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What is Bitcoin? And how much would you pay to mine for it?

Are you a bit worried about conventional currency? After all, the dollar was downgraded, and Cyprus is the latest sign of a financial system that seems seriously stressed. Even gold is tanking. Could bitcoin be the answer?

Screen Shot 2013-04-23 at 10.11.51 AMThe virtual currency, first introduced in January 2009, isn't based on gold, or on government regulation (like a fiat currency, such as the US dollar). Instead, it’s based on mathematics.

Bitcoins can be traded on a variety of exchanges, the largest one being Japan-based Mt Gox. However, they can also be created by anyone with enough processing power. Bitcoins are “mined” using software that looks for specific patterns using a mathematical system.

There is now a race on to find the most powerful computer system to calculate the mathematical ‘hashes’ for generating bitcoins. People started with general-purpose computers, but quickly moved on to graphics cards. These cards excel at moving numbers around so that they can display complicated graphics, and this makes them good at the heavy mathematical lifting required for bitcoin mining.

But things are moving ahead quickly. People are already using a special type of programmable computer chip called a field programmable gate array, which can operate more quickly than a graphics card in most cases. And now, a handful of companies are offering even more efficient ‘mining rigs’ based on a super-fast  chip called an application-specific integrated circuit (ASIC). Early versions of the latest one, from US firm Butterfly Labs, shipped to an excited developer on Friday,

ASICs offer the fastest mining capability of all, but they come at a price. You can expect to pay more than $2000 for a heavy duty unit. 

Would you make your money back on that investment? Bitcoins are an extremely volatile alternative currency. In early April, possibly as a response to the financial crisis in Cyprus, the value of bitcoins spiked, reaching $266 per coin. Since then, the value has slumped but still sits at around $125 today. That makes the estimated payback on the ASIC hardware about seven days, and everything after that is profit, even wih the power consumption taken into account.

But not all is not well in the world of bitcoin. The volatility in the market has made it difficult for the specialist currency exchanges to stay open. One, called Bitfloor, closed down last week after its bank pulled the plug on its account. The largest, Mt Gox, is finding itself subject to massive distributed denial of service attacks, which introduces trading delays. None of this will have a positive effect on the public's confidence in the virtual currency. 

Perhaps that's why a company like Butterfly might decide to sell equipment to mine bitcoins, rather than simply using its equipment to produce as many of the coins as possible for itself. Just as in the original California gold rush, the real money to be made here may lie not so much in prospecting, as in infrastructure. The market for bitcoins is volatile and unpredictable, but selling the equipment to mine the coins is a sure bet.  

On the other hand, some firms are putting their money squarely into mining their own coins. One company, ASICMiner, is making large clusters of its own ASIC equipment for mining the coins, but won't be selling them to the public. 

Even Kevin O’Leary likes bitcoin. But would you make the investment to start mining the currency, or do you think it's all just a modern-day version of the gold rush?

Danny Bradbury, MSN Tech & Gadgets



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Danny BradburyDanny Bradbury

Danny Bradbury is a technology journalist with 20 years' experience. He writes regularly for publications including the Guardian, the Financial Times, the Financial Post, and Backbone magazine. Danny also writes and directs documentaries.

Maurice CachoMaurice Cacho

Maurice Cacho is a Toronto-based journalist mixing his love for tech with a passion for news. He's also CP24's Web Journalist and appears daily on CP24 Breakfast and weekly on the channel's tech show, Webnation, discussing tech news and trends.