By Noel Randewich

Sunnyvale, California/Reuters

Tucked away in an air conditioned data centre in Silicon Valley is a hodgepodge of black boxes, circuit boards and cooling fans owned by 27-year-old Aaron Jackson-Wilde, a modern-day prospector looking for Bitcoins.

Since discovering the digital currency a few months ago, Jackson-Wilde has paid about $2,000 for his “rigs,” which are powered by specialised computer chips. They are designed to help operate and maintain the Bitcoin network - and, in return, generate a small reward in a process known as “Bitcoin mining.”

A form of electronic money independent of traditional banking, Bitcoins started circulating in 2009 and have since become the most prominent of several fledgling digital currencies.

While they quickly gained a reputation for facilitating drug deals and money laundering, Bitcoins have of late garnered attention from investors, such as venture capital firm Andreessen Horowitz. The volume of transactions using Bitcoins today remains miniscule, but enthusiasts believe the peer-to-peer currency will play a major role in e-commerce and could eventually become as ubiquitous as e-mail.

Bitcoin mining is based on a unique feature of the digital currency. Unlike traditional currencies, where a central bank decides how much money to print based on goals like controlling inflation, no central authority governs the supply of Bitcoins.

Instead, Bitcoin transactions are tracked by a network of computers that solve complex mathematical problems to validate transactions and prevent counterfeit. The system automatically generates new Bitcoins as the maths problems are solved and rewards them to the computer operators.

In a key twist that keeps inflation in check, the difficulty of the cryptographic maths that leads to newly minted coins grows as more computers join the network.

That has led some technology professionals to target a new market in souped-up computers and specialised chips aimed at the growing ranks of Bitcoin “miners.”

Consider Ravi Iyengar, who first heard of Bitcoins about six months ago. Since then he has quit his job as a senior chip architect at Samsung Electronics and raised $1.5mn to launch CoinTerra. He says he has already pre-sold more than $5mn worth of the hardware he has designed for Bitcoin mining.

“I’ve been in arms races throughout my career - AMD, ARM, Intel,” said Iyengar, referring to prominent semiconductor companies, “but none of them match the intensity of Bitcoin mining. Each month in Bitcoin mining is like a year.”

Little is known about exactly who started Bitcoin, but the concept was introduced in a 2008 paper written under the pseudonym Satoshi Nakamoto. Since then, Satoshi Nakamoto has become sort of a patron saint among advocates pushing for Bitcoins as an alternative to national currencies.

Bitcoin is not backed by physical assets, is not run by any person or group, and its value depends on people’s confidence in the currency. The dollar price of Bitcoins has spiked over the past year as more people became aware of the currency and speculators jumped into the market, which remains highly volatile. Bitcoin recently broke $200, compared to $12 a year ago.

The goal of Bitcoin miners is to pull in more than what they spend on their rigs - some cost over $20,000 - and the electricity they need to keep the machines running 24 hours a day.

That is no easy feat. In the past three months, miners added so much gear with drastically improved chips that processing power on the network jumped from 289 terahashes per second to more than 4,000 terahashes per second, according to The Genesis Block, a blog that collects Bitcoin data.

In reaction, the network drove up the difficulty of verifying each cryptographic block of transaction data, making it even harder to break even on investments in costly mining gear.

“Bitcoin makes silicon perishable,” said Andreas Antonopoulos, a digital currency entrepreneur in San Francisco. “Your mining rig rots away in front of your eyes every day you have it.”

It has become so hard to make a profit that comparisons to the 19th century California gold rush, when money was often made selling shovels to naive prospectors, have become a running joke among Bitcoin miners.

“It’s the guys who sell the equipment who are making the money, not the Bitcoin miners,” said Jackson-Wilde, a manager at a company that makes motorcycle batteries.

CoinTerra believes spending on new Bitcoin mining chips could easily hit $100mn a year for the next three years, assuming no change in prices. While that is peanuts for large semiconductor companies like Intel Corp and Qualcomm Inc, it is a lucrative market for a handful of small developers.

About 11.9mn Bitcoins, worth $2.4bn at recent prices, have been minted since the currency began circulating. Based on recent activity, the network is on track to create around 1.4mn new Bitcoins annually over the next three years, the equivalent of more than $280mn a year at recent exchange rates.