CoinDesk's Daniel Cawrey recently visited and toured the facilities at Butterfly Labs, one of the most prominent and written about producers of bitcoin mining technology. In this second part of this series, he reports on the factors involved in the bitcoin mining arms race.

Now that Butterfly Labs is shipping ASIC bitcoin miners at a steady pace, their production plus that of Avalon and mining pools like ASICMiner are causing the mining difficulty to go up quite quickly. What this means is that it takes more computational power to complete proof of work algorithms. It means that a race is now on to offer the most processing power, but will also mean that other technical elements will come into play very soon.

I asked Butterfly Labs if the rise in mining difficulty is causing an increase in sales which might be leading to the price fluctuations. They didn’t seem overly concerned about any price volatility. It seemed to me that they have simply been too busy to contemplate if mining had anything to do with the price on any given day. “I don’t think that anyone knows. It's so uncharted", Dave McClain, who works on account management, told me during my recent visit to BFL.

In the previous FPGA generation, processing was measured in hundreds of megahashes. The current generation of Bitcoin miners perform at a speed of gigahashes. The most powerful unit that Butterfly Labs offers is the 500 gigahash per second Mini Rig SC, currently priced at $22,484. It comes with a Nexus 7 tablet that has a custom built BFL app for mining bitcoins, which is also known as a "host" device since the miners need a software application to tell them what to do.

The Mini Rig has a unique form factor. From the side, it pretty much looks like a gaming PC tower. But when you look at the width of the unit, you can see that it is something different altogether.

While Butterfly Labs is catering to the consumer bitcoin market, it's clear that bitcoin mining will eventually not be viable for the mass market. BFL Chief Operating Officer Josh Zerlan made it clear that even if the mining difficulty were to be at a rate over 900 million (it is around 26 million right now), even the entry-level Jalapeno should still be able to make at least a little bit of money.

Of course, those are the company's back-of-the-napkin calculations - it's no guarantee. Bitcoin pricing is volatile, so it's hard to predict the future value of mining. You have to believe that the price of bitcoins are going to be much higher in the future if you want to be a part of the race towards more hashes. The best resource that I have found to be able to work out the variables that go into bitcoin mining is the profitability calculator on Bitcoinx, which takes into account the mining difficulty, a miner's hash rate and power consumption, among other factors. There is also an excellent bitcoin mining dashboard that has been created by TradeBlock.

What the Mini Rig SC does is amalgamate many of BFL's "longboard" PCB units. When a customer purchases a Single - the unit that's one level above the entry-level Jalapeno - it comes with one of these boards. The Mini Rig is a bunch of them in a larger configuration connected with a USB. One of the first things that I noticed about the unit is that it would sit quite awkwardly inside of a datacenter rack.

This is important when you start to realize where the future of bitcoin mining lies. For the most part, the past few years have been full of miners building rigs inside of their houses. But with so much power and cooling needs that will be required in the future, it is likely that a future with mining rigs in the home will no longer be possible.

It is the power and cooling that will become the most important elements of mining going forward. It will only be a matter of time until a unit is capable of performing at the level of terahashes per second and beyond. While Butterfly Labs did not want to comment on their future plans, they made it pretty clear to me that they are hard at work on developing the next generation of bitcoin hardware.

The key is going to be efficiency, in terms of power and cooling. Unlike the Mini Rig SC, it's highly likely that units are going to need to be configured in a blade form factor that can slide into a datacenter rack. I was told that water-cooling would be the most effective option for heat reduction in the future because it is cheaper overall than technology that utilizes liquid nitrogen cooling.

Even then, a traditional datacenter rack can only handle 20,000 watts of power at a time. According to the Butterfly Labs official FAQ, a Mini Rig consumes 2,500 to 2,700 watts of power at any given time. Right now, that datacenter rack comprising of today's average servers would only be able to handle about six Mini Rigs.

The competition to make bitcoin mining hardware energy efficient yet maintain a high hashrate is going to be important. Cooling is an aspect of this, but it is going to take some creative thinking instead of just jacking up the hashrates. At some point, engineers are going to have to start thinking more about power consumption than hashing.

So here's what is happening with mining right at this moment, a reflection on future things to come. "The GPU miners are dropping out. The cost of electricity versus the reward is going through the roof", says McClain, the BFL account manager. Now that ASICs are here, the FPGA mining units cannot survive. This example of what is going on at this moment will in fact be a continuous cycle in what is the bitcoin mining race, an occurrence that the Butterfly Labs folks admitted is similar to a "treadmill".

But is that going to stop people from mining bitcoins? Is that going to stop Butterfly Labs, Avalon and Terrahash, among others, from making money selling bitcoin mining to the masses? No, there is too much incentive. And if you believe in bitcoin, perhaps you'll feel a little bit better about it if you own a part of the network.

It at least gives people the opportunity to own a part of financial technology. And that's more than you can say about the banking industry today. You can own shares of a publicly traded bank, but even then that might not be the same thing as being part of a decentralized network, no matter what kind of hardware race might be going on. Actually, it can sometimes be fun to watch technology mature in this form. If you're not caught in the middle of this, it might be kind of exciting.