate their time is to pay them somehow. So, in exchange for mining for these things and running this program that mines all day long, people are actually earning Bitcoins as they do it. So, everytime that a block is discovered, whoever discovered that block wins how many Bitcoins?
K: Currently, it’s 50 Bitcoins.
R: 50 Bitcoins. So, 50 times 17 is what? I don’t know. Like, $900 or something like that right now?
K: It’s $850.
R: Yeah, and that’s when it’s currently valued at $17. So, as the value of Bitcoin continues to go up, mining continues to be more and more valuable so long as the competition doesn’t go up.
Now, there’s a lot people that are competing on it right now and a lot of people that are getting into mining for Bitcoins. So, the competition has gone up significantly over the last couple of weeks. However, it’s still extremely lucrative.
K: Yeah. Well, I wouldn’t say extremely lucrative, but we think it’s pretty good. I mean, it’s definitely good now. The profitability of mining is probably going to decrease over time as more and more and more people mine because Bitcoin algorithm is designed such that on average one block will be found every 10 minutes. So that the computing power of the network doubles, they make it so that it’s twice as hard to find a block to keep it so that, on average, the same amount of money is created every day.
So, now you may ask, well, how much a computing power...if I just started running my computer...if I started mining, how much would I be expected to make?
The answer is basically zero if you just have a regular computer. At this point, there’s basically so much computing power in the network, that if you just have a regular computer processor, you pretty much don’t stand a chance of finding a block. What you need to do at this point is that pretty much everyone is now mining using graphics cards.
Why is that? Well, it just turns out that the design of a graphics card processor is much more suited to the particular problem that needs to be solved to keep the Bitcoin network running.
R: But not just any type of graphics card processor.
K: That’s right. It basically needs to be an ATI brand or, sorry, there’s now...ATI’s the original company name, now they’re called AMD brand graphics card processors. And video graphics cards will still work and they’re better than a CPU, but they’re approximately 10 times worse than an ATI graphics card.
R: Yeah. So, basically, what we’ve done...because we’re involved in mining, is we’ve bought a number of machines that are dedicated Bitcoin mining machines. And what we did is put 3 graphics cards, top of the line graphics cards, like $200+ cards in each machine. So, right now, we have 4 mining machines, so that’s 12 graphics cards that are running full time mining and making us about...how much are we making per day right now?
K: Right now we’re making about close to 90 Bitcoins a month. So, do the math on that...and it is about...I don’t know...Fifteen hundred bucks a month, sixteen hundred bucks a month?
R: Yeah. It’s all changing based on the value of the Bitcoin and also the difficulty that changes about every week. So, it’s kind of a gamble based on: 1) the potential value of a Bitcoin going up – because we’re holding on to these Bitcoins, we’re not spending them as soon as we earn them; and 2) the difficulty not getting too crazy too fast.
So we kind of think that if the value of the Bitcoin shoots up, the difficulty’s also going to shoot up. So, it’s kind of nice that right now, the value of a Bitcoin is somewhat stable and still relatively low, which we think is keeping the difficulty somewhat in check and reasonable. And that’s allowing us to save up some Bitcoins over time.
Now, what we hope is that, at some point, the value of the Bitcoin is going to skyrocket and we think that it is going to go up significantly either way. And then those Bitcoins that we’ve already mined at a lower difficulty will be worth a lot more.
So, it’s kind of an interesting finance problem. And it’s pretty exciting too because we were able to invest a couple thousand dollars into this and it’s got an enormous potential upside depending on the future of Bitcoin.
K: Yeah. Basically, the decision of a...so, if you’re interested in getting involved in Bitcoin. Really, there’s 2 ways you can really go about it. You can just straight up buy some Bitcoins on an exchange and you can hold them. Or you can invest your money in mining hardware and try to make the Bitcoins through mining. And the decision of which is smarter is really based on what you think is going to happen to the difficulty level.
The difficulty level is basically a proxy for the total number of computing power that is mining. So, do you think that we’re going to see the number of people who are mining go up by a factor of 10 in a week? Or do you think that it’s going to stay relatively stable for 3 months?
Obviously the answer is somewhere in between, but it’s a question of exactly where in between is it going to fall. And it’s also a bet on the future value of Bitcoin too.
So, we currently think that mining is a slightly better deal. I wouldn’t say that we think it’s a killer better deal, but we’re right now, we’re still decently bullish on mining.
R: It all depends too because, for instance, a friend of ours just recently built a new computer and he has a pretty decent graphics card in there because he likes to play video games. So, it’s not a big deal for him to be running this mining program in the background while he’s using his computer and he’s able to make a consistent amount of money. I mean, what do you make? He makes like...it would make like $3 a day if you’re running a really solid video card.
And that adds up, obviously, because at the end of the month, that’s $90. So you could pay for brand new video card within 2 months if you’re doing that and everything else that you keep on top of it is pure profit.
So, I mean, it’s not bad. You know what I mean? Even if you want to do the fully dedicated machine version, which is a little more expensive and more of an investment because you have to buy the case, you have to buy the processor, the motherboard, all the other stuff, whatever, the stick of RAM, which kind of adds up a little bit in the price. So you have a longer payback period on your investment.
But, if you just want to do it casually and use one graphics card that’s pretty good and a computer that you already have, it’s a pretty good investment for a small time at the very least.
K: You should definitely do that. If you already have an ATI graphics card or at least a computer that could handle one, you should definitely consider slapping one of those in there and at least mining for yourself.
R: Yeah. Now, the one thing that we didn’t mention that people may be confused about is we were saying that only the person who finds the block gets paid. So how is it possible that our friend can chug along and make $3 a day? Well, the answer is mining pools.
So, it turns out that a lot of people don’t want to just keep rolling the dice everyday and potentially hitting that thousand dollar windfall. They’d rather make a slow and steady profit over a year that will eventually add up to that thousand bucks.
And the way that people do that is called mining pools. Basically, it’s pretty simple. You just kind of take everyone’s mining power and you kind of work together. And then if someone from the pool finds the winning block, you split the earnings amongst the people on the pool. And it’s a proportional split based on the amount of effort that your computer put in.
R: Yeah. So we’re involved in mining pools just because we like to smooth our earnings out a little bit and avoid random probability of not finding one. And it’s pretty cool.
So, yeah, that’s a majority of the background on Bitcoin mining.
K: Yeah. The other thing that we should mention too is the other factor in your profitability is your electricity cost.
K: These mining machines eat power like you would not believe. Not only that, but they also generated a ridiculous amount of heat.
R: Yes. So, you’re going to have to factor that in. I mean, that’s why it’s also a better investment if you’re already running your computer because the difference in power costs can be fairly marginal there, whereas, if you’re running a dedicated machine, then it’s obviously all power costs that you wouldn’t have otherwise. So, you’ve got to factor that into your equation. It all depends on how much you pay for electricity in your State or in your home.
K: Alright. Well, that’s mining. Hope you guys learned. If you guys end up doing any mining, shoot us a line and let us know how it’s going.
R: Yeah. Absolutely. We’re also potentially working on a site where we kind of explain this to people and maybe promote Bitcoin mining a little bit. So, if you want to check it out, go to mineforbitcoins.com. That’s our site.