Why is Bitcoin 'rare' and 'expensive' ? Because it is increasingly very difficult to 'mine' The total number of bitcoins is limited to 21 millions.
Here's the details
The crypto currency that evolved from obscurity
Bitcoin was conceived in the doldrums of the 2008 market meltdown, when the regular banking system came near a global collapse. It is accredited to a person using the pseudonym of Satoshi Nakamoto who published in November 2008 a paper under the title: Bitcoin: A Peer-to-Peer Electronic Cash System. The bitcoin software was released under open source code in January 2009. To this date the identity of Nakamoto remains unknown.
The BitCoin Miners
The software released essentially entails an organized search for difficult to find numbers, called nonce. You can envision it as a form of massive hacking attempt to find the access key to a cryptographically secured password. If you crack it, you obtain a block, which gets exchanged for Bitcoins. Early on the keys you had to crack were short, so it was easy, but the network continuedly adjusts the difficulty requiring more processing power and time to find the next one. Imagine a password that has only 2 digits, who can be either 0 or 1.
4 attempts of combinations will open it:
11,01,10 or 00
When you extend to 3 digits it will take 8 attempts:
111,110,101,011,100,010,001 or 000
The longer the key, the longer it takes.
In the Bitcoin world, this isn’t called “cracking” but rather “mining”, conjuring the image of digging for gold.
(Source)
Early on, computers could find a nonce fast, but as the difficulty got elevated, it required more and more processing power. As it turns out parallel processing capability is preferable to the serial processing of computer processors. Modern graphics cards excel at this. In the race to mine Bitcoins the fastest graphics cards gave you an edge. This led to an un-expected demand for Nvidia (
NVDA) graphics cards in the early days, as they were ideal for mining. These days specialized computer chips designed for the sole purpose of mining bitcoins are deployed. Nvidia graphic cards are still in use for other digital currencies.
There is a cost associated with mining, and that is the electricity to run the computer.
The usage could spike high enough that the police raided bitcoin miners in the search of illegal weed growing operations.
As finding a bitcoin block got more and more demanding, mining corporations sprung up. Essentially a mining corporation or guild used the distributed computing power of its members to search for bitcoins and then shared the bounty with all, minus an administrative commission. An individual miner didn’t have to go for the all or nothing option anymore, he obtained fractions of a bitcoin.
The race was always to find the next block first, as the one after it gets subsequently harder and if you weren't first, all the computing time invested was lost. That explains why Nvidia was constantly sold out on the newest most bitcoin-worthy graphics cards.
The total number of bitcoins is limited to 21 million. The last bitcoin to be mined is expected for 2140. So there will be a limited supply.
You have found “virtual gold” - what to do with it? Bitcoins are stored publicly in something called a blockchain, which is the equivalent of a security box that resides on multiple networked computers. Your ownership is secured with an almost un-crackable private key. J
ust yesterday the CEO of NiceHash announced some $75M worth of bitcoins stolen in a successful hacking attempt, so "almost" is the correct description.
As an individual if you lose the key you lose the bitcoin in your deposit box. There is no central key to get it back.
Paying with BitCoin
A virtual wallet stores the information necessary to access and transact with bitcoins. With your private key you can re-assign bitcoins to someone else. These transactions can happen without any proof of your identity, which made it attractive for all sort of illicit activity on the dark net.
Bitcoins are the equivalent of digital cash, not a check or a wire transfer, where you can easily identify the sender.
Bitcoins have three useful qualities in a currency, according to
The Economist in January 2015: they are "hard to earn, limited in supply and easy to verify"
It is still debated though whether bitcoins are indeed a currency, as they do not have backing of any government. Where it becomes real is at the bitcoin exchanges that trade bitcoins for any other global currency.
How much is a bitcoin really worth?
Let’s start with an easier question: What is the cost of a bitcoin?
Miners pay real world dollars to invest into computers commonly called bit mining rigs (capital) and then electricity to operate them (running cost).
If bitcoins cost more to generate than their trade in value in USD, the mining economy would collapse. First the capital would dry up, as it isn’t worth to spend thousands of dollars on new mining rigs and then bit by bit the existing rigs would be shut down as the cost of electricity exceeds the value of the bitcoin generated. No different than the fracking drilling rigs really….
As of Nov. 30 th this year according to one calculation published on
Quora you need 13,684 kWHrs to generate one bitcoin. In comparison a typical US home uses about 11,000 kWhrs per year. At the average rate of electricity of 12 cts/kWhr in the US, that equates to 1642 USD just for the operating costs.
The Antminer S9 rig that was used for this calculation is available for purchase on Amazon for about $5,500. For $7,200 you too could get into bitcoin mining. But I wouldn’t recommend it. By the time one Antminer finds a bitcoin block, the goal post will have moved. If someone else finds it first, your work gets discarded and the clock restarts. You are competing with data center size installations, some of them located in Iceland where energy is cheap.
This has grown into a veritable industry. As a former bitcoin prospector, I couldn’t compete anymore.
Let's assume that the Antminer has to pay back in a year as it will obsolete quickly. The cost of generating a new bitcoin in the US equals about $7,200 today. In a country with lower energy cost, it could go as low as $6,400.
This is the current price to continue increasing the supply of Bitcoins.
Assuming a 20% profit that calculates to around $7,800-$8,640 for a brand-new bitcoin. The lower floor is the variable cost of electricity: $400 - $1600/bitcoin
Unlike the oil industry which is solely dependent on the selling price of oil, in bitcoin mining, the difficulty of finding a bitcoin block is dependent on the aggregate computing capacity assigned. The time to find a new blockchain is kept nearly constant. If the computing capacity doubles, the task will get doubly difficult, taking the same time. If everyone else would stop mining completely, your own desktop computer would be sufficient again to do some mining. The cost of mining is variable and drops with less market participants. Of course, that would have to be precipitated by a massive price drop of Bitcoins, causing everyone else to fall below variable cost.
