The Bitcoin Novelty

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Lately I’ve been getting a lot of questions about Bitcoins; stuff about what they are and how do you mine them. As my title would suggest, the answer most of the times is, “You’re too late.” Bitcoin mining is now a novelty and anyone who says otherwise just isn’t coming to grasp with reality. One could argue that Bitcoins itself is also a novelty but let’s tackle one thing at a time. There are several arguments I’ve heard for mining. (1) My computer is on 24/7 anyway so I might as well put it to use. (2) It seems like an easy way to ‘print’ money/free money! Yea!. (3) I heard “insert name of friend here” made a lot of money from mining bitcoins and I want to do the same. (4) One day when bitcoins are worth a lot I will have some.

If mining isn’t your concern, you may want to skip over this next part.

There are other arguments as well but these are the most common. And for each argument here are my responses:

(1) Your computer may be on 24/7 but chances are, your graphics cards are idling at 100%-120% capacity. If they were, you should get them looked at or replaced. Once you start mining, your graphics card power consumption goes through the roof. My personal PC idles anywhere between 200-300W. I’m not going to list all my specs but it is going to be towards the higher end desktops and one of the more efficient GPU mining rigs as far as for every day practical usage. Once I start mining, I O.C. my GPU’s at 120%, my power consumption jumps to 1.1-1.2kW. So if I were to maximize my mining time to 24hours/day 30 days/month, I use 720kWh each month just for my computer alone. And lets say you have some ridiculously low rate of $0.08/kwh that’s close to $60/month. So my rig will put out about 1.3GHash/s when properly cooled. So at current difficulty on 2/5/14 I will average about 0.00025BTC/day. Lets say somehow I can get top dollar, $950/BTC; $0.24/day. But wait, what about electricity cost? $2/day. It doesn’t take a genius to know a quarter is a lot less than 2 dollars. Not only that, your computer is going to be putting off a lot of heat. And I mean a LOT. So now you’re going to spend more money on electricity to keep your room cool because as ambient temp rises, your PC cooling becomes less efficient and you overheat your GPU. So long story short, GPU mining is dead and has been dead for the last 6 months or so.

(2) But what about all those new mining hardware and mining rigs out there? Much more efficient; use less power much higher hash rate. My advice: Don’t fool yourself. Take BFL’s Jalapeno for example (I use it as example only because I have one so I can vouch for it’s performance). Advertised 5GHash/s (about 4 times the speed of my computer) 30W power consumption but it will actually push around 5.3GHash at 31W (and puts out a lot less heat). So great, lets do the same calculations, top dollar for BTC and super cheap electricity. ~$0.74 profit /day. So cool, we’re turning a profit, right? Not so fast. say you got one at the absolute cheapest price from ebay or somewhere (and it’s not beat to shit): Cheapest buy it now price is $200. so at $0.74/day it would take us about 9 months to break even. But wait! Theres more! Did I mention that the difficulty of mining is a direct function of the total network hashrate and that it’s been increasing exponentially? Rather than go through all the numbers, you stop turning a daily profit somewhere in July and you start losing money again. Even with the most efficient miner on the market right now, by August you will not be able to turn a profit and will not even have mined enough to pay off cost of the rig. And if you think the next generation of miners are any different good luck to you. Once new machines are out, the network will be saturated and you’ll be left in the same boat. So unless you want to gamble with several tens of thousands of dollars worth of pre-order mining equipment that has been known to ship well later than estimated shipping date, be my guest and make a couple grand.

(3) Same response as (1) and (2). Whoever you know who mined before, mined when the difficulty was low and barely anyone actually gave a damn about bitcoins. The game has completely changed.

(4) This one bothers me the most. If you acknowledge that you don’t generate enough bitcoins to make it worth now, but bank on them increasing in value later, why don’t you just go on one of the exchanges, BitStamp, BTC-e, MtGox, and just buy bitcoins? Just by sheer calculations I can guarantee you now, you will wind up with more bitcoins if you just buy them at the current price than trying to buy what’s on the market right now and try to mine them.

So now that mining is out of the question, turn to another aspect of Bitcoins that has recently been bothering me. The viability of Bitcoins themselves. So for those who know me, I’ve been a strong advocate of Bitcoins in the past. Yea, decentralized fiat currency, maintains a real value over other currencies which are subject to hyperinflation and national crises. Anonymity, cool. Built in security is a good selling point too. But as you take a closer look at each of these things, there’s a problem.

The first problem comes in the form of government. China, one of the major players in the Bitcoin economy recently announced a nationwide ban on financial institutions engaging in bitcoin related activities. The senate hearings were seen as a victory to many by acknowledging that bitcoins do have a place for use, but what they really mean is that they will keep an eye on it and make sure it doesn’t get out of control. Why would any major government want to primarily use a currency which they have absolutely no control over the value? Then you could argue that you would use BTC in conjunction with the dollar. Either use the dollar to buy a loaf of bread or some BTC. But with the price of BTC changing all the time, think about how much trouble it would be to have to change one of the prices to correctly reflect the other, even if it was once a week. I find it very hard for many retailers to be able to keep up with both, so then you will find yourself with a currency that you can use in some places but not others. In the end, you’d still be relying on the dollar for the things that BTC just cant buy.

I know there’s already been some debate on the fact that senders of BTC are anonymous so you can use them to buy illegal paraphernalia and stuff like that. I’m not going to get into that debate. I want to tackle the aspect of this anonymity thing. Well, unless you mined the bitcoins yourself, you probably bought them with some form of money that can ultimately be traced (I’m excluding these new bitcoin vending machines that are starting to pop up for the sake of argument) such as a wire transfer, credit card information, bank account. Though it may take some time and technical know how, there are ways to figure out what e-wallet the funds were transferred to. The premise of Bitcoins is that each transaction is encoded on to the end of the Bitcoin chain so that other users can verify the transaction. So great, if we can decrypt the block chain we can determine the sender and receiver wallet and the amount. The e-wallets are either stored on a computer, personal device or on the cloud through some provider all connected to the internet. quick trace to IP and MAC and bam! We have all the information to identify who sent how much to whom. Yes it would take a lot of work and technical know how but it is not impossible.

Now what happens if you purchase something with bitcoins and you’re not satisfied with the product or service. Well, in modern times you can go back to the retailer and ask for a refund. You give them your credit card or whatever form of payment and they simply reverse the charge or give you back the cash. In a way you can do this with bitcoins. Just have the ‘retailer’ send you back the appropriate amount. But what if you accidentally send someone too much money, or even worse, send it to the wrong person? Well with cash, it’s pretty hard to do that. To my knowledge the $1, $10, and $100 bills are all very distinct and chances are you know where the $100 bill is in your wallet if you’ve got one in there. And when you hand someone cash, usually it’s face to face so you know who’s getting it. Not so much with bitcoins. An extra digit can be easy to add or forget. Suddenly that gift you wanted to send someone of 10BTC became 100BTC. Are you going to try to track them down and ask for the 90BTC back? What if you sent them to the wrong address? Now you don’t even know who to ask for the money back. And in the realm of Bitcoins, there’s no undo button.

Last point I will make is volume and exposure. Simply put, the volume of Bitcoins on the market right now is minuscule. It has a market cap of only $10bln. What’s even more worrying is that a very, very, very, very minute amount of that is being used as a currency. Most of the Bitcoins that are sent back and forth each day are people trying to buy and sell them on exchanges. Bitcoins are being treated as a commodity rather than a currency. Congratulations you have bought yourself several digits and characters in cyber world that is worth xxx amount of dollars to the people who buy and sell these things. And exposure, the common misconception that everyone these days has a computer or smartphone or mobile device. I don’t know where these people are living but it sure isn’t anywhere I know on earth. With a median household income of USD$40k-50k, poverty line of ~$20k and a staggering 15% living below that, even in the wealthiest nation in the world a good number of folks don’t have access to a personal electronic device that they can use for Bitcoins.

Bitcoins are for the aristocrats of the world. A concept that they tout around on a string as a way to make the world better by being blind to reality. Don’t get me wrong, in many ways Bitcoins are ingenious. If done correctly it IS the ideal currency. But we don’t live in an ideal world. It’s the same reason why we are not currently living in Marx’s Communist Utopia. Just because something sounds good on paper, doesn’t mean it translates well into reality. And that my friends is why Bitcoins are just a novelty. Perhaps in several decades, something similar will come along and maybe the kinks will be worked out, but until then I’ll put my faith in the dollar.

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