Bitcoin Warning Signs for New Investors

bitcoin warning signsBitcoin warning signs for new investors are increasing rapidly as negative reports tarnish the once bright image of the world’s leading digital currency. Before the spectacular collapse of the Mt. Gox Bitcoin Exchange on February 7, 2014, after an estimated 745,000 Bitcoin worth approximately $9.5 billion went missing, the only people who were aware of Bitcoin’s promise of a fast track to easy wealth were computer geeks and currency traders. Stories about Bitcoin billionaires surfaced and disappeared again as the news media, obsessed with Obamacare, failed to pick up on them.

After Mt. Gox collapsed, Bitcoin suddenly became front page news all over the world, and millions of would-be Bitcoin miners have been looking for a way into the business ever since, despite recent Bitcoin warning signs, including an IRS decision to tax Bitcoin as real property, ending a presumed tax exemption for Bitcoin currency speculators. Russia, China, Australia, New Zealand and Iceland have either banned or restricted the use of Bitcoin within their jurisdictions. Iceland released its own auroracoin digital currency on March 25, issuing 31.8 coins (equal to $400 US) of the currency to each citizen in an attempt to revive the country’s moribund economy. Since then, auroracoin’s value has dropped from $12.58 per coin to $1.16.

The most telling blow to strike the embattled digital currency movement has been the precipitous collapse of Bitcoin values, which have fallen from a record high of US $1124.74 on November 29, 2013 to $423. Nevertheless, more and more people are looking at Bitcoin mining as a means to fast, easy money. Those numbers are reflected in the shrinking earnings in the Bitcoin mining industry. Last week, miners’ weekly earnings were down by 40.9 percent to $14.9 million compared to weekly earnings of $25.2 million in December, before the bad news began to accumulate.

bitcoin warning signs

Not so fast, warns Vancouver Island’s Jonathan Kervin, owner of Kervin Marketing, a confessed computer geek who has been studying the Bitcoin mining process for the past six months. Kervin, who has a small Bitcoin mining “guild” of his own, believes that newcomers can still make money “mining” digital currencies but only with the right equipment and under the right circumstances.

Kervin first heard about Bitcoin mining from fellow computer geeks. Over the past six months, his research has shown it is quite possible to make money mining digital currencies, but would-be Bitcoin miners have to do the homework required to understand the industry.

For the uninitiated, Bitcoin “mining” is the process that creates Bitcoin by solving a complex mathematical equation through the use of specialized computers. Bitcoin miners work together on a global peer-to-peer network, logging onto a central website, where they attempt to break the code protecting the Bitcoin database. The first Bitcoin miner to solve the current equation brings home the bacon.

Every time the code is broken, the Bitcoin system awards the Bitcoin miner that breaks the encryption code with a number of Bitcoin determined by the complexity of the code that was broken…and the system then adds more lines of code, making it more difficult to solve. In addition, the open source software that runs the Bitcoin system automatically upgrades the complexity of the encryption by another 10 percent every 10 days adding more lines of code to the equation that Bitcoin miners have to solve in order to earn more Bitcoin.

Bitcoin warning signs for new investors

Bitcoin mining machines are graded according to their Gigahash characteristics. One Gigahash is approximately equal to one billion computations per second. Eight months ago, a Butterfly 600 Gigahash Bitcoin mining card was priced at $2,196, or $3.66 per Gigahash, making it 151 times more powerful than typical PCs, which clock in at speeds up to 3.96 GHz. Today, a current AMT 1.2 terahash machine sells for $5,599 or $4.67 per Gigahash.

One of the most powerful systems is the relatively affordable $10,0000 3.0 Terahash (equal to three trillion instructions per second) unit from KNC. At the current hashing rate, this unit will break even in 102 days…but the complexity of the algorithm that must be solved will have doubled over those 100 days, so that the AMT machine’s operating efficiency will have been cut in half by then. Over the next 100 days, the complexity of the Bitcoin algorithm will automatically increase by another 10 percent every ten days so that, after 200 days, the machine will be running at 25 percent of its original efficiency, putting it out of the money as newer, faster machines flood the market.

With efficiency decreasing by 10 percent every ten days, the user may earn another $5000 before the machine is outclassed. A 50 percent net profit margin over 200 days is a reasonable return on investment, but the Bitcoin miner who owns that machine is going to be effectively out of the business unless the miner re-invests the profits earned after breaking even on the next machine.

The problem Kervin himself encountered while trying to get into the business is that many Bitcoin mining machine makers are six to 12 months behind their delivery date which means that, by the time those prepaid machines are delivered, they are already obsolete, too slow to earn any Bitcoin.

While some companies, such as Butterfly, are notorious for never hitting their delivery dates, others, likeBitman, are right on the money, delivering their machines often with 48 hours of confirmation. It is, however, difficult to recommend one company over another because things change so rapidly in this business.

Anyone thinking about getting into Bitcoin mining today who is not put off by the Bitcoin warning signs for new investors, should consider the risks carefully. Kervin recommends joining a Bitcoin mining guild, where members share their knowledge and processing power to generate better results. Be especially careful about purchasing used machines, because a six-month old machine is no longer competitive in the Bitcoin mining business. Not knowing this, newcomers often buy used machines to lower entry-level costs.

Used, older Bitcoin machines may be competitive, however, for  mining some other digital currencies, and are being used for that purpose.  Recently,  an increasing number of Bitcoin miners have shifted their attention to other digital currencies like Litecoin. A $3,500 Litecoin GPU system can generate $25 worth of coins per day, at a cost of $3 for electricity. Let the buyer beware, however, because the break-even on Litecoin is 159 day, one-third more than Bitcoin’s break-even point. The math indicates that, in this scenario, a Litecoin miner would be 450 days from earning enough money to replace the first machine with the updated model required go remain competitive.

Look for hardware suppliers with guaranteed delivery policies. Find the ones that offer upgraded chips to offset delivery delays. Consider manufacturers who only accept payment in Bitcoin, which will automatically adjust the price of the machine to the current value of the coins….and do not  ignore the Bitcoin warning signs for new investors. Remember your caveat emptors!

By Alan M. Milner
Look for me on Twitter:@alanmilner

Sources:
San Francisco Chronicle (via SFGATE)
Bloomberg News
CNN Money