Where to Buy Bitcoin and Litecoin Shares

Disclaimer: Do not take this as financial advice. I may or may not hold shares in any of these markets at any time. You should always do your own research before investing anywhere in any currency. Bitcoin and Litecoin stock markets are by nature unregulated and thus carries a significant risk in addition to traditional market. Please review the terms and conditions for each exchange carefully.

Be very, very careful about investing anywhere.

There, those disclaimers should indicate the seriousness with which you should take investing, especially when you are investing in Bitcoin and Litecoin shares.

With the recent rise in ASICMiner share prices, interest in cryptocurrency investing has increased and people are looking very hard for the next ASICMiner company.

However, you can’t research or invest anything unless you know where to go to find those shares, so allow me to give you a brief overview of the various market places.

Major Exchanges

At the time of this writing, there are four major cryptocurrency exchanges that offer a variety of investment options. All of the exchanges offer regular shares and some offer options and futures as well.

MPEx

MPEx has been around the block longer than any of the other exchanges that are currently in existence. Run by the arguably eccentric Mircea Popescu and sporting a user interface that would make a new investor cry blood. MPEx also requires a hefty fee for joining the exchange, currently at 30 BTC. The owner argues this keeps inexperienced investors away and maintains a high degree of seriousness among those that choose to trade here.

However, what MPEx lacks in beauty and user friendliness, it more than makes up for in volume and stability. MPEx offers trades in three shares only, including itself, but additionally offers options and futures trading on the BTC/USD exchange price, which is very useful in volatile times. Further, MPEx has a strict vetting policy for new listings, requiring a thorough review of new listings more like traditional stock exchanges.

Site: https://mpex.co/

Bitcoin Trading Corporation

On the face of it, the Bitcoin Trading Corporation, or BTCT, has a much higher volume than MPEx. However, at the time of this writing, the majority of that volume comes from ASICMiner Pass-Through trades.

Note: To learn more about pass-through shares, check out my article on How to Buy ASICMiner Shares.

BTCT sports a nice, clean interface, with security features such as two-factor authentication for bids, asks, withdrawals, and account changes. The exchange has a modest range of available shares, including the ever so famous ASICMiner pass-through shares, as well as pass-through shares to all the MPEx shares.

BTCT also offers option trading and a dividend reinvestment plan to turn your dividends into new shares automatically.

Site: https://btct.co/

Bitfunder

If variety of shares is what you favor most, then Bitfunder offers more shares than any other exchange currently on the market, including ASICMiner pass-through shares. Bitfunder also has pass-through shares to the MPEx shares and currently offers trades in more than 30 different stock.

Bitfunder’s interface is clean and fresh and offers multiple charting options giving you more options than the other exchanges. On the negative side, the funding process of Bitfunder is somewhat quirky and requires you to register an account with a different provider to which you will send your funds. As such, the process for trading shares is more cumbersome than BTCT although it is far easier than MPEx.

Site: https://bitfunder.com/

Note: Just as a reminder, please review each site’s terms and policies before you invest anywhere.

Litecoin Global Exchange

The only major, and I say major in the most generous sense, Litecoin stock exchange in the world, is the Litecoin Global Exchange, or LTCG. This exchange resembles BTCT quite a lot, and the simple reason for that is that the same person runs both exchanges. In fact, LTCG owns BTCT, despite the latter being orders of magnitude larger than the former.

Litecoin shares comprise a much smaller market than its big brother Bitcoin, but can still offer viable investments. Several shares traded on LTCG are pass-through shares to Bitcoin-denominated assets (like MPEx and SDICE) which complicate the process of determining the correct price. However, if carefully planned, this can serve as a hedge against volatility in the BTC/LTC exchange rate.

The features of LTCG closely resemble that of BTCT. LTCG offers around 30 shares for trade, including several mining companies and the exchange itself.

Site: https://www.litecoinglobal.com/

Minor Exchanges

In addition to the major exchanges, there are some smaller exchanges that offer very interesting shares too.

Picostocks

Picostocks is the brainchild of a small group of people that want to help hi-tech companies get public funding. Currently, only three companies are listed, including the exchange itself. The other two companies is a pharmaceutical company (Proteon Pharmaceuticals) and a mining company (100TH).

The user experience of Picostocks is in tune with the idea behind Bitcoin, with anonymous but public ledgers of all trades. This allows traders to look into the holdings of any other trader but without knowing the identity of that trader. The idea is that learning how the best traders work will help others learn as well, creating an informed user base.

Update: A word of warning, though, and a clear indication of how unregulated the Bitcoin stock market is. When a certain piece of good news comes through on Picostocks, the stock exchange itself has a tendency to dump large amounts of shares in the market, preventing any reward for risk-taking on this exchange.

As such, I cannot really recommend anyone investing on Picostocks.com as you can be certain that the reward you would normally get for accepting risk will be taken away.

Site: https://www.picostocks.com/

Havelock

Havelock Investments is a small exchange, both in volume and share diversity. However, it does offer pass-through shares to other shares, including a 1/100 pass-through to ASICMiner.

In addition, the Havelock user experience is very neat and looks extremely professional. While this may be unimportant to share prices, a smooth operation is important to get the right share for the right price and the right time.

Havelock also offers direct import of S.DICE (SatoshiDice) shares from MPEx, sports an optional two-factor authentication, lists IPOs separately from other shares, and shows financial reports for all assets that have them available.

Site: https://www.havelockinvestments.com/

What Else?

You know that disclaimed I stated in the beginning? Read it. In fact, to make it easier for you, I’ll repeat it right here:

Disclaimer: Do not take this as financial advice. I may or may not hold shares in any of these markets at any time. You should always do your own research before investing anywhere in any currency. Bitcoin and Litecoin stock markets are by nature unregulated and thus carries a significant risk in addition to traditional market. Please review the terms and conditions for each exchange carefully.

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Be very, very careful about investing anywhere.

Why Investing in Mining is Always a Bet That Prices Will Drop

The one thing that really puzzles people when it comes to evaluating Bitcoin mining profitability is the fact that investing in mining equipment is always a bet that the prices of your chosen currency goes down.

I’ve tried numerous approaches to explaining why this is true, and I’m almost always met with either complete bewilderment (but, it’s free money, how can that not be profitable?) to rage (you simply don’t understanding mining, it’s all about difficulty/price/speed/etc) to weird math-related arguments (well, your calculations cannot be true because you didn’t prove it with my numbers).

As such, I’m going to explain this concept, hopefully in a way that makes it easy to understand.

However, to do so, I’m going to have to trick you.

Currency Trading

I want to start with a completely unrelated topic, just to make sure we have something relatively easy to understand. The topic is going to be currency trading with three currencies.

These three currencies are not to be understood as the traditional currencies you usually handle, like US dollars, Euros, or Pounds. To accomplish this, I’m going to call them A, B, and C.

Because we’re going to do some trading with these currencies, we need to establish an initial exchange rate between the currencies. I’m going to start with the following exchange rates:

Currency Pair Exchange Rate
A:B 1:2
B:C 1:50
A:C 1:100

This table should be fairly easy to understand. If you have 1 A, you can trade that for either 2 B or 100 C. If you have one B, you can trade that for either 0.1 A or 50 C. If you have 100 C you can trade that for either 2 B or 1 A.

In fact, let’s start with 2 B and see what we can do. To make this simple, we trade only once per day, using the final exchange rates for that day.

Initial Status: Our holdings initially is 2 B, the equivalent of 1 A or 100 C

First Day of Trading

On the first day of trading, we decide to buy 1 A for our 2 B.

Day 1 Status: Our holding before day 1 is thus 1 A, the equivalent of 2 B or 100 C.

After the first day of trading, the exchange rates have shifted, making C 2.5 times more valuable. Our exchange rates now look like this:

Currency Pair Exchange Rate
A:B 1:2
B:C 1:20
A:C 1:40

Dang! Our value measured in C is now down to 40 C. Even if we still hold 1 A, the exact amount we started with, the increase in C value means our starting sum now translates to a much lower amount of C.

In other words, our value of 1 A means we can get 2.5 times less C today than initially.

Second Day of Trading

Thinking that the C price surge on day one may be a flop, we decide to hold on to our A during day two.

Day 2 Status: Our holding before day 2 thus remains at 1 A, the equivalent of 2 B or 40 C.

After the second day of trading, it turns out we were right! The exchange rate of C drops down to only 10% to its original level, and our exchange rates thus look like this:

Currency Pair Exchange Rate
A:B 1:2
B:C 1:500
A:C 1:1000

Luckily, we didn’t buy into the C hype. If we did, we would still hold 40 C, but measured in A, we would suddenly hold only 0.04 A. Measured in B, we would have had only 0.08 B.

In other words, our value of 1 A means we can now get 25 times more C than yesterday.

Final Status: Our holdings after day 2 is thus 1 A, the equivalent of 2 B or 1000 C.

Do we understand each other so far? Everything looks swell? Happy with what’s going on? Good! Because it’s time for me to spring my trap.

The Trick

I mentioned earlier that I needed to trick you to explain how this all relates to investing in mining and how investing in mining is always a bet that the prices of Bitcoin or your favorite cryptocurrency will drop.

The trick here is that in the scenario above, there aren’t really three currencies. There are just two. One of the currencies, A, is actually a piece of mining equipment, for example a graphics card (GPU).

Hold on!” you say “That’s not fair! Mining equipment isn’t currency and you can’t trade it like that!

You’re right! However, you may notice that we didn’t trade A at all, we just bought it at the beginning. In the two days of trading, we used it only to measure how much of the other currencies we held.

Let’s see if my trickery goes further. What if we replaced currency B with US dollars, and currency C with Bitcoin or some other cryptocurrency? Let’s review our positions initially, after day 1 and after day 2.

Note: Remember that during day 1, the price of C, or our cryptocurrency, increased drastically while on day 2, the price of our cryptocurrency dropped like a rock.

Let’s just exchange our statuses with A being GPU, B being USD, and C being Bitcoin.

Initial Status: Our holdings initially is 2 USD, the equivalent of 1 GPU or 100 Bitcoin

Day 1 Status: Our holding before day 1 is thus 1 GPU, the equivalent of 2 USD or 100 Bitcoin.

Day 2 Status: Our holding before day 2 thus remains at 1 GPU the equivalent of 2 USD or 40 Bitcoin.

Final Status: Our holdings after day 2 is thus 1 GPU, the equivalent of 2 USD or 1000 Bitcoin.

See what happens here?

When the price of Bitcoin rises, our value denominated in Bitcoin drops drastically. When the price of Bitcoin crashes, the amount of Bitcoin our holdings represent goes through the roof!

In short, buying mining equipment yields far more reward in Bitcoins when the value of Bitcoins drop than if Bitcoins rise in value.

Your Questions Answered

As always, I’m anticipating, partially because I’ve been trying to explain this to people many times, that you have some questions. Let me get ahead of you and answer some of them right now. If you have other questions, feel free to leave them as comments below.

Q: You Forgot Mining, You Idiot!

Nope, I didn’t forget, I left it out because it would only add to your nightmare.

Go ahead, add mining into the equation. Let’s pick any number, say 10 Bitcoin per day. After day 1, you would have had 50 Bitcoins instead, an increase in Bitcoins of 25%! Amazing, increase, so mining must be profitable, right?

Well, after day two, you’d have 1020 Bitcoins, which represents an increase of Bitcoins of 1020% (yes, that’s one thousand and twenty percent) from our initial value. In other words, a price drop means you get 995% more Bitcoins than if you mine while the price goes up and manage to sell at the top. Clearly, a decreasing price yields far more Bitcoins than mining because a drop in price would add 900 Bitcoins, whereas mining would add 20 Bitcoins.

Q: It’s All About Mining Difficulty, You Idiot!

Not really. If the mining difficulty goes up, you get fewer coins, but even a doubling of the difficulty would only reduce your mining revenue by half. The theory seems to be that increased difficulty leads to a higher price because the cost of mining one coin goes up.

Note: This theory is far from certain, and looking at how major difficulty shifts in other cryptocurrencies have affected prices recently, there doesn’t even seem to be a correlation, much less a dependency between difficulty and price.

In any case, difficulty increase or decrease does not affect profitability anywhere near enough to compensate for the changes in price of a coin.

An increase in difficulty means you get fewer coins, which if the price/difficulty theory holds true means the price will rise. Of course, with fewer coins, that also means less effect of that price increase. Conversely, if the difficulty drops and the price goes down, you have more coins affected by the price decrease.

In the end, it does balance out, but if you think difficulty affects the profitability like that, just run the numbers yourself and see.

Q: You Forgot Equipment Depreciation, You Idiot!

OK, enough with the insults already!

Depreciation means that something loses value over time. For a GPU, you may expect a lifetime of 12 months, so you can on average expect the value of your GPU to depreciate 1/12 per month. The number of months may be different, but the idea is the same.

Let’s go back a couple of steps and look at the investment before my little text replacement trick. In our first example, depreciation would mean that the exchange value of our A would drop by, for example, 1/12 every month.

However, we would still have one A. Our value denominated in other currencies would drop over time, but our ability to mine with our A does not go down.

Our production from having a GPU increases over time when compared to the value of our GPU. For example, after one month, our A or GPU would be worth only 11/12 of the B/USD and C/Bitcoin value, and would give 10 C/Bitcoins. After 11 months, our GPU would be worth only 1/12 of its original value, but would still produce 10 Bitcoins, or whatever value you choose to use.

Q: You’re Using Made-Up Numbers! Use My Numbers, You Idiot!

This is the counter-argument that ultimately demonstrates whether you understand math or are just being argumentative.

Look, replace the numbers with whatever makes you happy. It’s not about whether there is a 1:2 exchange rate or a 1:45, 2:31, or 86:15 exchange rate. It doesn’t matter whether a dollar currently is higher or lower than a Bitcoin.

Try it and see! It’s very easy. Just replace the A:B exchange rate with the price of your favorite mining equipment in USD (don’t forget to convert the value to USD, regardless of whether you buy it using USD or Bitcoins), the B:C ratio with the exchange rate of US dollars to Bitcoins, and A:C with the price of your favorite mining equipment in Bitcoins. Then, do the same experiment, using higher or lower decreases and increases if you like.

Don’t trust me, trust the math.

Oh, and if Bitcoins isn’t your chosen cryptocurrency, just swap Bitcoin in the previous paragraph with Whatevercoin.

Q: Of Course I Want the Price of My Coins to be as High as Possible. Nobody Wants to Sell at a Low Price, You Idiot!

That is true, but tell me, would you rather have 1,000 coins or 100 coins to sell if the price was the same? You’re thinking right but ignore the acquisition of the coins completely.

Remember that when you sell your hardware, you are no longer a miner. You are a coin holder. The argument here is that a mining operation benefits from a falling price, but since your mining operation ceases the moment you sell your mining operation, the falling price no longer benefits you.

In fact, it’s the exact opposite when you just hold coins. You want the price to skyrocket! Until that happens, however, you want to gain as many coins as possible at the lowest price possible, and thus you gain more from a falling price than you do from a rising price.

In our simplified trading example, we stopped the analysis after the price dropped. Add one more day where you trade in your A for 1000 coins after day 2, and see what happens when the price of C or your chosen coin shoots up again on day 3 to the level it was after day 1:

Final Status: Our holdings after day 3 is thus 1020 Bitcoin, the equivalent of 25.5 GPUs or 510 US dollars.

If you were just mining at the rate of the 10 Bitcoins per day from the example in the first question, the results would be:

Final Status: Our holdings after day 3 is thus 1 GPU and 30 Bitcoin, the equivalent of 1.8 GPUs or 36 US dollars.

Mining yields a profit of 34 dollars while mining plus selling your hardware yields 508 dollars.

The End?

I doubt it, because this is a topic that seems to bring rage to miners all over cryptocurrency land. However, the short version of this article is this:

Mining is always most profitable when the price of Bitcoin goes down. If you invest in mining equipment your highest profit comes when the price of Bitcoin crashes.

That doesn’t mean that mining isn’t profitable when the price rises, only that you’re missing out on a lot of coins when that happens.

Still disagree? Leave your comment below and I’ll try to answer any question you have. Perhaps you know better? Heck, I might even update this article to include your question, and you’ll be famous for setting me straight!

.b

Feathercoin – There’s a New Kid on the Block!

A couple of weeks ago, a new cryptocurrency popped up over on Bitcointalk. The new coin, dubbed Feathercoin, initially looks extremely like Litecoin with the major difference being the amount of coin in potential circulation. Block rewards are set to 200 FTC as opposed to LTC’s current 50.

So, if Feathercoin is just a straight Litecoin clone, and Litecoin already struggles with getting the traction that Bitcoin has, what chance does Feathercoin stand in the world of cryptocurrencies?

FTC versus LTC

The similarities between these coins are fare more than their differences, but there are some key aspects that may turn people towards Feathercoin.

First, there’s the freshness of the coin, and the initial surge of enthusiasm from early adopters drive the ecosystem of Feathercoin forward at an astonishing pace. Already, several exchanges like BTC-E and Vircurex have taken Feathercoin on board, and there are mining pools popping up everywhere.

The lack of adoption presents an opportunity for miners as well. People have mined the established coins for a long time, and with ASICs coming online, graphic card miners move from Bitcoin to Litecoin and drive the difficulty through the roof. Profitability of mining Litecoins has dropped almost 80% since early April (at the time of this writing, a month ago) due to the difficulty rise.

From a non-technical perspective, Feathercoin offers few differences for most people at this time. Beyond the name, which is actually quite funny if you’re into the community jargon, the main difference is that there will be four times as many Feathercoin than Litecoins.

Note: The name, Feathercoin, both indicates something lighter than Litecoin, but also plays on the Trollbox nickname of Alt-coins in general and Litecoins specifically, chickun. In other words, we have both feather and chickuns.

This may have a psychological impact more than a practical one, as a price will need to be four time higher, which again means discounts can be four time higher, in absolute values.

“I love this car, but I can’t afford the 200,000 FTC to buy it!” says the customer. “No worries, I’ll drop 20,000 off the price for you” says the car salesman. 20,000 sounds like a much higher discount than 5,000, although the price of 200,000 also sounds a lot more than 50,000. I guess the benefit or drawback depends on whether you’re offering a discount or selling at a low price, and we’ll have to let the market decide what’s best.

That actually brings me to the next point, which is something that I believe goes for any cryptocurrency that pops up.

It’s a Rip-Off!

Actually, no.

Cryptocurrencies need diversity! Granted, the coins may look exactly the same at this point, but as the market matures, people will favor different characteristics of the coins.

The coins themselves may evolve and add new features or behavior, which may spawn further ideas that can bring about the next cryptocurrency revolution.

For Bitcoin, the big brother in this family, there are already a number of similar coins that have added different characteristics that the world is now evaluating.

Note: You may also want read my take on the different cryptocurrencies and why they are unique.

For Litecoin, however, which differs from Bitcoin in that it uses scrypt as its mining algorithm, there haven’t been a plethora of alternatives to help Litecoin evolve.

Feathercoin, and indeed some other coins that have appeared recently, also uses scrypt for mining and can thus be to Litecoin what Namecoin, Devcoin, Terracoin, PPCoin and the other SHA-based cryptocoins are to Bitcoin; helpful in evolution, but not in themselves and alone the future of cryptocurrencies.

.b

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.

.b

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.

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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.

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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.