Like it or not, bitcoins are sweeping the globe. Some see them as the future of currency - fast, secure, low fee - while others argue it’s ridiculous to assign value (currently in excess of $650 USD per bitcoin) to something that is nothing but numbers and letters on the internet. No matter where you fall on that spectrum, it might be worth taking a closer look. Bitcoins, although volatile and risky, could provide an excellent return on investment. You can buy them, receive them as payment, or mine for them.
How Can I Get Some?
Bitcoins are obtained via one of three ways:
- Purchase on a bitcoin exchange. You give them $650 USD (the current value), and you get one bitcoin in exchange.
- Receive them as payment for goods and services. Many businesses now accept bitcoin as payment.
These two methods are the way the average user will encounter bitcoins. You can buy them, or exchange them for goods and services. PLEASE BE CAREFUL. Bitcoin is an unregulated currency, with no central governing or insuring body (as the Mt. Gox fiasco showed). Their value could drop to zero at any time (as many economists and analysts have predicted...although others believe the value will continue to rise indefinitely). Bitcoins are a risk, albeit one that has so far proved quite lucrative.
The third and final method for obtaining bitcoins is through mining.
What is Mining?
According to Bitcoin.org, mining is the process of making computer hardware do mathematical calculations for the Bitcoin network to confirm transactions and increase security. As a reward for their services, Bitcoin miners can collect transaction fees for the transactions they confirm, along with newly created bitcoins (Note - currently 25 bitcoins). Mining is a specialized and competitive market where the rewards are divided up according to how much calculation is done. Not all Bitcoin users do Bitcoin mining, and it is not an easy way to make money.
How Do I Mine for Bitcoins?
Gone are the days when the average individual could mine on their own. The hardware required has become prohibitively expensive and specialized. The system is designed that way...the more coins that are mined (currently over half of the predetermined cap), the more processing power that is added to the network, the harder and more difficult it becomes to find new ones.
Mining is essentially a three step process:
Step 1 - Get Yourself a Bitcoin Wallet
Bitcoins exist only online, and really only as part of the public ledger. Your wallet is where you keep the code that proves you “own” a certain number of them. You need to install the bitcoin client software - available at Bitcoin, as well as other online portals - and download the blockchain (currently over 6 GIGABYTES, so make sure you don’t have any data caps on your wifi). Once installed, click on “New” to generate a new wallet address for yourself, and be sure to record the long string of numbers and letters. Another good piece of advice is to keep a copy of the wallet.dat file on a USB stick, or in the cloud. If your computer is lost, stolen, or destroyed, and you don’t have that .dat file, your entire wallet is gone...along with any bitcoins you may have. Coinbase is another good place to obtain a bitcoin wallet.
Step 2 - Join a “Pool”
The equipment required to go it alone is cost-prohibitive (you need an incredible amount of computing and processing power), so most people join a group that puts everyone’s collective power into a shared pool. Any bitcoins mined are shared by the group. The most popular - and one that allows virtually anyone to potentially earn from mining - is Slush’s Pool (there are others...a simple Google search will reveal plenty of choice). BTC Guild is another popular choice.
Whatever pool or group you ultimately select, you simply follow the sign-up instructions on their website, create “workers” in your account (each with its own unique ID), and add your wallet address. Any bitcoins (or more accurately, parts of a bitcoin) that you receive as a member of the group go directly into your private wallet.
Step 3 - Install the Mining Software
Once you have your wallet and have joined a pool, you need to install the actual mining software on your computer. There are a number of available options, but GUIMiner (for Windows) and Asteroid (for Mac) seem to be two reliable choices. Install the program, and follow the steps to enter your pool and worker(s) details.
The software works to solve a computationally difficult problem. If it does, the block of transactions is unlocked, everything is compared against the official public ledger (because every transaction involving bitcoin is open to the public, every new transaction can be compared against every other transaction ever made), and if everything lines up, the new transactions are verified and added to the end of the public record to be used against future transactions.
That’s the basic set-up. You need a bitcoin wallet, you need to join a pool, and you need to run mining software on your computer. The more power and time you contribute to your pool, the more you’ll receive if (and that’s a pretty big if) the pool mines some bitcoins. Truthfully, the hardware and processing power required now is far beyond the typical computer, and the likelihood or making any money from mining is slim. Not impossible, but not great, either.
Me? I think I’ll continue to keep my money under my mattress. For now.
Photo by Janet Lindenmuth
Creative Commons License