by Dave Carlson
Updated Aug 21
What is the benefit of mining Bitcoin over just buying it with your own currency? This is a good question. Some people mine for the technological challenge of it. Some very bright minds are bending their will towards achieving new performance levels in mining.
Most people are participating in Bitcoin mining because using an existing pc, one can literally make money from the processing power already sitting beside your desk. Still others are approaching mining with a gold rush mentality, pouring cash and mining revenues into more and more hardware in order to increase mining capacity.
As you’ll learn in this eBook, this “arms race” has the effect of accelerating the increasing difficulty of actually finding blocks, which are the the fundamental rare-commodity that backs the currency. This is an important point because basic economics says that as the difficulty rises, scarcity occurs, which should cause the value of the currency to rise.
Some players are banking that Bitcoin mined at current prices (~$6.75 USD/BTC) may someday be worth many times that amount, due to the fact that difficulty will rise over time – its part of what makes up the Bitcoin protocol itself. More on that later.
So, why might you mine for Bitcoins? There are lots of reasons. Bitcoin mining can be considered a valid small home-based business opportunity. As with any business opportunity, there are risks, however it truly presents a business you can start with a small investment and grow over time. Management of your mining operation shouldn’t take up too much time, provided you’ve done your research and invested in reliable hardware that you’ve configured correctly.
Perhaps you are interested in owning BTC from a speculative standpoint – i.e. you think BTC is liable to rise against your home currency. Many miners are saving their coins for this very reason. They believe that as mining Difficulty increases over time, Blocks will become more scarce and thus the value of BTC will have to rise. Many retailers and service providers are beginning to accept Bitcoin as payment.
You can earn Bitcoin using your processing power, and then turn around and buy something of real value in the real world. If that sounds good, read on!
Maybe you just want BTC, but don’t want to pay for it! Since you can spend your BTC in a variety of ways, or even just convert it to your home currency, it makes sense to set something up that will constantly contribute small amounts of money into your account day and night, with very little effort.
Others are recognizing that Bitcoin is a great way to store money “off the grid” away from prying eyes, or governments that want to control how your money is loaned, leveraged or taxed.
The Bitcoin space by its nature has a core group of intellectual tech-savvy gamer types leading the charge. The more experienced hardware development experts are bringing significant advancement to the space through engineering of technologies like FPGA and ASIC. Economics buffs that believe fiat currency systems are doomed to fail can also be found buying into BTC as a truly decentralized and identityless currency system.
Unfortunately a system like this also attracts unsavory individuals. Hackers have already incorporated CPU and GPU mining into their botnets and malware programs. In late 2011, a hacker gained access to a popular BTC trading exchange and made off with BTC worth hundreds of thousands of USD, in addition to publicly posting screenshots documenting the deletion of the company’s virtual servers. Criminals have found that they can convert their cash to BTC using a variety of methods, selling it back as their home currency, thus laundering their illicit capital.
Still interested? Good, you have been informed of a few of the risks, but obviously are tough enough to get in the game. If you want to get a sense of how mining works, you can get your computer mining in just a few minutes. Try CPU mining – grab a CPU/GPU miner, like GUIMiner, make an account at a Mining Pool such as BTC Guild, and hit go.
Soon you’ll see your shares being counted at the pool, and tiny amounts of BTC will begin adding up. Think of this as gold dust – you’ll need a ton of it to be worth much – it will take a lot of time, and you may never see a nugget. There’s got to be a better way!
Graduate to GPU mining – use an existing video card or two. You can use a couple newer video cards you may already have, or find some used ones on eBay or Craigslist. You can use the same GUI Miner or other free and easy to find miner program to discover your GPUs and increase your mining capacity by a few orders of magnitude.
Keep in mind only more recent GPU’s will work, and there are other compatibility considerations that may mean that even your fancy new video card can’t make BTC when you aren’t using it. Watch out for burned out miner cards being dumped on the market by existing miners, and calculate your electricity costs first if you care about profits. Use the Bitcoin forum before deciding on a purchase – I can’t stress this enough. We’ll cover these concepts more in detail later.
When you’ve gained confidence in your mining ability and understanding, you can make the leap to building a dedicated Mining Rig. This will require an investment in money and time to build, but you’ll see big gains in your hashing capacity, and BTC in the bank!
A less technical way to be involved with Bitcoin mining is to invest in a mining company, or buy mining bonds. There are exchanges such as cex.io where you can purchase shares of ownership in a mining operation run by an experienced operator. He or she will be well versed in the technical details involved in maintaining and growing a large scale mining operation.
When you buy bond shares you are funding the creation or growth of the enterprise. The Bond offering will have specific details outlining the dividend payment plan or other method of deriving revenue from your investment.
Why would a person rent hashing power or buy into a mining bond?
There are actually several reasons to go the investor route, rather than buy BTC outright, or start mining on your own. The future ratio of how much money you can earn with a given hash power could become more favorable, so a long-term contract could make sense.
Mining pool operators wanting to attract miners to their pool may take this approach. A person holding other types of cryptocoins could utilize rented hashing power to force difficulty and price higher in that currency.
Finally, you can always just buy into Bitcoin yourself. There are several ways to do this, perhaps the easiest is to simply do a transaction with a company like localbitcoins.com, where you can purchase bitcoin locally by bank deposit or even cash. Owning Bitcoin as an investment means you will want to watch the value of Bitcoin against your home currency – hopefully it will go up and your investment will be making a profit!
Bitcoin is volatile! That means price can rapidly go up or down quite a lot. In fact, in the time of writing this eBook, BTC has already risen to $9.50 USD/BTC – that’s nearly a 100% increase! You can play the market with your BTC if you want to try it. Volatility can give you opportunities to sell your BTC and then buy it back again when price drops (if price drops). This currency trading can be fun, profitable or stressful if you get the timing wrong!
What kind of results can you expect? You’ll quickly realize CPU mining has been far surpassed by new technology (this may have resulted in a difficulty spike that drove BTC to over $30USD/BTC! If you are still interested in mining with your CPU, you can mine LiteCoin as an alternative, hoping that it too may achieve a stable value – and heck its pretty fun.
With an investment in GPU hardware you’ll see much more mining capacity, however most ROI analysis looks for the hardware to make a profit against the power it consumes. Depending on what you pay per Megawatt, GPUs may not be profitable.
You can go to your local PUD website to look up your rate for electricity. You are likely to end up with a mix of GPU and newer technology such as FPGA (dedicated programmable chips that have recently been brought to market). Either way, you can expect a big learning experience, some excitement, some disappointment – but definitely an Adventure in Bitcoin Mining!
Next Section: The nuts and bolts