The general idea is that every 10 minutes, a block of 50 Bitcoins is generated. This creates a fixed money supply. The 50 bitcoins are not generated by a central bank, but rather are generated by a "lottery" type of system where all participants in the Bitcoin network use their computers to calculate very difficult math. Whoever's computer correctly calculates the next block in the chain, wins that block of 50 Bitcoins. The difficulty of the math increases as more computers are added to the mining pool. A majority of the computers in the pool must agree on the new block, which prevents someone like Goldman Sachs from setting up a "fake" pool and printing money.Bitcoin is a peer-to-peer currency, meaning it is not issued by a central authority, like the dollar or yen. The money supply grows as the network grows and will max out at about 21 million bitcoins. But right now, you can purchase them online on the Mt. Gox currency exchange or an over-the counter market. They do not exist in physical form—only electronically, owned and traded by members of a special, anonymous peer-to-peer network. No third-party intermediary, such as a payment processor or a bank, needs to keep tabs on or process the electronic transactions. The network itself does, with each participating computer running a special, secure program that ensures no user can spend a coin twice or create new money out of thin air.
So, here is some math:
A typical computer with a high end graphics card, the ATI Radeon 5970, consumes just under 500 watts of power. The hardware investment is around $1,000 to buy the computer and graphics card. Let's assume, for the sake of easy math, that this consumes 12kwh of power per day. If you pay $0.12 per kwh, your power costs are $1.44 per day.
Up front costs - $1,000 for computer + ATI Radeon 5970
Daily costs - $1.44 for electricity
Now, the ATI Radeon 5970 can generate about 600 million hashes per second. Plug that number in here: http://www.alloscomp.com/bitcoin/calculator.php to see how much money you would make mining.
Note: Current exchange rate of Bitcoins to USD is around $6.61 USD per Bitcoin
Based on current rates (as of 5/20/11):
Coins Dollars
per Day ?2.47 $16.31
per Week ?18.02 $118.96
per Month ?75.15 $495.97
So, your fixed cost + $1.44 per day is now generating $16.31 per day in revenue!
Because you might only win one block of 50 coins in an entire month (or not at all), what most people do is join a pool. A pool of miners share their computer resources, and when the pool gets a block, bitcoins are distributed evenly based on how much computing resources each miner contributed to the pool.
There are some gotchas:
1. As more and more computers are added to the pool, the difficulty of winning each block of 50 bitcoins increases, which means while mining is profitable now, it might not be profitable soon (a few months ago, people were making $1000+ profit a month with the same miner).
2. You might feel guilty about consuming all of this electricity and contributing to global warming.
3. Although this seems unlikely due to the decentralized nature and limited supply of Bitcoins, the value might drop until they are worthless.
Anyone want to start mining? I have one computer doing it but unfortunately it can only generate ~106mhash/s so it's about 1/6th as profitable as the example. Maybe I'll spend $600 on a new graphics card.
