99% of the time when you read or hear something that says “make money from your computer doing no work”, you are usually correct to assume it is a scam. BTCs fall in that 1% where you actually can make money doing absolutely nothing (as your PC does all the work). So how can you “make it rain” with BTC?
Well there are two primary ways to make money with BTC: speculate on the exchange rate valuation for the BTC or by “mining” for BTC.
Speculating
If you are not familiar with speculation in regards to finance, speculating is regarded as:
The act of trading in an asset, or conducting a financial transaction, that has a significant risk of losing most or all of the initial outlay, in expectation of a substantial gain. With speculation, the risk of loss is more than offset by the possibility of a huge gain; otherwise, there would be very little motivation to speculate. – Investopedia
Speculating on the BTC exchange rate can be done by purchasing BTC at a specified exchange rate on MTGox/CaVirtex and holding onto the BTC in the hopes to sell it in the future for more than you spent. Although this might seem up your alley if you are a finance guy, you should understand this is particularly risky business.
This is because the BTC operates within its own economic sphere that has significantly different drivers then those in the traditional financial markets. When a natural disaster occurs to a prominent nation, financial markets will usually dip in response whereas the BTC market may be completely unaffected. To understand what these drivers are requires considerable insight into issues occurring within the BTC sphere. The other issue is that speculation can compounds on top of speculation. If the major driver in the BTC price is speculation, you are essentially facing an issue of a Ponzi scheme where early adopters profit from the late adopters.
This has occurred in the short history of the BTC multiple times. The most prominent example was on June 8, 2011, when the BTC rallied to its all time high of $32 USD = 1 BTC. Shortly after (really, in about two-three day) the BTC plunged to $20 USD = BTC). The primary reason for this increase in price was not because of some advancement in the actual viability of the BTC but speculators entering and exiting the market. Well-known media outlets reported on a site where BTC could be exchanged for illegal drugs (Silk Road). Some investors thought that the BTC price would increase as the “average druggy” discovered he/she could buy drugs online and anonymously with BTC.
It didn’t really amount though. BTC, at that time, was far from being an easy to utilize currency and Silk Road transitioned it website to the Tor Network (so access to the public became even more limited). As speculators saw the amount in BTC fail to rise over $32 (which only got to that point from the rampant speculating to begin with), they began to sell their BTC and the prices dropped accordingly. This continued in a slightly downward trend until MtGox’s website was hacked (arguably, a real driver in the BTC community), when this happened, BTC prices plummeted.
In conclusion, if you want to speculate on the BTC; understand it is not a guaranteed bet and really requires a deep level of understanding about the BTC community. It would be advisable to keep alert on the forums (Bitcointalk) to understand what is causing people to be confident/anxious and pick your investment vehicle accordingly.
Mining
We now get to my bread and butter: mining is the low risk way of making money with BTC.
Lets discuss what you will need to mine:
- An AMD Graphics Card (AMD 58XX, AMD 59XX, AMD 68XX, AMD 69XX, AMD 78XX, AMD 79XX)
- A GPU miner (I recommend GUIMiner)
- Pooled Mining Service (I recommend Deepbit)
- Your bitcoin application installed with wallet file (see prior post for install link)
As you can see, there is not a whole lot to mining. To elaborate further:
The AMD video cards are recommended, as they tend to have the most shader cores available to perform calculations. Nvidia graphics cards tend to lack the most shader cores and they don’t work particularly well with the OpenGL (which is used by GPU miners). At one point CPUs could have been used to mine, those days are long gone.
The same is true for individual mining, as it is also unlikely you will solve a hash by yourself. With pooled mining, you all work together to solve a hash. In return, you all get a certain % of the hash when it is solved (relative to your effort). Statistically speaking, your best bet is with the largest pool and Deepbit fits that bill. Deepbit offers two payout methods, a Pay Per Share and one where you only get paid when Deepbit solves a hash. With the Pay Per Share, you are paid a fixed amount per each work your video card does; regardless if Deepbit is the first to crack the hash. The rates are usually set per day and Deepbit provides you a tool to check what your estimated reward would be, although it usually works out to being at a 10-12% cost. The other model, as you might have guessed, pays you a percentage of the work you done when it solves the hash minus a fee of 3%. The Pay Per Share may be a good alternative if you prefer a consistent payout but if you are mining for more than a couple of days, you would be better off with one where you only get paid when a hash is solved.
Viability Assessment
So that is what you will need to get started, but before you do so; you need to be aware if you will be making any money from Bit Coin mining or not. Here is what you need to know:
You need to be aware of how much Mh/s (essentially, how “quick” your video card can perform a task) you can get from your graphics card. The website link provided in the “links” section should provide you with a rough estimate of how your video card performs. Performance can also be increased by overclocking and running custom flags in the miner (to dedicate more of your video card to task) but given the thousands of variables here, I won’t discuss any of them in specific here.
You need to be aware of current difficulty levels and how much BTC your video card will produce a day. On Deepbit’s website, a counter is provided the estimate current difficulty level and can estimate how many BTC your video card will net you in a day. As difficulty changes every two weeks, a conservative estimate would be based on the highest increase in the past two-three months.
You will also need to be aware of the current exchange rates and any trends occurring in them to calculate what your payout will be in real dollars.
Finally, you need to be aware of your costs.
A variable cost in the BTC production is electricity. If your PC is now on all the time because you are BTC mining, this is an extra cost and will be reflected on your electricity bill. Having your video card at 100% usage, 24-7, will also increase your electricity costs. You need to be aware of how much energy your PC draws and then factor that in with your electricity rates.
A fixed cost is the video card and PCs needed for BTC production. If you bought certain items strictly for BTC, you will need to factor this in. If you are using items you already own, you need to factor in economic costs (what you are “losing” by having your PC mine). Another unexpected cost is that of dealing with the excess heat from the graphics card. To effectively cool your video card, you might require changing the ambient temps in your house (i.e. running the air conditioner or mounting a bigger fan) that you will also need to factor in. There is also the “noise” cost from having all these fans running to keep your video card cool.
Once you figure out these costs, you simply compare them to how much BTC you are expected. Pretty easy right? Well maybe this fairs a more indepth explanation. I will demonstrate with a profitability analysis of an example scenario:
Example Scenario
Back story
So I have a Radeon 7970 that I bought specifically for BTC mining that I would sell immediately after I am done (starting December 1st and ending December 31). I plan on BTC mining only for 1 month. I see that a 7970 can mine at a rate of 710 Mh/s and I can buy a 7970 for $440 from NCIX. As I leave my PC on all the time, the only extra electricity cost will be that from my video card. Based on reviews, I estimate this to be at 250W. I also know that my city’s electricity rate is $0.06/kwh. I don’t plan on using my PC this month at all as I am busy with holiday stuff, so there are no opportunity costs to factor in. Finally, I live in a small apartment building and expect that the warmth of the heat from the video card will reduce my heating costs by 10% (current heating costs are $40/month).
After going onto Deepbit, I find that 710 Mh/s returns 0.4 BTC/day (fees inclusive). I assume difficulty will increase in two weeks by 10%, so I expect my daily return to drop in two weeks from 0.4 BTC/day to 0.36 BTC/day and to 0.324 on the last 3 days. Looking at exchange rates from BTC to CDN, I see the low for the month was $5.50, the average was $6.10, and the high was $6.70 (fees inclusive). I assume that the probability the average price will remain is 50%, that the low will occur is 30%, and the high will occur is 20%.
I assume that the prices for my video card will remain fairly consistent in a month for my video card and I will be able to sell it at a $20 loss.
Looking at the stock markets, I find an aggressive portfolio can net me a return of 2% per month.
Revenue
Total BTC mined = [First 14 Days - .4BTC * 14] 5.6 BTC + [Next 14 Days - .36 * 14] 5.04 BTC +[Next 3 days 0.324 * 3] 0.972 BTC = 11.612 BTC
Weighted BTC to CDN price = [6.1 * .5] + [5.5 * .3] + [6.7 * .2] = $6.04
Reduced Heating Costs = [$40 * .1] = $4
Total Revenue = [$6.04 x 11.612 BTC]+ $4 = $75
Expenses
Electricity = [250W x 24 hours x 31 days]/1000 * 0.06 = $11.16
Depreciation/Loss at sale = $20
Foregone interest on original investment = [$440 * 1.02] – $440 = $8.80
Total Expenses = $39.96
Total economic profit = [$75 - $39.96] = $35.04
$43.84 (total financial profit) on a $440 investment in 1 month’s time is not shabby at all, definitely beats a 2% monthly return, that you would be hard pressed to find in the stock market, by a HUGE margin! Evidently, you need to decide what type of costs/revenue you will be making and decide if it is worth the endeavor or not. Hopefully the framework I provided above gives you a guideline on how to do so. Some final notes about the scenario above:
- I simplified aspects for brevity (i.e. calculating the discount rate)
- I simplified assumptions for brevity (i.e. time PC is spent on, if GPU is always mining, etc.)
- I simplified the amortization/depreciation of the hardware (it might be less or more)
- The timeline is not realistic, I don’t know why you would only mine for a month
- I assumed heat was a positive aspect, not so if you don’t live in the coldest city in the world
- I did not properly account for the noise issue, something that might be concern if you are nearby your PC
Links:
GUI Miner
GPU Comparison Chart for Mining
Deepbit
Silk Road Wiki