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The State of Cryptocoin Mining - Pt 1

Published on August 21st, 2013 by ron

About Me

Hello, my name is Ron Frazier. I have an Electronics Engineering background.  I've been using the internet ever since it became available to consumers.  I've worked in maintenance on flight simulators, computers, and IT equipment, as well as doing programming and teaching.  I have interests in currencies, graphics design, fiction and non fiction writing, GPS systems, Linux, Android, and potentially robotics and VoIP.

About This Article

In this article, I will examine the state of Bitcoin and Litecoin mining for individuals using actual examples of my own GPU mining and theoretical examples of ASIC mining.  I do not personally own any ASICs at this point.  In part 1, I will discuss what Bitcoin and Litecoin are and how they work as a currency.  In part 2, I will examine mining in more detail and review whether it's profitable to mine or not. First, I should mention what this article is not.  It is not a tutorial on how to do mining.  Rather, it is an exploration of the potential financial profitability of mining for the average consumer without thousands of dollars to spend on it.  It does not attempt to document all possible methods, only to describe some methods I've used.  It does not give legal or tax advice, so you will have to find your own competent sources for that.  The readers may have various levels of expertise on the topic, but I do not assume any certain level of expertise.  I start with a little basic background first.

What is Bitcoin?  What is Litecoin?

Bitcoin and Litecoin are types of currency.  The currency has a floating value determined by the market for the coins.  Just like other currencies, they allow holders of the currency to exchange it with other people or companies for other currency, things of value, or services.  Bitcoin and Litecoin are subsets of general currency in that they are digital currency.  They exist fundamentally as bits of specialized digital data in a computer.  Although physical objects can be used to represent Bitcoins and Litecoins, this is not required.  This makes digital currency different from the coins and bills we're used to.  Digital currency can exist without ever having physical form. In some respects, you already use something like digital currency when you use your debit card.  Let's say your payroll deposit goes directly into your bank account.  You work for some period of time, and you collect, say $ 10,000.  You go to the ATM and look, and it says the money is there.  But ... IT'S NOT!  Yes, you can go into the bank and collect $ 10,000 in bills.  But everyone cannot.  We use a fractional reserve banking system.  Only a portion of all the "money" on deposit actually exists in the form of bills or coins.  All that money that doesn't exist in physical form is similar to digital currency, although normal people don't call it that. You use it like digital currency too.  You did some work and gave value to your employer.  They in turn gave you some value as wages.  You go to the pizza shop or the gas station and swipe your debit card and transfer some of that value to the vendor for pizza or gas.  And, the amount of "money" in your account goes down without the "money" ever having any physical form.  In that regard, your normal money, unless you "cash out", works just like digital currency. Bitcoin and Litecoin have a further attribute in that they are cryptocurrencies.  A cryptocurrency's fundamental technological structure is based on cryptography.  This gets insanely complex, more so than I understand, but the cryptography allows users to create digital coins, verify them, transfer them, and avoid some kinds of fraud.  You don't have to understand the cryptography in order to use Bitcoin or Litecoin.

What is A Bitcoin?  What is A Litecoin?

This is where things start to get a bit more complicated.  Here are some links that I find useful: Introduction - Bitcoin - https://en.bitcoin.it/wiki/Introduction Bitcoin - Wikipedia, the free encyclopedia - http://en.wikipedia.org/wiki/Bitcoin A Bitcoin or a Litecoin is a specific set of data residing on your computer or in your online wallet which denotes to the network that you own a certain amount of value.  In order to get Bitcoins or Litecoins, you would need to follow certain procedures to either create the coins by mining them or have them transferred to you from someone else.  The protocol and the network verifies the authenticity of the coins and the transaction.  If you mine some Bitcoins or Litecoins, you essentially create them out of thin air, and the balance in your wallet grows.  If someone transfers Bitcoins or Litecoins to you, their balance decreases and yours increases.

Why does a digital coin have value?

If you own a digital coin, why does that specific pattern of data on your hard disk have value that you can use and transfer to other people to buy things or services?  Essentially, because the players in the market say that it does.  I'm not being comical here.  Why does an old ratty chair on Antiques Road Show that intrinsically does what a $ 30 chair from Walmart does have a value of $ 50,000?  Because some collector is willing to pay that much for it.  The seller and the buyer agree on a price, and exchange the goods for the currency. In terms of digital currency, the players in the market appreciate the various advantages of digicoins over dollars or euros or yen, or possibly in addition to those.  If I have a Litecoin, it has value because I can go to BTCe right now and exchange that Litecoin for $2.36 or for BTC.024.  My Litecoin has value because the sellers in that market place have posted offers, through the exchange, to sell me their $$$ or BTC in exchange for my Litecoin.  Other exchanges have different prices.  But, if NOBODY was willing to sell me their $$$ or BTC ... or pizza for my Litecoin, then it wouldn't have value.  So, digicurrency can be used as currency, because we agree that it can. In part 2, I will examine mining in more detail and review whether it's profitable to mine or not. Ron  

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