Bitcoin mining is as simple as installing software on your computer, but is the time and energy investment worth the effort? Bitcoin is a digital currency, known as a cryptocurrency, that can be bought and sold for ‘real’ currency such as US Dollars.
Created in 2008 or 2009 (depending who you ask) by Satoshi Nakamoto (not their real name), but first described in 1998 by Wei Dai on the cypherpunks mailing list, bitcoins exist as a string of letters and numbers, stored digitally, created digitally and have no physical form.
Bitcoins can be used to pay for physical goods and services online and major brand names are jumping on board as a sign of legitimacy for the digital currency.
The creation of new bitcoins is an automated process accomplished by servers, called bitcoin miners, that operate on an internet-based peer-to-peer network that is not centrally managed by any single authority, like a government.
Anyone with a computer can be a bitcoin miner by simply installing software that generates bitcoins out of thin air.
How can this be of any value in the real world? Read on, my friends.
What Is Bitcoin Mining
The term ‘mining’ refers to the computational process involved in solving mathematical transactions that keep the bitcoin system up and running. Transaction blocks can be processed by a multitude of different miners who work together, and each get paid in BTC (the bitcoin currency) for a proportion of the work they have done to ‘solve’ the transaction.
Solving blocks and creating new bitcoins takes a lot of computational power. Currently, 25 new bitcoins are generated with every 10 minute block. This will be halved to 12.5 bitcoins during the year 2017 and halved continuously every 4 years after until a hard limit of 21 million bitcoins is reached during the year 2140.
The effort in generating bitcoins is usually achieved by a pool of miners, rather than one solo operator.
Mining for bitcoins can be risky business due to the value’s volatility, cost of hardware, drain on electricity and the rising difficulty in solving transactions.
Selling mined bitcoins is easy enough through trading platforms such as LocalBitcoins that allow miners to sell bitcoins directly to others safely and anonymously.
As far as currencies go, Bitcoin’s exchange value is like a roller-coaster ride, fluctuating wildly, sometimes by USD$100 in a day as experienced in April 2013. From trading as low as $2 per bitcoin in late 2011 to the giddy highs of 2013 valued at $260 a pop. Values are sure to rise and fall, but record highs are likely to be broken again.
Some enterprising folks are approaching mining with a business mindset, pouring cash and mining revenues into more and more hardware for the purpose of increasing their mining turnover.
How To Start Bitcoin Mining
It’s possible to can get your computer mining for bitcoins in just a few minutes. It depends on your computer’s capabilities and if you have a powerful graphics card. If you are not familiar with computer hardware, bitcoin mining may not be for you, but you can still be brave and jump in anyway.
To try mining for bitcoins using your computer’s CPU or GPU (on your graphics card) – grab a CPU/GPU miner, like GUIMiner, make an account at a Mining Pool such as BTC Guild
You’ll need a digital wallet to store your bitcoins. Just like a physical wallet to store your banknotes, a digital wallet keeps your digital currency safe. It is either stored on your computer, USB stick or with an online service (which I dont recommend).
Choose your wallet at the official Bitcoin website
Bitcoin Mining Hardware
Technophobes, look away now.
If this room of digital snakes excites you, bitcoin mining could be your thing! Pictured above, is an extreme set up of a GPU-based bitcoin mining operation. To get a sense of scale, see those racks with a fan sitting on top? That’s a normal PC fan usually found on the back of desktop computers. That whole setup is sitting on a big desk.
While you certainly don’t have to be that extravagant with your mining operation, to earn any serious coin, you need serious hardware.
There are some companies who sell hacked together GPU-based mining machines but those are already ‘old hat’.
The new breed of mining machines are called ASICs (Application Specific Integrated Circuit) which are designed solely to mine bitcoins and are vastly more powerful than GPU-based systems and consume a fraction of the energy, saving on electricity costs.
If you are considering purchasing an ASIC super computer, get ready to hand over your real hard-earned dollars because it will cost you. From Butterfly Labs, the lower end starts at a few hundred dollars ranging upto $30,000 per machine.
Bitcoin has some major advantages over government backed currencies.
No Government Can Claim Ownership Of Bitcoins
The bitcoin transactional database is distributed and copied across hundreds of thousands of servers and computers in a peer-to-peer network. These redundant copies make seizing the bitcoin currency near impossible.
Governments can’t seize anyone’s bitcoin wealth because bitcoin transactions are anonymous, untraceable and only the owner can know their true wealth.
Since bitcoins are a global digital currency, there is no viable way to implement a bitcoin taxation system. The only time you would be taxed by your government would be at the time of selling your bitcoins for local currency. In most cases, this would be classified as income, therefore taxable.
Bitcoin transactions are untraceable to any specific person. The amount of bitcoins in an owner’s wallet is also private.
Unlike the traditional banking system, 3rd parties don’t have access to your personal financial data.
No Transaction Costs
Sending and receiving Bitcoins between users cost nothing. Once bitcoins are sent to someone, the transaction cannot be reversed.
Bitcoins also have some disadvantages over government backed currencies.
Not Widely Accepted
Bitcoins are only accepted by a small group of businesses, however the numbers are growing. WordPress, Etsy, OKCupid (the dating website), many web hosting companies and other online merchants have begun to accept bitcoins as valid payment.
As seen in the Paypal case against Wikileaks, governments have shown the willingness to interfere in legitimate business operations. In the Wikileaks case, the US government pressured Paypal to stop accepting donations to Wikileaks. The same pressure, theoretically, can be applied to merchants who accept bitcoins as payment for services.
Bitcoin Wallets Can Be Lost
If the hard drive storing your bitcoin wallet dies, or a virus corrupts data, or you forget your wallet’s encrypted password, your bitcoins have essentially been “lost”. Those bitcoins would be “lost” to the system forever, never to be recovered or used by anyone else.
Wild Fluctuation In Value
Some may see bitcoin’s value fluctuations as a disadvantage, and others may see it as an trading opportunity to “buy low, sell high”.
The value of Bitcoins is constantly fluctuating according to demand. This makes it difficult for online merchants to set a fixed price for products or services, which adds to confusion if a refund is to be made.
Dishonesty And No Buyer Protection
Since all bitcoin transactions are final and cannot be reversed, what happens when you’ve paid for goods that never arrive, and the seller refuses to refund or disappears entirely? Nothing. Kiss your sweet bitcoins goodbye.
Currently, one block transaction is worth 25 BTC until 2017, at which time it will be halved. This is no speculation. This halving mechanism is built into the system to cause deflation of the currency.
Each bitcoin will be worth increasing more as time goes on until the total number of bitcoins maxes out at 21 million.
This system is designed to reward early adopters.
No Valuation Guarantee
If there is a run on the currency and a large group of investors decide to dump all their bitcoins, it’s value would decrease sharply and hurt other investors in the currency. It is entirely possible for bitcoins to be worth USD$0.01 each (conversely, it’s also possible to be worth USD$10,000 each).
Where To Buy And Sell Bitcoins
The Euro currency crisis piqued investor interest in digital currencies, who began to consider using bitcoins as a safe haven for their money. The wildly fluctuating values are also being eyed by currency traders looking to make a quick buck.
One of the world’s largest Bitcoin exchanges and online trading platform, Mt Gox, has encountered a lot of regulatory trouble and lost their position as the market leader for buying and selling bitcoins
New entrants like LocalBitcoins allow people to buy and sell bitcoins directly with each other, effectively bypassing regulatory hurdles faced by the big exchanges.
Timing is everything when trading bitcoins as much can be lost or gained within a short period of time. Some say trading in bitcoins is a gamble, so be tread carefully.
*IMPORTANT* This article does not constitute financial advise and you are fully responsible for your own decisions.
Disclaimer: Links to 3rd party sites included within this article denoted with /go/ in the URL may result in commission being earned if you decide to make a purchase.
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