If you want to join in
the bitcoin frenzy without simply buying
the digital currency at today's inflated prices, then bitcoin
mining is another way to get involved. However, mining bitcoins
does come with expenses -- and risks -- of its own. And the more
popular bitcoins become, the harder it is to mine them
profitably.
Unlike paper currency, which is printed by
governments and issued by banks, bitcoins do not come in any
physical form. That creates a major risk, as hackers could
theoretically create bitcoins from nothing. Bitcoin mining is how
the bitcoin network keeps its transactions secure.
Bitcoin transactions are secured
by blockchains, which make up a public
ledger of transactions. Because of how blockchain transactions are
structured, they're extremely difficult to alter or compromise,
even by the best hackers. But in order to secure these
transactions, someone needs to dedicate computing power to
verifying the activity and packaging the details in a block that
goes into the bitcoin ledger. And that's precisely what bitcoin
miners do. As a reward for doing the work to track and secure
transactions, miners earn bitcoins for each block they successfully
process.
The bitcoin founders have set a limit of 21
million bitcoins available for mining. Once that total is reached,
miners will still be able to benefit from transaction fees, but
they won't be granted bitcoins as a reward for their work. As of
mid-January 2018, approximately 16.8 million of those 21 million
bitcoins have already been mined. Assuming the bitcoin mining
industry doesn't change dramatically, it looks like we won't hit
the 21 million-bitcoin limit until the year 2140.
During the early days of bitcoin mining,
miners would often download a software package designed to allow
their computers to process bitcoin transactions in the background.
Unfortunately, that's no longer practical, because solving bitcoin
transactions has become too difficult for your average computer to
manage.
The bitcoin network is designed to produce a
certain number of new bitcoins every 10 minutes. If only a few
people are bitcoin mining at any given time, then the network will
be generous and share bitcoins readily in order to reach the
predetermined number. But now that bitcoin mining has become so
widespread, the network has become much stingier about handing out
bitcoins to miners. In order to control how frequently bitcoins are
generated, the network requires miners to solve more and more
difficult problems to confirm transactions -- which means that
miners must have more and more powerful equipment just to keep up.
These days, in order to have a chance at being profitable, miners
need to adopt one of two approaches: 1) buy specialized hardware
(aka a bitcoin mining rig) or 2) join a cloud mining pool.
To get started with your own mining rig, you
buy hardware designed for mining bitcoin (or some other virtual
currency), set it up, and let it run 24/7 solving bitcoin
transactions. Ideally, this will result in a steady flow of
payments without your needing to get involved.
While it's fairly easy to set up and use a
bitcoin mining rig, actually making money on the
process is something of a challenge. Because more and more people
are signing up to mine bitcoins, the mining process continues to
get more difficult and will likely keep doing so for some time.
That means the hardware you bought last year to mine bitcoins
probably won't be up to the job a year from now. And because
bitcoin mining rigs aren't cheap -- expect to pay at least $1,000
for the hardware, or several times that for a top-quality rig --
having to replace it every year or two takes a huge bite out of any
profits you make from mining. Plus, most mining rigs consume
enormous amounts of electricity, so you also have to subtract that
expense from the bitcoins you earn to determine your
profits.
If buying and maintaining your own mining
hardware doesn't appeal to you, then cloud mining may be the way to
go. Cloud mining companies invest in huge mining rigs, often
filling entire data centers with the hardware, and then sell
subscriptions to individuals interested in dipping a toe into
bitcoin mining. Your subscription to a cloud mining company earns
you a small percentage of the bitcoins that those mining rigs
yield.
The biggest challenge facing cloud mining
subscribers is avoiding fraud. The field is rife with
pseudo-companies that sell thousands of multiyear subscriptions,
pay out for a few months, and then disappear into the sunset. If
you decide to try cloud mining, do your homework in advance and
confirm that the company you're dealing with is
a real cloud miner and not a scheme. Preferably,
you'd pick a cloud mining company that's been around for several
years and has a decent reputation. Avoid companies with anonymous
domain registration (you can look up their registration info
at Network Solutions), as well as any mining company
that "guarantees" profits or offers huge incentives for referring
new customers; anything above a 10% referral commission is deeply
suspicious, because legitimate mining pools simply don't generate a
high enough profit margin to pay big commissions.
If you find a legitimate cloud mining company,
you'll still lose out on a portion of the bitcoins the company
generates, as said company will take its cut from whatever profits
it generates. Many cloud mining companies also charge a fee or
deduct a percentage of your take to pay for maintenance,
electricity, and other costs of doing business. And as bitcoin
mining becomes more and more competitive, the returns you make from
that multiyear subscription may sink to an unprofitable level.
Bitcoin may or may not be at
the top of a bubble, but bitcoin mining has
definitely become much less profitable as more and more people get
involved. You can help predict your profitability by using
a bitcoin mining calculator to crunch the
numbers, but even the best calculator can't tell you what the
situation will be like in a few months or years. In short, getting
involved in bitcoin mining today is a risky business. You might be
able to make a fortune, but you're more likely to lose big.
yahoo
In a newly published paper on the use of bitcoin for
illegal activity, researchers from the University of Sydney, the
University of Technology Sydney and the Stockholm School of
Economics in Riga indicate that a quarter of all bitcoin users are
associated with illegal activity.
The use of bitcoin for illicit purposes has long been
the most controversial aspect of the cryptoasset, although it has
taken a back seat to speculation around the bitcoin price over the
past few years.
In addition to estimating the scale of illegal activity
involving bitcoin, the research paper also claims this sort of
activity accounts for a significant portion of bitcoin’s intrinsic,
underlying value.
In the paper, which was co-authored by Sean Foley,
Jonathon R. Karlsen and Tālis J. Putniņš, publicly available
information is used as the basis to identify an initial sample of
users involved in illegal activity on the Bitcoin blockchain.
Seizures of bitcoin by law enforcement, hot wallets of darknet
markets, and Bitcoin addresses on darknet forums are used here, in
addition to the trade networks of users who were identified in this
data set.
Additionally, the researchers use a formula of their
own creation to detect users likely to be involved in illegal
activity by analyzing the entire public blockchain up until the end
of April 2017. The formula for detecting criminals on the
blockchain involves a wide variety of metrics such as transaction
count, transaction size, frequency of transactions, number of
counterparties, the number of darknet markets active at the time,
the extent the user goes to conceal their activity and the degree
of interest in bitcoin in terms of Google searches at the time.
“Bitcoin users that are involved in illegal activity
differ from other users in several characteristics,” the paper
says. “Differences in transactional characteristics are generally
consistent with the notion that while illegal users predominantly
(or solely) use bitcoin as a payment system to facilitate trade in
illegal goods/services, some legal users treat bitcoin as an
investment or speculative asset. Specifically, illegal users tend
to transact more, but in smaller transactions. They are also more
likely to repeatedly transact with a given counterparty. Despite
transacting more, illegal users tend to hold less bitcoin,
consistent with them facing risks of having bitcoin holdings seized
by authorities.”
The paper also notes that bitcoin transactions between
illegal users are three to four times denser, meaning those users
are much more connected to each other through their transactions.
This is consistent, the paper says, with illegal users taking
advantage of bitcoin’s use as a medium of exchange, while legal
users tend to view the cryptoasset as a store of value.
As with any research into the activities of criminals
on the internet, it’s important to take the findings of this study
with a grain of salt. Remember, this is a study on the activities
of those who do not wish their activities to be discovered in the
first place.
For example, another study Bitcoin
Magazine reported on last week indicated a much
lower level of illegal activity — albeit limited to the concept of
bitcoin laundering — on the Bitcoin network than what was found in
the study being reported on today.
Having said that, here are the levels of illegal
activity on the Bitcoin network, according to the study:
The study compares Bitcoin’s black market to the
markets for illegal drugs in the United States and Europe. In the
United States, this market is worth $100 billion per year. In
Europe, the market is 24 billion euros on an annual basis.
“While comparisons between such estimates and ours are
imprecise for a number of reasons (and the illegal activity
captured by our estimates is broader than just illegal drugs), they
do provide a sense that the scale of the illegal activity involving
bitcoin is not only meaningful as a proportion of bitcoin activity,
but also in absolute dollar terms,” the paper says.
While the amount of illegal activity taking place on
the Bitcoin network appears to be relatively large, the paper
indicates that the prevalence of this sort of activity has been
declining since 2015 as more mainstream users have entered the
market due to the interest in bitcoin as a store of value or
speculative asset.
The paper notes that the illegal activity involving
bitcoin is inversely correlated to the number of searches for
“bitcoin” on Google.
“Furthermore, while
the proportion of illegal bitcoin activity has
declined, the absolute amount of such activity
has continued to increase, indicating that the declining proportion
is due to rapid growth in legal bitcoin use,” says the paper.
The paper also indicates that privacy-focused altcoins,
such as Monero and Zcash, may be cutting into bitcoin’s role as the
currency of the online black market.
The paper notes that it’s currently unclear if bitcoin
is leading to an increase in black market activity or if this is
simply offline activity moving onto the internet.
“By providing an anonymous, digital method of payment,
bitcoin did for darknet marketplaces what PayPal did for [eBay] —
provide a reliable, scalable, and convenient payment mechanism,”
the paper adds.
According to the paper, this use case is the underlying
value of the bitcoin asset.
“Our paper contributes to understanding the intrinsic
value of bitcoin, highlighting that a significant component of its
value as a payment system derives from its use in facilitating
illegal trade.”
In addition to implications the online black market
could have on the valuation of the bitcoin asset (a claim that is
highly speculative as the bitcoin price has continued to see
tremendous gains in the face of declining use for illicit
payments), the paper adds that this realization also has ethical
implications: those who choose to speculate on the bitcoin price
may question whether they wish to provide liquidity for a payment
system that enables illegal online transactions.
This article originally appeared
on Bitcoin
Magazine.
..., the use of cryptocurrencies is a
violation of foreign-exchange rules. Singapore: Official warning Characterized – sometimes
with pride – as a nanny state, Singapore
has lived up to that label when it comes to ...
The financial-services industry has been undergoing a
revolution. But the driving force is not overhyped blockchain
applications such as Bitcoin. It is a revolution built on
artificial intelligence, big data, and the Internet of Things.
Already, thousands of real businesses are using these
technologies to disrupt every aspect of financial intermediation.
Dozens of online-payment services – PayPal, Alipay, WeChat Pay,
Venmo, and so forth – have hundreds of millions of daily users.
And financial institutions are making precise lending
decisions in seconds rather than weeks, thanks to a wealth of
online data on individuals and firms. With time, such data-driven
improvements in credit allocation could even eliminate cyclical
credit-driven booms and busts.
Similarly, insurance underwriting, claims assessment
and management, and fraud monitoring have all become faster and
more precise. And actively managed portfolios are increasingly
being replaced by passive robo-advisers, which can perform just as
well or better than conflicted, high-fee financial advisers.
Now, compare this real and ongoing fintech revolution
with the record of blockchain, which has existed for almost a
decade, and still has only one application: cryptocurrencies.
Blockchain’s boosters would argue that its early days
resemble the early days of the Internet, before it had commercial
applications. But that comparison is simply false. Whereas the
Internet quickly gave rise to email, the World Wide Web, and
millions of viable commercial ventures used by billions of people,
cryptocurrencies such as Bitcoin do not even fulfill their own
stated purpose.
As a currency, Bitcoin should be a serviceable unit of
account, means of payments, and a stable store of value. It is none
of those things.
No one prices anything in Bitcoin. Few retailers accept
it. And it is a poor store of value, because its price can
fluctuate by 20-30 per cent in a single day.
Worse, cryptocurrencies in general are based on a false
premise. According to its promoters, Bitcoin has a steady-state
supply of 21 million units, so it cannot be debased like fiat
currencies.
But that claim is clearly fraudulent, considering that
it has already forked off into three branches: Bitcoin Cash,
Litecoin, and Bitcoin Gold. Besides, hundreds of other
cryptocurrencies are invented every day, alongside scams known as
“initial coin offerings,” which are mostly designed to skirt
securities laws.
So “stable” cryptos are creating money supply and
debasing it at a much faster pace than any major central bank ever
has.
As is typical of a financial bubble, investors are
buying cryptocurrencies not to use in transactions, but because
they expect them to increase in value. Indeed, if someone actually
wanted to use Bitcoin, they would have a hard time doing so.
It is so energy-intensive (and thus environmentally
toxic) to produce, and carries such high transaction costs, that
even Bitcoin conferences do not accept it as a valid form of
payment.
Until now, Bitcoin’s only real use has been to
facilitate illegal activities such as drug transactions, tax
evasion, avoidance of capital controls, or money laundering.
Not surprisingly, G20 member states are now working
together to regulate cryptocurrencies and eliminate the anonymity
they supposedly afford, by requiring that all income- or
capital-gains-generating transactions be reported.
After a crackdown by Asian regulators this month,
cryptocurrency values fell by 50 per cent from their December peak.
They would have collapsed much more had a vast scheme to prop up
their price via outright manipulation not been rapidly implemented.
But, like in the case of the sub-prime bubble, most United States
regulators are still asleep at the wheel.
Since the invention of money thousands of years ago,
there has never been a monetary system with hundreds of different
currencies operating alongside one another.
The entire point of money is that it allows parties to
transact without having to barter. But for money to have value, and
to generate economies of scale, only so many currencies can operate
at the same time.
In the US, the reason we do not use euros or yen in
addition to dollars is obvious: doing so would be pointless, and it
would make the economy far less efficient. The idea that hundreds
of cryptocurrencies could viably operate together not only
contradicts the very concept of money; it is utterly idiotic.
But so, too, is the idea that even a single
cryptocurrency could substitute for fiat money. Cryptocurrencies
have no intrinsic value, whereas fiat currencies certainly do,
because they can be used to pay taxes.
Fiat currencies are also protected from value
debasement by central banks committed to price stability; and if a
fiat currency loses credibility, as in some weak monetary systems
with high inflation, it will be swapped out for more stable foreign
fiat currencies or real assets.
As it happens, Bitcoin’s supposed advantage is also its
Achilles’s heel, because even if it actually did have a
steady-state supply of 21 million units, that would disqualify it
as a viable currency.
Unless the supply of a currency tracks potential
nominal GDP, prices will undergo deflation.
That means if a steady-state supply of Bitcoin really
did gradually replace a fiat currency, the price index of all goods
and services would continuously fall. By extension, any nominal
debt contract denominated in Bitcoin would rise in real value over
time, leading to the kind of debt deflation that economist Irving
Fisher believed precipitated the Great Depression.
At the same time, nominal wages in Bitcoin would
increase forever in real terms, regardless of productivity growth,
adding further to the likelihood of an economic disaster.
Clearly, Bitcoin and other cryptocurrencies represent
the mother of all bubbles, which explains why every human being I
met between Thanksgiving and Christmas of 2017 asked me if they
should buy them.
Scammers, swindlers, charlatans, and carnival barkers
(all conflicted insiders) have tapped into clueless retail
investors’ FOMO (“fear of missing out”), and taken them for a
ride.
As for the underlying blockchain technology, there are
still massive obstacles standing in its way, even if it has more
potential than cryptocurrencies. Chief among them is that it lacks
the kind of basic common and universal protocols that made the
Internet universally accessible (TCP-IP, HTML, and so forth). More
fundamentally, its promise of decentralised transactions with no
intermediary authority amounts to an untested, Utopian pipedream.
No wonder blockchain is ranked close to the peak of the hype cycle
of technologies with inflated expectations.
So, forget about blockchain, Bitcoin, and other
cryptocurrencies, and start investing in fintech firms with actual
business models, which are slogging away to revolutionise the
financial-services industry. You won’t get rich overnight; but
you’ll have made the smarter investment. PROJECT SYNDICATE
ABOUT THE AUTHOR:
Nouriel Roubini is Professor of Economics at the Stern
School of Business, New York University, and CEO of Roubini Macro
Associates.
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