Bitcoin is a new kind of virtual currency that exists only in the mysterious world of the Internet. It sprang up after the financial crisis of 2008, when people fearing that the sky was falling began investing in gold bars and silver coins. Many geeks also feared the apocalypse was nigh, but they chose to invest not in old-world currencies, but in a new currency created from scratch and made up of digital bits. That currency is Bitcoin.
What’s really interesting about this brand-new currency is that it’s mined through good old-fashioned hard work—by your PC though, not you. You simply run a program on your computer and eventually a virtual coin will appear. The more powerful your setup, the faster the coins will arrive, theoretically at least. It’s very similar to the SETI@home and Folding@home programs, in that it uses spare computing cycles to help churn through complicated equations, but this time the equations result in a payday for the person willing to devote the resources necessary to acquire them. Of course, it’s not quite that simple, and there are pitfalls and caveats, as always, so follow along while we take you on a brief tour of this brave new frontier. And if you become a virtual millionaire down the road, we want a finder’s fee.
Bitcoin = system
bitcoin = unit of currency
Bitcoin is a decentralized virtual currency that exists solely online. You generate bitcoins with your computer, stuff bitcoins into a virtual wallet, trade them with others, and eventually cash out if you want. Since there is no central authority or government agency providing oversight, users are allowed to semi-anonymously transfer money to one another, making it similar to any other peer-to-peer transaction, except this time, instead of swapping torrents, you’re swapping virtual cash. This lack of oversight is one of the key benefits, and downsides, to Bitcoin at this time, making it the latest frontier in the battle over how much freedom should exist in the online world. This state of anarchy has also made Bitcoin quite intriguing for people who have a lot of spare GPU cycles, which is a wide swath of the Maximum PC readership. But before you fire up your GPUs and quit your day job, let’s examine the basics of Bitcoin so you can decide if it’s something you even want to bother with, because—spoiler alert—it’s not for everybody.
*Note: This article was originally featured in the October 2013 issue of the magazine.
Bitcoin currency consists of four denominations, with the largest being one bitcoin (BTC), followed by a milicoin with a value of 0.001 BTC. One step lower is a microcoin with a value of 0.000001 BTC, and the smallest denomination is a satoshi, with a value of 0.00000001 BTC. Since its inception in 2009, bitcoin value has varied widely: $1 could buy you one bitcoin at the beginning of 2011, but you'd need $230 to buy that same bitcoin in April 2013, making it a damned good investment for those who got in early. Bitcoin is a different kind of currency though, so naturally it works a bit differently than traditional currencies. While your local bank keeps a private ledger for deposits and withdrawals, Bitcoin’s ledger, called the block chain, is public, and everyone can download a copy. This allows anyone to effectively audit transactions sent over the network, which has elicited fears of a Panopticon of constant surveillance. This ease of monitoring has also caused many users to actively conceal their identities on the Bitcoin network, which is somewhat easy to do since bitcoins are sent to an alphanumeric address that is randomly generated by a virtual wallet (more on that in a moment). This structure helps keep users anonymous by allowing them to create a new address for each transaction, which also means others can’t see any previous transactions from a particular user.
While all transactions and wallet addresses are recorded in a public ledger, the keys needed to access funds are private, which ensures that only you have access to your bitcoins. Each transaction over Bitcoin is verified by a software program that generates an SHA-256 hash, which is sent to the public block chain. Once it’s in the block chain, it is confirmed that the money has been left at your address. Donating hours of CPU/GPU cycles and electricity to compute these hashes in order to maintain the public ledger isn't going to attract many sane people, so part of the genius of Bitcoin is that the person who computes the newest block of the public ledger, or block chain, is rewarded with bitcoins. The people who actually do this work with their PCs are called miners, and these power users carefully calculate the cost/benefit ratio of computer hardware and electricity costs against the bitcoin exchange rate. Miners make money by exchanging their bitcoins for local currency through exchanges. We know it sounds good, and you’re raring to compute some cash, so let’s take a look at what you need to do to acquire some bitcoin.
The block chain tallies all transactions, and features a ticker showing the latest payouts.
The most popular method of acquiring bitcoins is to mine them by crunching algorithms on a PC, but the fastest way to get them is the old-fashioned way. No, not stealing them, but buying them. If you’re looking to anonymously exchange cash for bitcoins, BitInstant (www.bitinstant.com) offers a network of retail locations that let you do just that. If you're willing to sacrifice some anonymity, you can use a service such as Coinbase (www.coinbase.com), which allows you to add funds through PayPal. If you’re a smooth talker and have friends in the Bitcoin community, you can always solicit them to send funds to your address, but be warned: There is no way to reverse a bitcoin transaction!
The more interesting way to acquire some coin, at least for our audience, is to use your PC to mine them. To get started, you register online to either join a mining pool or start mining solo. There are dozens of popular pools, with some reaching over 30,000 users, and they are always accepting new members. You just need to find a pool and register, then download a mining program that will start crunching numbers for your pool. GUIMiner is one of the most popular mining programs for new users because it's one of the few applications with a graphical user interface, so it keeps users away from the command line and will have you mining in only a few clicks. If you had to register for your pool, select your pool from the server box, insert your username and password in the appropriate boxes, then click “Start mining.” If your mining pool is not listed, select Other and insert your mining pool's URL and port number.
A lightweight client that can be used with any mining pool, GUIMiner is a good way to start your bitcoin mining career.
Before 2010, people were crunching numbers using their CPU; then the GPU was introduced to bitcoin mining and drastically changed the game. With its fleet of specialized compute units, GPUs crunch bitcoin many factors faster than even an Intel Core i7 CPU. As an example, a Radeon HD 7970 can reach over 700Mhash/s, whereas a GTX 680 can crunch a little more than 110Mhas/s, and an Intel Core i7 4770k can only achieve a paltry 8Mhash/s! Keep in mind, though, that one Radeon HD 7970 would take over a year to chew through a Bitcoin block, so you'll need some major firepower to increase the speed at which the transactions occur. One more problem: As more users compete to mine bitcoins, the difficultly is automatically adjusted, making it harder to mine, ensuring bitcoins are constantly mined at approximately one block every 10 minutes.
To use your GPU to mine bitcoins, you need to install OpenCL or CUDA, which are included in the latest driver packages from AMD or Nvidia, and then select your GPU in the GUIMiner device box. GUIMiner’s Extra Flags box allows you to specify the GPU load you want and even the fan speed to keep things frosty. For best performance on AMD cards, we generally found “–v –w128 –f0” to be the optimal settings, and “–f0 –w128” on Nvidia cards.
An application-specific integrated circuit, or ASIC, bitcoin miner is a microchip specifically designed to run the Bitcoin calculation. These chips' physical circuits are built only to mine bitcoins, really fast. While an Asus Ares II Radeon HD 7990 can mine bitcoins at a blistering 1,420Mhash/s, a similarly priced ASIC miner can hash 25,000Mhash/s! Almost 20 times faster at the same power rating, making ASIC miners the go-to hardware for those trying to get rich mining bitcoins. There are a variety of companies designing these bitcoin mining integrated circuits, but sadly most are still vaporware, even after taking pre-orders. Butterfly Labs, Avalon ASIC, and ASICminer have managed to ship their products in limited quantities, starting at around $100 for a plug-and-mine USB model that can mine at about 300Mhash/s and going as high as $1,250 for a 25,000Mhash/s miner. But with the difficultly of bitcoin mining increasing and the high price of really powerful ASIC miners, many people are doubtful that serous money can be made, even with these specialized devices.
Butter Fly Lab’s 5,000Mhash/s Jalapeno ASIC miner costs $275 and mines bitcoins 10 times faster than a similarly priced GPU.
Click the next page to learn how to manage your Bitcoin.
Now that you’ve got your gear and are mining away in a pool, you had better get ready to receive your first bitcoin, and to do that you’ll need to set up a virtual wallet. Since Bitcoin is all about user control, you can decide how you want to set up your wallet, so you can choose an online wallet such as Blockchain or an offline wallet such as MultiBit (www.multibit.org). Online wallets are the most convenient, as all your addresses and private keys are stored in the cloud, though this does leave them vulnerable to hackers and other malicious attacks. In contrast, desktop wallets are stored locally and are best for people who like to have all their data where they can see it; you just have to manage your private key files yourself.
Once you’ve chosen a wallet and set it up, you will then need to know your address so that you can receive bitcoin. Using MultiBit, you can simply select the wallet where you want to receive the funds, select the Receive tab, and MultiBIt will show the address of that wallet. To help people preserve anonymity, a new wallet and address can be used for each transaction by one individual, which makes tracing transactional histories almost impossible.
MultiBit is one of the most popular offline bitcoin wallets, thanks to its clean interface and ease of use.
Spending bitcoins is just as easy as receiving them—you just click the Send tab within MultiBit and insert the alphanumeric destination address of the person or organization you are sending bitcoins to, and hit send. If you are sending X number of bitcoins, the software will display conversion rates from the biggest currency exchanges so you know the USD equivalent, and you can also specify an amount in your local currency, which is automatically converted to bitcoins by the software.
AMD is head-and-shoulders above Nvidia when it comes to mining hardware, and that’s a fact, not an opinion. Its dominance is due to two main factors: the type of algorithm Bitcoin uses, and AMD’s hardware configuration. For example, the SHA-256 algorithm crunched by bitcoin miners uses a 32-bit integer right-rotate operation, something that takes later-model Nvidia GPUs (excluding Titan) three steps to do, while an AMD Radeon can do it in a single step. Mining bitcoins also favors a higher number of compute units, so AMD also has the advantage here since the Radeon HD 7970 has 32 compute units compared to the 14 SMXs in a GTX Titan.
AMD’s performance advantage is so large that a $100 Radeon 7750 can mine bitcoins at about 140MHash/s, which is about 20 percent faster than a $450 GTX 680. Nvidia's flagship GTX Titan narrows the performance gap with GPU compute optimizations, but still falls behind. Mining bitcoins with a GTX Titan will give you 340Mhash/s while an Asus Ares II (Radeon HD 7990) can give you 1,420Mhash/s, over four times the performance.
With four Radeon 6970s and two Radeon 5870s, this rig uses a custom open case to keep the GPUs cool. This monster machine hunts for bitcoins at about 2,400 MHash/s.
When a Bitcoin block is completed, the 25-bitcoin reward is split among the pool miners in one of several different methods. Pay-per-Share (PPS) is one of the safest ways to pool-mine bitcoins, as the pool operator pays you immediately for each share of the block you compute. The operator pays users out of his or her own pocket before getting reimbursed for the block by the Bitcoin network. Since he or she is fronting all the virtual cash, they usually take a higher percentage fee from each block reward in exchange for assuming all the risk. Another method of compensation is named a Score pool, and it rewards you for your share of the block, but your payout is weighted by the amount of time that has passed since the beginning of the block, so with a Score pool you are rewarded for crunching the most numbers and for your loyalty to the pool. Alternatively, a Pay-on-Target (POT) pool rewards each user based on the difficulty of their compute contribution. This is an attractive pool for those with high-powered PCs. Some of the most popular mining pools include 50BTC.com (a PPS reward system), Mining.bitcoin.cz (a Score reward system), and BTCGuild.com (a variant of the PPS reward system).
Many applications allow you to see all your Bitcoin transactions and account balance.
Also, in order to ensure an even pace of bitcoin development, the reward amount is cut in half every four years and currently is set at 25 bitcoins a block. In the year 2016, it will be cut in half again, and that will continue until 2140, when all 21 million bitcoins will be mined and bitcoin production will stop.
Now that you have bitcoins in your wallet, you will need to know where you can spend the crypto currency. The anonymity that bitcoin offers first attracted a lot of adult and underground illicit websites like Silk Road that accepted bitcoins for payment. However, with Bitcoin gaining mainstream attention, large e-commerce sites have started accepting the digital currency, so today you can buy everything from discount flights (BTCtrip.com) to webhosting (WordPress.com), and even TigerDirect.com just recently announced it would be taking Bitcoin as a form of payment. There is also a bitcoin-only marketplace named Bitmit (www.bitmit.net) and, of course, you can always donate to the Electronic Frontier Foundation (www.eff.org) with bitcoins. Paying with bitcoins is streamlined on e-commerce sites, so you just click the button labeled “Pay with Bitcoin” and you are generated a unique bitcoin address to send your payment to. At checkout, the final price shown in bitcoin is accompanied by the price in dollars, making it easy to know how much you are spending. Along with the anonymity of bitcoin, many businesses that accept bitcoin offer discounts of up to 10 percent for the using the digital currency.
As the currency gains mainstream awareness, more retailers will start accepting bitcoins and more startups will develop services to make Bitcoin easier to use. Many believe the currency will continue to rise in value, as mining bitcoins becomes increasingly difficult and more people start to use them. Companies are also developing Bitcoin ATMs that will easily let you transfer your cash into a bitcoin wallet. Bitcoin debit cards are in the works, too, which will allow you to pay retailers by automatically converting your bitcoins to dollars.
On the hardware side, the advent of ASIC bitcoin mining boxes has made the act of using a PC to mine bitcoin a big waste of time and money, causing PC hobbyists to abandon bitcoin mining altogether. ASIC miners are so much faster that GPU miners can’t compete. As the ship has sailed for GPU mining enthusiasts, most GPU miners have sold off their mining rigs or moved to a new currency named Litecoin. Litecoin is a digital currency based on Bitcoin, but it grants rewards every 2.5 minutes as opposed to the 10 minute average interval for Bitcoin. More importantly, it's much harder to create ASIC litecoin miners and none exist so far.
Like any other phenomenon that goes from underground to mainstream, so goes Bitcoin, and as it does, companies will try to profit from Bitcoin and enthusiasts will move to newer, cooler crypto currencies.
Lamassu is a company offering Bitcoin ATMs that convert cash to bitcoins and deposits them in your bitcoin wallet.