Bitcoin Miners: Unboxing and Explanation

If you haven't heard about Bitcoin, I completely understand. If you have, and you don't get the appeal, I completely understand. My interest is in the economics behind the system, and maybe a little bit of interest in what the potential is overall. Regardless, this is kind of how the process has gone for me.

Way back in April, I ordered a couple of the new ASIC (application specific integrated circuit) Bitcoin mining machines from Butterfly Labs. These were really intended to be more educational than investment, so I'm not really going to go into the relative value of the investment more than to say that if I'd simply bought Bitcoin with the money I paid for the machines, I'd be far more wealthy now than with a pair of miners. The quick napkin math would have put me at a rough 450% profit had I simply purchased the coins when I purchased the machines. No matter what your own personal opinion is of Bitcoin, there are people out there who value it, and there are businesses that accept it as payment. That makes it a currency. Its scarcity drives its value. Imagine if pogs were easily traded over the internet, had a limited number printed, and couldn't be counterfeit. That, in a nutshell, is Bitcoin.

At any rate, the two miners I ordered came in over the last month, and it's been kind of excited to see them hashing away.

Currently my machines hash at a combined 42-47.5 GH/s, which would be considered underperforming. The culprit is the Single, which has been plodding away at 35-40 GH/s instead of its intended 50. I have an RMA in to Butterfly Labs for it, but I'm not holding my breath. So what do these things do?

Mining machines spend their days rapidly hashing away, building the Blockchain (the transaction log that makes Bitcoin extremely problematic to counterfeit) and validating network transactions. Once every 10 minutes, 25 Bitcoins are awarded to a miner on the network, rewarding people for their efforts. Because this is the only way Bitcoins can enter the system, and the awarding of Bitcoin for mining shuts off in 2040, there will be a maximum of 21,000,000 Bitcoin. Ever. Once 21 million Bitcoins have been distributed, mining machines earn a portion of all Bitcoin transactions, elegantly building incentive for miners to continue validating network transactions, even after the last Bitcoin has been allocated.

Bitcoin, and almost everything associated with it is like the wild west. There's a lot of theft. There's not much regulation. People love being "free" to use it as they wish, but hate that there's not much recourse if they have their coin stolen. The people making the most money aren't the ones mining, they're the ones selling the miners the equipment. New technology is rapidly outpacing the old, in an arms race of epic proportions.

But it's really interesting, and it's crazy to have watched something take off so much over the last couple of years. There's no shaking the simple fact that if you'd invested 11 dollars to buy a bitcoin a year ago, that same bitcoin would be worth $450 as of this article's creation, which is a gain of roughly 40x. 

Bitcoin Trending vs. Value

Every now and then, I see something trending in the media, and I wonder just how much influence has been exerted. It’s very rare to be able to have data on that sort of thing, as without concrete facts, you can’t really gauge public opinion without extensive polling data. Even then, you’re still subject to quite a bit of bias. But with something like Bitcoin, we have a very easy way to compare media attention with value.

In the last two months, Bitcoin value has been skyrocketing. Since the beginning of March, the value has gone from $33 USD to $90 USD.

Data via bitcoincharts.com.

I was pretty intrigued by why this was the case. There have certainly been a lot of news articles about Bitcoin recently. So I decided to do a quick Google Trends search, and cross reference the results with the value of Bitcoins.

Google Trends data for Bitcoin, August 2010-Present

So, in April-June of 2011, we saw a spike in the search traffic, and articles. We saw another brief spike in the search traffic in January of 2012. Another spike in September of 2012, and recently, a huge trend on the topic. Keep all that in mind.

Now look at the value of Bitcoins from August 2010 to the present.

Data via bitcoincharts.com.

What this should show you is just how easily a small market cap commodity can be driven (or manipulated) by media attention.