We all saw it coming with Bitcoin, but it’s temporary, as with any good investment!
With the quick growth of Bitcoin’s stock portfolio over such a small time-span, it was bound to have a crash in price eventually, and that is probably where we are headed. Crypto-currencies are a lot more reliable than any sort of fiat currency or gold-backed currency; but arguably, that is only because they are worth money in the fiat currencies and gold-backed currencies.
Here’s what Bitcoin’s stock value has looked like over the course of the previous year up until now:
Is the crash permanent?
No! As a currency, Bitcoin holds value as an asset that is backed by it’s value in how it is acquired, and the process in which Bitcoins are generated.
Bitcoin mining is the process by which transactions are verified and added to the public ledger, known as the block chain, and also the means through which new bitcoin are released. Anyone with access to the internet and suitable hardware can participate in mining. The mining process involves compiling recent transactions into blocks and trying to solve a computationally difficult puzzle. The participant who first solves the puzzle gets to place the next block on the block chain and claim the rewards. The rewards, which incentivize mining, are both the transaction fees associated with the transactions compiled in the block as well as newly released bitcoin.
You can clearly see how this has much more potential than a fake ‘federal’ privately-owned bank that prints money out of thin air, backed by nothing, at any amount.
The folks at investopedia.com break down what bitcoin mining is in-depth quite nicely:
The amount of new bitcoin released with each mined block is called the block reward. The block reward is halved every 210,000 blocks, or roughly every 4 years. The block reward started at 50 in 2009, is now 25 in 2014, and will continue to decrease. This diminishing block reward will result in a total release of bitcoin that approaches 21 million.
How hard are the puzzles involved in mining? Well, that depends on how much effort is being put into mining across the network. The difficulty of the mining can be adjusted, and is adjusted by the protocol every 2016 blocks, or roughly every 2 weeks. The difficulty adjusts itself with the aim of keeping the rate of block discovery constant. Thus if more computational power is employed in mining, then the difficulty will adjust upwards to make mining harder. And if computational power is taken off of the network, the opposite happens. The difficulty adjusts downward to make mining easier.
In the earliest days of Bitcoin, mining was done with CPUs from normal desktop computers. Graphics cards, or graphics processing units (GPUs), are more effective at mining than CPUs and as Bitcoin gained popularity, GPUs became dominant. Eventually, hardware known as an ASIC, which stands for Application-Specific Integrated Circuit, was designed specifically for mining bitcoin. The first ones were released in 2013 and have been improved upon since, with more efficient designs coming to market. Mining is competitive and today can only be done profitably with the latest ASICs. When using CPUs, GPUs, or even the older ASICs, the cost of energy consumption is greater than the revenue generated.
So how is this profitable, really? Other than investing?
Basically, you’d have your computer run algorithms and solve puzzles in your sleep, which would slowly generate value for the Bitcoin currency itself. Not only that, but the fact that you can invest in Bitcoin in a global stock market now makes the currency of course worth thousands of times worth more what it was worth before.
The question so much isn’t: “Is Bitcoin profitable?”, as your question should be, “How much am I willing to invest into hardware and crypto-currency technology?”.
Currently, if you want returns on all of your investments, or to make any real money at all with Bitcoins, it will take investments, other than stock investments. It’s going to take a lot to determine if this is a profitable venture for you. This starts with having the knowledge behind getting into Bitcoin. The basics, the hardware you do-infact need, and what kind of budget you have set for yourself.
Some Terminology to help you out:
- Hash Rate – A Hash is the mathematical problem the miner’s computer needs to solve. The Hash Rate is the rate at which these problems are being solved. The more miners that join the Bitcoin network, the higher the network Hash Rate is.
- Bitcoins per Block – Each time a mathematical problem is solved, a constant amount of Bitcoins are created. The number of Bitcoins generated per block starts at 50 and is halved every 210,000 blocks (about four years). The current number of Bitcoins awarded per block is 12.5. The last block halving occurred on July 2016 and the next one will be in 2020.
- Bitcoin Difficulty – Since the Bitcoin network is designed to produce a constant amount of Bitcoins every 10 minutes, the difficulty of solving the mathematical problems has to increase in order to adjust to the network’s Hash Rate increase. Basically this means that the more miners that join, the harder it gets to actually mine Bitcoins.
- Electricity Rate – Operating a Bitcoin miner consumes a lot of electricity. You’ll need to find out your electricity rate in order to calculate profitability. This can usually be found on your monthly electricity bill.
- Pool fees – In order to mine you’ll need to join a mining pool. A mining pool is a group of miners that join together in order to mine more effectively. The platform that brings them together is called a mining pool and it deducts some sort of a fee in order to maintain its operations. Once the pool manages to mine Bitcoins the profits are divided between the pool members depending on how much work each miner has done (i.e. their miner’s hash rate).
- Profitability decline per year – This is probably the most important and elusive variable of them all. The idea is that since no one can actually predict the rate of miners joining the network no one can also predict how difficult it will be to mine in 6 weeks, 6 months or 6 years from now. This is one of the two reasons no one will ever be able to answer you once and for all “is Bitcoin mining profitable ?”. The second reason is the conversion rate. In the case below, you can insert an annual profitability decline factor that will help you estimate the growing difficulty.
- Conversion rate – Since no one knows what the BTC/USD exchange rate will be in the future it’s hard to predict if Bitcoin mining will be profitable. If you’re into mining in order to accumulate Bitcoins only then this doesn’t need to bother you. But if you are planning to convert these Bitcoins in the future to any other currency this factor will have a major impact of course.
Some possible hardware options:
BITMAIN ANTMINER S9 (BITCOIN MINER 13.5 TH/s)
Regular price: $3,898.00
Antminer S7 ~4.73TH/s @ .25W/GH 28nm ASIC Bitcoin Miner
Regular Price: $1599.99
(It’s on Amazon)
What about scammers and hackers?
There are scant instances of any sort of successful hacks or scams with Bitcoins, unless you call investing in a shill company a real scam. (it’s your own fault) As such though, it is good to know the negative things that have been associated with this currency as a result of criminal activity.
June 2011: Bitcoin user loses $500,000 in bitcoin to hackers
In early 2011, Bitcoin had been a tight-knit community of hobbyists. Mining bitcoins was easier back then: people could generate thousands of bitcoins using a conventional home PC.
That’s what allinvain, a user on the Bitcoin Talk forums, claimed to have done, amassing a fortune of 25,000 bitcoins. Bitcoins were worth pennies in 2010, but, by early June 2011, the price of bitcoins had soared to $20, making his bitcoins worth around $500,000.
Then, on June 13, disaster struck for allinvain. “I just woke up to see a very large chunk of my Bitcoin balance gone,” he wrote. Allinvain believed that someone had hacked into his PC and stolen the bitcoins from his hard drive, transferring them to an account controlled by the hackers.
If those coins had not been stolen—and he’d held on to them until today—they would be worth around $250 million.
August 2011: Wallet service MyBitcoins disappears from the Web
Bitcoin wallet services offer to store bitcoins on users’ behalf. These were initially portrayed as a convenience to the customer, but many of them turned out to be either insecurely run or outright frauds (it can be hard to tell, since the frauds tend to claim they were hacked).
One wallet service that was popular in Bitcoin’s early days, for example, was called MyBitcoin. In August 2011, the company disappeared from the Web, claiming the site was hacked.
This and similar experiences have made the Bitcoin community suspicious of online wallet services. With no real regulation, there’s no way for users to verify that a wallet service is reliable.
An exception to this is client-side Web wallets like the one offered by Blockchain.info. In these services, customer data is only stored in encrypted form on the server. Data is encrypted on the client side with a customer-provided password. That approach makes users less vulnerable than traditional wallet services where the service provider has direct control of the bitcoins.
March 2012: Hacked Web host leads to stolen bitcoins
Hackers exploited a vulnerability in the shared online web host Linode to steal at least 46,703 bitcoins—then worth more than $200,000—from several Linode users. That included more than 43,000 bitcoins stolen from Bitcoinica, an early Bitcoin exchange.
Bitcoinica suffered a second hack in May 2012 that cost the company another 18,000 bitcoins. It was then taken offline for a security audit. Bitcoinica didn’t survive these incidents. In August 2012, the site was sued by several users seeking the return of $460,000 in deposits.
One lesson of the Linode debacle is that Bitcoin-related businesses have to be extremely careful when operating on shared hosting providers. Bitcoins are secured by encryption keys. If any third party—either other customers or rogue employees—has access to customer data, they will be able to read the encryption keys and use them to transfer bitcoins away from their owners.
August 2012: Bitcoin Ponzi scheme is shut down
The Bitcoin Savings and Trust was a classic Ponzi scheme. Customers were lured in with a promise of high returns—seven percent per week—and new customers’ deposits were used to pay profits to previous customers.
The scheme shut down in August 2012, and a year later the government indicted organizer Tendon Shavers. The government accused him of raising more than 700,000 bitcoins from gullible customers. In 2014, a judge ordered Shavers to repay victims more than $40 million. The judge found the scheme had cost victims 265,678 bitcoins.
September 2012: More exchanges get hacked, shut down
In September 2012, a Bitcoin exchange called Bitfloor suffered a catastrophic attack. Attackers stole 24,000 bitcoins, then worth around $250,000. Bitfloor didn’t have $250,000 in reserves, so the theft effectively made Bitfloor insolvent.
Bitfloor resumed operations a few weeks later, hoping to earn enough in fees to repay earlier customers. But the effort was unsuccessful; Bitfloor closed its doors for good in April 2013, leaving frustrated users in its wake.
February 2014: Hackers bring down the world’s then-largest exchange
The Bitcoin world’s biggest financial fiasco was the collapse of Mt. Gox—then the world’s leading Bitcoin exchange—in 2014. Operated by French-born CEO Mark Karpelès from a headquarters in Japan, Mt. Gox was the main way people bought and sold Bitcoins from its foundation in 2010 until February 2014. Then Mt. Gox announced that 850,000 bitcoins had gone missing—likely stolen by hackers, the company said.
At early 2014 prices, those bitcoins were worth around $450 million. Today, they’d be worth $8.5 billion.
In July, US law enforcement officials announced they had arrested a suspect in the massive theft. A Russian man named Alexander Vinnik was the owner and operator of a competing Bitcoin exchange called BTC-e. The feds allege that he knowingly accepted stolen bitcoins from Mt. Gox and laundered them through his own bitcoin exchange.
The collapse of Mt. Gox left no shortage of angry customers. Ironically, the continued appreciation of Bitcoin’s value means that the bankrupt company could eventually be able to repay its debts in full—with piles of money left over. Mt. Gox’s assets and liabilities were frozen while the company worked through the bankruptcy process. The liabilities were frozen in terms of Japanese yen, while the company’s remaining bitcoins have ballooned in value—from around $400 each at the time of the bankruptcy to around $11,000 today.
Obviously, Mt. Gox’s former creditors believe they should be repaid in appreciated bitcoins, but Japanese law might not be on their side.
January 2015: Bitstamp exchange is hacked
In January 2015, the popular Bitcoin exchange Bitstamp reported that it had lost around 19,000 bitcoins, then worth about $5 million. The exchange survived the attack and remains a leading Bitcoin exchange today.
August 2016: Another exchange loses 120,000 bitcoins to hackers
In August 2016, the Bitcoin exchange Bitfinex announced that hackers had stolen $77 million worth of bitcoins. The company foisted these costs on to users, forcing them to take a 36-percent reduction in the value of their deposits.
Bitfinex is still around, but there are big questions about the company’s credibility. As the New York Times puts it, Bitfinex is an “opaque operation that provides no information on its website about where it is or who operates the company.”
It is most important to remember that bitcoin is a big gamble, and any investment in it should be treated as such. To take attempting to step into the industry lightly, would lead to your own peril. Tread with caution when it comes to crypto-currencies. There are many, many out there, all with their own unique potentials. It is also worth noting that Bitcoin could be a shill currency, as the founders of it were murdered.
Food for thought.