Bitcoin

HOW TO START USING BITCOIN

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You’ve learned what Bitcoin is and how it works. So now, why not actually start using bitcoins? It’s incredibly easy to send and receive BTC, and this guide will show you how to get setup as a regular Bitcoin user or a Bitcoin merchant. Let’s get started.

Learn how to buy bitcoins here.

Your Bitcoin Wallet

As with all forms of currency, you need a place to keep your money. With traditional (fiat) currency, most people keep a small amount of money in a wallet or purse while keeping the rest of their savings at the bank. Let’s see how to do something similar with bitcoins. While there are many different ways to store bitcoins, this guide will examine some of the easiest methods for new users.

In simplest terms, bitcoins are stored in digital wallets. A Bitcoin wallet is simply a piece of software that can store, send, and receive BTC. However, there are many different wallets to choose from, each with its own pros and cons. Regardless of what you choose, it’s a good idea to keep two wallets – one for spending and one for your savings. Bitcoin doesn’t rely on financial institutions like banks, and instead, users have complete control over their money. While this might sound like a huge responsibility, this guide aims to show how easy it is to be your own bank.

Your Spending (Hot) Bitcoin Wallet

Your first wallet will be used for day to day transactions, similar to the physical wallet in your pocket or purse. This type of wallet is also sometimes referred to as a “hot wallet,” meaning that it is connected to the Internet. One very popular and easy to use hot wallet is Blockchain.info, a wallet that can conveniently be accessed from anywhere in the world on any device as long as you’re connected to the Internet. To start using Blockchain, simply navigate to this page, and create an account. In just a few simple steps, you’ll have your own Bitcoin wallet!

Blockchain Wallet

After logging in to your newly created wallet, you should see something like this, minus the $31k.

Notice the QR code on the left and the text next to it. This is your Bitcoin address. If anyone wants to send you money, they send it to your unique address. If you want to send someone money, you go to the “Send Money” tab and enter that person’s address and the amount of bitcoins you want to send. It’s that easy.

Send Bitcoins

Sending money has never been simpler. You can send bitcoins to anyone anywhere in the world without expensive fees.

You may have noticed something interesting. You are encouraged to share your Bitcoin address. A Bitcoin address doesn’t need to be kept private and protected the way a credit card number does. Instead, a Bitcoin address functions much like a mailing address. Anyone can send you mail, but only you have the key to access the mail in your mailbox. Similarly, anyone can send bitcoins to your address, but only you have access to the coins you receive.

Compare this to a credit card number or a debit card number.If you want to make a transaction, you have to give the merchant total access to your funds, and trust that he/she will only withdraw the amount authorized. But with Bitcoin, you send the money rather than having the merchant take the money from your wallet. As you will see, Bitcoin eliminates the need to trust third parties (although in some instances it can be convenient to trust one), and is in many ways a lot safer than traditional money.

Speaking of third parties, is Blockchain safe? The short answer is, yes. Blockchain’s source code is available for anyone to examine, meaning that users can be sure that the service isn’t doing anything suspicious behind the scenes. Furthermore, Blockchain does not have access to users’ private keys and is considered sufficiently secure by most in the Bitcoin community. Of course, for the truly paranoid, you could download a desktop wallet client such as Bitcoin Core or Electrum. Since the software would be on your own computer rather than Blockchain’s servers, it could be considered more secure. However, the downside would be that your wallet would only be accessible from your computer. Services like Blockchain provide both convenience and reasonably good security, which is important for an everyday wallet.

Your Savings (Cold) Bitcoin Wallet

Now this is where you want to make as few compromises as possible regarding security. Your savings wallet will be similar to your savings account at the bank. Since you’ll be keeping most of your bitcoins here, you’ll want to use the best possible security. One of the ways to achieve this is by making your savings wallet a “cold wallet,” meaning that it’s not connected to the Internet. By remaining offline, a cold wallet is far less vulnerable to hackers. A very easy to use cold storage solution is Coinbase Vault.

Coinbase Vault is Now Available to All

Coinbase’s Vault offers easy to use long-term storage for bitcoins.

Without getting into the technical details, the way the Vault works is that Coinbase stores your bitcoins offline in various secure locations around the globe. Withdrawing coins from the Vault requires multiple layers of verification, and withdrawals are time-delayed by 48 hours, meaning the transaction can be cancelled during that 48-hour window. Coinbase has been independently audited by trusted members of the community, and is used by prominent companies such as Dell, Expedia, and DISH Network.

But of course, as mentioned above, you don’t need to trust a third party like Coinbase. It just might be more convenient, especially for newer users. To truly be your own bank, you can generate a paper walletor use an offline hardware wallet. But these are beyond the scope of this guide.

Using Your Bitcoins

So you’ve got your wallets set up. Now it’s time to start using those bitcoins! If you don’t have any BTC, you can buy some from a Bitcoin exchange. There are also some free ways to get bitcoins. But of course, the most basic feature of money is that it can be used to buy things. So where can you actually spend bitcoins? The list might surprise you:

accepting bitcoinsCompanies That Accept Bitcoins

1-800-Flowers
CheapAir
Dell
DISH Network
Expedia
Fancy
Namecheap
Newegg
Overstock
ProtonMail
Shopify
The Humble Bundle
TigerDirect
Twitch.tv
Wikipedia
Wordpress

– and so many others.

Furthermore, services like Gyft allow users to purchase gift cards for various stores with Bitcoin. This essentially allows users to use bitcoins at Amazon, Target, and other retailers that don’t yet accept Bitcoin payments. As Bitcoin continues to gain traction, undoubtedly more and more companies will start accepting Bitcoin payments as Bitcoin provides a secure and easy way to transmit money online.

How to Accept Bitcoins For Merchants?

Perhaps you’ve got your own business and are interested in accepting Bitcoin payments? If that’s the case, services like Coinbase and BitPay make it incredibly easy for merchants to accept bitcoins. Depending on how popular your business is, you’ll see little to no fees for accepting bitcoins (and the fees will always be less than those of fiat payment processors like PayPal).

All in all, it’s both easy and advantageous to start using Bitcoin. Hopefully this guide will help you get set up. And if you have any questions, feel free to leave them in the comments.

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What is Bitcoin?

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Bitcoin is a form of digital currency, created and held electronically. No one controls it. Bitcoins aren’t printed, like dollars or euros – they’re produced by people, and increasingly businesses, running computers all around the world, using software that solves mathematical problems.

It’s the first example of a growing category of money known as cryptocurrency.

What makes it different from normal currencies?

Bitcoin can be used to buy things electronically. In that sense, it’s like conventional dollars, euros, or yen, which are also traded digitally.

However, bitcoin’s most important characteristic, and the thing that makes it different to conventional money, is that it is decentralized. No single institution controls the bitcoin network. This puts some people at ease, because it means that a large bank can’t control their money.

Who created it?

A software developer called Satoshi Nakamoto proposed bitcoin, which was an electronic payment system based on mathematical proof. The idea was to produce a currency independent of any central authority, transferable electronically, more or less instantly, with very low transaction fees.

Who prints it?

No one. This currency isn’t physically printed in the shadows by a central bank, unaccountable to the population, and making its own rules. Those banks can simply produce more money to cover the national debt, thus devaluing their currency.

Instead, bitcoin is created digitally, by a community of people that anyone can join. Bitcoins are ‘mined’, using computing power in a distributed network.

This network also processes transactions made with the virtual currency, effectively making bitcoin its own payment network.

So you can’t churn out unlimited bitcoins?

That’s right. The bitcoin protocol – the rules that make bitcoin work – say that only 21 million bitcoins can ever be created by miners. However, these coins can be divided into smaller parts (the smallest divisible amount is one hundred millionth of a bitcoin and is called a ‘Satoshi’, after the founder of bitcoin).

What is bitcoin based on?

Conventional currency has been based on gold or silver. Theoretically, you knew that if you handed over a dollar at the bank, you could get some gold back (although this didn’t actually work in practice). But bitcoin isn’t based on gold; it’s based onmathematics.

Around the world, people are using software programs that follow a mathematical formula to produce bitcoins. The mathematical formula is freely available, so that anyone can check it.

The software is also open source, meaning that anyone can look at it to make sure that it does what it is supposed to.

What are its characteristics?

Bitcoin has several important features that set it apart from government-backed currencies.

1. It’s decentralized

The bitcoin network isn’t controlled by one central authority. Every machine that mines bitcoin and processes transactions makes up a part of the network, and the machines work together. That means that, in theory, one central authority can’t tinker with monetary policy and cause a meltdown – or simply decide to take people’s bitcoins away from them, as the Central European Bank decided to do in Cyprus in early 2013. And if some part of the network goes offline for some reason, the money keeps on flowing.

2. It’s easy to set up

Conventional banks make you jump through hoops simply to open a bank account. Setting up merchant accounts for payment is another Kafkaesque task, beset by bureaucracy. However, you can set up a bitcoin address in seconds, no questions asked, and with no fees payable.

3. It’s anonymous

Well, kind of. Users can hold multiple bitcoin addresses, and they aren’t linked to names, addresses, or other personally identifying information. However…

4. It’s completely transparent

…bitcoin stores details of every single transaction that ever happened in the network in a huge version of a general ledger, called the blockchain. The blockchain tells all.

If you have a publicly used bitcoin address, anyone can tell how many bitcoins are stored at that address. They just don’t know that it’s yours.

There are measures that people can take to make their activities more opaque on the bitcoin network, though, such as not using the same bitcoin addresses consistently, and not transferring lots of bitcoin to a single address.

5. Transaction fees are miniscule

Your bank may charge you a £10 fee for international transfers. Bitcoin doesn’t.

6. It’s fast

You can send money anywhere and it will arrive minutes later, as soon as the bitcoin network processes the payment.

7. It’s non-repudiable

When your bitcoins are sent, there’s no getting them back, unless the recipient returns them to you. They’re gone forever.

So, bitcoin has a lot going for it, in theory. But how does it work, in practice? Read more to find out how bitcoins are mined, what happens when a bitcoin transaction occurs, and how the network keeps track of everything.

Where to Buy and Sell Bitcoin

Exchange About Based
coinbase Coinbase operates one of the most popular wallets and is an simple way to buy bitcoin. $5 bonus on sign up. USA BUY BITCOIN
localbitcoins Localbitcoins matches buyers and sellers online and in-person, locally worldwide.  Finland BUY BITCOIN
BitQuick claims to be one of the fastest ways you can buy bitcoin. USA BUY BITCOIN
CoinCorner allow purchases with credit and debit cards for verified users. Isle of Man BUY BITCOIN
Bitbargain has a vast range of different payment options for UK buyers. UK BUY BITCOIN
Xapo Xapo is Known for it’s ease of use and bitcoin cold-storage vault. USA BUY BITCOIN

The above table is an advertising unit. For more options, please see our guide to buying bitcoin.

WHAT IS AN ALTCOIN?

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Even if they do not accurately understand how it works, most people are at least somewhat familiar with Bitcoin. However, once they begin to get involved with cryptocurrency, they may be surprised to learn that there are actually hundreds of types of cryptocurrencies known as altcoins. Altcoins are an intriguing facet of the cryptocurrency landscape, but they are not for everyone. Altcoin newcomers often have many questions, and this guide will provide a brief overview of altcoins to help beginners decide whether or not to invest in them as part of their cryptocurrency portfolio.

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What Are Altcoins and Why Do They Matter?

The word “altcoin” is an abbreviation of “Bitcoin alternative,” and thus describes every single cryptocurrency except for Bitcoin. Altcoins are referred to as Bitcoin alternatives because, at least to some extent, most altcoins hope to either replace or improve upon at least one Bitcoin component.

There are hundreds of altcoins (CoinMarketCap listed 478 at the time this guide was written), and more appear each day. Most altcoins are little more than Bitcoin clones, changing only minor characteristics such as its transactions speed, distribution method, or hashing algorithm. Most of these coins do not survive for very long. One exception is Litecoin, which was one of the first altcoins. In addition to using a different hashing algorithm than Bitcoin, Litecoin has a much higher number of currency units. For this reason, Litecoin has branded itself as “silver to Bitcoin’s gold.”

altcoins altcoin market caps altcoin price charts

The top 5 altcoins according to CoinMarketCap

However, some altcoins innovate by experimenting with useful features Bitcoin does not offer. For example, Darkcoin hopes to provide a platform for completely anonymous transactions, BitSharesdescribes itself as “a fair version of Wall Street,” and Ripple serves as a protocol users can employ to make inter-currency payments with ease. Some altcoin ecosystems, such as CounterParty andMastercoin, even utilize the Bitcoin blockchain to secure their platform.

Many Bitcoin enthusiasts argue that altcoins are completely unnecessary and will not succeed because they cannot rival the infrastructure Bitcoin boasts. However, altcoins serve an important role. Decentralization is one of Bitcoin’s most prominent goals, and altcoins further decentralize the cryptocurrency community. Moreover, altcoins allow developers to experiment with unique features. While it is true that Bitcoin can copy these features if the developers or community desires, fully-functioning altcoins are much better “cryptocurrency laboratories” than Bitcoin’s testnet. Finally, Altcoins give Bitcoin healthy competition. Altcoins give cryptocurrency users alternative options and forces Bitcoin’s developers to remain active and continue innovating. If users do not feel that Bitcoin satisfies their digital desires, they can adopt an altcoin. If enough users left Bitcoin for a particular altcoin, the Bitcoin developers would have to adopt the features the community desired or risk losing its place as the preeminent cryptocurrency.

Namecoin Altcoins

Namecoin was the first altcoin. It seeks to decentralize the world of online identities.

What Was the First Altcoin?

Created in April 2011, Namecoin was the first altcoin. Although it also functions as a currency, Namecoin’s primary purpose is to decentralize domain-name registration, which makes internet censorship much more difficult. As its place among the top ten cryptocurrency market caps suggests, Namecoin has remained one of the most successful altcoins throughout its short lifespan.

Should I Invest in Altcoins?

Due to how recent cryptocurrency was invented and how rapidly the landscape changes, all cryptocurrency investments carry a great deal of risk. Even Bitcoin–by far the most stable cryptocurrency–exhibits price volatility on a regular basis.

By comparison, however, altcoins are exponentially more volatile. Because they have such low market caps (the total value of all coins combined), altcoin markets are highly prone to price manipulation. Wealthy traders–colloquially called “whales”–often inject large amounts of capital into low-priced coins to build hype and cause the price to skyrocket. Once the price has risen considerably, the whales sell their coins on exchanges at a massive profit, hurting many gullible investors in the process. This method is known as a “pump and dump.” Not only does this hurt greedy traders who did not take the time to do their homework, but it often proves to be the breath of an altcoin’s brief lifespan.

To avoid losing all your money in a pump and dump, focus on long-term investments in coins you believe have immense potential and exhibit overall health. Generally, healthy altcoins possess strong communities, exhibit high liquidity, and have developers who proactively improve the coin’s source code (though not necessary, many users also prefer developers who reveal their true identities). CoinGecko’scomprehensive coin metric analysis algorithm statistically analyzes these three important factors and ranks coins according to overall strength.

coingecko altcoins

CoinGecko’s coin ranking chart ranks coins according to overall health.

If you do choose to invest in altcoins, it is important to remember some basic tenets of investing. Avoid the hype that coin communities propagate. Investors have an agenda, so you should not take their word at face value. Only invest in coins you have researched. It is unwise to invest in something you do not understand. Making an ill-informed investment is the first step to losing your hard-earned money. Take the time to research the coins you are considering for long-term investments, and research day-trading before you attempt to become a high-volume, short-term trader. Most importantly, never invest more than you can afford to lose. Far too many people have lost their life savings by centralizing them in volatile investments.

Where Can I Obtain Altcoins?

As with Bitcoin, there are a variety of ways to obtain altcoins. The most basic way to obtain altcoins is to accept them as payment for goods or services. If you are interested in doing this, place an ad showcasing your skill-set on a cryptocurrency job board.

You can also trade for altcoins on cryptocurrency exchanges. Most exchange use Bitcoin as an intermediary (although a few include fiat pairs), so if you do not already own bitcoins you will need to buy some before you can trade for altcoins. Some of the most-trafficked exchanges include BTERBittrex,MintPalCryptsy, and BTC38 (Chinese-only).

Many altcoin communities also sponsor giveaways to increase exposure of their coin and entice new users to join their communities. This is a great way to acquire coins if you are low on funds or do not have marketable skills.

WHAT IS CRYPTOCURRENCY?

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A cryptocurrency is a medium of exchange like normal currencies such as USD, but designed for the purpose of exchanging digital information through a process made possible by certain principles of cryptography. Cryptography is used to secure the transactions and to control the creation of new coins. The first cryptocurrency to be created was Bitcoin back in 2009. Today there are hundreds of other cryptocurrencies, often referred to as Altcoins.

Put another way, cryptocurrency is electricity converted into lines of code with monetary value. In the simplest of forms, cryptocurrency is digital currency.

Unlike centralized banking, like the Federal Reserve System, where governments control the value of a currency like USD through the process of printing fiat money, government has no control over cryptocurrencies as they are fully decentralized.

Most cryptocurrencies are designed to decrease in production over time like Bitcoin, which creates a market cap on them. That’s different from fiat currencies where financial institutions can always create more, hence inflation. Bitcoin will never have more than 21 million coins in circulation. The technical system on which all cryptocurrencies are based on was created by Satoshi Nakamoto.

While hundreds of different cryptocurrency specifications exist, most are derived from one of two protocols; Proof-of-work or Proof-of-stake. All cryptocurrencies are maintained by a community ofcryptocurrency miners who are members of the general public that have set up their computers or ASIC machines to participate in the validation and processing of transactions.

History of Cryptocurrency

bitcoin stack

The first cryptocurrency was Bitcoin. Bitcoin was created in 2009 by a pseudonymous developer named Satoshi Nakamoto. Bitcoin uses SHA-256, which is a set of cryptographic hash functions designed by the U.S National Security Agency. Bitcoin is a cryptocurrency that is based on the proof-of-work system.

In April 2011, Namecoin, the first altcoin, was created to form a decentralized DNS to make internet censorship more difficult. In October 2011, Litecoin was released and became the first successful cryptocurrency to use scrypt as its hash function rather than SHA-256. This gave the general public the ability to mine for litecoins without the purchase of specific hardware such as the ASIC machines used to mine Bitcoin.

Litecoin began receiving media attention in late 2013 – reaching a market cap of $1 billion. Ripplecoin, created in 2011, was built on the same protocol as Bitcoin but services as  a payment system – think of it like a Paypal for cryptocurrencies that supports any fiat currency, cryptocurrency, commodity or even frequent flier miles.

Cryptocurrencies & Market Capitalization

Bitcoin is the largest cryptocurrency in both market capitalization, volume, acceptance and notoriety, but it’s not the most valuable coin. NEMstake, while only having a market cap of $1,116,720, trades at $1,117 a coin. Looking at the market cap, Litecoin takes second place after Bitcoin with Ripple close behind.

One coin that you are more than likely familiar with is Dogecoin. Dogecoin ranks, on average, thirds in trading volume, but has a relatively low market cap – ranking number six in the largest cryptocurrency.

hashWhat is a Cryptocurrency Hash?

Cryptocurrency mining power is rated on a scale of hashes per seconds. A rig with a computing power of 1kH/s is mining at a rate of 1,000 hashes a second, 1MH/s is a million hashes per second and a GH/s is one billion hashes per second. Every time a miner successfully solves a block, a new hash is created. A hash algorithm turns this large amount of data into a fixed-length hash. Like a code if you know the algorithm you can solve a hash and get the original data out, but to the ordinary eye it’s just a bunch of numbers crammed together and remains practically impossible to get the original data out of.

SHA vs. Scrypt

While Bitcoin and a several other coins are mined using SHA-256, Litecoin and many other coins, useScrypt. This are the two major hashing functions, but several different kinds exists and are used by other cryptpcurrencies such as scrypt-N and x11. The different hashing functions were adopted to answer concerns with the SHA-256. Before, individuals were able to mine Bitcoin with their GPU’s, which require a large amount of energy. But as Bitcoin grew in popularity, ASIC SHA-256 machine were built which  made GPU mining obsolete.

To give you an idea of just how powerful these machines are, a mining rig running 4 GPU’s would get a hash rate of around 3.4 MH/s and consume 3600kW/h while an ASIC machine can mine 6 TH/s and consume 2200kW/h. This effectively killed GPU mining and left many individuals worried about the security of the network. With less individuals being able to profitably mine from their home computer, the network become less decentralized. Scrypt mining was implemented with the promise of being ASIC resistant due to the memory problem it introduced.

Scrypt hashes require lots of memory, which GPU’s are already designed to handle and ASIC machines were not. However, Scrypt mining require a lot of energy and eventually scrypt-ASIC machines were designed to address this problem. At this point Litecoin considered changing their proof-of-work functionto avoid ASIC mining. Scrypt also taut that their proof-of-work is much more energy efficient than SHA-256. Bitcoin blocks are solved at a rate of 1 per 10 minutes while Litecoin blocks are solver at a rate of 1 per 2.5 minutes.

securityCryptocurrency Security

The security of cryptocurrencies is two part. The first part comes from the difficulty in finding hash set intersections, a task done by miners. The second and more likely of the two cases is a “51%” attack“. In this scenario, a miner who has the mining power of more than 51% of the network, can take control of the globalblockchain ledger and generate an alternative block-chain. Even at this point the attacker is limited to what he can do. The attacker could reverse his own transactions or block other transactions.

Cryptocurrencies are also less susceptible to seizure by law enforcement or having transaction holds placed on them from acquirers such as Paypal. All cryptocurrencies are pseudo-anonymous, and some coins have added features to create true anonymity.

 

Cryptocurrency Legality & Taxes

Taxation

Bitcoin Taxation

While cryptocurrencies are legal in most countries, Iceland and Vietnam being an exception – Iceland mainly due to their freeze on foreign exchange, they are not free from regulations and restrictions. China has banned financial institutions from handling bitcoins and Russia, while saying cryptocurrency is legal, has made it illegal to purchase goods with any currency other than Russian rubles.

In the U.S., the IRS has ruled that Bitcoin is to be treated as property for tax purposes, making Bitcoin subject to capital gains tax. The Financial Crimes Enforcement Network (FinCEN) has issued guidelines for cryptocurrencies. The issued guidelines contain an important caveat for Bitcoin miners: it warns that anyone creating bitcoins and exchanging them for fiat currency are not necessarily beyond the reach of the law. It states:

“A person that creates units of convertible virtual currency and sells those units to another person for real currency or its equivalent is engaged in transmission to another location and is a money transmitter.”

Miners seem to fall into this category, which could theoretically make them liable for MTB classification. This is a bone of contention for bitcoin miners, who have asked for clarification. This issue has not been publicly addressed in a court of law to date.

Cryptocurrency Services

There are a host of services offering information and monitoring of cryptocurrencies. CoinMarketcap is an excellent way check on the market cap, price, available supply and volume of crypto currencies. Redditis a great way to stay in touch with the community and follow trends and CryptoCoinCharts is full of information ranging from a list of crytocoins, exchanges, information on arbitrage opportunities and more. Our very own site offers a list of crypto currencies and their change in value in the last 24hrs, week or month.

Liteshack allows visitors to view the network hash rate of many different coins across six different hashing algorithms. They even provided a graph of the networks hash rate so you can detect trends or signs that the general public is either gaining or losing interest in a particular coin.

A hand website for miner is CoinWarz. This site can help miners determine which coin is most profitable to mine given their hash rate, power consumption, and the going rate of the coins when sold for bitcoins. You can even view each coins current and past difficulty.

How to Mine Litecoin and other Altcoins

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While it is now considered too late for hobbyists without expensive ASIC processors to start mining bitcoins, many of the alternative digital currencies are still well suited for mining on your home PC.

In this guide, we’ll take you through all you need to know to start digging up a few litecoins, feathercoins or dogecoins without any costly extra equipment.

For the most part, cryptocurrencies employ either SHA-256 or scrypt as their proof-of-work hashing algorithm, but many of the newer currencies have opted for scrypt.

Gridseed Litecoin Miners
Row of Gridseed litecoin miners set up. Copyright: Arina P Habich

Scrypt tends to be the more memory intensive of the two – however, home PCs with reasonably powerful graphics cards can still mine those cryptocurrencies quite effectively, as there are no dedicated ASICs to compete with – yet.

Perhaps surprisingly, it’s still possible to use just your computer’s CPU to mine some of the digital currencies. This holds true, even if you have only a laptop with integrated graphics; though this may not prove terribly effective and is not a set-up we would recommend.

Wallets at the ready

Before you start mining, you will need a wallet to keep your hard-earned coins in (see our guide to storing bitcoin). A good option is to head to the homepage of the currency you intend to mine and seek out the download link for the default wallet app. If you would like to do more research into litecoin specifically, we have a guide on how to get started.

If you find yourself in need of help and advice, most altcoins have community forums, as well as their own subreddit. The majority of wallets are based on the original Bitcoin-Qt client. Be warned, though, that before these wallets are truly usable, you may face a lengthy wait while the coin’s entire block chain downloads.

Dogecoin Client
Wow. Much Wallet (This is DogeCoin’s Wallet)

The need for speed

gpuUnless you possess specific mining hardware, there are two ways to mine cryptocurrencies: with your central processing unit (CPU) or with your graphics processing unit (GPU) – the latter being sited, of course, on your graphics card.

Of the two, a GPU offers far better performance for the cryptographic calculations required. However, if you are making your first foray into mining and don’t possess a souped-up gaming computer – a laptop with Intel integrated graphics, perhaps – it will still be possible to mine those altcoins, but at a far slower rate.

The catch with GPU mining is that it requires a dedicated graphics processor, such as you may have fitted inside your desktop PC – the Intel integrated graphics cards found in most laptops are just not suitable for the task. To keep speeds up to a respectable level, most altcoin miners build dedicated machines using motherboards that can house multiple graphics cards, usually via riser cables.

Be aware, too, that mining digital coins is very system intensive and can reduce the lifespan of your electronic components. It’s a good idea to make sure you have adequate cooling in place, keep an eye on those temperatures and keep hold of any warranties – just in case.

Solo, or with the crowd?

poolMining can either be a solitary venture or you can join a mining ‘pool’, where a number of people combine their processing resources and all take a share of the rewards.

It can be helpful to think of mining pools as joining a lottery syndicate – the pros and cons are exactly the same. Going solo means you get to keep the full rewards of your efforts, but accepting reduced odds of being successful. Conversely, joining a pool means that the members, as a whole, will have a much larger chance of solving a block, but the reward will be split between all pool members, based on the number of ‘shares’ earned.

If you are thinking of going it alone, it’s worth noting that configuring your software for solo mining can be more complicated than with a pool, and beginners would probably be better off taking the latter route. This option also creates a steadier stream of income, even if each payment is modest compared to the full block reward.

Deciding which altcoin to mine will be something else to bear in mind, however, some pools, such as Multipool, manage this for you and switch coins based on profitability.

Installing your CPU miner

A handy piece of software called cpuminer is the easiest way to start mining, but does require the ability to use the command line on your computer. The program can bedownloaded from SourceForge and is available for Windows (32 and 64 bit), OS X and Linux. For the purposes of this guide, though, we are making the assumption that you are using the Windows OS.

First, download the appropriate file for your operating system. The zip file can be extracted to anywhere on your hard drive, as long as you remember where it went. A good idea would be to create a ‘cpuminer’ folder on your desktop.

Writing your script

So, how to set up cpuminer with the parameters needed for your mining pool? Well, it’s usually simplest to write a one-line script (known as a ‘batch file’ in Windows) to launch the miner with the correct instructions.

To do this you will need the following:

  • The full path of the directory in which the mining program (“minerd.exe“) is stored (eg: “C:\cpu-miner-pooler”).
  • The ‘stratum’ URL of your mining pool server (eg: “stratum+tcp://pool.d2.cc“).
  • The port number of your mining server (eg: “3333”).
  • Your mining pool username (eg: “username”).
  • Your worker name or number (eg: “1”).
  • Your worker password (eg: “x”).

Now, open Notepad or your preferred text editor. Do not, however, use a word processor such as MS Word. Next, enter the script using the following formula (note that this method assumes you are mining a currency that uses the scrypt algorithm):

start “path” minerd.exe – -url URL:PORT –a scrypt – – userpass USERNAME.WORKER:PASSWORD

So, using the example details above, you would have produced the following text:

start “C:\cpu-miner-pooler” minerd.exe –url stratum+tcp://pool.d2.cc:3333 -a scrypt –userpass username.1:x

Save this file with a “.bat” extension; for example: “my-mining-profile.bat“.

Once the batch file is saved, double click it to activate the miner program. Your mining pool will most likely have a web-based interface and, within a few minutes, the website should show that your mining worker is active.

Now that you know how to mine with the CPU, let’s have a look at using your GPU.

Setting up your GPU miner

For those that intend to mine with GPUs, or USB mining devices, cgminer is the program to use and can be downloaded from the developer’s website – unless, that is, you’re a Mac user, in which case you will find some unofficial binaries here.

Versions of cgminer following version 3.72 do not support scrypt mining, and support for GPUs was removed in version 3.82. Therefore, the latest version isn’t necessarily the one to download. Instead, seek out the version appropriate for your needs.

Again, in this example, we are making the assumption that you are using the Windows OS. However, if you are using Linux or OS X, the command line arguments (ie: the parameters) are the same. Furthermore, the instructions below once again assume you will be mining a scrypt currency.

Extract the software into a folder that can easily be found, eg: “c:\cgminer\”.

Before going any further, make sure that your graphics drivers are up to date.

Next, press the Windows key together with the “R” key, type in “cmd”, and press “enter”. This will open the command terminal. Use the “cd” command to change the directory to the one housing the cgminer zip file.

Then, type in “cgminer.exe –n”. This will list all recognised devices on your PC. If your graphics card is detected, you should be good to go. If not, you’ll have research the steps required to properly set up your specific graphics card.

You will now need your mining pool details, just as with the CPU mining section above:

  • The full path of the directory in which the mining program (“minerd.exe“) is stored (eg: “C:\cpu-miner-pooler”).
  • The ‘stratum’ URL of your mining pool server (eg: “stratum+tcp://pool.d2.cc“).
  • The port number of your mining server (eg: “3333”).
  • Your mining pool username (eg: “username”).
  • Your worker name or number (eg: “1”).
  • Your worker password (eg: “x”).

Now we’ll make a batch file again, in order to start cgminer up with the correct parameters. In this case, the command structure is:

Start “path” cgminer — scrypt -o URL:PORT -u USERNAME.WORKER -p PASSWORD

For example,

Start “C:\cgminer\” — scrypt –o stratum+tcp://pool.d2.cc:3333 –userpass username.1:x

Watching your miner

cpuminerNow the mining software of choice is set up, you will see various statistics scrolling across your command line terminal. If you are using cgminer, you will see more information than you would with cpuminer. In the case of the former, you will see information about the currency and the mining pool, as well as about your mining hardware. If you’re running cpuminer, you will only see references to blocks that your PC has solved; although, it does, at least, show your hashing speed.

Maximising your power

Good news for miners who own PCs with dedicated graphics cards: it is possible to run both cpuminer and cgminer at the same time. To make this possible, add a “– threads n” argument to the minerd command. Here, “n” stands for the number of CPU cores that you wish to employ for mining.

Remember to leave one or two cores free to control your GPUs, though. Setting minerd to use all CPU cores will mean that the CPU will be too busy to send data to the GPU for processing. For example, if you have a quad core CPU, try setting the “–threads” argument to “2” or “3”.

Mining with both GPU and CPU concurrently reveals just how much better GPUs are at mining than the CPU. Compare the hash rates shown in the terminal windows for each of your mining programs and you should see at least a five-times difference in hashing speed.

What is the Difference Between Litecoin and Bitcoin?

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In 2009, Satoshi Nakamoto launched bitcoin as the world’s first cryptocurrency. The code is open source, which means it can be modified by anyone and freely used for other projects. Many cryptocurrencies have launched with modified versions of this code, with varying levels of success.

Litecoin Logo

Litecoin was announced in 2011 with the goal of being the ‘silver’ to bitcoin’s ‘gold’. At the time of writing, Litecoin  has the highest market cap of any mined cryptocurrency, after bitcoin.

Here’s our guide to show you the crucial difference betweenbitcoin and litecoin.

At-a-glance differences

bitcoin litecoin
Coin limit 21 Million 84 Million
Algorithm SHA-256 Scrypt
Mean block time 10 minutes 2.5 minutes
Difficulty retarget 2016 block 2016 blocks
Block reward details Halved every 210,000 blocks. Halved every 840,000 blocks
Initial reward 50 BTC 50 LTC
Current block reward 25 BTC 50 LTC
Block explorer blockchain.info block-explorer.com
Created by Satoshi Nakamoto Charles Lee
Creation date January 3rd, 2009 October 7th, 2011
Market cap $10,467,596,650.78 $540,274,528.26
 Bitcoin Statistics  Litecoin Statistics

Mining differences

Just like bitcoin, litecoin is a crytocurrency that is generated by mining. Litecoin was created in October 2011 by former Google engineer Charles Lee. The motivation behind its creation was to improve upon bitcoin. The key difference for end-users being the 2.5 minute time to generate a block, as opposed to bitcoin’s 10 minutes. Charles Lee nowworks for Coinbase, one of the most popular online bitcoin wallets.

ASIC Mining
ASIC Mining

For miners and enthusiasts though, litecoin holds a much more important difference to bitcoin, and that is its different proof of work algorithm. Bitcoin uses the SHA-256 hashing algorithm, which involves calculations that can be greatly accelerated in parallel processing. It is this characteristic that has given rise to the intense race in ASIC technology, and has caused an exponential increase in bitcoin’s difficulty level.

Litecoin, however, uses the scrypt algorithm – originally named as s-crypt, but pronounced as ‘script’. This algorithm incorporates the SHA-256 algorithm, but its calculations are much more serialised than those of SHA-256 in bitcoin. Scrypt favours large amounts of high-speed RAM, rather than raw processing power alone. As a result, scrypt is known as a ‘memory hard problem.

The consequences of using scrypt mean that there has not been as much of an ‘arms race’ in litecoin (and other scrypt currencies), because there is (so far) no ASIC technology available for this algorithm. However, this is soon to change, thanks to companies like Alpha Technologies, which is now taking preorders.

Bitcoin Mining Rig
GPU mining

To highlight the difference in hashing power, at the time of writing, the total hashing rate of the bitcoin network is over 20,000 Terra Hashes per second, while litecoin is just 95,642 Mega Hashes per second.

For the time being, ‘state of the art’ litecoin mining rigs come in the form of custom PCs fitted with multiple graphics cards (ie: GPUs). These devices can handle the calculations needed for scrypt and have access to blisteringly fast memory built into their own circuit boards.

There was a time when people could use GPU mining for bitcoin, but ASICs have made this method not worth the effort.

Transaction differences

The main difference is that litecoin can confirm transactions must faster than bitcoin. The implications of that are as follows:

  • Litecoin can handle a higher volume of transactions thanks to its faster block generation. If bitcoin were to try to match this, it would require significant updates to the code that everyone on the bitcoin network is currently running.
  • The disadvantage of this higher volume of blocks is that the litecoin blockchain will be proportionately larger than bitcoin’s, with more orphaned blocks.
  • The faster block time of litecoin reduces the risk of double spending attacks – this is theoretical in the case of both networks having the same hashing power.
  • A merchant who waited for a minimum of two confirmations would only need to wait five minutes, whereas they would have to wait 10 minutes for just one confirmation with bitcoin.

Transaction speed (or faster block time) and confirmation speed are often touted as moot points by many involved in bitcoin, as most merchants would allow zero-confirmation transactions for most purchases. It is necessary to bear in mind that a transaction is instant, it is just confirmed by the network as it propagates.

Bitcoin Litecoin image via Flickr. Mining Rig image via Wikipedia. Mining USB devices Image via Shutterstock.

How to Calculate Mining Profitability

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Are you serious about mining cryptocurrencies? If so, you need to know how to make the best use of your money and equipment. In this guide, we’ll show you how to mine your digital treasure in the most profitable way.

Obviously, the big money is going into costly bitcoin ASICs. If you are already in that position, you probably know how the process works and are intending to mine bitcoin. However, those of you on a more moderate budget are probably looking at building a GPU miner for scrypt currencies, or a buying a small ASIC machine for bitcoin or other SHA-256 currencies. In that case, you have come to the right place.

How do I start?

Choose your currency

Digital puzzleThe process of mining digital currencies involves solving complex cryptographic puzzles. By doing this, miners are providing ’proof of work’ that is rewarded with digital currency. Broadly speaking, there are two proof-of-work hashing algorithms in use today: SHA-256 and scrypt. Note that there are some lesser-used alternatives, which we will not be looking at in this guide (for example, Primecoin).

  • SHA-256
    The SHA-256 algorithm favours raw processing power. In bitcoin’s very early days, one could mine effectively with the CPUs and GPUs (graphics processing units) that you find in a normal home PC. That time has passed, however, and the difficulty level of bitcoin is so high that specialised processors known as ‘Application Specific Integrated Chips’ (ASICs) are needed to mine it. The use of such powerful processors, along with bitcoin’s exponential increase in difficulty level, have created a technological arms race, which means that even quite recently designed chips can quickly become obsolete.
  • Scrypt
    The scrypt algorithm favours greater amounts of RAM and parallel processing ability, which is why GPU-based rigs are still the way to go. Furthermore, ASICs for scrypt have yet to take off, so the difficulty level of those currencies has not been pushed up as dramatically as has been the case with bitcoin.

The right rig

shutterstock_88988593Depending on your budget and the type of currency you intend to mine, there are two ways to go when setting up your mining system:

  • DIY mining rig
    These can be built from your own PC, with as many graphics cards (ie: GPUs) as you can fit or afford. While some people may use a standard PC case, many use unusual casings, such as beer crates, which allow for increased air flow around the components. A bonus of DIY systems is that you can carry out both CPU and GPU mining at the same time (see our guide to mining altcoin).
  • ASICs
    ASICs are self-contained units (power adapters not withstanding), which come with a USB and/or Ethernet port, and are usually ready made by manufacturers. ASIC miners are usually more expensive than DIY rigs and are mostly produced in the USA, which means those of us in other parts of the world will have to spend a little extra to get them imported.

Power up

Mining rigMining requires electricity – lots of electricity. If you are building a DIY rig, you’ll be getting an ATX power supply unit (PSU) anyway, so it’s worth investing in the most efficient supply you can get.

Consider the following two cases, for example: A PSU that is guaranteed to supply 860W and is 93% efficient would actually draw 925W (860W/0.93). By contrast, a 750W power supply that is only 80% efficient would actually draw 937.5 W (750/0.8) – thus using more power, but supplying less.

When building a mining rig, you will need to take account of the power requirements of all the components you are using ­– especially all those graphics cards. Plus it’s a good idea to provide some excess capacity to deal with unexpected events and provide the potential to overclock your system.

ASICs, on the other hand, can do far more calculations with far less power because they are highly specialised devices. And since they ship with an appropriate power adapter, you won’t have to worry about doing all the maths to find one that is up to the task.

The mining efficiency of different systems can be compared by taking the ratio of the number of hashes it can perform in a second, divided by the power it consumes:

Hashing speed / power consumption = mining efficiency

Check your bills

After the initial expense of your rig, the essential thing you need to know to calculate your ongoing profitability is the cost of your electricity. Check with your provider, or take a look at your last bill. If the power charges add up to more then you earn, it obviously isn’t a good business model.

Pool your efforts

Rather than go it alone, it usually makes more sense to join a pool, where you combine resources with other miners. By joining a pool, you earn a share of the coins mined by all members of the pool and stand a greater chance of solving a block.

Miners earn a share of the rewards if the difficulty level of the blocks they solve is greater than the level set by the pool operator. That level is always somewhere between 1 and the difficulty level of the currency.

Problems to be aware of

Spend to earn

shutterstock_96423176Inevitably, the difficulty level of all currencies increase with time – a fact that will reduce the chances of your equipment earning coins or mining shares. As a result, it is important to start with the best equipment you can afford, in order to mine profitably over the longest period of time.

The volatility of the currency being mined also affects your long-term profitability. If the price suddenly drops, you will be faced with the choice of either selling at a low price or hanging onto your coins until their value increases. In the former case, you would have to keep mining for longer to recoup your expenditure on equipment and electricity.

Keeping cool

Mining rigWhichever way you mine, it’s a computationally intensive operation that creates lots of excess heat. Mining efficiency decreases as temperature increases, so make sure your rig has adequate ventilation and cooling. As mentioned above, this is why some mining rig builders  use beer crates rather than PC cases – to maximise airflow around their components. Even a standalone desktop fan can help to keep your kit cool.

Power problems

When building a DIY mining rig, it doesn’t make sense to save money by buying a cheap PSU. Any instability in the power supply could hit performance, or even cause a system crash that will lead to downtime, so do invest in a high-quality unit.

Avoiding downtime

If your hardware isn’t mining, you are losing money. Here are some ways to minimise downtime:

  • Get the best power supply you can afford.
  • Consider using an uninterruptible power supply (UPS), so that, if your electricity supply cuts out for a moment, it won’t affect your miner.
  • Configure your mining computer to automatically start mining on start-up, so that if the system crashes and reboots, it will automatically start mining again. (This applies to DIY rigs and computers hosting an ASIC.)

Hidden costs

Losing moneyThere are costs involved with mining, of course, like the rig and the ongoing electricity costs for starters. However, some extras are less obvious:

  • Delivery and customs
    We imported a Jalapeno ASIC miner from Butterfly Labs to the UK. The delivery cost £53 ($88), and UK customs charged £46.09 in duty (around $76). These costs are significant, and if you’re importing an item, try to work out beforehand what costs it might incur.
  • Accessories
    Will you need cables, adapters, etc, for what you are planning to use and/or build?
  • Cooling costs
    It’s not just the cost of your miner’s power use. What about the electricity of running any extra cooling system, such as fans or air conditioning?

Doing the sums

Profitability calculators

shutterstock_135890222For assistance with some of the calculations miners need to make, there are several websites that provide profitability calculators. You can input parameters such as equipment cost, hash rate, power consumption, and the current bitcoin price, to see how long it will take to pay back your investment.

As a test, we entered the specifications of two mining systems into the calculators below. For our Scrypt GPU mining rig, we used the system described, and for our SHAS-256 ASIC miner we used the specifications of a Butterfly Labs miner.

With a UK electricity price set at £0.20 per KWh (which equated to $0.33), these are the recommendations and profits that the following sites presented:

(Note that these figures were correct as of January 21st, 2014, and that they are all subject to currency volatility and shifts in difficulty level.)

Multicurrency calculators:

Dustcoin:
SHA-256: Freicoin at $1.43 per day
Scrypt: Dogecoin at $31.05 per day

CoinWarz:
SHA-256: Bitcoin at $1.14 per day
Scrypt: Dogecoin at $39.13 per day

Bitcoin specific calculators:

Tradeblock:
Bitcoin at $1.20 per day

Bitcoinx:
Bitcoin at $1.42 per day

Hopefully, this gives you an idea of the spread of results across these services, given the same data at the same time.

Data miningdigital puzzlehandscomputer powerCPU fanrisk,businessman and calculator images via Shutterstock