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September 21, 2014 / 26 Elul, 5774
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How Do You Mine for Bitcoins?

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Photo Credit: Cloudhashing.com

In 1848, an unassuming carpenter stumbled upon a gold deposit in the American River in California and history was forever changed. Over three hundred thousand people swarmed to California to make their fortune during the period of history known as the California Gold Rush.

Today, investors aspiring to cash in on the next hot commodity don’t need to uproot their lives and travel across the country with a sifter and a pan; they need merely to go online to CloudHashing.com and invest in a bitcoin mining contract.

“Bitcoin is like digital gold,” says Lukas Gilkey, the President of CloudHashing and a bitcoin enthusiast, “it is a hybrid currency/commodity”. Conceptualizing bitcoin as a high-tech version of gold may help those who simply cannot wrap their heads around the concept of a completely digital currency not backed by any government nor represented in any physical form. Bitcoin is essentially a peer to peer digital currency that can be used for online transactions without making use of a bank as a middleman.

The sheer novelty of bitcoin may drive away many investors with a more conservative bent but conversely, it attracts people looking to get in on the ground floor of an entirely new type of commodity. Already, the success of bitcoin has spurred the proliferation of other ‘cryptocurrencies,’ most notably Dogecoin and Litecoin.

If bitcoins aren’t issued by any sort of government agency, or printed in any mint, where do they come from?

Bitcoin is a math-based currency and every transaction involving bitcoin, whether it is the creation or transfer of bitcoin, must be verified by other Bitcoin users. The first user to verify or “solve” the encryption receives newly created bitcoins as a reward. Theoretically anyone with a computer can set up their own mining rig, but the Bitcoin community has expanded exponentially since the currency first came into existence. It is now very hard to mine bitcoins without the help of a powerful computer specifically engineered for that purpose.

In fact, the complex algorithms governing Bitcoin are set up in a way that the production of bitcoins will slow dramatically over the coming years. The creators of Bitcoin (whose identities are uncertain) set it up so that a maximum of 21 million bitcoins will ever be created and about half of those are already in circulation. By the end of 2016, approximately 87% of all bitcoins that can possibly be created will already be out in the world. These numbers mean that Bitcoin miners need to work fast and effectively to capitalize on the next few years of relative Bitcoin abundance.

Someone who decides to pursue Bitcoin as an investment can go one of two routes; they can buy bitcoin at the market value on one of the online Bitcoin exchanges or they can try to “mine” for bitcoins, which essentially means trying to grab a portion of new bitcoins as they are released into the bitcoin network. The advantage of investing in the mining of Bitcoin with a company like CloudHashing is that, as Gilkey explains, “the consumer can essentially buy bitcoins at a wholesale price.”

CloudHashing is one of several companies that take the complexity out of bitcoin mining by allowing entrepreneurial investors to buy units of computing power in CloudHashing’s continually growing network of supercomputers. But Cloudhashing is the largest in the world, with facilities in Dallas, Kansas City, Washington State and, their flagship mining installation in Iceland. Their Iceland headquarters takes advantage of the abundant (and free) arctic air which is piped in to keep their heavy-duty computing equipment from overheating. This helps address the ongoing challenge facing Bitcoin miners to find a way to maintain profitable margins even as the cost of power can threaten to eclipse the value of the bitcoins mined. This is why Iceland, with its abundance of cheap geothermal and hydroelectric energy, made the perfect location for CloudHashing to establish its center of operations.

So why does a company that essentially prints money even need to find investors? “It’s all about economies of scale,” notes Gilkey, “the more investors we have, the better price we can get on hardware, power, and data center space.” Since mining is a competitive activity, the higher percentage of the bitcoin network controlled the better. Currently CloudHashing controls approximately 10% of the Bitcoin network but Gilkey says that the company’s goal is to raise that to 25-30 percent of the Bitcoin network by the end of this year.

Ryan Oquin, CloudHashing’s Marketing Coordinator, explains why Bitcoin may very well be the currency of the future; “When the internet first became widely used, it became necessary to figure out how to bring money to the internet. Unlike other types of money which were forced to adapt and figure out how to work with the Internet, bitcoin is a currency that is based on the internet.” Bitcoin also has certain other distinct advantages over more traditional currencies. “If I want to send you a million dollars from halfway across the world,” says Gilkey, “If I use bitcoin you would have it within about half an hour and it would cost around a dollar in transaction costs. Compare that to transferring a million dollars through a bank – that would take much longer and cost much more in transaction charges”.

Cloudhashing offers 12 month contracts to its investors. CloudHashing investors receive percentages of the bitcoins mined by the CloudHashing system into their account pro-rated to the amount of space the investors purchases.

Whether Bitcoin proves to be a wise long term investment is still very much up for debate. Government regulation and security concerns have caused enormous volatility in the bitcoin market over the past year. However, if one wants to get involved in the exciting world of Bitcoin investment, CloudHashing.com is definitely worth a serious look.

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