Monthly Archives: April 2013

Why Litecoin has a Place in the Cryptocurrency Community

Litecoin is the second largest cryptocurrency today, and has around 2-3% of the total cryptocurrency market. It seems to bother some people to no end that Litecoin even exists, so I thought it would make sense to look closer at what Litecoin does that Bitcoin may not.

Diversity

I have previously argued that the diversity of cryptocoins is good for the overall cryptocurrency community. In short, the existence of cryptocurrencies other than Bitcoin serves to provide the community and the world with alternatives.

Note: Refer to my article Bitcoin, Litecoin, Whatcoin? Oh My! for the full article.

Why are alternatives important? Well, as in biology, the features that best provides survival for a species tend to survive from generation to generation, while features that are pointless tend to die out. To some extent, this can be said for alternative coins too; those that have features that make them competitive are those that society will adopt.

One argument I hear often is that Bitcoin can implement any of the features that alternative cryptocoins have. That may be, although it may certainly call for severe changes in Bitcoin, but the big question remains: Which features should Bitcoin adopt?

Litecoin has features that society seems to like. Even if the coin itself may not survive, it can provide Bitcoin or other cryptocoins with important information about what society wants.

This is not necessarily an argument for Litecoins specifically, but Litecoins success compared to other coins may tell the cryptocurrency community that Litecoin has features society wants.

Another argument against Litecoin is that it isn’t innovative enough; that it is too similar to Bitcoin and thus offer no additional value.

I’m not sure I agree with this argument in the first place, but the state of a currency at its beginning is not necessarily an indication of how it will evolve. This is, in fact, the whole idea of innovation and evolution. You start out with one idea and evolve that as time moves on.

Litecoin may evolve in completely separate directions from Bitcoin, and may thus be a completely different coin months or years from now. This further strengthens the cryptocoin community, and even Bitcoin may choose to pick up features that have evolved from other coins.

Speed

One feature that separates Litecoin from Bitcoin is transaction speed. Where Bitcoin has a 10 minute block time on average, Litecoins have a 2.5 minute block time.

Note: For those that do not know, block time determines how fast a transaction is confirmed.

This increased block speed makes Litecoin a faster currency. For vendors looking to process transactions rapidly, this may be a benefit.

The change in block speed isn’t necessarily the benefit that stores and other rapid transaction processors want, though. Even with Bitcoin’s 10 minute blocks, once a transaction is distributed to the network, essentially immediately after sending, it is virtually impossible and certainly uneconomical for someone to try to exploit the unconfirmed status.

For smaller transactions, say less than $100, a store owner can relatively safely assume that a transaction will not be at risk as soon as they see the payment received on their end.

However, for larger transactions, vendors may want to wait for a certain time or for a certain number of confirmations before sending the goods.

This is where Litecoin can provide a benefit. If you are buying a car, you want to get into your new vehicle as quickly as possible, but the vendor is unlikely to give you the keys before the customary 6 confirmations have happened. This takes an hour with Bitcoin and about 15 minutes with Litecoin.

Note: The number of transactions does not necessarily equate to more security. In other words, 6 Litecoin transactions may not equate to 6 Bitcoin transactions in terms of security.

Of course, if you’re standing in line at the grocery store, waiting around for 2.5 minutes for your payment to verify at least once is still too long. If stores require at least one verification, however, 2.5 minutes is better than 10 minutes.

Security

Speaking of security, Litecoin may offer some interesting features to help make it more secure.

First, the most fatal security issue with Bitcoin-derived cryptocurrencies is what is known as a 51% attach. In short, this means that someone who controls 51% of the total network mining power can effectively double-spend money. Double-spend means that money can be spent twice, for example to send money first to a merchant, but then resend the money back to the attacker, essentially cheating the merchant of the money.

Litecoin, although much smaller than Bitcoin, uses a different algorithm for mining called Scrypt (where Bitcoin uses SHA-256). This is important because Scrypt is much more expensive in terms of computing power and it is currently infeasible to create specialized hardware that mines Litecoins much faster than current technology.

For Bitcoin, ASIC equipment is very effective at achieving massive hashing power. As such, the network itself is very powerful and growing in power every day. However, this also cuts the other way; because Bitcoin blocks can be easily mined with specialized hardware, it makes it cheaper to produce hardware to attack the network.

Note: To read more about ASICs and what they are, check out the article called What Are ASIC Miners and Why Are They So Important?

For Litecoin, the most effective hardware today are graphics cards with GPU processors and massive memory bandwidth. This means that an attacker today would need to gain control over a huge amount of graphics cards, which are very expensive, in order to conduct a 51% attack.

Another factor in the 51% attack is that for the attack to be successful, the attacker needs to control the network for a certain amount of time. Even if the attacker had 51% of the network, the power cost of running such a network would quickly outweigh the benefit of double-spending money. 

Right now, though, the Litecoin network is much smaller than the Bitcoin network, so that means an attack today may be feasible, especially if the attacker could get control over one of the mining pools.

Well, maybe, but we still have one more feature to discuss.

Mining

As mentioned, Litecoin uses a different mining protocol from Bitcoin. This protocol, called Scrypt, requires memory bandwidth in addition to raw processing power. The algorithm was designed to be resistant to specialized cryptographic hardware that could otherwise be used to crack strong encryption.

Until ASICs came along in 2013, the most efficient way to mine Bitcoins was using graphics cards, and especially AMD Radeon cards. These cards, however, are not match for ASIC miners, so with the introduction of ASICs, a lot of Bitcoin mining graphics cards will become less profitable.

However, Litecoin mining with graphics cards and their GPUs and massive memory bandwidth is still feasible. In fact, today, GPUs are the most efficient way to mine Litecoins. Combine that with the fact that Litecoin is resistant to current ASIC technology, and existing Bitcoin miners will quickly find that moving their resources to mine Litecoins yields far more profit.

This means that the Litecoin network is far more distributed than Bitcoin. In the case of Bitcoin, large ASIC mining farms can quickly take 25-40% of the total network capacity. This can make Bitcoin more susceptible to a 51% attack because an attacker would need to control just one of two of the large mining pools in order to control more than 51% of the network.

Of course, the mining profitability of Litecoin also means that people that bought special mining rigs for Litecoin still has a place to earn money from their investments, which in turn means that the network will continue to exist as long as people are using Litecoins are willing to part with other types of currency to get it.

Conclusion

To summarize, Litecoin is an important part of the cryptocurrency experiment because it offers diversity, speed, security, and a chance for miners to continue earning from their investments.

Whether Litecoin, Bitcoin, or any currency survives, well, that all depends on you, as a part of the society that has to adopt these coins as a new way of thinking money.

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How to Buy ASICMiner Shares

Disclaimer: At the time of this writing, I am a shareholder with ASICMiner. I get a direct personal benefit from a high share price. Keep that in mind as you read this.

In fact, when reading anything about investment, it is a good idea to assume the author has an interest in promoting a certain message.

Also be aware that the Bitcoin stock market is, like Bitcoin, very immature and not regulated. The risks involved are far greater than for a traditional stock market.

With those disclaimers out of the way, thanks for stopping by, I’d be happy to answer your questions about how to get ASICMiner shares.

What is ASICMiner?

ASICMiner (AM) is a company that develops ASIC chips and equipment for Bitcoin mining. They currently both mine for Bitcoin block rewards and sell Bitcoin mining equipment to end users (albeit so far to somewhat technical end users).

If you don’t know what ASIC means, check out my article on what ASIC miners are and why they are so important.

ASICMiner is headed and fronted by friedcat, a user pseudonym on bitcointalk.org. It is owned by the public (holding 163,962 shares) and the shareholders of a company called Bitfountain (holding 236,038 shares).

Note: Technically, ASICMiner refers to the part of the Bitfountain company represented by the 163,962 shares, so the publicly traded shares are only that part of the full Bitfountain company. As such, ASICMiner is a virtual identity in which the public trades shares.

The first public announcement was made on August 9, 2012, on Bitcointalk.org. Since then, friedcat has kept the public informed on regular basis (often several times per week) on the progress of the development, plans for sales, as well as answering questions from the public. The thread has become quite long, but I recommend reading at least friedcat’s posts to make sure you understand the history and the company structure.

Today, ASICMiner runs mining operations at BTC Guild and OZCoin and have since February 2013 mined at a rate of between 6-8 TH per second.

At the time of this writing (April 26, 2013) ASICMiner is in the process of increasing their hashing rate to about 15 TH per second, and friedcat has also announced that ASICMiner will deploy 50 TH per second in the near future.

Further, ASICMiner also wants to sell ASIC mining equipment to end users. The first step in this plan was an auction sale held at Bitcointalk.org of 10 blades of ASIC chips called Erupter Blades. These blades, each with a hashing power of 10 GH per second, were sold for ฿75-76 each and were delivered immediately after the auction.

friedcat has stated that after receiving feedback from users, ASICMiner will start selling more Erupter Blades to the public, although the price has not been decided yet.

Finally, friedcat has also announced that they will sell a much smaller USB-stick type ASIC miner that hashes at 300 MH per second each. Pricing and availability is not clear at this point.

From an investor’s perspective, ASICMiner pays dividends on profit from mining operations and sales of equipment. Dividends are paid once per week on Wednesday, and dividends as well as dividend history are published on both stock exchanges that trade the stock (although stocks are traded as a pass-through. See below).

How Do I Buy ASICMiner Shares?

You have two ways of buying shares in ASICMiner. You can buy Pass-Through (PT) shares through two separate stock exchanges, BTC Trading (BTCT) and Bitfunder (BF). You can also buy directly from holders of real shares if you know them or they put their shares up for auction.

By far the easiest and quickest way is to buy Pass-Through shares at one of the two major stock exchanges, BTCT and Bitfunder. I personally prefer the former due to its easier interface, but either works.

On BTCT, the process of signing up for an account and starting trading is very quick. You simply sign up for an account with a username, password, email and a 4-digit pin code. You then fund your account by sending Bitcoins to an address provided by BTCT, and once those funds are confirmed (usually takes about 30 minutes) you can begin trading ASICMiner or other shares on the exchange.

For Bitfunder, the process is a bit more complicated, because Bitfunder uses an external service to handle its Bitcoins. Please review the Bitfunder process on their web site.

In either case, you should be able to buy your first ASICMiner PT share in less than an hour.

However, know that shares traded on both these exchanges are Pass-Through (PT) shares only. A PT means that you buy shares with someone who holds real shares with ASICMiner. Each share in the PT represents on ‘real’ share in ASICMiner and pays the same dividend less a fee to the PT operator.  In practice, a PT share is much the same as a ‘real’ share, but you don’t get voting rights, so keep that in mind. Also, the PT on BTCT has a 0.5% fee (which is waived for 90 days from March 5, 2013), whereas the PT on Bitfunder does not have any dividend fee.

Update: The BTCT and Bitfunder PTs no longer have dividend fees.

Note: Yeah, I know, a lot of abbreviations… These are the abbreviations that are used in the community, though, so you probably should learn them.

You should also know that PT operators may offer a conversion between PT shares and regular shares. That means that if you hold PT shares, you can contact the PT operator and request your shares be converted from PT shares to regular shares. You can also convert regular shares into PT shares. Contact the PT operator for information and terms.

Finally, you’ll also find several 100PT shares. These are just like normal PT shares, except each share represents 1/100 of a share (in other words, one hundred 100PT shares represent one regular share). Because each normal PT share can cost up to $200, a 100PT share makes it easier to invest the exact amount you want to invest.

Make sure you read up on the description of each PT share so you understand any fees and condition for that share.

For regular shares, ASICMiner do not sell those directly. They were sold initially at a now defunct stock exchange (GLBSE) which turned into a bit of a disaster. After that, friedcat decided he did not want the shares traded on any exchange for fear of similar accidents.

That said, there are a lot of people that hold regular shares, and these are sometimes put on auction over on Bitcointalk.org (check https://bitcointalk.org/index.php?board=73.0). If you participate and win shares in one of these auctions, the seller will transfer the sold amount by sending a message to friedcat with your email address and your Bitcoin address for dividends, and you are now the proud owner of ASICMiner shares.

I suggest using one of the escrow service providers on that forum to ensure the transfer goes smoothly and safely. Several escrow providers will do this for free, but it is customary to tip a few bitcents for their service. Look around in the forum and ask what their terms and availability are.

This process can take a few days, depending on how long auction lasts, but the transfer afterwards should be quick, and usually takes less than a day.

Now you can sit back and wait for the next Wednesday when you will receive your first ASICMiner dividends.

Dividends for PT shares are paid to your exchange account and directly held shares are paid directly from friedcat to your Bitcoin address on file.

Beyond that, ASICMiner does not have a web page per se, but they keep everyone informed several times a week here:https://bitcointalk.org/index.php?topic=99497.0

Like I said, be very careful about investing in Bitcoins and cryptocurrency stocks. There is no regulation, no recourse, and seldom any personally identifiable information. Oh, and always consult a tax advisor before investing in anything.

And again, for those that forgot:

Disclaimer: At the time of this writing, I am a shareholder with ASICMiner. I get a direct personal benefit from a high share price. Keep that in mind as you read this.

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What are ASIC Miners and Why Are They So Important?

ASIC, or Application Specific Integrated Circuit, entered the Bitcoin mining market with full force in 2013. Shrouded in mystery for most and being almost mythical creatures, these mining beasts of burdens reached staggering prices in April 2013.

What are these beasts and why are they destined to change the face of Bitcoin for a long time to come? Why is are ASIC Bitcoin mining massive benefit for Litecoin?

Built for One Thing

ASIC stands for Application Specific Integrated Circuit, and essentially means a computer chip that has one purpose and one purpose only. In the case of ASIC Bitcoin miners, the sole purpose of the ASIC chip is to generate billions of hash values every second, 24 hours a day, all year round.

The obvious purpose of an ASIC miner is to generate Bitcoins through the reward system built into the system. An ASIC miner does this by generating SHA-256 hash values for a Bitcoin block at tremendous speeds, far out-performing any other technology at present.

Note: To understand more about hashes and mining in general, check out my article on Understanding Mining Difficulty

The race to get ASIC miners into production stems from a beautiful balancing aspect of Bitcoin, namely that the total rate of Bitcoin generation remains constant at a steady pace of 25 Bitcoins per 10 minutes. This means that whoever holds the most hashing power gets a bigger piece of the reward cake.

That cake, however, is always the same size, and even though there is a new cake every 10 minutes, the cake doesn’t get bigger even if more people want to eat from it. In fact, after 2016, the cake gets smaller because the reward per block goes down to 12.5 BTC per 10 minutes. This is determined by Bitcoin’s built-in controlled supply of coins.

Note: Due to the transaction fee system in Bitcoin, blocks will continue to reward miners, so even if the block generation reward will eventually go down to zero, the block transaction fees will still yield rewards to miners. This, however, is simply coin circulation; no new coins will be minted after the block generation reward goes down to zero in 2140.

Because ASIC miners perform so much better than other technology, whoever manages to get ASIC miners into production first will yield massive rewards. It doesn’t increase the total number of coins in circulation, it only means that the first movers have a huge advantage over those that arrive later.

At some point, when everyone has an ASIC miner at home (or at least has the opportunity to have one), the advantage of ASIC miners become much less. In fact, if everyone had an ASIC miner, the advantage of having one would simply disappear completely and the ASIC miners would even less valuable than the previous graphics card based technology, because the ASICs cannot be used for anything else.

As such, what we are seeing now is an arms race, to get new technology to the market first and thus reap the financial reward of being ahead of the crowd for a while.

However, the block reward is just one of the reasons why ASIC miners are destined to change the face of Bitcoin.

Attack! Attack!

One major concern with the Bitcoin system is that it is susceptible to what is known as a 51% attack. This means that if a malicious entity were to control more than 51% of the total network hashing power, they could control transactions to some extent. Although there are defense mechanisms against this situation, and the fear of such an attack is believed to be largely overrated, ASIC miners play an important role in stabilizing Bitcoin.

With the current Bitcoin network hashing power, largely based on GPU and to a lesser extent CPU mining, it is feasible that someone with enough resources could take over the Bitcoin network.

However, with the introduction and distribution of ASIC based hashing, the total network hashing power will skyrocket, making the chances of a 51% attack much less feasible. The more people get their hands on and start deploying ASIC miners, the more secure the Bitcoin network becomes against a 51% attack.

What About Litecoins?

Litecoins are currently not very interesting for ASIC miners, largely because Litecoin uses a different mining algorithm called Scrypt (whereas Bitcoin uses SHA-256). Scrypt requires far more memory than Bitcoin, and ASICs do not have a lot of memory. In fact, to build an ASIC based miner that could do Litecoin mining would be so expensive that nobody could possibly hope to make any profit from it.

This may lead you to think that Litecoin does not reap any benefit from the protection that ASIC miners give Bitcoin. You would be wrong in assuming that, though, and there’s a very good reason for this.

Up until ASICs become widely distributed, most of the hashing power in Bitcoin comes from normal users that have graphics cards mining for Bitcoin.

However, as ASICs take over, those users will not longer be able to reap rewards from Bitcoin mining and may want to move over to mining Litecoin. This means that the introduction of ASIC miners for Bitcoin moves a lot of computational power to Litecoin, thus making the Litecoin network more resilient against 51% attacks.

Of course, a massive shift in home mining will lead to increased difficulty in Litecoin mining, so whether the migrating users will actually get any sensible rewards remains to be seen.

Note: To understand the factors that determine mining profitability, check out my Litecoin Mining Profitability Guide.

As you can probably understand, ASIC miners are changing the cryptocurrency world, not just for Bitcoin, but also for related coins such as Litecoin.

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Understanding Bitcoin Mining Difficulty

You have probably heard of the term ‘”mining difficulty”, and perhaps you’ve encountered the terms pool difficulty and network difficulty. Perhaps you are a bit confused as to what these terms mean and why the pool difficulty always seems to be so much lower than the network difficulty.

You may even wonder why on earth anyone would want to increase their pool difficulty voluntarily? Well, if you want to learn about these topics, you’ve come to the right article.

I’m going to simplify several aspects of this explanation to make it as easy to understand as possible without compromising the core idea.

What is Mining Difficulty?

Bitcoin and its related cryptocurrencies have an amazing ability for self-balance. You’ll see this throughout the system, but one place where you see it often is in the mining difficulty. The mining difficulty determines how difficult it is to solve a block, but that may not tell you much so I’ll try to elaborate on what that means.

I’ll have to be a bit technical, though, but I’ll try to keep it simple.

Mining is the process of trying to find a hash value for a block of transactions. You need to understand what this means to understand mining difficulty.

Building and Solving Blocks

When a miner starts running, it will wait for new transactions in the Bitcoin network. It will then add those transactions into a block of data. Every miner does this, although for pools, the pool will accept the transactions and build the block for you.

Example: Alice sends Bobs 1฿, which she does through her wallet by signing a transaction using her private key. She then broadcasts that transaction to the network, and as soon as the transaction has propagated through the miners in the network, Bob will see that there is an incoming transaction of 1฿ coming to his wallet.

However, the transaction will still be unconfirmed, it has simply been added to the blocks that miners will try to solve.

Miners will continuously try to solve this block of data. The process of solving is a cryptographical task which involves generating a hash for the block. For Bitcoin and several other cryptocoins, the hash algorithm used is SHA-256, and for Litecoin and Novacoin, the algorithm is Scrypt.

A hash is essentially a checksum that is unique for the underlying data (the data is called the message) so that if the message changes, so does the checksum. For example, you can have a hash value for a file or document (the message), and because the hash will be unique for the message, you can verify that the message has not been modified since the hash was generated. If someone tampered with the message, the checksum will change too.

The benefit of a hash is that it is impossible to predict what it will be in advance without actually performing the computations to generate the hash. However, it is very easy to verify that a hash belongs to a message, simply by repeating the hashing computation and seeing that the results are the same.

Solving a block means that the miners try to find a hash value for the current block of transactions that is below a certain limit. This limit is determined by the current difficulty of the Bitcoin network. The higher the difficulty, the lower the hash value must be.

Because it is impossible to predict the result of a hashing computation without doing the computation, the only way to find a hash that has a value below a certain limit is thus to perform a lot of hashing computations.

So,” you ask, “hashing is fine, but if the block or message does not change unless new transactions come in, why would a miner need to generate thousands or millions or billions of hashes? Wouldn’t the hash always remain the same?

Great question! Of course, if the block remained the same, the hash value would also be the same. That’s why miners add a nonce to the data. A nonce is just a random piece of data, in Bitcoin’s case it is an incremental number, that the miner adds to the block to create a unique message. It does this for every computation.

Example: For simplicity’s sake, let’s say the block or message was AAAA. The miner will add a nonce value to the block, say 1, and generate a hash from AAAA1. If the hash value for that message is not below a certain limit, it will increase the nonce value to 2, and generate a new hash from that message (AAAA2). This goes on and on until you finds a nonce that combined with the current block message yields a value under a certain limit.

Once you find a hash value below the certain limit, you have solved the block and can submit the solution to the network and claim your reward. You actually create this reward money yourself, but the other nodes in the network will only allow you to spend it after it has been verified in the network. Verification means that your creation transaction must be part of a solved block.

Once you have solved the block, though, everyone will start solving a new block by collecting new transactions, adding nonces, and solving hashes. Also, at this point, Alice’s transaction, being part of the block you just solved, is considered to be confirmed once. Bob can choose to accept only one verification, or may wait around for other blocks to be solved to further secure that there is no possible way that there is anything wrong with the transaction.

The ‘certain limit’ comes back to haunt us, but that too is relatively simple to explain.

Why Difficulty Changes

Because the output of a hashing computation is more or less random, the chance of the hash value being below a certain limit becomes increasingly less likely the lower that limit is. The Bitcoin network adjusts the difficulty automatically to ensure that a block is solved around every ten minutes.

Let me illustrate with an example.

Let’s say, for the sake of simplicity, that the hash value range is 1 to 1000, and the difficulty starts at 1, meaning the difficulty is 1000/1 or just 1000. Also for the sake of simplicity, let’s say you manage to calculate 1 hash per minute.

You generate a hash, and the chance of your hash value being below 1000 is 100%. Thus you ‘solve’ the block very easily because every hash value will match.

However, let’s say the difficulty increases to 4. Now you have to find a hash value that is below 1000/4, or 250. Suddenly, the chance of finding a hash is just 25%. Still, you manage on average to find a hash after 4 minutes.

Let’s further say that we increase the difficulty to 100, so you have to find a value that is below 10. In this case, on average, you will only be able to solve a hash every 100 minutes.

Finally, you decide to bring a friend over to help calculate. Your friend, strangely enough, is exactly as quick as you are to calculate hashes, so now you have a hash rate of 2 hashes per minute. With this, you manage to solve the 100 difficulty hash at just 50 minutes.

Bitcoin does not like any of these situations because it wants a new block to be solved every 10 minutes. Thus, the network will adjust the difficulty so that with the number of people trying to solve a block, combined they are able to solve one block every ten minutes.

In our example, because you and your friend solves 2 hashes per minute, that means the difficulty should be 20. If your friend falls asleep of prefers to play Xbox instead, your rate of solving drops to 1 per minute again, and the network difficulty adjusts down to 10 again. If two of your friends drop by, the difficulty increases again to keep the whole system in a beautiful balance.

Note: The numbers aren’t this simple in reality, but this serves as an easy to understand example.

Oh, and other coins have different rates of distribution, but the principle works the same. Litecoin, for example, wants a new block solved every 2.5 minutes.

Pool Difficulty

I you are mining in a pool, you may have seen another kind of difficulty, which is the pool difficulty. The pool difficulty is usually much lower than the network difficulty.

To understand this, you need to understand how a pool works.

When a miner starts working for a pool, the pool server will send the block to each miner and ask it to start solving it. However, instead of having the miner solve a block with the network difficulty, the pool sets another, much lower difficulty. The miner then has a much easier task of finding a hash value that is below that share, and can thus submit their nonce values much quicker.

Of course, it doesn’t help anyone to solve a block with much lower difficulty than the network because the network won’t accept it as a solution to the block. Thus, when the solutions from the miners come into the pool, the pool checks to see whether the solution is above the network difficulty, and if not, it simply discards the value. If the miner solution is correct and above the network hash value required, the pool can submit the solution to the network, receive the reward, and distribute that reward to the pool miners as appropriate.

Let me again show this with an example.

You and four friends, Alice, Bob, Charlie, and Donna, decide to mine for Bitcoin. However, rather than each of you trying to mine alone, and after all, Charlie is really bad at math, so he probably wouldn’t be able to make much at all, you decide to pool your efforts.

You nominate Charlie as the pool ‘master’, and the network difficulty is 200, meaning you need to find a number that is below 5 (in the range 1-1000 as in the previous example).

You, Alice, Bob, and Donna starts calculating hashes at a rate of 1 hash per minute. However, you submit your solutions to Charlie even if the hash value is below 100 (meaning a difficulty of 10).

Why would you do that? Well, every solution that has a number over 100 is guaranteed to be a wrong solution, so you can just throw them away. However, you have proven that you have done some work, so Charlie records your submission for later sharing of the reward.

Charlie not being as good with math, can now simply check the solutions you, Alice, Bob, and Donna submit, and see whether the value you submit is below 5 too. If not, he can simply throw away the result, and wait for the next result to come in.

At some point, Alice comes up with a solution of 3. Now Charlie sees that the number is below the network difficulty and thus submits the solution to the network. Of course, depending on how you agree to share the rewards, you all get a piece of the reward, even if Alice was the one to find the correct solution.

Here’s a trick question for you: Why doesn’t Alice just keep the solution in her pocket and take the whole reward herself? After all, she finds the right number and can easily submit it herself rather than sending it to Charlie for sharing with the others.

Bitcoin has a trick up its sleeve to prevent that from happening. You see, included in the block message that the pool generates is the transaction that sends the reward to Charlie. Thus, if Alive submits the solution herself, that’s fine, because Charlie still gets the money. If Alice changes the address to her own then her solution is no longer valid, and won’t be accepted in the network.

Clever, eh?

I hope this makes it easier to understand how mining and mining difficulty works, but feel free to ask questions or leave feedback in the comments below.

.b

Why Do We Need More Than One Cryptocoin?

I wrote a bit about the differences between the various currencies here:

http://coin.furuknap.net/bitcoin-litecoin-whatcoin-oh-my/

However, I may not have spent enough time explaining the rationale behind why there is a need for multiple currencies.

Here’s the thing; most of the cryptocurrencies have different characteristics that make them useful in different situations and for different purposes.

At the moment, the primary ‘differences’ (better or worse is yet to be decided) between Litecoins and Bitcoins are the mining algorithms and the speed of block solving and thus transaction.

The actual amount of coins, although different, is rather irrelevant; both LTC and BTC can be divided into 1 billionth of a coin, and they can even be further subdivided if required and approved by the network. Further, they both represent 100% of their respective markets, and fewer coins just mean that each coin is relatively more valuable.

So, why not agree on just one? Why does the world need two, much less multiple currencies at all?

What matters long-term is more important. Having two or more cryptocurrencies means they can evolve in various directions to suit what society needs. If society changes (more/less online trade, more/less demand for physical monetary units, more/less trust, etc) then different coins will be suited differently to those needs, and the market has better options.

Technically, the world doesn’t _need_ more than one currency, whether fiat or crypto, but the problem is that shortcomings in how that money can handle transactions means that society becomes limited in what it can do.

The stock market is an example of this; traditional fiat currencies lack the ability to represent a share of something, so one invents a new ‘currency’ (stocks) to fill that need. Rather han having $100 worth of a company, you may have 10 shares, and these shares independently of what you paid for them represent a certain percentage ownership of the company. It’s a value, although it’s not a physical currency bill that you can go down to the Deli and use to buy a sandwich.

Similar things will happen to cryptocurrencies, where each coin can be technically adapted to suit a rising need. A new idea of colored coins come to mind as a way that cryptocoins can represent stock, showing how the community can think of new and innovative ways to use money and represent value.

Think of how may ways you store value today. You may have a house, some physical currency, a bank account, maybe some shares in a company, a couple of funds through your 401K, and similar.

Each of these measures of value represent different needs and characteristics and you use them for different purposes. You may calculate them into a common denominator (like US Dollars, Euros, or Bitcoins) but that only serves to give a translated representation of the value. You house isn’t an amount of US dollars any more than your US dollars is an amount of Bitcoins.

As such, Litecoins represent evolution and increases the adaptability of cryptocurrencies in general. They are not better or worse than other currencies, any more than fish are better than birds; they are just different.

.b

Litecoin Mining Profitability Guide

Who doesn’t want to have their own money printing press, right? Well, with cryptocurrency mining, you can.

Recently, the cryptocurrency community has seen an explosion in mining interest, and although I obviously wasn’t present at the time, I can only imagine this is how society looked during the California gold rush.

However, before you too jump on the Litecoin mining wagon, you need to understand whether mining will make financial sense.

No, it’s not as easy as looking at the cost of hardware, power, and current exchange rates; you need to understand the factors that affect profitability, and you need to guess or predict a number of factors that will affect your profitability.

For the purposes of this Litecoin Mining Profitability guide, I’m using Litecoin as the examples. Bitcoin and other currencies are similar, but there are coin-specific considerations that would make a comprehensive article very complex. To get an idea, though, feel free to imagine that references to LTC also apply to Bitcoins, PPCoins, or any other cryptocurrency you consider mining.

To start off, let’s look at the factors you need to predict, and the questions you need to ask.

Litecoin Mining Profitability Questions

Before you begin, let me just implore you not to take lightly on any investment. Check out the other articles on this site for more information about the dangers of investing. If investing seems like a gold mine, you are probably not looking at it correctly because it is a massively complex domain.

The same applies for these questions. If you do not carefully consider the questions, chances are you’ll end up with a lot of pans and very little gold, to continue the gold rush metaphor.

Also, nobody knows the answer to these questions, and that includes you.

Will the price of LTC in US Dollars go up or down?

This is a key question that can drive you mad, but the answer may affect your decision differently than what may seem intuitive.

To answer this question, you need to predict not just what the price will be two weeks from now, or a month from now, or even six months from now, but what it will be at every single time during the lifespan of your mining operation. With the current volatility in the exchange rates, the uncertainty about the future of cryptocurrencies, and the current size of the market, this is extremely difficult to predict.

Note: Volatility means the degree to which prices fluctuate. A high volatility means prices go up and down rapidly.

The reason is simple, really. If you buy mining equipment today, you are effectively locking your current money into US Dollars or whatever fiat currency you have, provided, of course, that you pay for the equipment in a fiat currency. Thus, if the price of Litecoins rises and remains high, your fiat-denominated hardware will actually drop in relative value. Let me explain.

Let’s say you buy $2,000 worth of mining equipment today and the price of LTC rises 200% and remains there for a long time. If you had instead purchased LTC for your $1,000 dollars, you would have yielded 200% profit by buying LTC rather than buying mining equipment.

In fact, if you believe the price will go up, you should instead buy LTC for your money. If the price rises 10%, 50%, or 500%, you’d get 10%, 50%, or 500% more mining equipment by holding LTC and selling it later rather than holding fiat-denominated hardware.

By buying mining equipment, you are actually betting the price of your cryptocurrency will go down.

How many others will start mining?

Another key component in understanding mining profitability is how many others are mining in the world. The rate at which new LTC or other cryptocurrencies are minted is closely tied to the total computing power dedicated to mining that currency in the whole world.

This factor is measured in difficulty. The difficulty goes up if more computing power mine coins and conversely go down if fewer people mine coins or switch to other currencies.

This question is more complicated than it seems. If more people join, the profitability of mining goes down and thus fewer people will see that it is profitable. However, if more people join that also means more interest in the coin, making the coin more scarce and thus the coin price in fiat currency may go up.

Conversely, if nobody sees any value in mining, the number of coins each miner gets increases, but the value of each coin in fiat currency may do down.

This is a finely balanced scale that can quickly change the profitability of mining in one direction or the other. At times, the difficulty has risen 50% in a week (reducing profitability in coins by the same percentage) and this seriously affect the overall profitability of mining.

On average, though, and given a long enough time frame, this balance will remain balanced, even if the total number of miners go up during that time frame. If the overall market for cryptocurrencies go up, meaning more people use them, the overall value in US dollars or other fiat currencies go up, more merchants accept payment in LTC, and so on, then the profitability of mining will go up. Conversely, if interest goes down over time, profitability also goes down.

By investing in mining equipment, you are betting that the difficulty/interest balance remains steady over time and that interest will go up.

How long do I have to make back my investments?

For the previous question, I mentioned a ‘time frame’ but didn’t specify that further. You need to decide what time frame you use to measure your profitability. This is where you need to understand far more about investing than most geeks do and also where you gamble the most that your calculations are right.

For example, you may want to say that you invest $1,000 in equipment, will mine for 10 months, and want to have a return-on-investment (meaning what you get back per dollar or other currency spent) of 5% each month for a total of 50% return on investment.

Let’s also say that you think the equipment you buy will have 50% of its new price value after those 10 months. I’m using these numbers because they are somewhat easy to understand and doesn’t require too many calculators at work. However, this is a massive profitability, as any investment advisor will tell you. Getting the equivalent of 60% ROI in a year on average is beyond the capability of any traditional investment instrument. At the time of this writing, NASDAQ has risen 7.41% over the past 12 months.

Note: Keep in mind that the equipment you buy will have value after that time so you shouldn’t write it off completely.

To decide, then, whether you will reach your goal, you first need to consider both the fiat-denominated price of a coin as discussed in the first question, remembering that investing means you bet the price will go down or at least remain the same, and what everyone else in the world will do, remembering that if profitability is high more people will join thus reducing profitability.

Then you need to calculate what rate your mining operation will produce coins. There are a number of calculators that will help you to tell you what the current rate of coin production will be (And Dustcoin seems to give reasonable numbers), but again, remember that price may change rapidly in either direction which both affects the difficulty but also the profitability of your equipment.

Let’s say you predict your mining operation produces a net of 50 LTC per month on average for the 10 months, for a total of 500 LTC. Keep in mind that you must consider the price of electricity too.

This means that each LTC must be valued at least $1 for you to have a 50% return on investment by the end of 10 months. You can sell your mining equipment for $500 and pocket another $1000 from mining.

By investing in mining equipment, you are betting you can beat NASDAQ by 700%, even for a modest return.

What could I be doing instead?

Mining isn’t a casual pastime, that you can set up once and leave to generate money forever. You need to monitor your equipment, keep track of the current difficulty, put up money up front for the electricity (or complicate the calculation considerably by paying the electricity from your earnings, thus introducing currency volatility to your electricity bills too), and you may need to fix issues with the equipment or the software configuration.

You also need to learn all of this, you need to build your rig, you need to tune it to a profitable point, and all of this takes time, time you could otherwise have spent flipping burgers for $5 per hour at the very worst.

You will need to put down a considerable amount of hours to get a stable mining operation going and you need to continuously monitor the operation. Over time, you may have a more stable operation, but keep in mind that the importance of a stable mining operation is dependent on the difficulty of producing coins. The higher the difficulty, the less important a day of downtime becomes (because coin production is lower) but conversely, the lower the difficulty, the more important uptime and tweaking becomes.

Let’s say you spend 10 hours a month on doing mining plus a weekend of 15 hours to get everything up and running. If you go down to the local burger joint or to a car wash stand, you could probably land a minimum wage job at $5. This means that you effectively lose $50 per month plus $65 for the initial building, from your mining operation. Over 10 months, you have actually lost $65 on your mining operation if you use the numbers from the previous question as a guide.

And that’s just for a minimum wage job. If you take an hour off your high-paying job as a doctor, you’ll probably have lost your entire month’s salary just there.

Your life also has value, even if you don’t have a job or don’t want to flip burgers or do other minimum wage jobs. For $5 per hour, you are sacrificing time with your family, your kids, friends, or other things that may be valuable to you.

Are you sure you don’t want to spend that time on something else?

By investing, you are valuing your lost time less than the profits you may make, if everything goes according to plan.

Great, This Seems Very Profitable!

Great,” you think, “I’ve done my calculations, the price now is over $2, so this is a dead simple equation! I’ll be rich by the end of this month!

Not so fast, grasshopper. First of all, if I have not given you a sufficient impression that the equation is incredibly complex by now, either I’m a very bad writer or you simply haven’t understood all the factors.

Do you think you’re the only one thinking this? If this is really that simple, that putting up $1,000 now would get you a 50% return in 10 months, what will that do to mining interest? Oh, suddenly question two comes into mind; everyone will do it and the difficulty will skyrocket, reducing your coin generation rate to far less than 50 LTC per month.

Well,” you think again, “that would be countered by the increased interest which will drive the price per LTC up so I’ll be rich anyway!

Again, cool down. Remember that if the price at any point during those 10 months were to rise 50% over your predicted value after those 10 months, question one comes along and lets you know that you would be better off just buy the LTC today rather than spend it on mining equipment. Do you think the price, at any point over the next 10 months will be 50% higher than it is now? If so, mining doesn’t make sense.

No worries,” you think, “we’re in a bubble now so interest will go down just like the prices, and then I can just sell my generated coins when they go up in value again a couple of years from now!

Yes, well, question one still pops that idea, because if the price will eventually go up, again, you’re better off just holding on to your LTC and sell when you have made the profit you expect.

Ah,” you think, “I can still mine with the equipment for two years instead and have far more coins to sell then!

Sure, that may work, but keep in mind, the value of your mining equipment also goes down during that time, and the remainder value will be much lower. Also, in a year, new equipment and advanced in technology may have rendered your current equipment far less efficient than it is today. AMD may come out with their HD8XXX-series causing a rise in difficulty and your equipment production rate will change considerably.

Not a problem,” you think, “I already have some equipment that has practically zero value, and I can mine without taking the hardware cost into consideration

You still invest in mining, even if you don’t buy new equipment. Question four comes into mind, because you spend time you could otherwise have used for making money doing something else.

If you have older equipment, keep in mind that the rate at which older equipment can generate coins is far lower than the most modern equipment. The cost of electricity is relatively higher due to lower efficiency, so your rate of generation compared to cost may be far lower than you think initially.

If you have more modern equipment, well, why not sell that, buy some Litecoins or Bitcoins, and then wait for the price to rise?

Should I Stay or Should I Go?

Here’s the bottom line: If you think you know the answer to whether mining is profitable, you are likely wrong, either because you’re gambling like everyone else or you don’t consider all the factors. The profitability of investing in mining, even if you have some or all of the equipment, is a hugely complex topic, with so many variables that nobody can predict whether it will make sense.

However, you may not want to consider the profitability merely as an investment.

Mining is a great way to learn about cryptocurrencies, hardware, over-clocking, and all the other things you need to learn to make your mining operation efficient.

Further, it is great fun, at least it is to me! I love learning, but I also love challenging myself, spending time figuring out the exact ratios of a specific configuration to tweak the last hash out of a card, seeing how different people build their machines, and of course, being part of the community.

From an investment perspective, mining is very close to gambling, but even if the profitability may not be as great as you think, you can do it as a learning exercise and as something that’s fun and engaging.

What would you do? What factors do you consider most important? Let me know in the comments 🙂

.b

How to Mine Litecoins for Beginners Guide

Welcome weary travelers! Pull up a chair and let me tell you how to start mining Litecoins. If you have no idea what this means, you may have found the wrong place, but take a look around these walls and you may find information that can help you understand.

In this guide, I’ll tell you what you need to get started and how to set up your mining operation. I’ll show you this on Windows, using a graphical user interface miner, and you’ll see in a few easy steps how you can start getting your very own Litecoins into your wallet.

What You Need to Mine Litecoins

Before we begin, you need to have a few things in place.

First, you need a computer, and to have any success, you need to have a graphics card. It is highly preferable to have one from AMD in the Radeon series. These cards are named something like Radeon HDXXXX, with XXXX being a number, and a higher XXXX number usually means a better card. At the time of this writing, the fastest card, but also the most expensive, is the HD7970.

Note: Technically, the AMD Radeon 6990 is a faster card than the 7970, but the 6990 is actually just two 6950 chips bolted onto a single card. Oh, and it’s even more expensive than the 7970 🙂

If you need to buy a new card to start mining, I highly suggest you carefully consider the economic benefit. Mining can be fun and profitable, but you need to do some math work and plan ahead if you need to make investments to get started.

If you have the necessary hardware, however, you need a couple of software pieces and then you’re ready to go.

You may need a wallet. Technically, you can mine without having a local wallet installed, and if you’re just starting out, you can join a mining pool that will keep your mined Litecoins until you’re ready to cash out.

If you need to get a wallet, using the default Litecoin-QT client is a good choice, and you can download that from the official Litecoin site.

When you download and install the wallet, it will take some time to synchronize the blockchain, and this may take a few hours. You can start mining before that, though, so just leave the wallet to its business while you grab a mining program.

For a beginner, the easiest choice for a mining program is to get a copy of GUIMiner for Scrypt. You can download that from the GUIMiner-scrypt thread on Bitcoin forum, which can also be a source for help, if you run into any. Be aware, though, that the Bitcoin forum has some hoops through which you need to jump if you want to ask for help.

Note: Make sure you get the GUIMiner for Scrypt. There are two versions, one that is not for Scrypt (used for Bitcoin and other SHA-256 based mining) and one that is for Scrypt, which is the one we use for Litecoin mining. You want the one that is for Scrypt.

If you want to be slightly more adventurous in your mining software, you can always download cgminer. CGMiner is a console based application that gives you more options for configuring your mining operation, at the cost of a graphical user interface. Yes, that means you need to click and type and stuff, but you can reap better mining rewards, so make your choice.

If you are just starting out, I recommend you use GUIMiner because it is easier to get started.

The final thing you need is to make sure you have the correct drivers for your graphics card. The safest bet is to get the latest official driver, such as the Catalyst drivers for AMD Radeon. Oh, and you need to make sure you get the AMD APP SDK. This will usually come with your drivers, so just make sure you select it during installation. If you forget or haven’t installed it, you can either reinstall your driver to add it there, or download the AMD APP SDK for manual installation.

Ready? Let’s Get Mining!

Oh, before you start, you probably want to join a mining pool.

There are two ways of mining for Litecoin; you either work alone for great but rare rewards (think weeks in between) or you join a pool, which gives smaller but far more frequent rewards (think every minute, hour, or day). On average, these two options generally come out equal, so you probably want to join a pool when you first start out.

The Litecoin project wiki has a great list of Litecoin mining pools from which you can pick. Don’t worry too much about the various columns there yet; the reward type can be particularly confusing at first. If you’re just starting out, join a PPS pool, which gives out rewards quicker but at a slight cost (you get continuously paid while you work, so payment can come after a few minutes). When you get more experienced, you can start researching the other methods to see what makes sense in your situation.

Once you’ve signed up, you’ll be given a worker username and password. You need these to configure your miner, so keep them available. They are not ‘secret’, though, so don’t freak out if someone discovers your worker’s username and password.

While you are at your pool’s web site, make sure you grad the URL for your miners. This is not the URL for the web site so look around the site and make sure you find the mining URL and the port number.

With that in place, let’s go through our checklist of equipment.

  1. You have a graphics card
  2. You have a wallet
  3. You have a mining program
  4. You have the latest supported drivers and the AMD APP SDK installed
  5. You have joined a pool and have your worker username and password as well as the URL and port for the pool ready

With these things in place, you can now run GUIMiner (or cgminer if you’re really brave and want to figure this out on your own) and you should see something along the lines of this:

GUIMinerScrypt

To start easy, find your graphics card in the GPU Defaults drop-down and select it. This should fill out some of the numbers for you so you don’t need to learn what they mean right now.

Note: When you do get into mining, you probably want to learn what these numbers mean and how to tweak them to get the optimal performance from your mining. A good place to learn is the cgminer SCRYPT Readme file.

Next, you need to get the mining pool details added. Add the pool’s URL in the Host section, and then add the username and passwords to their respective fields.

With this in place, you are ready to start mining! Hit the Start button, and you should start seeing the number of shares rising. This means you are making money as part of the pool. You should also see your hash rate in the lower right of the GUIMiner tool.

When you have mined for a while, and ‘a while’ may range from a few minutes to a few hours, your pool should start reporting your earnings to you. How this happens depends on the pool but when you log in, you should see some kind of earnings report.

The pool will also pay out your earnings, either automatically when you have reached a certain level of earning, or manually when you request it. Refer to your pool’s information to learn how to get your money out.

Note: Before you can get your money, you need to have your wallet set up so you have an address to which your earnings should go.

So now it’s just up to you to sit back, enjoy the ride, and start swimming in all the money you will make. Just make sure you have a really small swimming pool, because it may take a while for you to get rich 🙂

Your Questions, Please?

If you are just starting out, you probably have a lot of questions, so let me answer some of them now.

Q: Can I mine Litecoins without an AMD graphics card?

A: Yes, you can, but most likely, the cost of electricity will be higher than any revenue you generate, so it won’t really be effective.

If you have an existing graphics card, whether it is from AMD or Nvidia, the best way to find out whether you will be profitable is to try it out to see what hasrate you get. You can also look at the Mining Hardware Comparison guide to give you a pointer.

Keep in mind that prices, difficulty, and exchange rates change almost on a daily basis, and thus the profitability changes too. Giving general advice on specific scenarios is thus very difficult.

Note: You may also want to refer to my Litecoin mining profitability guide to better understand more about the profitability of mining.

Q: I have free electricity, can I mine Litecoins without an AMD graphics card then?

A: Yes, you can, but still the reward will be minute. At the time of this writing, a good, mid-range CPU may generate around 45 kilohashes per second, which in turn may yield US$0.20 per day (yes, that’s twenty cents per day). Oh, and the reward will go down over time. You won’t be rich.

Q: How many kilohashes will I get?

A: The rate you get greatly depends on your configuration and how much you tweak your settings, graphics card clock speeds, the intensity with which you mine, and so on. The Mining Hardware Comparison guide may help you determine your rate, but keep in mind, these settings vary by card and can vary by as much as 50% depending on the card.

Q: How much money will I make?

A: Not much, I can tell you that. Even at the time of this writing, the profitability of Litecoin mining has dropped considerably, and even high-end graphics cards struggle to break even over several months if you have to buy a new one. If you think ‘money’ in terms of Dollars, Euros, Yen, or something like that, then it also greatly depends on the exchange rate you get, which also varies greatly.

Q: How can I decide whether buying a new graphics card makes sense if I don’t know how much money it will make? Tell me now!

A: Fine, here’s a pointer. A new AMD Radeon HD7950 should yield somewhere in the area of 450-500 kH/s without too much tweaking, and will drain around 200 watts of power. Put those numbers into a mining profitability calculator and see for yourself!

Q: Should I mine solo or join a pool?

If you are just starting out, join a pool. Mining solo may yield greater reward, but you also run the risk of getting nothing for a very long time.

Understanding Bitcoins: Making Money!

No, this isn’t about SharePoint, like my blog usually is. So sue me! It’s my blog and I do whatever I please, so suck it up rather than complain.

In this series, I’ll explain what Bitcoins are, how they work, and offer some thoughts and opinions. Feel free to leave comments or questions, and I’ll try to respond.

In this part, I’ll tell you how Bitcoins appear, and even how you can make your own money for free. No, it’s not an April fools joke; you can actually create your very own Bitcoins.

Sounds fishy? Read on and I’ll explain how it works, and more importantly, why it works.

Refer to the bottom of this article for other parts of the series.

Make you Own Money!

One very unique characteristic of Bitcoins is that you can make them yourself through a process called mining. I’m certain that sounds dubious at first, so let me explain briefly how that works. I’ll write this as simply as possible, so there will be some shortcuts that may make analogies inaccurate, but the principles are sound. If you want further information, check out the Bitcoin wiki.

Bitcoins creation is based on a concept called proof-of-work, which means that to get them you need to prove that you have done something. In the world of Bitcoins, that ‘something’ is generating hashes, which is a cryptographic tasks based on the fact that a hash is difficult to reverse but easy to create. This, in fact, is a key factor in all modern cryptography; a task is easy to verify but difficult to do.

Note: If you don’t care about the details, think of it like this; it is very difficult to predict a dice roll before the roll, but very easy to verify afterwards whether the prediction was right.

In Bitcoin terminology, the difficult task is to generate a cryptographic hash which has certain properties from a data ‘block’ of transactions. You can’t reverse engineer a hash, but you can easily verify whether it is correct once you have it. In Bitcoin, the properties of the hash which makes it a valid solution is that the hash should be lower than a certain global ‘target’, and since there is no known way to start with the hash and reverse it back to its source, you are forced to calculate a huge number of hashes to find the ones that ‘solve’ the particular block by being lower than the target.

The target is somewhat important here, because it determines the difficulty of solving new blocks. The Bitcoin network is designed to let the entire world solve approximately six blocks per hour. Of course, as computers become faster, the ability to solve hashes greatly increases, so to keep the rate steady, the Bitcoin network changes the difficulty my modifying the target required in the hash. So, if more computing power is thrown at ‘mining’, the difficulty increases, leaving the rate at a steady six per hour for the entire world.If fewer people mine, the difficulty decreases, and the rate is still steady.

When solving a hash for a given block, the ‘solver’ gets a reward in Bitcoins from the network. That reward is designed to decrease over time, but is currently at 25 BTC. In other words, if you solve one of these blocks and finds the right hash, you get 25 BTC.

Note: The reward is halved for every 210,000 blocks, so the next time it is halved, which happens in late 2016, the reward will be 12,5 BTC for a block.

Start Your Engines, or Don’t Bother

All of this means that you can start mining for Bitcoins by solving hashes right now. Your CPU is just sitting there doing nothing, and those wasted cycles can be used to generate Bitcoins which you can then use to purchase things or trade for other currencies like US dollars, Euros, Rupees, or Norwegian Kroner.

However, keep this in mind: Solving a particular block is very difficult on average. If you use a regular CPU then you may spend years before you are able to solve your first block and get the coveted 25 BTC (or even lower at a later date).

If you have a graphics card of some power, however, your ability to solve blocks greatly increases, by a factor of tens or maybe hundreds. The reason behind this is somewhat technical, but think of it in the way that a GPU is purposely built to solve massive amounts of simple calculations at the same time while your CPU is designed to solve many different tasks at once like manage memory, control hardware, and so on. Your GPUs ability to solve simple tasks at an astonishing rate means that it can generate hashes much faster than your CPU.

Check the resources section at the end of this article for information on mining, including software you need to mine.

However, you still will find that it will take a very long time to solve a block. There’s no accurate way to predict this because whether you find the right hash is simply a matter of luck, but as an example, on my Radeon HD6950 graphics card, having a fairly powerful GPU, it seems to take around 250 days to solve one block at the current difficulty. Again, not that this is completely random, so I may go for decades without finding a single one or I may find ten over the next hour.

There’s one other factor to put into the calculations. Because Bitcoins are rapidly becoming popular, several companies have made and are in the process of launching purpose built machines containing dedicated chips called ASICs that solve Bitcoin blocks at a rate that dwarves any current GPU. For a few hundred US dollars, you can soon buy Bitcoin ASIC machines that solve hashes at 300 times the speed of my current CPU, this reducing the time taken on average to just a few days.

Note: Remember that the rate of creation is steady so when these new monster ASIC machines enter the network, the rate at which current CPUs and GPUs can solve blocks go down rapidly. Because the difficulty increases, the ASIC machines won’t be as lucrative as the initial numbers may indicate.

Those were the bad news regarding mining, so let’s wrap up with some good news.

To counter the increasing difficulty of solo mining, several groups have formed mining pools. A mining pool works by having a large groups of people solve hashes together. When one of the participant in the pool solve the block, the reward gets distributed to all participants. Thus, instead of having to wait maybe months or years for a large reward, each participants get rapid but much smaller rewards. In fact, because the rate at which blocks are solved is steady, you can expect to get paid several times per day.

I’ve joined a pool called Slush’s pool, which is so far a stable and functional pool with a large enough group that it makes sense to participate and rewards are frequent. However, there are many other pools out there, so you may consider picking another one.

I’m Impatient – Give Me Bitcoins Now!

So, you want to get some Bitcoins, huh? Well, if you can’t wait around for mining to give you the huge piles of cash you’re unlikely to ever get, the alternative is to buy them. Again, this works just like any other currency; you exchange your money for other types of money.

The major difference is that, thus far, no traditional banks offers exchanges to Bitcoins. There are Bitcoin exchanges that partner with banks, like Bitcoin Central, but you can’t just go into any brick and mortar bank branch and ask to get Bitcoins moved to your wallet, at least not yet.

One reason for this is the irreversibility of transactions in Bitcoin. Where a traditional bank can reverse a credit card charge, once a BTC transaction has taken place, there’s no way to change it. Because banks and credit card companies in most civilized countries have responsibility for the charges made, this irreversibility doesn’t sit well with them.

This will probably be resolved at some point as digital currencies become more popular, but there are already ways for you to buy Bitcoins. I use Coinbase.com, a site that allows me to fund my Bitcoin balance directly from my US bank, but other exchanges offer similar funding options too. Very few offer the ability to pay with credit cards, though, for the reasons mentioned above.

Note: Be vary of anyone trading Bitcoins in reversible transactions and never sell Bitcoins using reversible transactions (including bank transfer, PayPal, credit card, and so on) to people you don’t know. Anyone can simply reverse the charges leaving you without money and without Bitcoins.

Getting Bitcoins take time because nobody wants to risk selling Bitcoins using a reversible transaction. You should always expect to prepay for your Bitcoins unless your marketplace of choice offers a direct link to your bank (like Coinbase).

Before You Jump Into Bitcoins

A word of caution, though. Bitcoins at the time of this writing (early April 2013), has seen an amazing rise in value and is currently trading at over US$100 per BTC. This may or may not be a bubble, and as for any investment, there’s always a risk that things can go terribly wrong. Don’t buy Bitcoins as an investment until you know about the risks involved in any currency speculation.

I am not a financial advisor and you should not listen to any financial advice I give you. Really. My personal opinion is that Bitcoins are extremely cool and I enjoy learning more and more about the technology. It’s equally fascinating from a technical point of view as observing how Bitcoins work in society.

I’ll offer further thoughts and ideas for Bitcoins in future posts in this series.

Once you’ve gotten your Bitcoins, however, you can immediately start using them and enjoy low rates for transactions (free is as low as it gets), quick transfers, security, potential anonymity, and, of course, being part of the cool gang 🙂

Want More Bitcoin Information?

Check out these resources on how to get Bitcoins.

Bitcoin Wiki on Mining

GUI Miner for Windows

Install this to start mining. Make sure you have updated OpenCL drivers (graphics driver). I also highly recommend joining a mining pool first (see links below)

Slush’s Mining Pool

BTC Guild – Largest mining pool

Mining Pool Comparisons

Coinbase.com, my preferred purchase site

MTGox – Largest BTC Exchange

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Understanding Bitcoins: What Is it and How Does it Work?

This isn’t even remotely SharePoint related, but I’ll still blog it. It’s my blog, dammit!

If you have no idea what Bitcoins are, it’s a way for you to make your own money. Really. Oh, and it’s free, as in beer.

Read on and I’ll tell you more.

In this series, I’ll explain what Bitcoins are, how they work, why they work, and how you can make your own money. First, I’m going to explain what Bitcoins are and how they work, and you can check the bottom of the article for more parts on the other topics.

What are Bitcoins?

A Bitcoin, or BTC, is a digital currency that solves a number of issues with existing national currencies (also called fiat currencies). It is the currency world’s equivalent of what the internet is to information; a distributed, tamper-resistant, decentralized, secure, and potentially anonymous way to handle money.

Bitcoins are becoming increasingly popular as a currency and you can already pay with Bitcoins on several sites and stores, such as Reddit and WordPress.com (plus many, many, many others). In addition, there are many currency exchanges that allow you to trade Bitcoins for traditional currencies and exchange it for ‘real’ money.

Note: I’m contemplating whether to start accepting Bitcoins as payment for my training and professional services and for USP Journal, and although the jury is still out, I’m leaning towards at least trying it for a while. I’ve added a Bitcoin donation option at the bottom of my blog articles for starters.

Unlike fiat currencies, though, there is no central authority behind the currency. The existence of Bitcoins relies solely on the thousands of users that participate in the network, which they do by running a Bitcoin client that allows them to store, send, and receive Bitcoins from others through a Bitcoin wallet.

Every transaction in the Bitcoin network is public, but the wallets are completely anonymous. In fact, you can even generate wallets yourself and all clients I’ve used allow you to do so easily. These wallets contain your Bitcoins, so you may think of them as similar to bank accounts, except you don’t have to be a bank or even a customer of one to have a wallet.

When I say that transactions are public, this is a key component to both the security and the stability of the Bitcoin network. Transactions are cryptographically signed and broadcast to the network, which then validates each transaction, and each transaction becomes part of the global chain of transactions which after it has been verified cannot be changed. Thus, you can’t ‘trick’ the system in any way because neither you nor the recipient is solely responsible for validating a transaction like you have in traditional banking, for example.

I’ll leave the finer details on how this works for a possible future post.

Is it Fake Money?

When I try to explain Bitcoins to people, the first thing people say is that “it’s not real money, it’s not backed by anything”.

Well, sunshine, nor is any other major currency in the world; it is backed only by demand and trust in the system, which is why fiat currencies like the US dollar or Euro fluctuate wildly depending on whether people trust the stability and demand of the currency. In fact, it’s been decades since the US dollar was backed by anything but the market’s demand for it; you can’t just go to the Federal Reserve and trade your US dollars for gold, for example, nor can you swap your Euros, your Norwegian Krone, or your Indian Rupees for anything but products and services or other currencies.

Bitcoins are no more real or fake than US dollars or Euros, although it is in much lower circulation. Think of it so far as a minor currency in that respect, like Norwegian Kroner. Only demand for the characteristics of Norwegian Kroner make it a viable alternative for representing value, and it’s only because society agrees somehow to ‘trust’ a currency to some extent that you can even say you have value when you hold a currency.

You can’t take a Norwegian Krone and buy stuff in Boston, and although you may get a bank to exchange it for US dollars, that’s going to cost you fees, and the bank decides the exchange rate. For Bitcoins, most transactions are completely free and it costs nothing to own a wallet either, so your money remains in your ‘account’ forever. On the flip-side, you don’t earn interest either, at least not until someone comes up with a banking system that can lend people BTC in the more traditional sense.

What Gives Bitcoins Value?

The only thing that gives value to Bitcoins, just like any currency, is your ability to buy stuff with it, and let’s face it, the options for buying is still very limited compared to traditional currencies. That said, there are already hundreds of sites that accept Bitcoins and you can exchange your Bitcoins for traditional currencies like you can with any traditional money. The valuation of Bitcoins depends on demand, which in turn depends on the ability to exchange it for other things, just like for any other currency.

Bitcoins have some unique characteristics that make it competitive to fiat currencies, though.

First, the for fiat currencies, you trust the issuer (Federal Reserve in the US, European Central Bank in the EU, Norges Bank in Norway) to control the value of the currency. Only they can issue new money, and you trust them not to double the amount of dollars in circulation, for example, which would skyrocket inflation. As we have seen in recent years, in times of crisis, countries like the US issue more money into circulation, thus reducing the value of each dollar and increasing inflation, meaning your money is less valuable.

For Bitcoin, the supply of money is steady and accurately predictable down to almost the hour through as technique called controlled supply. There will only ever be 21 million BTC in existence, and these are distributed through a process called mining, a process, by the way, in which you can participate and thus make your own money. I’ll go into more detail on how this works in Part 2 of this series.

Through controlled supply, the rate at which new Bitcoins enters circulation is fixed and predictable, and ends somewhere around the year 2140 (as in over a hundred years from now). However, most of the Bitcoin will enter circulation much faster, and more than 99% of all Bitcoins will be in circulation by late 2032.

Thus, there is now way that inflation will reduce the value of your Bitcoins; in fact, a problem may actually be deflation, in which your money becomes so valuable that people don’t want to part with them, driving prices for goods and services paid in BTC down.

Second, Bitcoins are cryptographically secure, meaning there is no way to counterfeit money or fake transactions. In fact, you can’t really have physical money at all, which solves a lot of the problems with traditional money (loosing them, ‘black market’ trading, counterfeiting, wear and tear, and so on).

Technically, it is possible to ‘trick’ a transaction for a few seconds after it has happened, but it would be the equivalent of swiping your credit card and then taking the products and run before the transaction can be verified by the credit card company. A Bitcoin transaction is more secure than regular transactions because there is no way to reverse it after a few seconds, which works to secure both the buyer and the seller against chargeback, fake money, validation issues, and so on. For larger transactions, you can just wait a bit longer before you approve the purchase, just to be extra sure that nothing can go wrong.

Third, Bitcoins can be completely anonymous, which may sound sketchy at first, but is important in some situations. I’ll leave the discussion about whether anonymity is good or bad for a later post, or preferably a different forum, but I’d like to point out a couple of things regarding that anonymity.

Bitcoin anonymity is just a potential anonymity, and you have to take special measures to ensure your transactions are anonymous. Everything in Bitcoin is completely transparent.

Keep in mind that every single transaction is publicly completely visible to the entire Bitcoin network. Thus, if the identity of a wallet’s owner is known, everyone can see who that person sends Bitcoins to or receives money from.

Because of this, everyone can also see how much money is in each wallet. If you put your wallet address in public, well, everyone now knows how many Bitcoins you have in that wallet.

This transparency may freak you out at first, but there are ways around having everyone snoop into your financials. Nobody knows who owns each wallet by default. You don’t have to publish your wallet address, and even if you do, you can still have as many wallets as you care to generate, so you can simply have a ‘receiving wallet’ and a ‘storing wallet’ or even multiple layers of wallets, which makes tracking more difficult. In fact, a recommendation for those wanting to retain anonymity is to use a single wallet for every transaction you make, which may sound like a lot of work, but is actually quite easy.

Conclusion for Now

The bottom line is this: Bitcoins are ‘real’ money in the same way other currencies are ‘real’ money. Bitcoins have many unique properties which address many problems with fiat currencies, but whether they have a value depends on whether people want them and whether merchants accept them.

In the next part, I’ll talk about how Bitcoins come into existence, and how you can make your own Bitcoins, at home, using nothing but your computer, a bit of electricity, and some patience.

Want to learn more about how Bitcoins work? Here are some resources from the Bitcoin wiki:

Bitcoin Wallets

Bitcoin Transactions

Bitcoin Transaction Fees

Controlled Supply

Anonymity

Understanding Bitcoins: Cryptocurrency Mining Equipment and Preparation

In the previous post of this series, I explained that you can make your own money in cryptocurrencies. That’s right, you make your own money. Feel free to read it again so I don’t have to repeat myself.

This may not be for the faint of heart, though, and will require that you do some research. In the end, your cost may exceed your earnings, so you don’t want to based your pension on mining coins unless you’re prepared to spend considerable time preparing.

For the purposes of this article, I’ll be using examples from mining Litecoins. Litecoins is a cryptocurrency, a younger and much smaller brother of Bitcoin, that uses a slightly different algorithm for mining than its big brother. I’ll explain more later in the article.

Oh, and the article is written in mid-April 2013, so chances are high that the numbers will be wildly different at a later date (better or worse; it will likely be different).

Mining for Money

In terms of cryptocurrencies (of which Bitcoin is the major player), mining refers to the process by which new money come into existence. This process is performed by performing massive amounts of calculations and then by sheer luck ending up with a certain result that matches a pre-determined value. I explained this briefly in the article Making Money!

This may sound strange, but works very well and is a very fair way of distributing money. You get more money if you put in more computational power.

It does, however, favor the geeks who are willing to spend the time to do the mining. Mining for coin is certainly not as easy as double-clicking Setup.exe and accepting all the defaults.

You need to make sure you have the right hardware. Technically, you can mine on any computer, but chances are you may be spending more money in electricity than you gain from the venture. Next, you need the right software and the patience to learn how it works, and to be honest, it’s quite hostile at times.

Finally, you need to get your expectations right. It’s easy to get blinded by the initial earnings you can reap from coin mining, but you’ll likely have a rude awakening before long unless you know what to expect.

Let me elaborate on these details.

Hardware

TL/DR; If you don’t have a high-end graphics card, you won’t make money.

The first consideration you need to make is what hardware to use. Now, you may have a brand new laptop that you’d want to use to mine or you have an old PC laying around that’s collecting dust, and you want to see whether you can get some money from it.

Chances are, you won’t make any money, and in fact may lose money due to power cost, unless you have a high-end graphics card, and preferably one from AMD.

The reason for this is simple; the computational tasks you need to perform are perfect for the graphics processing unit (GPU) of your graphics card, but utterly inefficient for a CPU. Your CPU is designed to perform a wide variety of tasks while your GPU is designed to do only one thing; crunch numbers by the billions. You can read more about why a CPU is inferior to a GPU in the Bitcoin Wiki.

A good high-end card, though, may pay for itself over a few months, so if you’re planning on upgrading your gaming PC in any case, then you may actually get the graphics card partially of even fully paid for by using it to mine coins.

By high-end graphics card, I mean the top two or three cards on the market. You always want to get an AMD card, for example a Radeon HD7950, over an nVidia Geforce card, for example, because the Radeon cards have more ALU pipelines than Geforce. If that tells you nothing, think of it as AMD having more but simpler ways of doing calculations. This means you can get more simple stuff done per second, often by a factor of 4-5 in favor of AMD, which is all that matters in coin mining.

How much money can you make from a card? Well, it greatly depends and it goes down over time. It’s impossible to accurately predict how much money you will make, but you can get a pretty good estimate by using numbers from a mining hardware guide and putting those numbers into a mining profitability calculator.

Note: The Dustcoin mining calculator at http://dustcoin.com/mining will show you the profitability of several cryptocurrencies so you can pick the one that gives you the most money.

Give Me Power!

TL/DR; You want enough power and a good PSU. A cheap or bad one may cost you money or lost revenue.

And important consideration in mining profitability is your power consumption. This is a reason why older machines perform far worse; they are simply less power efficient.

When you start mining, your power consumption will skyrocket. At idle, a GPU may consume 40-60 watts, but at full peak, a 7950 can easily drain 250 watts or more if you overclock it.

As such, keeping tabs on your power cost is vital to figuring out whether you will make money. For most older computers, they consume so much power and generate so little computational power that the calculations simply don’t add up.

As an example, my rather old Intel Core 2 Quad Q6600 CPU will generate around 14 kilohashes per second of computational power, but will consume 105 watts of power. Putting that into the mining calculator at at present, I will earn a whooping US$0.27 per week mining Litecoins. However, my new 7950 GPUs generate around 550 kilohashes per second (around 40 times as much as the CPU) consuming around 200 watts of power at peak. Put that into the calculator, and at present, it will generate around US$83 per week.

Note: Yes, those examples contained a lot of new terms. I’ll explain in a moment.

Because you need a lot of power, you also need to make sure your power supply unit (PSU) can cope. If you are building a new machine for the purpose of mining, that means a high-end PSU too. Expect around 200-250 watts per GPU plus 100-150 watts for the rest of the system. Also make sure you have a quality PSU; in terms of system stability, not all power is equal, and a bad PSU may seriously affect your mining operations and reduce profitability by giving you less than peak performance and possibly downtime.

Software

TL/DR; If you hate tweaking settings through a user hostile interface, you are out of luck.

The choice or software for mining is simpler, because in reality, there are just a couple of options. You can either use Reaper or cgminer. At the time of this writing, Reaper seems to be a dead project and the normal download links are dead, so cgminer is your weapon of choice.

cgminer is a free tool that is incredibly well designed once you get to know it. However, it has a console user interface and you need to know what you are doing to work it properly. Not using it properly means you lose a lot of hashing power, as much as 40-60 percent. It requires constant tweaking until you get it to run at peak efficiency.

As an example, with its default setting, my new GPUs do around 250 kh/s, while properly tweaked, they run at over double that.

cgminer

There is a nice graphical user interface version that will give you an easy way to just get started, but I highly recommend not using that. As for a non-tweaked cgminer, it will simply yield lousy results and you’re throwing money out the window.

In other words, you should expect to spend a fair amount of time tweaking settings and learning what yields the best results, or you should avoid the whole thing; it simply won’t be worth it.

Expectations and Results

After you’ve set up your mining operation, it’s time to start evaluating the results of your hard work and time to understand some of the terms I used earlier.

First, you need to understand that there are two types of mining for cryptocurrencies; SHA-256 and Scrypt. Every currency uses one of these methods, but both share the property of being far more profitable on a GPU than a CPU.

For SHA-256 based currencies (like Bitcoin, Namecoin, and PPCoin), you usually evaluate your efficiency in millions of hashes solved per second, or MH/s. For Scrypt based currencies (like Litecoin and Novacoin), you usually evaluate your efficiency in thousands of hashes solved per second, or kH/s.

Note: A further difference is that Scrypt based mining is resilient against ASIC mining due to memory requirements. ASIC mining refers to using specialized chips that do hashing very fast, by several orders of magnitude.

This does not mean that Scrypt based mining is 1,000 times slower or less efficient. In fact, at the time of this writing, the Scrypt based currencies are more efficient than SHA-256 in terms of return on investment. You can check Dustcoin for the relative efficiency of the various currencies.

Of course, the only proof is in the pudding, so the ultimate evaluation of your result depends on whether you make more money than you spend.

What Will I Earn?

Patience, grasshopper, it’s not as easy as giving an amount X which works in all or even most situations.

First of all, you need to understand that mining profits adjust based on the need and power of the network. The more power combined, the more difficult it becomes for everyone to find a correct solution to the problem. Thus, the more profitable mining becomes, the more people will want to mine, and the harder it gets, reducing profitability. Then, when people stop mining from lack of profitability, the difficulty decreases, and profitability rises again.

Note: Mining power moves between the different currencies in response to profitability. You can check the relative profitability on the Dustcoin mining calculator.

Due to this self-regulating characteristic,

What is your electricity cost? If you are mining on inefficient or older hardware, chances are your output is going to be less than the cost of your power drain. At the time of this writing, mining using your CPU is already obsolete, and for SHA-256 mining, even GPUs are falling behind the efficiency of ASIC miners.

What is the cost of your hardware? If you are purchasing new equipment to mine for currencies, you need to account for the cost of hardware over time, and this becomes a bit more complicated due to the self-adjusting difficulty of mining operations.

Let’s say you buy a new Radeon HD7950 card for $250, and put it through the hoops of tweaking until it reaches an output of around $10 per day. “Great”, you think, “I’ll have that baby paid off in a matter of weeks”.

Well, sorry to burst your bubble, Sunshine, but because the difficulty increases as more hashing power is added to the network, so does your profitability. At times, the difficulty has increased by 80-100% during a week, meaning your profitability may have dropped to $5-6 per day by the end of next week.

And yes, this will keep happening.

Oh, and let’s not forget that the reward for finding a block (which is how new coins are minted) goes down on a regular basis. That means that at predictable intervals, the profitability halves.

Get Rich Quick!

Here’s the bottom line, and I’ll elaborate on this further in a later article. If you think the price of cryptocurrencies is going to go up, there’s really no point in buying mining equipment. This may sound counter-intuitive, so let me explain.

First, though, allow me to thank Deprived over on Bitcointalk.org for explaining this somewhat counter-intuitive idea.

Let say you buy a Bitcoin right now at $250 because you think the price per Bitcoin will go up, and the future proves you’re right, sending the price per Bitcoin to $500 after a month. Now you can sell your Bitcoin and buy twice the processing power that you could when you started, because your equipment will be denominated in dollars.

Note: Denominated simply means its price is set in a certain currency

You won’t be nearly able to mine coins enough with your new equipment to warrant a repayment in a month. Most likely, you are looking at several months, probably more, before your investment has repaid itself. Of course, this also means that the Bitcoins you have mined will be more valuable.

Now, if you think the price per Bitcoin will fall, however, then buying your equipment now will mean you safeguard yourself against a drop in BTC prices because you’ve not invested anything in Bitcoins per se. Let’s say the price of a Bitcoin drops to $125; you can now buy two Bitcoins for the same dollar amount, so sell your mining equipment and buy two Bitcoins instead. Again, with the reduced Bitcoin value, your mining operation has likely produced a loss.

I’m not going to give financial advice, because I really suck at it, but you need to understand that the prospect of making your own money is more complex than you think. If you’re not willing or able to properly evaluate the investment before you begin, your chances of getting rich as opposed to losing money is minute.

Thanks for reading, and don’t forget to tip your waitress.

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