Digital Currencies in the Data Center: Bitcoin Explained

Note: This is the first of two posts in our Digital Currencies in the Data Center series. In this installation, we’ll take a look at what Bitcoin is and how it can thrive in the data center. Check out our second post, which will focus on Bitcoin alternatives.
Bitcoin Logo
It’s hard to avoid all the news and speculation regarding digital currencies and what they might mean for our economy. It seems that despite the media craze currently surrounding Bitcoin, the trend of online currencies is here for the long haul and will just keep growing. In addition to Bitcoin, there are now many alternative digital coins that are gaining in popularity, which we’ll discuss in detail in a future post. Many companies are also now setting up large Bitcoin operations in data centers around the globe. We want to help all of our customers understand these potential currencies of the future and help them capitalize on them in the most efficient way. In this post, we’ll look at the hardware behind Bitcoin mining and how bitcoins are mined in data centers around the world.

For those who may not be well-versed in the technical details behind Bitcoin, here’s a quick video to catch you up:

Mining Hardware: CPU, GPU & Beyond

CPUs & GPUs
The mining process mentioned in the video above differs depending on the type of coins you’re mining. With Bitcoin, this mining process depends on an algorithm called SHA-256, which relies heavily on the processing unit in the server. Originally all one needed to successfully mine bitcoins was a computer with a basic CPU, or central processing unit. The barriers to entry for Bitcoin were very low at this point, since nearly everyone who had the desire to mine bitcoins could easily be successful and competitive. However, miners were soon advancing past the mining capabilities of a CPU, and began tailoring software in order to utilize the more powerful GPU, or graphics processing unit (otherwise known as a Graphics Card). GPUs are much faster and more efficient at mining bitcoins than their CPU counterpart, because they can do large amounts of bulky mathematical labor (especially repetitive tasks like mining) in greater quantity than CPUs.

ASICs and Beyond
Of course, miners soon grew beyond GPUs and looked for even more efficient hardware, such as FPGAs (field programmable gate arrays) and ASICs (application specific integrated circuits). Both of these types of hardware can be customized for specific uses, like Bitcoin mining, and are capable of very fast and efficient processes. As you might imagine, these specialized chips are very expensive. The rise in popularity of FPGAs or ASICs has effectively increased the barriers to entry for digital currency mining and left any less-invested miners in the dust. New miners just starting out, especially with Bitcoin and other SHA-256 based coins, can not be competitive with the bigger players in the network unless they invest tens of thousands of dollars into hardware for their operations.

Bitcoins in the Data Center
Most traditional servers in data centers, including the ones at Liquid Web, have multi-core CPUs that are perfectly suited to web hosting. They usually have very limited or no GPU facilities and don’t use specialized hardware like FPGAs and ASICs, since their web hosting duties are mostly managed over a text-based remote interface. While it is certainly possible to mine a SHA-256 based coin, like Bitcoin, on one of Liquid Web’s CPU servers, it is not very efficient and won’t be competitive with the other miners in the network. Customers who are looking to mine SHA-256 based coins with their own customized hardware should consider colocating.

Bitcoin mining has already been making a steady shift to the data center environment and away from personal setups in the home. Colocating your mining operation in a data center may in fact be the ideal alternative to setting up an operation in your own home for a number of reasons. First and foremost is that relying on a data center’s network and power means your operation will always be running. Data centers like Liquid Web’s provide premium Tier-1 bandwidth, secure facilities, and N+1 redundancy on all networks, hardware, cooling units, batteries, power systems, and generators. With a colocation plan customers can utilize a data center’s network and uptime guarantees while still remaining competitive with other miners. For customers that are interested in colocating Bitcoin miners, we’d love to discuss the colocation plans that Liquid Web has to offer.

To learn more about what kind of digital currencies might have less expensive barriers to entry, read the second Digital Currencies in the Data Center article.

Are you mining bitcoins? Tell us about your mining adventure in the comments below!