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Bitcoin

Can anyone explain it to me? Particularly the idea of “mining” them.

21 Comments

  1. john in cheshire says:

    NickM, as I understand it, someone called Satoshi Nakomoto developed an algorithm (if that’s the correct term) – a complicated calculation that has a finite number of solutions; I understand that there are something like 21 million solutions. This calculation is available to everyone who has a computer; and everyone can participate in completing the sums to produce the unique results. I believe something just over half the results have been achieved to date. Once a calc has been completed, it is recorded as a unique number (again my layman understanding); ie there can be no duplicates and websites (vague understanding of who or whom) are custodians of the unique and allocatable results. Once one is in possession of a unique number, this is termed a bitcoin and it is possible to digitally store this/these numbers either on a web storage area or on one’s own pc. There are websites that are set up for mining – which is, as I have said, just carrying out the calculations to produce the unique numbers; however, it now seems to be quite an industry not just for bitcoins, but for litecoins, namecoins and many others. Of course the more obscure coins – which are derived in a similar fashion to bitcoins – are of lower value (if that’s the correct term) than bitcoin – which might be due to all the publicity surrounding bitcoin – and therefore more of them, relatively, are mine-able at lower cost (bearing in mind that one’s pc has to be on all the while; I know, because I’m experimenting just out of curiosity; and of course it’s costing real money in power consumption costs. Bitminter is a site that’s understandable for people such as me. Other sites are so jargonised I have given up trying to understand what is going on. The next development then is that sellers of goods and services have now become interested in exchanging their produce for bitcoins, primarily. There are websites where bitcoins can be purchased; ie you buy a unique number. Trying to buy bitcoins, certainly my experience, because I’ve also given up on that front too; is quite difficult. The process here in England seems to be that one has to transfer GB pounds into either Euros or Dollars (and a fee will be charged) and then into bitcoins (and another fee will be charged). So, there’s real money being expended in this process and it can take several days; and you have to be wary of the site from which the bitcoins are purchased because the world is full of scam merchants. Also, many banks will not entertain allowing one to use one’s funds to purchase bitcoins, so that has to be taken into account too. In addition, as can be seen from the news recently, Bitcoin, particularly, is very volatile, so quite risky. One has to ask the reason for purchasing Bitcoins; if it’s for speculation, then I suppose if gambling is your thing, why not. If it’s to protect one’s wealth – then possibly in the long term. if it’s for more nefarious reasons, then I suppose the US government take down of the Silk Road website could lead one into a high adrenalin charged lifestyle.

    Does that help at all?

  2. John Galt says:

    Although it is possible to mine bitcoins using standard computer architecture, the cost in terms of standard PC hardware, processing time and power is not really justifiable as it costs more to run the software to do the mining than the resulting bitcoins are worth.

    One way around this is to develop ASIC’s (Application Specific Integrated Circuits) which have no overheads in terms of operating systems and exist only to churn out bitcoins. By having lots of these ASIC’s running in parallel, bitcoin mining is a viable business, but even so the bitcoin calculation has built within it a kind of technological inflation, such that over time it becomes harder and harder to calculate new bitcoins.

    A Bitcoin Farm running on multiple ASIC's

    There is also a maximum limit on the number of bitcoins that can ever exist (21 million) and this is hard-wired into the system to prevent dilution.

    Bitcoins themselves have no intrinsic value (any more than a paper dollar bill has) and they are only worth what people are prepared to pay to obtain bitcoins, for use in purchase of illegal items such as drugs from the Silk Road market on Tor or alternately to bypass currency restrictions (e.g. Argentina, Venezuela, etc.) or to undertake money laundering. There are some genuine sites which accept bitcoin, but I suspect that their primary use at the moment is to bypass state controls (not a bad thing in my view).

    There is also a problem of botnets capturing vast numbers of computer and then turning them into a vast virtual bitcoin farm, obviously this is more efficient (albeit illegal) for the botnet hijacker as they pay nothing for the hardware, cpu cycles or power of running this virtual bitcoin farm.

    There have also been a number of bitcoin hedge funds operating a form of pump-and-dump scheme in this unregulated market:

    01. Fund buys bitcoins heavily over a period of days/weeks
    02. The masses get bullish and start buying
    03. Funds stops buying
    04. Masses in bull fever continue buying pushing prices to new highs
    05. Fund starts selling to masses at new high making profit
    06. Masses run out of cash/bull prices start to fall.
    07. Fund continues selling pushing prices lower
    08. Cool Masses get bearish and start selling
    09. Fund stops selling
    10. Selling increases pushing prices to new lows
    11. Fund starts buying from masses at new low making profit
    12. Start all over again

  3. NickM says:

    JiC,
    Very much so! Thanks. So is it possible by setting my big old computer to make money by doing sums? NickM BSc MSc is curious for obvious reasons. Or is it just a cyberpunk Paypal?

  4. john in cheshire says:

    NickM, from my experience, you will not make any money using any PC let alone an old one. I have an old desktop; xp era; and it is barely making 30mh/s (this is the measurement term for mining equipment – meg-hash/second), my laptop has a dual core CPU and only manages just about 100mh/s and my i5 desktop just manages 450mh/s. and the power usage is quite high. Given that there are people out there running specialised rigs churning over many gigahash/s us little people are out of the running. However, for me, being of a practical mind, I tend to learn better by doing. Hence, this little excursion into the new world of electronic money. I’ve been mining for just over a month, although not continuously and all I have achieved in producing is something of the order of 10 pence in bitcoin equivalent. To stand a chance of making a profit, one would have to purchase a dedicated rig, as John Galt describes. And even then it’s getting harder to produce the bitcoins. My other thoughts therefore are turning to other cryptocurrencies, just for the hell of it. However, they are not as developed as bitcoin and hence I haven’t yet hit on a website that enables me to mine, for example, Litecoin.

  5. John Galt says:

    @Nick

    Try this here “Introduction to Bitcoin Mining” but be aware that although this will get you started, you won’t make any profit from your bitcoins (as in mining versus cost of hardware & power) until you get into the realm of running multiple ASIC’s.

    Even then, profits are very “peaky” and most people with equipment join pools to transform their equipment into a reliable income stream. It takes a lot of equipment, know-how and power to make money generating bitcoins and the most profitable are operated using stolen power (i.e. secretly hosted by IT staff in their employers computer facility), to remove the power and cooling element from the costs.

  6. Sam Duncan says:

    My understanding is that even ASICs are a mug’s game these days, and almost all miners are now only doing it out of curiosity, like JiC, rather than to make any money.

    By the way, Johm, I did find a Litecoin site – can’t recall where it was now – but to be honest even it isn’t worth the electricity now. I made a few pence in a week; better than BC, but still a lot less than I paid for it. (Didn’t even bother putting it in my wallet, actually. What am I going to buy with that, a virtual toffee? So the owners of the site get a few free cents. It’ll help pay their costs.)

    It’s a bit frustrating, but I think we have to accept that we’ve all missed the boat as far as cheap crypto-cash goes. It’s worth installing the software, Nick, and maybe mining for a while just to see how it works, but it’ll cost you money rather than making it. “Cyberpunk PayPal” might sound dismissive, but yes, that’s more or less what it is now, and no bad thing at that.

  7. I suspect that Mr S.N. is actually Max Keiser – an American who works for Mr Putin.

    It is amusing that Bitcoin people, who tend to be horrified by the NSA and the CIA, are almost certainly an, unwitting, part of an FSB operation.

    That does not mean that the idea is a bad one (who knows?), but people should know who they are getting into bed with.

    Especially as Max Keiser spends a lot of time or Russian English language television promoting Bitcoin under the mask of investigating it as a “journalist and commentator” ( rather than as the person who originated the project).

  8. NickM says:

    It seems like a kinda twisted version of stuff like Folding@Home which involved distributed networks doing something to the purpose.

  9. CountingCats says:

    Nick,

    I started asking this question about a month ago, and did a bit of research. It is easy to find stuff.

    Thing is, while there are only 21 million possible bitcoins, they are infinitly dividable. So although there winn never be any more they are still, potentially, capable of being used for any volume of transactions.

    The value has been going up and down like a ***** delicates, but the trend is up. I am considering buying some, quantity to be determined, sticking it in a wallet, and coming back in ten years to see if I have enough for a good dinner somewhere.

    I suspect one of two things will happen, either usage will follow an exponential curve, and they will take off into the stratosphere, or they will nosedive through lack of interest/usage. Thailand is already banning them as an inport/export trading currency, while Finland has formally announced it is more than happy with it.

    What they won’t do is tootle along at current usage. Either up or down.

  10. Philip Scott Thomas says:

    The how has been explained. For the why it’s best to start with asking Uncle Timmy.

  11. Julie near Chicago says:

    I just ran across this video from Stefan Molyneux. Haven’t watched it yet. Don’t know if it will be helpful or not. Be interesting to see Mr. Molyneux debating Peter Schiff on the subject.

  12. Julie near Chicago says:

    Well, on YouTube there’s a bar to click for the debate video. Anyway, here it is:

  13. The plus side of bitcoin – the limited supply (the fixed number-of-numbers is the big selling point).

    The minus side of bitcon – no nonmonetary use, and impossible to show anyone a bitcoin.

  14. John Galt says:

    While I agree with you, in a world in which the majority of transactions are electronic, is the lack of physical form that important? especially when one aspect of the use of bitcoin is that they can be used in anonymous transactions such as buying drugs from Silk Road or evading currency regulations.

    Having a form of cash which exists only in a virtual form that I can hide in a laptop and can’t be found by sniffer dogs or x-rays is surely a big bonus over having physical form?

    Equally, it wouldn’t be hard to create a physical piece of paper with a scannable QR code on it and voila, you have a paper version of a bitcoin.

    Bitcoin note

  15. By the way I hate this talk of “backing” which even Peter Schiff is guilty of. Either the commodity is currency or it is not. If the commodity is “backing” for something else that is the currency then the door is open to a total mess.

    People should talk in terms of the weight and degree of purity of the commodity – NOT in terms of “Dollars” and so on

    Electronic means of transferring the ownership of a commodity is fine (that is where debit cards and so on come in). But treating “bank currency” as some thing-of-its-own is a mistake.

    There should be special names (no “Dollars”, “Yen”, “Francs” and so on) – just weights of a certain purity.

    “Not Pounds and Pence – pounds and ounces”.

    Of course even gold and sliver may go if things get really bad.

    But they will hang on a lot longer than Bitcoin if things go bad.

    And gold and sliver will not be replaced by Bitcoin if things go really bad.

    In such circumstances gold and sliver would be replaced by lead – by bullets as the currency.

    I suspect that (if things go really bad) the ability to make bullets would be a more useful skill than the ability to “mine” Bitcoins – especially as the MAIN SELLING POINT of Bitcoin is that the number-of-these-numbers is fixed.

    In short – it makes no sense to talk of “mining” Bitcoins .

    By the way when S.M. talks of nonmonetary uses of Bitcoin he is being wildly dishonest (which is why he allows no reply AT THIS POINT of his argument, quickly changing the subject, it is an old political technique – alas I know it well).

    There is no nonmonetary use for Bitcoin – S.M must know that, yet he said the exact opposite.

    And if is prepared to give a false impression on that point – what else is he playing games about?

  16. John Galt says:

    Since most of the point of bitcoin is to bypass the problems with pure paper fiat currencies (ever increasing volumes in circulation, currency controls), then by definition when the collapse becomes so bad that we’re trading bullets as currency then we are either in full scale civil war or in a post-civil war economy, much like modern day Somalia.

    In either case, the value of bitcoin in such an economy would be moot as would any paper based fiat currency, about it’s only value would be for wiping your arse with. Try doing that with a bitcoin.

    Going by what happened in Argentina, precious metals would still be valuable as a store of value, but the problem that you have is that even the smallest gold coins are inestimably valuable in a collapsed economy and hard to easily fractionalise (historical pieces of eight aside), one of the lessons learned during the Argentinian collapse was that cheaper gold rings were easier to trade than the 99.99% pure gold coins as the purity of the coins wasn’t at a premium, since most gold transactions were on a scrap gold value basis.

    As second point is that the Argentinians were able to trade gold on the black market for fiat paper currencies such as the US dollar which was still a functional monetary instrument. We might not be that lucky when our turn comes.

  17. NickM says:

    Why gold? Or silver? Valuable, yes but horses for courses and all and all metals have value for specific purposes. I mean you might want Au for as wedding ring but Al for a Coke can and oddly enough I tend to drink Coke more often than get married – not being Liz Taylor and all.

  18. John Galt says:

    But if you’re trying to reconstitute a monetary system due to the collapse of ALL fiat currencies then moving back to money based upon gold and silver has some obvious advantages. I’m not talking about the uses for gold per se, just its use as the basis for money.

    It’s a lot easier to trade bits of metal for goods than pure barter is, which is why money was invented in the first place. No point reinventing the wheel.

    Equally, I suspect that we’d be at the level of basic sustenance (meat and vegetables) rather than branded sugar water. I suspect a lot of goods would be off-the-market during the actual economic collapse.

    Anyway, plenty of incentive to pray that the various fiat currency providers keep the plates spinning in the air for a bit longer.

  19. NickM says:

    “I’m not talking about the uses for gold per se, just its use as the basis for money.”

    But isn’t that arbitary? Why not also value titanium or uranium? Why is Au special? I mean my phone is built on an Al chassis and is tougher (therefore more useful) than will.i.am’s which is undoubtedly gold. Or something. Metals do have intrinsic value but due to their use. You do appreciate the NAA XB-70 bomber was largely built (on the sly) with titanium from the USSR (ha ha!). Cold forged titanium. The Ti here was what was need for Mach 3 cruise, not gold. That just wouldn’t have worked.

    What you need is what you need at the time and for the purpose. That is commerce.

  20. John Galt says:

    I agree, but I don’t make the rules.

    If you plonked a KG of gold and a KG of titanium and said to a 100 people “pick one”, how many people would pick the titanium?

    Gold! Gold! Gold! Gold!
    Bright and yellow, hard and cold
    Molten, graven, hammered and rolled,
    Heavy to get and light to hold,
    Hoarded, bartered, bought and sold,
    Stolen, borrowed, squandered, doled,
    Spurned by young, but hung by old
    To the verge of a church yard mold;
    Price of many a crime untold.
    Gold! Gold! Gold! Gold!
    Good or bad a thousand fold!
    How widely it agencies vary,
    To save – to ruin – to curse – to bless -
    As even its minted coins express :
    Now stamped with the image of Queen Bess,
    And now of a bloody Mary.

    Thomas Hood

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