Why I Bought a Mining Contract on CloudHashing - Part 1

Discovering Bitcoins

With all of the talk excitement around Bitcoins on the Internet recently, I decided to look into the whether a Bitcoin would be a viable currency option for my online side venture, HITsWorthTurkingFor.  What particularly interested me in the subject was the Bitcointip bot on Reddit, which would enable us mods on /r/HITsWorthTurkingFor to make almost seamless, transparent payout transactions at much lower transaction fees than we are currently paying on Amazon Mechanical Turk.

After doing a little research, I realized that Bitcoins could work for our operations, though the volatility of the currency exchange was certainly and continues to be a going concern.

Here's a valuable FAQ that will start to get you familiar with Bitcoin.

Bitcoin Mining

Through my research, I stumbled upon a a side path of Bitcoin operations, namely the prospect of Bitcoin mining - where powerful computers and graphics cards would decipher the codes that keep the cryptocurrency secure. This is an essential step in the Bitcoin process, because it validates transactions made in Bitcoin. The miners receive a significant amount of coins in exchange for allowing the currency, currently this amount is 25, but will be cut in half after every 210000 blocks have been mined.

Here's an interesting wiki on bitcoin mining.

At first, the barriers to entry into mining were too high for me to get interested. The payouts were also unenticingly low when the market price for Bitcoins was < $10 USD. But the price spiked in March to nearly $200 and now they fluctuate somewhere between $60 to $100, which brought much more interest into the realm of Bitcoin. Additionally, the barriers to entry have been greatly reduced now that various companies are offering mining-specific computer equipment (called ASICs, or Application Specific Integrated Circuits) at reasonable pricing relative to the market price of Bitcoins.

Proprietary Mining

One of the companies offering an ASIC is Butterfly Labs, which offers a small unit that can mine $100 of Bitcoins a month (at current market price and current complexity of the hashes) for $274. This means that you can essentially get back your investment within 3 months, which translates to a 400% return on initial investment for the year.

Risks

400% returns are nearly unheard of and usually too good to be true. And to some extent, this return likely is too good to be true because the volatility of Bitcoins will likely make the income less - and possibly much less if the bottom of the market falls out. Another concern is that the hash complexity increases as the mining capacity goes up. This helps regulate supply vs. demand, but with so much interest in Bitcoins as of late and with the number of ASICs coming online within the next few months, capacity is expected to skyrocket. As a consequence to all of this extra capacity, the time it will take to solve complex hashes will skyrocket as well, which means it will take up more computing power to make the same amount of money.


Computing power costs electricity - you have to consider electricity expenses for running the unit, which for Butterfly Labs' smallest, most inefficient unit will be about 30W to 50W to continuously run the unit, which would be like leaving a 50W bulb on all day, every day, which at current prices is somewhere around $5 to $10 a month. That's one fixed cost each month that almost all miners will incur. As the number of bitcoins mined goes down, the profit margin will too until it may not be worth it to mine because expenses will be higher than revenue earned. In fact this has already happened once before in 2011, when the market rate of coins were < $10, it actually cost more money to run the graphics cards that solved the algorithms than the cards would make. Many people dropped out of the market at that time, reducing capacity, and so the complexity went down, making mining worth it for some people again.


When running your own mining hardware, you also have to consider additional and risks and expenses. Since solving a block is a race, smaller proprietary units may not be able to solve the chains before someone else does, so a lot of smaller miners join up with others to form mining pools. Mining pools use their entire capacity to solve a block, and so they will - more often than not - end up solving the block that they work on. However, there are usually fees associated with joining a pool. While typically these are under 10% they could end up being a significant amount of your net income.

Here is a list of Bitcoin mining pools.

Another concern is the risk that your unit may have to be taken offline. Many of these ASIC suppliers are just now coming online with their product, which means the early adopters will incur greater unforeseen defects on their purchases. So is the way of industry, consider Boeing, one of the largest and longest standing airplane manufacturers had battery defects and fires on their newest model passenger jet, the Dreamliner. No company is immune to defects and the law of unintended consequences.

In fact one of the reviewers of the Butterfly Labs Jalepeno product, Lee Hutchinson at Ars Technica, had a defect in his unit that took him offline until he was able to secure a new one.  Fortunately Butterfly Labs provides a warranty for manufacturer defects. Yet, having to take your unit offline can significantly reduce your income, especially if you're taking on the risk of having only one unit and no backup units.

Lastly the cost. In all but the Jalepeno product, the costs to enter the Bitcoin mining race are quite significant for the average 1st World citizen. $500 is about 15% of monthly household income for an average American family and most bitcoin ASICs cost over $1000. As stated above, while at current rates and hashes, this could be recouped quickly, the is no assurance that any of these factors will remain as favorable in the future nor that the early ASICs will perform as intended.

My recommendation - if you have some discretionary income and feel that the risks vs the rewards are worth it to you, then give it a shot. The barriers to entry are quite low and the potential reward, at current, is better than almost anything else available to the average investor. Just understand that you could lose your investment completely, as Butterfly Labs states right on their Bitcoin Mining page:

"Perhaps the best way to describe Bitcoin mining to the layman would be to say that it is somewhat like a cross between the California Gold Rush and the lottery."

 Well put.

Why I Chose CloudHashing

The reasons I decided to go with CloudHashing instead of purchasing a proprietary unit are fairly straightforward.

• I wanted to test out Bitcoin mining.
• I wanted to minimize personal risk and expenses.
• I felt more comfortable with their business proposal, efforts and location.
• I had a limited amount of discretionary income I was willing to spend on mining.
• I wanted sustainable capacity in a large pool.
• I wanted the option to be able to reinvest profits directly back into BitCoins.

As with any unknown startup, there are some serious reservations I have with the CloudHashing, but I like to explore Kickstarter and feel that this is not much different. So, I limited my initial purchase to $500. I'll get more into the details of why and what is next in my next post, Why I Bought a Mining Contract on CloudHashing - Part 2.