Bitcoin Mining is an activity where the computer tries to collect reported Bitcoin transactions during a period and bundle them into an electronic document that can be added to the current data base of transactions (i.e.The Block Chain).
While adding the new transactions and creating an augmented block chain each time, there is a conditionality attached to the proposed additional block set by the Bitcoin protocol. The hashing of the block header should have a specific value such as it should be lower than a threshhold value.
For example, the latest block which is Block number 273289 created on 6th December 2013 at 01.52.05 had a hash value of :
This block was built on the previous block whose hash value was:
This block (273289) recorded 18 transactions for a total value of 3047.95199544 BTC units. (Note that a block can have varying number of transactions. eg: block 2732725 had 1259 transactions).
All such Blocks start with the first transaction (Coin base transaction) which records the issue of 25 BTCs as a reward to the successful first creator of the previous block and then lists the other transactions during the period showing the amount of transaction as well as from and to wallet addresses. The creator of this block who is entitled to receive 25 BTCs as a reward is also identified in the block with his wallet address.
While any body can easily list the transactions during a period, the successful miner is identified as one who first creates it in such a manner that the hash value meets the difficulty criteria. The difficulty criteria itself is hardened after every 2016 blocks so that the process becomes increasingly difficult until the final block is created. (expected in 2140 with the creation of a total of 21 million bitcoins). The variable that makes the block containing the pre determined data such as the list of transactions and the creator’s identity meet the required criteria is an addition of a “Nonce Value” which is a random number added to the data before computing the hash. If the hash is not acceptable (i.e. does not meet the required criteria), the nonce value is changed and once again the new hash is calculated and so on until the right solution is found.
Thus the so called “Mining” activity of Bitcoin is nothing but processing a certain amount of data with various nonce values to arrive at a target hash value. For this activity, computer has to do a brute force processing of data. In order to arrive at the solution within a short time in competition with the thousands of miners across the world , the miners need a fast processing power in the form of processors which can process more hashes in a short time.
At present the fastest rate of processing is said to be around 600 Giga hashes per second (GH/s). These processors are special purpose cards ( Application Specific Integrated Circuits or ASIC Cards). By combining many of such processors people put together “Mining Rigs” that can process at huge rates. Normal CPUs used in computers have a hash rate of hardly around 0.5 MH/s. A windows server with 20 cores operating 2.10 Ghz AMD chip is said to reach a hashing rate of 35 MH/s and indicates that it is very uncompetitive for miners who want to use their normal computers to be successful miners. They therefore often pool their resources by creating “mining pools.” or use “Cloud Mining resources”. The future in bitcoin mining belongs to specialist miners who set up customized mining rigs which is an expensive activity.
It is interesting to observe that the total mining resources devoted to BTC mining today is estimated to be higher than the 500 super computers in the world.
Thus it is clear that BTC wealth of the world does not come cheap!
One important issue in mining is that it uses electricity and substantial energy gets converted to heat during the the processing. The economics of mining has to therefore factor in the cost of electricity and a need to keep the processors as cool as possible.
It is estimated that at present miners will not break even with CPU mining or even with GPU mining. GPU mining in pools may break even. However for making reasonable profits, mining has to be set up and run as a special facility.
It is in this context that one can observe that in Hong Kong in particular, special facilities have been built with a series of high powered ASIC chips dipped in coolant liquids to reduce the temperature and conserve power. (See this interesting article). Such facilities cannot thrive in the Chinese economy if not for the tacit support from the government and hence we can draw a conclusion that China is supportive of the BTC in spite of the Central Bank’s recent guidelines for Banks not to accept BTC as a currency.
Considering the need for enormous efforts in mining Crypto coins, regulators need to keep in mind that this is no longer a game like the Secondlife.com to produce Lindens. It is a serious data processing activity requiring setting up of energy efficient data centers. Some respect is therefore due to the “Crypto Currency Mining Activity” as an activity similar to software exports. The activity however is more a hardware investment intensive activity and not a skill based activity.
We need to recognize that Bitcoin Mining is an activity that uses IT and the output is realizable in foreign currency and hence it is similar to a software export activity. Pool mining is akin to data processing BPO activity. India does not produce computer chips but it may be possible for innovative data center operators with excess capacity to consider taking up BTC mining as a diversification.
It is however necessary for us to spare a thought if it is wise to divert scarce resources such as power and data processing powers to producing Cryptocoins rather than some thing more productive in the long run!