Meet the manic miner who wants to mint 10% of all new bitcoins (2024)

Bitcoin miners all use the SHA-256 hashing algorithm to generate random numbers in hopes of searching for a 256-bit number that's low enough to win the latest round. "Generating a SHA-256 hash with a value less than the current target solves a block and wins you some coins," the Bitcoin wiki states. "Difficulty is a measure of how difficult it is to find a hash below a given target."

A hash will look something like this: 000c3af42fc31103f1fdc0151fa747ff87349a4714df7cc52ea464e12dcd4e9

The more zeros at the beginning, the more difficult the target is to find. The latest target requires 16 leading zeros.

"If you're crunching away and making these values randomly, and you get one that has this many zeros at the front of it, you've just essentially found the solution to the current block target," Carlson said. "The reason they call it a block is because once you've found that solution, the network is able to attach a block of transactions to this value and add it to the block chain." The block chain is essentially a public ledger that records all Bitcoin transactions. New bitcoins are created when a miner discovers a new block.

A block is "a block of transactions that are waiting on the network to get cleared by some miner out there," Carlson said. "All mining is really transaction clearing, and all we're really doing is building a large transaction clearing house for the Bitcoin financial network."

Specialized chips needed to keep up with the best miners

While CPUs, GPUs, and FPGAs (field-programmable gate array) have all been used for Bitcoin mining, they've been outstripped by ASIC, or application-specific integrated circuits. ASIC chips like BitFury's include "a mechanical design of the SHA algorithm," Carlson said. "The chip is able to do just that one function, but it can do it extremely well compared to other chips."

The chips still need help, though. While BitFury offers muscle, Raspberry Pi provides the brains. Carlson and his colleagues wrote their own mining software for the Pi, which communicates with the chips on each rig.

Before the Pis take action, a separate cluster of Linux servers that run the Bitcoin node software talks to the Bitcoin network to find out what the current target is. The cluster relays that information to the individual Raspberry Pis that direct traffic on each rig. Then the chips start hashing.

"Once a target value is found, the proposed solution is sent out of the chip, and the Raspberry Pi passes it to the cluster server," Carlson said. "That cluster server sends it out to the Bitcoin network and says, 'hey I think this is the solution for the current block target.' And if it is, then we receive a block reward back from the network."

New bitcoins are created at a fixed rate, and the system is designed to cap the total number of bitcoins at 21 million, an amount expected to be reached in the year 2140. As such, mining gets harder both as targets become more difficult to find and as more machines join the network.

Big risks, great rewards

In addition to the investment from BioInfoBank—which originally focused on genome sequencing and genetic data banks—the bitcoins Carlson mined before starting MegaBigPower helped finance his early operations.

"I figure I spent about $1 million building the existing facility and racking and deployment of the mining hardware, and then we probably spent in the range of $2 million to $3 million on the hardware itself," he said. Rent is another $8,000 a month, power $40,000 a month. "I think we spent probably $3 to $5 million dollars total on the operation. It's paid itself off [in bitcoins] many times over already."

While Carlson may run the biggest Bitcoin mining operation in North America, he's "fairly certain" that the creator of the UK-based BitFury is operating at a larger scale.

Carlson was a software programmer for the past decade, trading stocks and currencies as a hobby. That led him to Bitcoin.As you might expect, he goes to great lengths to secure his bitcoins. His investor was robbed of thousands of coins, apparently by an attacker who gained a copy of a digital wallet in its encrypted state and brute forced the password. Carlson himself never was hacked, he said, but he may not be able to recover the coins he had on Mt. Gox.

Carlson continues to store bitcoins both on hosted platforms like Coinbase and Blockchain.info. He also keeps bitcoins on his own hardware and uses paper wallets stored in a bank vault as a sort of low-tech backup. Bitcoin paper wallets contain a wallet's Bitcoin address and private key, and, if secured properly, it can beone of the safest ways to store bitcoins.

A software product called Armory handles security and backup. "That product facilitates highly encrypted Bitcoin wallets, and it facilitates backups," Carlson said. "Even if the computer this was on was stolen or the hard drive failed, I would be able to recover my wallets from printed backups that I have stored in a bank vault."

His digital wallets are encrypted twice with "a different password for each encryption pass, and each password is progressively harder to crack." Theoretically, someone who stole one of Carlson's wallets could try to brute force the passwords, a technique in which the attacker tries every possible password until one is successful. Just in case, Carlson doesn't leave bitcoins on any one wallet for too long.

"As another defense to somebody brute forcing my existing wallets, I roll them periodically to new wallets so that if anybody has been working on one wallet there shouldn't be much coin in it by the time they get to it," he said.

Part of Carlson's business has been selling mining boards online. He's still doing big shipments—including a $5 million deal with Bitcoin investment fund CoinSeed—but he's pulling back from online sales.

"It's funny, I really wanted to offer credit card purchasing to the community.When I did, I found what exactly is the problem with retailing online now, and it's credit card fraud," he said. "I now see why online retailers are offering deep discounts for Bitcoin purchases, because when you receive Bitcoin you know you're paid and you know it's not fraud. Our cost of supporting credit card transactions has actually caused me to arrive at this point where it may not make sense to support retail sales at our current price point."

People who are new to Bitcoin may rightly conclude that mining isn't a good investment of time and money. Carlson said, "you can certainly do well with it, the key is to do the homework up front and find a source of hardware that's priced correctly to the current market condition."

Even if you don't make any money, there is another benefit: you might enjoy it. When asked if there's any point getting into Bitcoin mining on a small scale, Carlson said, "well, I think it's really fun, and many of my employees are also becoming miners as a result."