Introduction

Let's be honest with each other, if you're reading this article then you are probably like me and thinking about jumping on the Bitcoin bandwagon but have realized the easy ship already sailed. Perhaps you actually heard about them back in November 2008 when the mysterious Satoshi Nakamoto published Bitcoin: A Peer-to-Peer Electronic Cash System (pdf). But it was a lot of crypto math so you blew it off. Bitcoins were a fad between 2009 and 2010 for small circles, so you blew it off then, too. As a matter of fact, you probably forgot all about them until 2013 when all of a sudden the currency spiked to $260 in the spring. And even then you thought, just a fluke, it'll never amount to much more whereupon you felt smugly vindicated when the price dropped. But then in winter 2013, Bitcoins were all over the news when the price broke $1200 each. This is probably when you started thinking seriously about getting in on the action ... and thus, here you are.

Cold Reality

You missed the boat for easy money. It's that simple. But you can still get in on the Bitcoin action, its just not cheap anymore.

What Happened

In those early days it was certainly possible to go at it alone with some mining software and simply allow your CPU to crunch away at the SHA256 hashes finding blocks and being rewarded with 50BTC (imagine ... $50K today for letting your computer not idle). But soon the progressive difficulty of the computations began rising and solo mining wasn't the best option. Pools became the next best way to handle crunching the data and miners aggregated their CPU horsepower together to find new blocks much faster and each receive a fractional share of the work. But again, the progressive difficulty rose and CPUs were no longer fast enough to find blocks quickly with only low MHash/s speeds (but usually just high KHash/s).

Software was written to take advantage of the massive parallel processing power in GPUs that were also highly optimal for these calculations, typically taking advantage of OpenCL. Soon, everyone began buying up ATI/AMD Radeon graphics cards to raise their hashing rates into the hundreds of MHash/s. This worked well through 2013 for many people, though soon the math began to get worked - are these power hungry graphics cards (each burning 300+W) producing enough Bitcoins to validate the electricity cost AND still make some money? That answer was leaning towards no even as the price per Bitcoin reached four figures. Despite that, I was just in a chat room where a fellow was cranking THash/s speeds with a custom built GPU rig utilizing 30 Radeon 7990 cards. If you have access to cheap (or free) electricity, it can still be done.

But most people don't have free electricity so companies at this point took risk and began building special hardware to process SHA256 hashes. They began with some FPGA devices but quickly resorted to specialized ASIC chips that offered GHash/s speeds while using a tenth of the electricity. Mining was affordable again and pre-orders were placed like crazy through summer and fall with folks hoping to get their hands on dedicated mining hardware.

Pick a Pool

There are plenty of options out there, but I chose BitMinter to start with. My reasons were poor, I just needed something to try it out and BitMinter had a Java client built into their page. Now, as mentioned before, CPU mining is over and Java isn't fast anyway. However, the client will make use of your GPUs so Java isn't much of a bottleneck as it merely has to pass data between the pool and your video card's processors. Anyway, my iMac's AMD Radeon HD 6970M is not awesome at this sort of thing (iMac's use mobility chips) and could only produce about 150MHash/s which nets a super lame 0.0001 BTC per day. According to handy Bitcoin profit calculators on-line, I could expect to make $14 a year like that while burning $300 in electricity. Yes!

At my iMac's native rate, I could solve a block going solo in about 1072 years. Or I could fork out some serious money to buy upgraded hardware to achieve 1GHash/s and reduce that solo rate to 160 years. Obviously, this is why being a member of a pool is useful since it's much better to gain fractions of BTC cumulatively than wait long past your death to have them.

There are actually many intelligent things to consider when joining a pool other than it having a Java client for lazy users. A very simple, but potentially lucrative pool feature is to find one that deals in more than just Bitcoins. This is called merged mining. For instance, BitMinter compares the submitted hashes against the NameCoin blockchain as well as the BitCoin blockchain. GHash.IO merges Bitcoin mining with NameCoin, IXCoin and DevCoins. You therefore get the benefit of mining multiple crypto-currencies for the same computing power.

Fees and payout plans are also a huge factor to consider. Obviously picking a pool that does not tax your earnings enormously is advised as those percentage takes for pool maintenance (and operator profit) will really nickel and dime you over time. Identifying a 0-10% skim off your mining is easy, just browse the Wiki comparison pages and read the pool's fine print. More importantly, you need to understand the payout system. Right now, PPLNS (Pay Per Last N Shares) are becoming very common. The different mechanisms have arisen due to miners "pool skipping" where the computational whales jumped into a pool with a simpler block to effectively steal all the shares before jumping again. An excellent description of the different reward systems can be found on the Bitcoin wiki.

Another factor is the mining pool's size. Obviously a big pool is going to solve blocks faster than a small pool because their collective processing power is greater. However, unless you're contributing a mammoth amount of that horsepower yourself, you are a very small fraction of that pool and your shares will be correspondingly small. Participating in a smaller pool increases your fractional share of the block reward. Interestingly, another reason not to join a large pool is to maintain the security of the Bitcoin blockchain itself. Security researchers have surmised that if a single pool were able to control too much of the blockchain, the overall value of the crypto-currency becomes unstable. Essentially, at least 2/3 of the overall participants must be, as they say, "honest" and not acting selfishly.

ASIC Mining

ASIC mining at home became pretty popular with the simple Block Erupter USB keys in the summer of 2013. These little units began their lives in the $10 range but jumped up in popularity due to their simplicity and immediate power savings over GPUs. However, they were only clocking at about 330MHash/s each but at their low price, people began buying lots of them and creating small ASIC farms in powered USB hubs. But even these little units were soon displaced by faster and faster specialized rigs. There are plenty of companies to choose from like Avalon, Block Erupter, Butterfly Labs, KnC Miner, Monarch and others that are all looking to get rich themselves selling you electronics.

I checked out Butterfly Labs after hearing about their popular "Jalapeno" model ASIC. But that unit had already retired and sold out with a 10GHash/s ASIC miner from their 68nm technology line representing the new economy model. Fortunately, I got one of the last remaining in stock units for $375 (they're all gone now). According to the profit calculators, if everything held steady, this unit would actually pay for itself in four months and net me about $800 profit over a year (compensating for electrical use, too). Of course, the company has lots more units in their inventory such as a $4200 68nm rack unit doing 250GHash/s as well plus a number of pre-order 28nm technology pieces advertised as reaching 600GHash/s. But I don't have that kind of money lying around whether its going to pay for itself or not - though I suppose a kidney could get me into the THash/s ballpark.

Before you get excited about building your own ASIC farm, you should know that buying from these Bitcoin mining companies is not like your typical Amazon purchase. (There are plenty of Bitcoin ASIC devices available through Amazon sellers though - generaly BitFury equipment). Like most Bitcoin exchanges, they don't accept credit cards because those violate the non-reversible nature of a crypto-currency when unscrupulous buyers initiate a chargeback. So you have to either pay with a bank wire or with Bitcoins. Well the whole point of this is that you don't have any Bitcoins so be prepared to pay with a wire which in turn means waiting for the electronic funds to transfer and be verified which ultimately took nine business days (and after that they "produced one" despite advertising them in stock so its been nearly 30 days).

Cloud Options

Getting your own ASIC mining hardware is a viable option as you can once again join a pool and produce fractions of Bitcoins daily for little more electricity than a few lightbulbs. But having a ton of ASIC units takes up a lot of space that really drags down your pimp pad's feng shui, plus all their little fans whirring away makes quite the noise. Wouldn't it be better if somebody else maintained that hardware and upkeep? There are several options emerging for jumping into a pool that offers as many GHash/s as you can buy without having to clutter your home with little black cubes and power cables.

Butterfly Labs is taking pre-orders for a share on their 28nm machine farm at approximately $10.83 per GHash/s. Despite being the lowest advertised price, it doesn't exist at the time of this article. A company called CloudHashing takes a slightly different approach by selling one year farming contracts at different service prices - with the entry level being their Silver Plan at 20GHash/s for $999 and the premium being their Diamond Plan at 2THash/s for a mere $35,000.

I actually opted for a different cloud service - CEX.io - due to the innovative approach they took towards cloud hashing. Essentially, CEX.io turned GHash/s into a tradable, derivative product and focused on allowing people to buy and sell computing power to each other. It just so happens they own the hardware but based on market conditions, somedays you pay less and somedays you pay more. Using a service like this eliminates your electric bill and hardware clutter, but that comes at a cost of a 3% maintenance fee. But while you "own" your GHash/s, it is actively hashing in your favor into their GHash.io pool (which supports merged-mining and has 0% pool fees). This seemed effective because if you grow tired of the mining game, you can always sell your horsepower back into the system whereas with owning an ASIC you have to find a hardware buyer.

I gave them a shot and bought $35 in Bitcoins which was a mere 0.05BTC. Truthfully, I went small on the first batch because I wanted to try out my first Bitcoin transactions on a small scale in case I had an accident. It would suck pretty bad to accidentally send a few hundred dollars to the wrong address. Remember, crypto-currency is irreversible! But the going rate for 1GHash/s was 0.0431BTC so I was able to start mining on their pool and get a cool status dashboard (which attracts the ladies of course). Sure, that's more expensive than Butterfly Labs projects, but it is much cheaper than getting locked into a full year with CloudHashing. Perhaps the price will drop when their competition comes on-line.

Direct Bitcoin Purchases & Trading

Earlier I commented on the process of purchasing hardware and cloud resources using Bitcoins. Of course, this is a problem if you don't have any and are pursuing this endeavor to get them. At least in the beginning, you need to go through some sort of intermediary to convert your cash into Bitcoins. Many folks will migrate to the largest exchange, Mt. Gox usually because of name recognition and its relatively proven track record for not having its accounts stolen. However, it's important to shop around to check out the various exchange rates and registration requirements at different locations. While Mt. Gox is known for stability, you will pay far more for a single Bitcoin than you will anywhere else (almost $100 more right now). Meanwhile, smaller exchanges ask a number of questions seemingly in order to validate the customer for wire transfers but a lot of those questions and document requests could easily be used for identity theft by a less than honest site operator (or hacker that compromises their data). Even if the exchange advertises itself as an incorporated entity in a country with decent laws, doublecheck the hosting location where you're about to send your information and account information with an IP geo-locator. It is very easy for these entities to host their infrastructure in Central America, Russia, Romania, or any number of places where you will have zero recourse in recovering stolen or hacked money.

Again, nearly none of the exchanges are going to allow you to buy Bitcoins off your credit card due to the chargeback scenario. You are going to have to either do a wire transfer or an electronic withdrawal from your bank account. I cannot stress enough that if you take the latter route, establish a unique account just for this purpose that only has the money you intend to use. At least if they try to rob you, the rest of your funds are inaccessible.

I ended up choosing CoinBase for my initial purchase. To me, at least it was an American company despite the servers being located in Costa Rica. Additionally, their exchange rates and fees were very competitive and I was not required to disclose information about myself that would be conducive to identity theft. (NOTE: If you click the CoinBase link, sign-up, and actually use their service, we BOTH get a $5 referral award.) Their company is attempting to be a secure, on-line wallet for managing your Bitcoins as opposed to keeping them on your computer. I still opted to transfer my Bitcoins out to an address under my own control, but security is a personal choice. The transfers from the checking account into CoinBase take about four business days, but if you opt to go through their user verification process you can get instant transactions.

Although this section discusses converting your base currency into Bitcoins, just trading them may be a more lucrative means of profiting than mining. According to the profit calculators, it will take me several months to make a few hundred dollars. Had I instead opted to buy directly after the Chinese incident, it would have been possible to buy in the $600 range and sell again two weeks later at around $900. The risk here is that buying and selling Bitcoins is pure speculation no different than playing the stock market or real currency exchanges. The charts have shown large volatility in short timeframes in addition to arbitrage scenarios between the other crypto-currencies which given the right amount of attention would be somewhat easy to play against. The profit opportunities can certainly be more immediate and larger than the mining operations if you have the patience. An old friend commented on Bitcoin speculating that your strategy could very well be, "Buy after every big bust. Wait 2 weeks. Roll a D20 every morning thereafter and sell if you hit THAC0 7" and you might just match all the people guessing anyway.

Summary

It is still possible to play in the Bitcoin mining world but it's largely a pay-to-play game now. CPUs are not powerful enough nor is the GPU in your existing computer. The custom built rigs with multiple high-end GPUs can produce the right hash rates but they are very expensive up front and consume astronomical amounts of electricity. The ASIC hardware is no longer entry level with prices over $1000 for the basic equipment (yes, cheaper stuff exists but the hash rates do not warrant a realistic likelihood of getting enough Bitcoins to spend).

The only real way to get in on the Bitcoin mining action now is to join a cloud hashing pool. The pooled approach to collective mining is the only way for commoners like you and me to still participate in Bitcoin mining and CEX.io is interesting because you can bid on exactly the rate you wish to buy (and have the safety of selling it back to ever increasing demand). As the old adage goes, "you have to spend money to make money," which aptly applies to the cloud where an upfront investment in a higher hash rate can reap the benefit of the existing price and the current "lower" computing difficulty (because it will increase). Or you can simply bite the bullet and simply trade Bitcoins as a commodity item directly where hopefully you buy low and sell high.

Consider a Bitcoin donation to 1Ac9npGDQM3mzeNdgJJBTGG7z4KNtAxVps if you're feeling generous and found this article helpful. Thanks!

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