Provided by Quartz Nice costume, but bitcoin's days as a fad are up.
For all the volatility in bitcoin pricing, 2014 may be looked back on as a year when Bitcoin began to move past the proof-of-concept stage and toward a mainstream market. Some 6.6 million Bitcoin wallets have been set up so far this year, according to Coindesk, a fivefold increase over 2013. And 75,000 merchants now accept the digital currency, including giants like Dell, Expedia and Overstock.
But one area of the Bitcoin economy is maturing much faster than the others, to the point where profits are increasingly harder to come by and consolidation and diversification are already happening: the mining of bitcoins. For years, bitcoins were mined largely by a far-flung network of desktop hobbyists. But increasingly, a smaller group of companies building large data centers set up for the sole task of mining new bitcoins.
Although mining is a throwback to pre-digital era of pickaxes and gold pans, bitcoins are mined in a unique way, by harnessing computing power to confirm transactions on a public ledger and increase security on the network. Miners compete not only to confirm transactions but to solve calculations that typically grow more difficult over time. The details of the process can be arcane, but the end result for miners is clear: rewards in transaction fees and freshly minted bitcoins.
In Bitcoins earliest years, mining could easily be handled by desktop computers running a CPU or a powerful graphics chip. As more would-be miners emerged, companies like BitFury, KnCMiners and Cointerra began to sell ASIC chips designed for a single task: running mining software. Bitcoin developers, hobbyists and speculators found mining to be an easy and often profitable way to get involved in the Bitcoin economy.
Quickly enough, that began to change. By design, the bitcoin reward offered for each block mined decreases over time. Currently, about 3,600 bitcoins are mined each day but the competition for them has surged over the past year. As economies of scale began to kick in, some miners found they needed to constantly spend the bitcoins they were earning on the latest, fastest hardware just to stay in the game. The hobbyist became sidelined, and the typical bitcoin miner became the industrial operator of data centers that could consume 10 or 20 megawatts of energy.
The Bitcoin mining industry is on its way to consolidation, as a few highly-skilled and well-capitalized vendors drive the industry, says Valery Vavilov, CEO of BitFury, which sells mining gear, operates 40 megawatts of bitcoin data centers around the world and plans to boost its capacity to 100 megawatts.
Only market players that can deliver the most energy-efficient equipment with the most cost-efficient capital and operating costs will thrive, says Vavilov, while small players with limited capability will struggle or drop out of the Bitcoin race, which will result in a narrowing of the field over time.
Several factors determine who profits the most from Bitcoin miningpower consumption, data-center speed and cost, electricity rates and the current price of bitcoin. Each month, it becomes harder for a small player to keep up. The costs of new ASIC miners alone are steep: The price of current cutting-edge processors can run $5,000 or more apiece, while cheaper offerings can be unreliable in quality or even fraudulent.
The higher-priced mining equipment can employ 20-nanometer chipsrivaling speeds from Intel and AMDand even faster 16-nanometer chips are on the way. Ever-powerful processors are necessary because the difficulty of the math calculations required to mine Bitcoins is designed to increase as competition grows. That level of difficulty can rise substantially in a matter of weeks, rendering mining equipment outdated between the time its ordered and the time it finally arrives.
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Gold rush days of Bitcoin mining are over, and not because of price