Good Money? Bitcoin mining and the future of money part 2

Find part one of this series on Bitcoin here.

Michael Williams, of Westminster, mines Bitcoins, a digital currency that is both issued and processed by like-minded computer users rather than any central bank or government treasury. Just like other miners around the globe, Williams runs software on a computer that solves cryptographic puzzles presented by the worldwide Bitcoin network: If he solves the puzzle before other miners, he is allowed to process the most recent set of Bitcoin transactions, simultaneously performing the role of banker and accountant, and is awarded Bitcoins of his own in the process.


Williams has mined roughly 6.4 Bitcoins in the past six months, which are presently worth more than $4,000.

Click an icon, set it to run the background on your desktop and collect money. If it sounds all too easy, that's because it probably is, according to Andrew Miller, a Ph.D. candidate at the University of Maryland whose research is focused on Bitcoin.


"The history of Bitcoin mining is a sequence of major shifts in technology," Miller said. "Around the time that Bitcoin was first launched [in 2009], there were very few users and it was easy to mine with even an ordinary [computer]."

Today, mining Bitcoins is a highly competitive endeavor, with miners like Williams using specialized hardware that is dedicated solely to the relentless calculations necessary to mine the cryptocurrency. Such hardware can be expensive to acquire, consumes a lot of power and, consequently, generates a lot of heat, making fires a hazard as real for Bitcoin miners as it is for coal miners, according to Williams.

"The [mining hardware] I have can get hot enough to burn or better terms melt your skin, but I haven't had any smoke occur," he said. "The more heat a miner creates and has to deal with the less the miner is able to operate at peak function ... this is what has lead to miners trying things like placing [hardware] outside in the cold in special housings, using special custom fan rigs ... to a guy in Japan, who was lucky enough to have the room at his work to submerge several servers in mineral oil vats."

Given the engineering difficulties in constructing hardware fast enough to keep up with the needs of contemporary Bitcoin mining, Miller said that dedicated companies have sprung up to produce these products and miners like Williams use online calculators to estimate how profitable a given mining operation will be given their investment. It is an inherently risky project.

"The main uncertainty is in how the competition will grow - the overall [difficulty] of the network has roughly doubled every two months throughout 2013," he said. "If you 'pre-order' a device from one of the mining vendors and there's a delay in shipping, then you could miss out on your most profitable week."

At a certain level, Bitcoin mining may be better suited for those attracted to participating in a novel banking system for intellectual reasons rather than as an investment, which Williams readily admits is a large part of the appeal.

If grabbing a bit of Bitcoin with the hope that you will make money is your aim, Miller said it might just make more sense to purchase some directly using cash.

"I suspect that Bitcoin mining is hardly ever profitable," he said. "To be more precise, due to the rise in Bitcoin's price, mining has often been profitable in the past year, but less profitable than purchasing Bitcoins directly instead of mining equipment. As the saying goes, when there's a gold rush, sell pickaxes to the miners - the mining equipment manufacturers are likely to profit more than individuals."


Underscoring the whole Bitcoin mining enterprise is the fact that it will eventually dry up entirely because it is, in fact, designed that way. According to Nicolas Christin, assistant professor of electrical and computer engineering at Carnegie Mellon University, the total number of Bitcoins that will ever be created is capped at 21 million, and once that total is reached - in 2140 - miners will no longer receive new coins as a reward.

How will Bitcoin, a financial network that relies on the computational power of miners for its existence, continue to operate once there are no more coins to be awarded? Christin said the answer lies in transaction fees, small fractions of a Bitcoin that users currently attach to any transaction in order to expedite the processing, more or less like a tip.

"Your transactions are given a priority based on the age of the transaction but also by the size of the transaction fee," Christin said. "I think we will see [transaction fees] playing an increasingly important part in Bitcoin ... As the mining reward goes down, we expect the transactions fees will go up."

There are no guarantees however: There are already dozens of Bitcoin competitors such as Litecoin, Feathercoin and Dogecoin that operate on similar principles and Williams and other miners have flocked to one or more of these alternate coins because they offer slightly more competitive returns on a mining investment than Bitcoin. It is entirely possible, Miller said, that once the mining of Bitcoin becomes too difficult, that miners will simply abandon it for a new digital currency that still offers big rewards, killing off the Bitcoin network.

Alternatively, "it's possible that the [Bitcoin] transaction fees will simply rise to meet the demand of miners," Miller said. "I don't have any idea how likely that is, though. It's really uncertain how that will play out over time."

Uncertainty over the future stability of the Bitcoin network and the stability of Bitcoin values remain big questions and for many economics experts, Bitcoin will not be a serious currency until it can address such issues.


, we will examine the possible futures for Bitcoin and whether or not its future will also be the future of money.