Record bitcoin payment of $1 million spent on new mining hardware

The order was a downpayment on new hardware for 'mining' new bitcoins

Butterfly Labs' BitForce 500 GH/s Mini Rig SC, which sells for $22,484

Butterfly Labs' BitForce 500 GH/s Mini Rig SC, which sells for $22,484

Bitpay, a company that lets businesses accept payments in the Bitcoin virtual currency, has just processed its first US$1 million transaction.

The money was spent on new bitcoin mining hardware sold by Butterfly Labs, a company in Kansas City that makes specialized computers used to unlock new bitcoins and help manage the bitcoin network, Bitpay said on Tuesday.

The order was only a down payment on a forthcoming order, which will be worth more than the million dollars just spent, said Jeff Ownby, a spokesman for Butterfly Labs.

It was placed by a U.S. corporation that's an existing Butterfly customer, Ownby said. Butterfly will disclose the customer's identity in the next day or so, he said, but Butterfly appeared to have been caught off guard by Bitpay's announcement and wasn't prepared to do so yet.

Bitcoin is a digital currency used to make payments over the Internet. It works on a peer-to-peer network and exists outside the control of traditional financial institutions.

When the Bitcoin system was set up, its creator designed it so that new bitcoins could be "unlocked," or introduced into the system, at a fixed rate over a period of time. Unlocking the bitcoins involves solving complex cryptographic algorithms, and a cottage industry has sprung up around "mining" new units of the currency.

Butterfly Labs is one of the companies selling hardware to do that work, using specialized ASIC processors. The top-end machine listed on its site sells for more than $22,000 and can process 500 gigahashes per second (GH/s), or 500 billion crypto hashes per second, according to the company.

But the downpayment was for upcoming processor cards manufactured on a 28 nanometer process that will be able to crunch through 600 GH/s, Ownby said.

Bitpay didn't say who placed the order either, only that the payment was processed this month.

Bitcoin can be bought and sold like any other currency, and it made the headlines earlier this year when its value spiked above $230, supposedly because people worried about the collapse of the euro were putting their money in the virtual currency instead.

The value plummeted soon after but has since climbed back over $200 per bitcoin, according to data from the Mount Gox Exchange.

The more compute power an individual or group of miners has on the bitcoin network, the greater their chance of unlocking new bitcoins. Conversely, the more total compute power there is on the network, the less probability they have of succeeding.

The amount of computing power on the network has grown exponentially this year, from 20 Terahashes per second on Jan. 1 to 3000 Terahashes per second today, Bitpay said.

The mining hardware also secures the bitcoin network, with each machine helping to verify the last transaction made. So more hardware helps make the network more secure.

Bitpay says it processed and cleared the $1 million transaction in a day. One benefit of the system, according to proponents, is that unlike credit card payments, bitcoin payments can't be reversed after they've been made.

Bitpay said last month that more than 10,000 merchants have signed up to accept bitcoins through its service.

James Niccolai covers data centers and general technology news for IDG News Service. Follow James on Twitter at @jniccolai. James's e-mail address is james_niccolai@idg.com

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