Tag Archives: Bitcoin

Understanding Bitcoin Malleability

Here’s an explanation of the malleability issue of Bitcoin and what it really means for you.

Let’s say you hire Jane Plumber to fix your sink for $100. After Jane completes her work, you write a check for $100, sign it, and send to Jane, thinking nothing of it.

CheckOriginal

Upon receiving the check, Jane annotates the check in some insignificant manner, for example by stamping it or writing a note that it has been received. She then sends the check to the bank to get the $100 deposited.

 CheckNew2

In Bitcoin, the check is analogous to a transaction. It is a signed statement from you that you want to transfer an amount to someone else. To declare that you intend to do so, you publish a cryptographically unique signature, or in this analogy a unique image, so that anyone can see that you intend to pay Jane $100.

All of these images or transactions are stored in the Bitcoin blockchain which is a public ledger of all transactions made by anyone. In this analogy each transaction is a picture of a check, a check signed by you, but that can be published to the public ledger by anyone who has that check.

BlockChainOriginal

As such, when Jane annotates the check, she can also publish the annotated image of the check. The annotated check does exactly the same thing; it withdraws $100 from your account and transfers to Jane. However, because of the annotations, the image that Jane publishes is different from the one you publish.

Although there are two check images published, only one of the images will be accepted by the bank or in this case the Bitcoin network. The details of how this happens is beyond the scope of this explanation, but involves a transaction history which ensures that you cannot give away the same dollar twice.

However, a malicious attacker can exploit this if you are a bit naive. If Jane’s image is the one accepted, Jane can call you and say that she never received the check. When you then go into the public ledger and search for your original image, it is nowhere to be found because it was Jane’s image that got accepted.

BlockChainHighlight2

If you are naive, you may then write Jane a new check, and she can withdraw your $100 twice, once for each check you sent her.

If this happened outside of Bitcoin, it would be very simple to check whether Jane was telling the truth. You can simply check your bank statement and see whether the charge for the personal check has been posted to your account. If so, Jane is lying and you can simply ignore her request.

BankStatementHighlight

In fact, even in Bitcoin, if someone claims that they have not received the funds you sent, it would be easy to check the balance of your address to see whether the funds are gone and thus have been sent. You may not find your original transaction, but you will find the transaction that sent the money and you could present that to Jane as evidence that the money has left your account and has been received in her account.

The malleability component of Bitcoin is the protocol’s ability to interpret the intent of the check, so to speak, even if it has been annotated with certain pieces of information or decoration. It is still the same check designed to do the same thing, but it looks a bit different than when you originally signed it.

Please also note that although you can make simple changes to a check or Bitcoin transaction, any change that is of importance, such as the sum you want to pay or to whom you send the money, can not be changed. If you attempt this, Bitcoin requires a new signature from you, and it’s not as easy as just copying the signature from a paper check.

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Give the Gift of Bitcoin Mining This Season

If you want to give a gift that is both a useful, educational, and benefits society, why not give someone Bitcoin mining as a gift? Here’s the idea.

CEX.IO, and I’ve written a couple of articles about them earlier (and links in this article are affiliate links; check the end for direct links), have the ability to generate vouchers that you, or someone else, can redeem for cloud mining power at CEX.IO. You buy the hashes for your own account and then create the voucher to give away some or all of that mining power to someone. Those that receive it can simply register and redeem the hash power and start watching their Bitcoin income grow.

I think this would be an awesome gift to someone who is interested in learning about mining and Bitcoin and are some reasons why.

Bitcoins are often difficult to get

One major obstacle to wide-spread Bitcoin adoption is that right now, getting traditional currencies into the system is a major hassle. By giving mining as a gift to someone, they get Bitcoins without the hassle and risk of sending money through wire transfers or buying in person.

Learning about mining is fun and exciting

For a lot of people, Bitcoin mining seems almost magical. However, it can be fun and exciting to follow and learning how it works is a great first step towards gaining a better understanding of Bitcoin.

Bitcoin mining at CEX.IO is redeemable instantly

Mining can be an exciting and educational, but some may not want to keep doing it for any number of reasons. That’s fine, at CEX.IO they can sell their cloud mining power any time they want and withdraw the Bitcoin to a normal account.

Investing in Bitcoin mining can be risky

Buying a Bitcoin miner means a lot of maintenance, electricity cost, and the risk of hardware failure. Of course, there’s also the risk that the miner won’t work at all or that the vendor doesn’t deliver or simply runs away with your money.

With CEX.IO, there’s little risk of hardware failure because CEX.IO is responsible for keeping the miners operational and replaces faulty hardware for free. They also take care of electricity and setup for you.

Getting a miner takes time

Buying a Bitcoin miner yourself will at best take a long time because miners are usually sold out way in advance of general availability. By the time you get your hardware, difficulty may have shot through the roof. Additionally, almost every vendor has been delayed with deliveries.

CEX.IO allows you to get Bitcoin mining power immediately; you can buy now and have your mining power start generating Bitcoin in a matter of minutes.

Physical Bitcoin miners are expensive

Getting a Bitcoin miner can often mean investing thousands of dollars. That’s a huge amount of money to give as a gift. Of course, you can’t just give parts of one either.

However, CEX.IO allows you to buy Bitcoin mining power for exactly the amount you want, whether it is $100, $1000, $1, or even $0.10 worth of hashing.

Note: You do pay in Bitcoin, though, so perhaps it is better to say 0.1, 1, 0.01, or 0.001 BTC.

Now that prices of Bitcoin has fallen, at least at the time of this writing, buying a few GHs of Bitcoin mining power isn’t half bad anymore, and it would make a great gift to introduce someone to the wonderful world of cryptocurrencies.

Please note: The links in this article are affiliate links, which means I get a small reward if you use those to sign up and make purchases. If you prefer to not use an affiliate link, just go directly to http://cex.io/.

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Why Altcoins Show the Future of Cryptocurrencies

I have previously written about how I think alternative coins like Litecoin, Namecoin, and Primecoin are important to the cryptocurrency community and to Bitcoin itself. My argument is that evolution is awesome and we should embrace it. A multitude of coins can keep cryptocurrencies from falling prey to the single point of failure.

Don’t get me wrong; Bitcoin is awesome on its own. For serving its purpose, it is almost perfect and there is no realistic alternative right now. If all we wanted to do with Bitcoin is what we currently do, alternative coins are a waste of time.

However, alternative cryptocoins, or altcoins as they are often called, have completely different uses too, and uses that Bitcoin cannot possibly expect to cover. In fact, although these uses  are incredibly useful (and I start to realize the overuse of the word use), adopting them into Bitcoin would be a huge mistake.

Let me show you some examples.

Litecoin

The biggest altcoin by far, Litecoin has been argued as being nothing but Bitcoin with a few minor changes and thus not adding anything of value. In fact, where some coins actually have useful features, the argument goes, Litecoin is simply Bitcoin with a slightly different algorithm. Faster transaction times isn’t really required and it isn’t really that much more secure, if at all. Nothing new to see here, move on.

However, look at what’s happening with the community. Over the previous few months, the Litecoin developers have given Bitcoin a completely new wallet program. The Bitcoin developers probably couldn’t have done this without inciting confusion, but Litecoin has been experimenting with this for a while and gave the result to Bitcoin for use as it sees fit.

In fact, being so close to Bitcoin in terms of features allow Litecoin to be the perfect test bed for new features for Bitcoin. Not only that, but other coins can also learn a lot from what Litecoin does, which may in turn yield even better alternatives than this current more-or-less replica.

Still, Litecoin is probably the coin that is easiest to just write off as a nice idea but not really required. Let’s move on, though.

Namecoin

Believe it or not, but a big problem today is the control that the US has over the domain name system. By court order, the US government can shut down or take over a .com domain, and because .com is operated by a US entity, that is a concern for those most paranoid about privacy and liberty.

It doesn’t even affect .com domains either; pretty much any country in the world has similar laws that allow someone to take over the operation of their domain names. This is one reason why you see a lot of ‘weird’ domain extensions; it is often an attempt of someone to gain some kind of protection from the scrutiny of governments.

Namecoin proposes to change all that by decentralizing the distribution of domain name management.

It has failed so far, but the potential to completely revolutionize and democratize the internet is there. Namecoin may be the first version of something that will eventually take domain names out of the control of government or ‘big corporations’ to democratize the process of managing domain names.

Primecoin

If you’ve read my articles on understanding Bitcoin mining difficulty, you may know that what Bitcoin and Litecoin miners generate is essentially thrown out the window. You may say that they are turning electricity into money, but for absolutely no other benefit beyond heating the room.

Primecoin is another example of how cryptocurrencies can have real life impact. If you don’t know, Primecoin is an attempt to turn the power generated by mining into something useful. In the case of Primecoin, it is generating chains of prime numbers, which is way beyond what I currently understand about math, but is potentially useful.

So far, Primecoin is only potentially useful, though, but it shows how cryptocurrencies can have the potential to yield real scientific benefit. Distributed computing, like the Folding at Home or SETI at Home projects, could be completely revolutionized by efforts like Primecoin.

Bitmessage, Colored Coins, and Mastercoin

Don’t like alternative coins at all? Fine, Bitcoin itself can also be utilized for other purposes than just as a store of value.

Three examples are Bitmessage, Colored Coins, and Mastercoin. Bitmessage is, or was, an attempt at building a messaging framework on top of Bitcoin. Colored coins can be used to make special Bitcoins that represent a different value like stock in a company, a car loan, or other valuables. Mastercoin can potentially allow anyone to create their own currency that is propagated through the Bitcoin block chain.

Bitmessage failed, or at least haven’t succeeded yet, because it simply doesn’t scale well, but imagine a messaging system where all messages are seen by everyone but encrypted so that only the intended recipient can decode the message. It may not replace email, but it could serve as a public verification and records of things like contracts, bids, agreements, and so on; an open and free notary public if you will.

Colored coins hasn’t been implemented by anyone yet, but imagine a system where a special Bitcoin could represent the shares in a company. Suddenly, you have an ability to trade that coin, or fractions of that coin, just like you trade shares in a company at a stock exchange today, except it would be open and transparent and not controlled by anyone.

Mastercoin is a new undertaking that seeks to build a protocol on top of Bitcoin to create custom currencies. Imagine a chain like Wal-Mart or Trader Joe’s issuing their own currency that you can buy and trade and use in their stores only. Governments could give custom coins for social welfare for use at a certain store only to prevent recipients from using them for drugs or gambling. Parents could give allowance money to kids without fear that they would use them for nefarious purposes. Airlines could give bonuses in terms of tradable currencies rather than ‘points’.

Version 0.1

At this point, cryptocurrencies are in its most basic infancy. We think of Bitcoin as just another form of money, albeit issued through mining rather than by a central bank.

However, this is akin to looking at the web in 1994. It was extremely basic and rudimentary. The ability to submit a form via a web page was considered a major breakthrough. Animating GIFs were considered the multimedia of its day. You could easily wait a minute or two while your browser loaded a web page. Much of the web was just text. It was awkward for most normal people and a niche thing for geeks and crazy people.

Today, we can barely imagine a world without the web. Not just did it pave the way for awesome communication across web pages, but it brought the internet to all those normal people, spawning a range of additional services, like online games, real-time video conferencing, secure communication for the masses, YouTube, and all the other things we now can barely live without.

Imagine, if you will, what the world can look like in a few years, the equivalent of the web in 2000, when cryptocurrencies have been around long enough for the mainstream to adopt them and build awesome services, products, and features.

Embrace the Future.

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Use Namecoin (NMC) to Purchase Bitcoin Mining Power

Disclaimer: Don’t take any financial advice from one source only. Always research multiple opinions. The CEX.IO links in this article are affiliate links. If you prefer a non-affiliate link, look towards the bottom of the article. Finally, do not under any circumstance invest more money than you’re comfortable throwing out the window. You can lose everything overnight. don’t say I didn’t warn you!

I’ve previously written about CEX.IO, which is a new way of investing in mining power where you purchase Bitcoin mining hashrate as a commodity on an open market. In short, if you can’t be bothered to read the original article, this is a great way of getting started with Bitcoin mining without having to risk more than exactly the amount you need and with the added security that you can sell your hashrate back to the market whenever you want. Oh, and you start mining the moment you purchase the mining power.

A nice feature of Bitcoin mining is its ability to do merged mining with other coins. Without getting too technical, this means that Bitcoin miners can mine several other cryptocurrencies at the same time using the same mining hash rate. Effectively, you get multiple coins from the same mining effort.

One of the most widely known merged mining coin is Namecoin, or NMC. Namecoin is a cryptocurrency that is built to support anonymous domain (DNS) names. Right now, however, the use of Namecoin is limited and due to the fact that there is a huge amount of Namecoin in circulation, a lot of miners have spare NMC in their wallets.

Note: If you want to read my opinion on why we need multiple cryptocurrencies, here’s my take.

CEX.IO supports merged mining, so you get several merged mined coins as part of your output, currently Namecoin, Devcoin, and IXCoin. That is fine and all, but unless you can actually use those coins for something, they’re pretty much useless for anything but trading to other speculators for Bitcoin.

Now, however, CEX.IO has started selling Bitcoin mining power for NMC, so suddenly all those Namecoins can be turned into something useful. The GHS price is pretty much the same as it is for hashrate bought with Bitcoin, but because there’s huge amounts of Namecoins out there that is pretty much only used for trading with other cryptocurrencies, the ability to turn them into Bitcoin mining power at CEX.IO is pretty cool.

You can also trade your NMC in your CEX.IO account for BTC directly so you don’t need to transfer it to a different exchange, sell them for Bitcoin, and then transfer them back. The exchange rate hovers at around the same exchange rate as for other exchanges, but because the transaction is instant, you save significant time even if you can’t speculate in the difference between exchange rates.

I’m still hoping that CEX.IO will also support buying hashrate for the other two merged mined coins you get, though, because it would greatly increase the value of these coins to the cryptocurrency miners.

Want to get started with Bitcoin mining using your Namecoins? Here’s my affiliate link to CEX.IO. If you prefer to have the plain link, though, here it is: http://cex.io/.

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Why I Sold My ASICMiner Shares

DISCLAIMER: As always, do not take financial information from me or anyone without doing proper research yourself. Always assume that anyone giving you such information has ulterior motives that benefit them rather than you.

A few months ago, I posted an article on how to acquire ASICMiner shares. Since then… interesting things have happened in the cryptostock community and you’re now left with Havelock Investments as your only reliable option.

At the time, ASICMiner traded at around 0.8BTC per share. I have put a, to me, considerable amount of my BTC into ASICMiner and say a huge rise in value. And then I sold.

Yeah, I sold at 1.8BTC per share. The price later rose to over 5BTC per share, but I was happy to have gotten out when I did, and here’s why…

Fundamental Investing

I don’t know too much about investment strategies. In fact, I started with investments when I got into Bitcoin, mostly as a learning experience. I’ve since read tons of material about how people construct their strategies and discovered to my amazement that I was following an already established strategy of investing based on fundamentals.

What is that you ask? Well, it’s a fairly simple strategy. Find out what something is really worth. Buy at a price that is lower than that and sell at a price that is higher than that. Simple, right? Like anything that is simple, though, there is a lot of homework required to get to that real worth number.

For example, in a mining company, you need to look at what is the long-term outcome of the mining operation. It doesn’t matter than a mining company churns out cash like it’s going out of fashion because if they follow the pattern of most mining operations, that churning will quickly diminish and will do so long before you get your share price back.

Finding the fundamental value of a share requires a lot of research, a lot of calculation, and a fair amount of guessing, at least in a market that is as volatile as Bitcoin mining. However, once you find that value, investing is mostly a numbers game; a cheap share is a certain value so you buy (or don’t sell) and an expensive share is another certain value so you sell (or don’t buy).

What fundamental investing doesn’t take into account, though, is people. Crowds tend to follow the moment of the crowd and that drives prices up or down regardless of what the fundamental value really is. In fact, all investors tend to bet on this to a certain extent.

ASICMiner Fundamentals

At the time, which was early April 2013, I looked at a few important factors of ASICMiner. First and foremost, I looked at their ability to deliver long-term. In April, the mining scene looked like a giant vacuum, and any ongoing mining operation was cash cows for their owners.

Friedcat had estimated that ASICMiner would hold an average of 15% of the total network hashrate throughout 2013. This was an awesome amount, but even that seemed too low as they were in the process of reaching the famed 51% limit and had to start selling their blade miners to keep below that limit.

15% of the network for 9 months is the equivalent of 864,000 BTC. Deduct a modest 10% in operational costs, salaries, and so on, and you end up with 777,600 BTC. Divided by just 400,000 shares and you’re looking at profits of almost 2 BTC per share, and that’s just for 2013.

However, the big question remained: would ASICMiner actually be able to keep this share of the network? A lot of people seemed to think so, and it’s easy to understand why. ASICMiner kept up with the growth in the network and had kept their promises and even exceeded them considerably.

In hindsight, it is equally easy to see why it had to fail. With the insane amounts of money ASICMiner generated, other companies and investors would want a piece of the cake. That meant huge investments into Bitcoin mining, leading to much higher pressure on ASICMiner.

Those investors also learned from another mistake ASICMiner made. ASICMiner was using outdated technology, which meant that even if they could produce huge amounts of hash power, that technology also required huge amounts of power and facilities, which were very expensive and difficult to operate. The competitors opted to use more modern technology and eventually rode in circles around ASICMiner in terms of performance.

In fact, this lack of updated technology and the vacuum created by ASICMiner’s initial success continues to create problems for ASICMiner. Their strategy of sticking with cheaper and faster to produce chips hasn’t given them much in terms of catching up, and right now, ASICMiner is just a few percents of the total network hashrate, diminishing by the day.

When considering any long-term investment in Bitcoin mining, one needs to take into consideration the halving effect. In short, the halving effect comes as a result of the halving of the Bitcoin block reward for miners, that happens sometime in 2016. At that point, a ballpark estimate is that miner income drops to 50% of what it is now. In effect, any mining investment loses half its value overnight.

To account for this effect, investors should calculate how much that effect is and increase their expected output each month so that they get enough back to counter the halving when it occurs.

Note: I’ve written an article that explains the halving effect in more detail.

The bigger the profit, the higher the impact of the halving effect. ASICMiner was slated to be one if not the biggest player, so the impact of the halving would be massive. This effectively reduced the dividends by several percentage points each month, so although ASICMiner at times had expected ROIs of 75-80% in a year, the real number was much closer to 30-40% over time.

Based on this, I estimated ASICMiner’s real value to be somewhere around 1.20-1.35BTC per share, depending on how optimistic I was. Of course, I wanted to make a profit on my investment at 0.8BTC, so I sold when I saw the price climb to 1.8BTC.

Before you run off to buy ASICMiner shares now, and thinking that the current price of around 0.6BTC must be an awesome bargain, keep in mind that at the time, I was estimating ASICMiner’s share of the network for 2013 to be 5-10%. Right now, it is not even 2%, and it’s dropping every day.

I’m not going to make a prediction at what I think the price will be, but you may want to consider that I haven’t bought back into ASICMiner at this point.

DISCLAIMER: As always, do not take financial information from me or anyone without doing proper research yourself. Always assume that anyone giving you such information has ulterior motives that benefit them rather than you.

New Bitcoin Client – From the Litecoin Developers

A few months ago, I wrote about why I believe Litecoin has a place in the cryptocurrency community. In short, one of the main reasons is that diversity strengthens a community, and Litecoin certainly offers a contribution to that diversity.

To show this, the Litecoin developers, lead by Warren Togami, just announced they have released a Bitcoin client called Bitcoin OMG. Yup, that’s right, the Litecoin team working for the “enemy”, making Bitcoin a better coin.

The new client introduces several interesting features that are sure to make an impact. For example, the new client allows watch-only addresses. What this means is that you can monitor any address and see it’s account movements as if it were your own address. Obviously you can’t do anything with the money in those remote wallets, but due to Bitcoin transactions being public, you can see what goes on in any address.

Another interesting feature for those managing multiple addresses (like myself) is coin control. If you don’t know how a wallet works, it is essentially a collection of Bitcoin or Litecoin addresses. Although your wallet will show the complete balance for all those addresses (including watch-only addresses with the new client), each address actually was its own balance independent of each other.

Let’s say you have ten addresses where you’ve received 1BTC each. Your wallet balance now shows 10BTC and you want to send 3.5BTC to someone.

The default client will “kinda randomly” chose from which of those 10 addresses funds will come. This may be a problem if you are managing addresses for multiple entities, for example if you have an address for a company, your spouse, or perhaps set aside for a specific purpose.

With coin control, the new Litecoin-based Bitcoin client allows you to control from which addresses you send money so you can keep certain addresses completely out of touch if you like.

A final feature worth mentioning is for miners; you can now disable the wallet functionality completely and use the client as a relaying or mining station only. This reduces RAM usage considerably and makes the impact of running a client much smaller.

There seems to have been a hitch with the first release of Bitcoin OMG, though, so the developers have pulled it for now, but you can follow its progress in the Bitcoin OMG thread over on Bitcointalk.org.

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Comparing Bitcoin Mining Contracts and Mining Bonds

Disclaimer: This article talks about investments, and in particular an investment of which I am the issuer. You should assume that I have a vested interest in you making a particular investment decision and always double-, triple-, and quadruple-check everything yourself. Don’t invest anything you cannot afford to lose.

When I designed and launched BFMines, my mining contracts over on BTCT, it became apparent that people didn’t quite understand what that asset was. I thought that the community would be able to relate to it easier if I described it as a mining bond, but apparently, that was just enough to get people to misunderstand when they wanted.

As such, I’m writing this article to clarify what the differences are between a mining contract like BFMines and a Perpetual Mining Bond (PMB).

Before you read on, you should make sure you have read my article on what PMBs are and how they work. If you think mining bonds are scams, you should also read my explanation of why that is not so. I’ll assume you know that and skip the basics. I’ll also name a few competing mining assets in this article; I do so because they are representations of classic PMBs, not because I would vouch for or berate them specifically.

Similarities

When you first look at PMBs and mining contracts, they may look very similar. Both are denominated in some hash rate, both promise regular pay based on Bitcoin mining with that hash rate, and both are simple ways of getting involved in Bitcoin mining without the hassle of owning and operating your own mining equipment.

Further, at least when it comes to publicly traded mining contracts, you can easily buy and sell them through some form of exchange. Have some spare cash you want to set aside? Buy a few extra bonds or contracts. Need some additional funds for the weekend? Sell off some assets and cash out.

You’ll also realize that the price of both PMBs and mining contracts drop as the difficulty of Bitcoin mining increases. Because both asset types represent a certain hash power, the less that hash power can produce, the less return on investment (ROI) the assets yield, so the less people are willing to pay for them. Of course, this also means that if difficulty were to drop, prices should also rise.

Finally, both PMBs and mining contracts pay frequent dividends. PMBs are easier to predict so they most often pay daily dividends, but with either asset type, you should expect to have daily or weekly dividends.

These similarities make it tempting to compare the issues side-by-side. In fact, I’ve done so already when I compared BFMines to other mining assets. However, there are differences between the asset types too, which are important to understand to pick the right asset.

Differences

However, despite being similar at first glance, mining contracts and PMBs are different enough that it can influence your investment decision. I’d like to focus on three aspects that are important; transaction fees, stability, and performance.

Transaction Fees

PMBs are not necessarily backed by actual mining like I explained in the article on whether PMBs are scams. In fact, most of them are not, and that’s quite OK.

This also means that they never actually do any mining, and your coupons/dividends are based on a formula that has a fixed output based on a fixed block reward.

This is a great benefit in predictability because you know weeks in advance what return you will get. It is easier for the PMB operator too because when there is a difficulty change, they can just schedule all the dividends up to the next change. No fuzz, no checking of actual output, no suspicion of manipulation.

However, the downside is that you also lose out on transaction fees. In short, what a miner earns is based on two parts; the block reward and any transaction fees accrued since the previous block.

Right now, the transaction fees are around 1.1%, which is income you lose if you have a PMB. If Bitcoin grows in popularity, however, the transaction fees will go up, and you’ll lose out even more. As such, you can say that investing in a PMB is better if Bitcoin does not grow too much.

BFMines specifically pays out everything that the miner produces, both transaction fees and block rewards. If Bitcoin succeeds and grows large, that’s a benefit to you as a contract holder.

Stability

Every miner knows that mining is a fluctuating business. There are good times and bad times, and operating and monitoring hardware is a lot of work, often resulting in downtime and lost income. The stability of the operation depends on continuous work, but even in the best of times, hardware, power, or internet connectivity may fail.

Because a PMB does not have hardware backing its operation, or at least is completely independent of any hardware, there’s no stability issues to talk about. You get a certain dividend based on the hash rate, and that’s it. Whether there even exists hardware is irrelevant, and if there exists hardware and it breaks down, that’s not your concern.

Mining contracts like BFMines, on the other hand, are backed by hardware. That means that if the hardware fails or power or connectivity is lost, the miner does not produce any output. Similar to mining companies, this risk is carried by the investors.

For BFMines, there are some plans in motion to mitigate this risk. What everyone knows, or can find out, is that BFMines is backed by more hardware than is required to pay out the promised dividends. The surplus mining power will be used to cover expenses but also be set aside to fund contingency plans if something goes wrong.

Note: During the first six months, while the hardware is still under warranty, the surplus mining power  in BFMines is paid out as a bonus to contract holders, meaning that for half a year, contract holders get more dividends than guaranteed.

Performance

Mining assets based on physical hardware have a fluctuating output to some extent. Mining is essentially based on luck, so with physical hardware, there’s always an element of chance. If you’re lucky, you can have higher output than what a PMB will yield because the PMB is based on a fixed difficulty and reward.

However, this also means that the miner may suffer streaks of bad luck. All mining operations are essentially based on a certain randomness, so at times, the luck will cause dividends to be lower and sometimes it will be higher. In theory, this means that you can end up with zero output, but can also mean you get incredible output, at least in the short term.

On average, however, this luck should balance out and have a negligible effect on the total output. You should be aware that for PMBs, you always get the same output whereas for assets backed by hardware, there will be slight fluctuations in return over shorter periods.

If the predictability of output is vital to you, PMBs offer that, but if you like a slight gamble, mining contracts offer a bit of entertainment and excitement waiting for the results.

Note: For BFMines, I’ll be announcing a mitigation against the risk of zero output as we get closer to the release date.

Which to Pick?

What type of asset you should chose depends on the investment profile you like. Both assets give you a piece of Bitcoin mining without the need to buy, operate, and manage physical hardware, worry about hosting options, stability of power or internet connections, noise, heat generation, or theft. Both assets should appreciate or depreciate based on the same factors. Both assets on average provide a similar output.

Here are some scenarios that may help you decide.

If you are depending on predictable output, PMBs are more stable at the cost of the possibility of higher output.

Do you feel lucky? Mining contracts offer the chance of higher output at the cost of the possibility of lower output.

Are you laying awake at night wondering whether the hardware will keep working? PMBs avoid that by not being dependent on underlying hardware (if it even exists) at the cost of transaction fees.

Do you feel safe that the hardware will work or that its operator has backup plans available? Mining contracts offer transaction fees at the cost of the risk of catastrophic failure.

Do you think that Bitcoin will rise in popularity and gain widespread adoption? Mining contracts give you transaction fees that increases as Bitcoin gains traction, at the cost of the risk of hardware failure.

Are you more concerned that Bitcoin will fail and want at least a certain stability and no risk out hardware, power, or internet failure? PMBs will yield a steady income at the cost of any benefit from rise in Bitcoin popularity.

Feel free to let me know if you have comments or questions.

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Comparing BFMines to Alternatives

Disclaimer: The BFMines asset is my own asset, so assume I’m trying to influence your decision into buying. Always do your own research, verify claims, run your own numbers, and so on. This should not be seen as financial advice.

Earlier this week, in preparation for the IPO of BFMines, I published an article outlining the risks I saw as most relevant to my BFMines mining contracts. That article sparked some comments in various forums, including one comment from Bitcoin investment luminary Deprived where he requested that I posted a comparison between BFMines and other mining investment opportunities.

Note: Deprived also requested that I added a risk factor regarding the BTC/USD exchange rate. However, that risk is not specific to BFMines but applies to any cryptocurrency investments, so I’m not going to address that specifically.

I’ve been hesitant to post specific numbers on both comparisons to other investment opportunities as well as difficulty speculations. The reason is that both of these numbers will be relevant only at the very minute the article is written, and changes almost on a daily basis. This is why it is very important that you run your own numbers.

However, as more and more people are requesting this, I’m going to comply with the following disclaimer: The numbers presented in this article are current as of this moment and change on a daily basis.

Make sure you review the numbers when you plan your investment.

Assumptions and Method Used

In this comparison article, I’m comparing numbers only. I’ll write a brief statement about each asset compared, but those statements have not been taken into account beyond what is explicitly stated.

For example, I may say that “Asset A has a risk of default” or “Asset B has a larger than normal volatility”. These statements focus on opinions only, and you should review them as part of your investment decisions. However, they may or may not make a favorable impact on the asset or on BFMines, depending on how you evaluate the statements.

For east asset, I’m focused on one number only; the price per mhs. BFMines is effectively denominated in mhs, so to have a reasonable comparison, this should be your main focus.

I’m providing some additional figures as well to give you some indication of the profitability potential. I am also using the highest sale price over the previous 24 hours as reported by BTCT.

Finally, I’m basing the price of BFMines on that everything goes according to schedule and that there is an average difficulty increase of 15% per month from now and until mining begins. After that, every asset denominated in hash power will have the same profitability evolution, so difficulty speculation beyond that should not affect which asset in which you invest (only whether you invest in mining at all).

Note on Bonus: BFMines has a bonus dividend which will be at a minimum 15% and likely more for the first six months. However, difficulty is expected to increase, so the ‘likely more’ is removed and I’m using 16.6% for six months to make it easier to calculate.

I am accounting for this by subtracting 1 month of September dividends from the price, and do the same for other mining contracts for the expected dividends paid until September 1.

Mining companies are assumed to keep their current percentage so dividend calculations are based on today’s dividends from mining. This means that although ASICMiner and Cognitive will increase their hash rate, I’m using the decline in profitability due to difficulty increase to counter this. As such, I have not included price adjustments for the mining companies.

Asset Comparison

I’ll compare BFMines to two classes of assets; mining contracts and mining companies. The difference may seem subtle, but mining companies may have better protection against difficulty increases as they may increase the hash rate to stay at the same relative rate, whereas mining contracts in general will not.

I have chosen two mining companies and two mining contracts from BTCT. The mining companies are ASICMiner and Cognitive and the mining contracts are TAT.VirtualMine (TAT.VM) and PAJKA. For Cognitive and PAJKA I have included their projected upgrades as well, as these may affect your calculations.

Note: One asset, called DMS.Mining is currently cheaper than all mining assets. However, this is a somewhat different asset that carries additional price volatility risk to holders, so I’m not including it here. Read more about the DMS assets in this article.

The conclusion, if you’re impatient, is that BFMines is right now the second cheapest mining asset when comparing yield from mining alone. TAT.VM is slightly cheaper at the moment, and the break-even point today (and this goes down every day) is 0.00483BTC for TAT.VM. If TAT.VM goes up to 0.00483, BFMines is again the cheapest mining you can buy.

Update, July 8, 2013: Due to a miscalculation in my initial model, I’ve updated the chart below and included updated numbers based on the situation as of July 8, 2013 at 7:43 PM CST. I have also included DMS.Mining in the comparison, but please not that this is neither a mining contract or a mining bond, so the price paid behaves differently.

The full overview is here, and note that in the final column, a lower value is better:

image

BFMines

Type Price Adjustment Price Adjusted Hash/Share Price/mhs Div/share Yield/year Cost/BFMines
Contract 0,004000 0,000479 0,003521 1,00 0,0035209 0,000016 165,54 % 100 %

Statement: This is the baseline to which I compare other assets. Note that the adjustment is based on one month of dividends in September as explained in the note.

ASICMiner

Type Price Adjustment Price Adjusted Hash/Share Price/mhs Div/share Yield/year Cost/BFMines
Company 5,170000 0,000000 5,170000 155,00 0,0333548 0,002475 17,47 % 947 %

Statement: The engine of Bitcoin stock markets is ASICMiner. ASICMiner has plans to keep their current percentage of overall mining, but will likely not exceed 35% of the total network. Note that dividend estimates are based on mining alone, not hardware sales. I have based returns on their purchased 62THs, not today’s rate (which is just 30THs)

Cognitive

Type Price Adjustment Price Adjusted Hash/Share Price/mhs Div/share Yield/year Cost/BFMines
Company 0,400000 0,000000 0,400000 10,50 0,0380952 0,000168 15,30 % 1082 %

Statement: Cognitive is a mining company with more incoming hash power, but also with some issues related to the trust in the issuer. Will likely increase hash power further and has a dedicated fund to support such increases.

Cognitive Upgraded

Type Price Adjustment Price Adjusted Hash/Share Price/mhs Div/share Yield/year Cost/BFMines
Company 0,400000 0,000000 0,400000 58,00 0,0068966 0,000926 84,51 % 196 %

Statement: See also Cognitive above. This calculation is based on the ordered hardware (7xBFL 60GHs miners) which should arrive in two weeks (and that’s a joke playing on BFLs continual promise to deliver in two weeks; I have no idea when it will arrive).

TAT.VirtualMine

Type Price Adjustment Price Adjusted Hash/Share Price/mhs Div/share Yield/year Cost/BFMines
Contract 0,004680 0,001308 0,003372 1,00 0,0033719 0,000016 172,86 % 96 %

Statement: TAT.VM is slightly cheaper than BFMines at present. The price adjustment is to account for the expected dividends paid from today and until September 1. Note that this adjustment goes down every day, so the difference goes down each day.

Update July 4: A forum user commented that mining contracts do not pay transaction fees. This is not true for BFMines as this is a real mining operation, not a virtual one, so all income, both block rewards and transaction fees, are paid out. I asked TAT about his asset, and he confirmed that TAT.VM pays only block reward. This gives BFMines a slight advantage equivalent to the transaction fee, which right now is somewhere between 0-2%.

PAJKA

Type Price Adjustment Price Adjusted Hash/Share Price/mhs Div/share Yield/year Cost/BFMines
Contract 0,062000 0,003924 0,058076 3,00 0,0193585 0,000048 30,11 % 550 %

Statement: PAJKA has been a long-running mining contract that got a recent price adjustment due to a certain investor getting panic an selling a large portion of the shares. Note that PAJKA also is scheduled for an upgrade so check below.

PAJKA Upgraded

Type Price Adjustment Price Adjusted Hash/Share Price/mhs Div/share Yield/year Cost/BFMines
Contract 0,062000 0,019622 0,042378 15,00 0,0028252 0,000240 206,31 % 80 %

Statement: When PAJKA gets its new hardware in two weeks (that’s still a joke), the issuer will upgrade the contract to 15mhs. At that point, the current price will compete with both BFMines and TAT.VM. Note that the adjustment is based on receiving the hardware today (which isn’t likely) and thus that the final adjustment will likely be lower and thus less competitive.

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.

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!

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