Mining Bitcoin Has Become A Ruthlessly Competitive Business

A huge aircraft hangar in Boden, in northern Sweden, big enough to hold a dozen helicopters, is now packed with computers--45,000 of them, each with a whirring fan to stop it overheating.The machines work ceaselessly, trying to solve fiendishly difficult mathematical puzzles.The solutions are, in themselves, unimportant. Yet by solving the puzzles, the computers earn their owners a reward in bitcoin, a digital "crypto-currency".The machines in Boden are in competition with hundreds of thousands more worldwide. The first to solve a puzzle earns 25 bitcoins, currently worth $6,900. Since bitcoin's invention in 2008 by a mysterious figure calling himself Satoshi Nakamoto, people have increasingly traded it for real money, albeit at a wildly varying price (see chart).Although there are only $3.8 billion-worth of them in circulation--about twice the value of Paraguayan guaraníes in use--bitcoins have three useful qualities in a currency they are hard to earn, limited in supply and easy to verify.But stability is important too just over a year ago a bitcoin was worth four times as many dollars as now. But then Mt Gox, the crypto-currency's biggest exchange, collapsed and the bitcoin bubble burst.Critics.

make comparisons with 17th-century "tulip mania", and predict that bitcoin mania will fizzle out in similar fashion.On January 5th Bitstamp, another bitcoin exchange, halted operations and reported that 19,000 of the currency units had vanished in an apparent hacking attack.The price collapse and the exchanges' woes do not tell the whole story, though: increasing numbers of businesses are accepting payment in bitcoin, including Time Inc and Microsoft; and whatever the fate of bitcoin, the technology may spawn a range of alternative crypto-currencies and provide the basis for other businesses involving such things as the transfer of assets.When Mr Nakamoto announced his invention (but not his true identity, see book reviews, "Bitcoin: Much more than digital cash"), several digital-cash schemes, including DigiCash and e-gold, had failed, or were in their death throes. But whereas some had tried to create the electronic equivalents of bills and coins, bitcoins only exist as entries in a giant electronic ledger called the "blockchain".This contains the history of every transaction in the coin, and copies of it are held on many computers around the world. What this means is that unlike conventional currencies and earlier digital ones, bitcoins do not need trusted third parties to handle flows of money or a "central bank" to issue it.The computers that solve the puzzles also process transactions in the currency and update the blockchain. Every ten minutes each machine or group of machines takes a block of pending transactions, and uses it as the input for a mathematical puzzle. The first to find a solution announces it to the rest,

which check that it is right, and that the transactions are valid. If a majority approve, the block is cryptographically attached to the ledger and the computers move on to a new set of transactions.If a fraudster wanted to spend a bitcoin twice, he would need to disguise it by rewriting the ledger. To do this he would single-handedly have to control more than half of the network's computing capacity. But such a "51% attack" would be prohibitively expensive: Coinometrics, a data provider, reckons it would cost $425m in equipment and electricity.