I spent the past few days learning about bitcoin and here is my summary so far.
Update: I will keep adding links and other information on this page. I have added other links about the background and economics of bitcoin whilst this review only focus on the coin mining aspect.
Bitcoin is often referred to as a crypto currency or virtual currency, as opposed to fiat currency which we are all used to. Fiat currencies are often without intrinsic value, so it might be difficult to say it is any more “real” in comparison. The word crypto can lead to some negative misunderstanding, giving it an under-ground, gang-land, hacker-land feel. But in fact, all it means is that the validation of all transactions are done with digital cryptography, a specialized type of maths, best done with lots of computational power. Similar cryptography is already deeply integrated with all banking and Internet transactions.
Without talking too much about the history of this, which can be found at most websites talking about bitcoin, I will focus on the tech side and summarize it as a well designed system, fully open-sourced, with many high profile hacking groups tried to hack the system directly but have been unable to so. Most of the security breaches so far have been using common attack strategies on vulnerable (badly secured) targets. However, users are learning very quickly from these attacks and generally improving the security of the whole system quickly.
I have just started my own mining against most advice on the net saying that mining for bitcoin is over. From what I am seeing so far is that I have sorted out most of the issues I read about running your own mining scheme.
Power – you need to know about power, how to calculate and measure kilo watt hours. Need to be able to work out how much it cost to run the machines accurately and fully. Including all fans and accessories. Buy a meter to measure it, don’t guess it. You will also need to know the cost of electricity accurately with any price tier structures.
Internet connection – need a stable one, doesn’t have to be too fast. But needs to be always on. Be careful when using wifi to avoid disconnection.
Machines – hard to buy them. Most of them are on pre-orders which in my view is just a scam to fund the hardware makers to build and run their own miners whilst keeping you out of the game. Remember it is all about the cost + running cost per calculation power. The cheaper the better. The days of anything other than ASIC based mining is over. It started with CPU, then GPU and then FPGA, but we all know that ASIC is the final stage of the maturity, this is essentially having a dedicated processor designed for this kind of calculation. If you can’t get ASIC, don’t do it. And even with ASIC, make sure you are competitive with the pricing and running costs.
Heating – yes, the machines will run rather hot. You will need to think of ways to keep them cool. Not to forget that extra fans will cost extra in electricity. So it is best done in winter, in a cold and dry place.
Consistency – you need certain skills to keep a server up and running 24/7/365. Because 1% of downtime will be 3.65 days and it will reduce your income by 1%. Obvious but easily ignored. When you do the calculations, always assume that you won’t get 99% uptime. 80-90% is more realistic.
Patience – there is no quick win. It takes a long time even with the best machines to make the money back.
Accounting – make sure you budget and set targets properly. Not only the hardware, but the electricity cost is also an upfront cost. Make sure you can afford both in your budgeting. As a general rule. Your electricity bill will likely match your hardware cost in a year. Also to remember that mining gets more competitive each year by about 40%. So what you have today will earn you only 60% of what you are earning in a year. Invest accordingly in additional hardware to make sure you stay ahead.
Picking the right pool – there are many pools out there to choose from, each with slightly different reward and fee structure. Make sure you pick the best one for what you need. Some allows to mine for both Bitcoin and Namecoin at the same time with no additional cost to you other than a different level of fees. Also, make sure you have backup pools, so if one pool is down, you can always switch to another.
Planning on how to cash out – pick the right exchange and get ready to cash out when the price is right. The few big ones out there now can link to bank accounts and even paypal. There is no point of putting lots of money into this for real hardware and other costs without having a way to get the value out of it. Of course, you can use the bitcoins at the thousands of shops that already accept it, but it is good to have the option to get back the dollars and pounds you use daily.
Here are some of the links I have found useful so far.
What is Bitcoin?
TED Talks about Bitcoin
A deeper look at the technology behind Bitcoin
Lots of stats about mining and bitcoin
A good profitability calculator, I suggesting adding your own downtime factor to this, say 80-90%.
Various mining software
Average Price of Electricity worldwide