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Understanding the Risks of Mining Bitcoin

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At this point of your journey into the cryptocurrency world, you probably have a strong grasp of the fundamental mechanics of the coin, and maybe understand the basics of “proof-of-work” systems.

Assuming you already have this understanding, you know that the robustness of the network is what secures the entire bitcoin protocol. As such, there is an opportunity for money to be made if you are able to add value to the network, you will be compensated for your time. This is essentially what mining bitcoin is, and it is very possible for you to make a good return on your capital if you go about it intelligently.

Cloud Mining for Lower Risk

Mining has advanced quite a bit since bitcoin’s creation in 2009. It used to be that you could use any PC to mine cryptocurrency. The algorithm is designed to adapt the level of difficulty and work required to be done so that the average block time stays at approximately 10 minutes.

The most important decision you’ll make in terms of bitcoin mining is whether to mine using cloud services, or if you are going to buy your own rig instead. Each method comes with different levels of risk due to the varying risk structures.

Cloud mining has you rent mining hardware from a company or just get a portion of their hashing power. There are many different operators in the field, and it is important you perform some heavy research to figure out what the best investment of your capital is. Cryptocompare has a list of all the different companies you can use and how they have been rated and reviewed recently.

Personal Mining for Higher Potential

When you make the decision to go the personal mining route, you are taking a much bigger risk in terms of upfront investment. There is a significant cost involved, and you are buying some very specialized hardware. The top consideration should be whether you have access to cheap electricity, because without that, you are putting yourself in a terrible position.

Once you choose your hardware, it is all a matter of selecting the type of hardware you are going to use (there are many review sites, and this is outside the scope of this article) and then choosing a mining pool and software provider. Research is your friend, so you would do well to not neglect it.

Determining the Logistics

No matter what route you decide to go, you are going to have to make some decisions that will affect your overall workflow significantly. First, you must select a mining pool, which means you need to adjust for the amount of risk you are willing to take. Mining can be very profitable on your own, or you could go months without making any money at all. Going with a larger group will increase your likelihood of making money, but cap your earnings at a certain point.

There are pools that are set up to allow switching from mining one currency to another, depending on which is the most profitable, but we are going to stick to Bitcoin for the purposes of this article. One common point to watch out for with pools is whether they are paying out before the block properly verified, since that can cost the pools significant amounts of money.

Payout methods are the most relevant factor to consider when assessing mining pools, since they will determine the risk and return of your payments. There are ten or so variations, but it is only necessary to understand the three most common: Prop, PPS, and PPLNS.

Prop (or proportional) mining pools you are paid for the amount of valid shares you contribute to the pool when a block is found. Basically, you would be getting paid an exact amount based on the “work” you submitted. This is the best deal for the miner, but carries risk to the pool operator, since bad shares still get paid here.

PPS (or Pay Per Share) rewards miners for each submitted share. The miner knows the estimated number of shares to get the reward, and takes the risk of paying out per share before the reward is earned. As such, these generally have the highest fees.

Finally, PPLNS (or Pay Per Last N Shares) works like Prop pool, but instead of just rewarding miners for the last block, it rewards based on long-term contribution.

Afterwards, you also need to make sure you trust the wallet the cryptocurrency is being deposited into. The last thing you want is to leave a vulnerability for any of your earnings. This is an often-emphasized point, but you shouldn’t overlook it just because your past solution has worked for the small investments you put in.

Control the Risk

Never forget the fact that nothing is certain in investments, especially with bitcoin. This should steel you against the fact your investment may be lost. The fluctuations in the price of hardware, as well as the continuing increases in computing power, have turned bitcoin mining into somewhat of an arms race.

If you do find yourself feeling too risk averse to put significant funds into mining bitcoin, it might be better for you to just purchase bitcoins directly. This way, you are at least guaranteed to receive cryptocurrency.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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How Do BTC Transactions Actually Work?

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The advent of bitcoin has revolutionized the payment arena by removing centralized systems and the need for expensive and often convoluted intermediaries. To illustrate, let’s take a look at payments via traditional centralized systems and contrast them to bitcoin.

Centralized Payments

Payments via traditional finance channels are done though the help of intermediaries (financial institutions with certain roles and level of trust).

What are the features of such a system? In short:

  • reversible transactions
  • intermediaries take a percentage, which increases the cost of transactions and sets their minimum price, making it impractical to carry out infrequent and small transactions
  • the reversibility of transactions increases the cost of services whose services are irrevocable (the transaction was canceled. but we have already paid% of it)
  • since the payment can be canceled, the seller is insured, requiring more information from the buyer than is necessary
  • a certain percentage of fraud is inevitable

But what if there would be a payment system that allows any two participants to transfer funds directly, without an intermediary? The computational cost of canceling transactions will make fraud unprofitable, and escrow mechanisms will protect customers.

This is exactly what does Bitcoin based on the blockchain technology.

How Does it Work?

Information (block info, counter, and list of transactions) is recorded in blocks. When a block (its size is up to 1 MB) is full, a new block appears. The blocks are interconnected linearly, one after another in order, and each block contains information (hash) about the previous one. Therefore, if you wish, you can see the story down to the very first block.

We define electronic coin as a sequence of digital signatures. Person A sends the coin to person B, signing the hash of the previous transaction and Person B’s public key, attaching this information to the coin. However, how does Person B determine how many times Person A spent this coin? He should know that none of the previous owners signed the transaction before the one that is in the chain of the coin sent to him. For this, a time stamp is written in the block hash. It shows that at the moment specific data existed and therefore fell into the block hash. It turns out that only the first transaction is valid, so you can not worry about late attempts at double spending, the information about the first transaction was already there and, since it is recorded for all system participants, the false (later) will be rejected.

From the user’s side, the operation looks like this: Person A opens his wallet, enters the recipient’s address and the amount of 2.5 (for example) Bitcoin, executes the signature using the private key (the public key or bitcoin address is a unique personal address that is used in the chain, and everyone can see it, and the private key works as a password).

Inside the system, a transaction will have three pieces of information:

  1. Input. Record with details about where Person A has bitcoins.
  2. Amount. The number of transferred coins. In this case, 2.5 BTC.
  3. Output. Person B bitcoin wallet address.

Input and Output

As you probably understand, Bitcoins exist only in the form of transaction records in the electronic repository. For example, Person A’s balance consists of 1 BTC from Person C, and 3 BTC from Person D. All these are different transactions that were carried out at different times. In Person A’s wallet, the records do not merge into a single file with 4 BTC but continue to be stored separately.

For Person A to send Person B 2.5 BTC, the repository is trying to find a file with such a sum or combination of data to make 2.5 BTC. In our example, there is no operation with such amount, and they are not cumulative to get the required amount. Person A cannot break 3 BTC received from Person D (the sum of the input) since the system does not allow such division. Therefore, Person A has to send 3 BTC instead of 2.5 (output amount) for two transactions or two outputs: 2.5 BTC for Person B and 0.5 BTC back in the form of change. Of course, the user won’t see the difference and this is just a way of explaining how this works overall.

Featured image courtesy of Shutterstock. 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.9 stars on average, based on 42 rated postsVladislav Semjonov has a legal and financial background. He has been involved in crypto space since early 2017 in both ICO advising positions in several ICO consultancy firms, and as an ICO analyst for VC. He began contributing for Hacked.com in April 2017.




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What is a Smart Contract? Here are Practical Examples

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Smart contracts

Even though there are very few newcomers to the crypto market now, I will provide some useful information on smart contracts even for those who have been investing in digital assets for a long time. After all, we all have knowledge gaps, and many definitions are very vague – especially as it pertains to blockchain and smart contracts.

What is a Smart Contract, Anyway?

A smart contract is a program that starts the execution of a specified result only when pre-specified conditions are met. In other words:

  1. The parties have determined the conditions and the result of their execution.
  2. When requirements are met, the smart contract will be automatically executed. This can be either the transfer of assets from one side to the other or the launching of a chain of any operations sequence.

The principle and most apparent advantages of this technology are the elimination of intermediaries and the resolution of the issue of trust which is an achievement of technological trust.

The first and most straightforward application of such a contract is multi-signature contract (i.e., multisig, escrow). Those parties who do not trust one another can freeze a certain amount of assets in the blockchain in such a way that, in order to spend them, a contract would require signatures of more than 50% of stakeholders.

Example 1

The contract execution mechanism is visible in the following example:

Suppose there is a contract for saving money initiated by parents for their children to use when they reach adulthood. Contributions can be made to the account, where funds can be returned strictly after 18 years. This contract accepts transactions, transfers money from the parent’s account and checks the timeline for a specified date (like 18 years). If it does, it transfers money to the child’s account. Miners, seeing the code of this contract, will execute it. If you do not need to do anything, then the state of the account will not change, and no transactions need to be performed. However, as soon as 18 years have passed, the miner will execute the contract code and receive a transaction returning the money to the child’s account – and write it in the blockchain. To avoid contracts that take money from accounts or DoS clients in endless cycles, each instruction of the contract costs a bit of a different currency (i.e., gas), which has a price in the currency of the network. Therefore, the execution of a contract requires money that goes to those who execute them and close the blocks (i.e., to miners themselves).

Example 2

The second example:

Another type of contract could be one that accepts bets on the bitcoin price on a specific date and then transfers the money to the winning party based on the result. How does a contract know a bitcoin rate when the time comes? After all, can’t the data be changed and faked?

Such problems can be solved with Oracles. An oracle is a conductor program that transfers information from external data sources to the blockchain, providing the necessary data to execute smart contracts. For example, an oracle can tracks stock quotes on the external web and transfer these data to the blockchain.

Oracles in smart contracts are a full-fledged industry in which many startups try to offer their solutions. Hacked covered this industry in the following article: Are Oracles the Ticket to Ethereum’s Next Bull Market?

Now smart contracts are widely used in the field of fundraising, such as in initial coin offerings (ICOs). As many investors know, ICOs have made their presence felt on many industries, such as financial markets (banking services, insurance, derivatives trading), supply chain management and logistics, accounting and auditing, registration of property rights, all sorts of voting, smart transport, digital identity identification and many, many others.

Unconditional advantages of smart contract technology are, of course, savings (due to the absence of intermediaries); immutability (since the prescribed terms of the contract are stored in a distributed registry, and no one can change them) and speed (when conditions are met, the process starts instantly).

The most apparent shortcomings are the susceptibility to bugs and the complexity of writing. Besides, the exchange of confidential data through transparent distributed registries is not suitable for many banks and large corporations. Also, problems of scaling and speed of transaction processing are still relevant.

However, overall, a smart contract is a significant breakthrough and a foundation of broader applications of blockchain technology. Smart contracts have proliferated the market via ICOs but their applicability extends far beyond that. Only time will tell if smart contracts disrupt other core areas of the economy.

Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.9 stars on average, based on 42 rated postsVladislav Semjonov has a legal and financial background. He has been involved in crypto space since early 2017 in both ICO advising positions in several ICO consultancy firms, and as an ICO analyst for VC. He began contributing for Hacked.com in April 2017.




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Crypto Kingmakers: Evaluating Exchange Listings

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Cryptocurrency exchanges have long been considered potential ‘kingmakers’ for up and coming ICO projects both pre and post launch of crowd-funding rounds owing to reputation, trading volume and community value, as well as prior experience of shrewd coin selection.

Cryptocurrency exchanges are (at a base level) responsible for fostering liquidity in the market whilst providing competitive choices for investment consumers in the market: both with regards to the exchanges themselves as well as the diversity of the coins they offer for trade.

When a new token is announced for listing on popular platforms such as Coinbase or Binance for example: trends show an increase on interest as represented by value and investment potential. Whether this offsets the prohibitively high cost of entry incurred by such service providers however is yet to be proven.

Separating the Kings from Pretenders

2018 has not been a fortuitous year for many start-ups and underdogs.

Whilst data shows an overall increase in investment volume for new ventures, it also shows a significant failure ratio within these same figures. In fact, data published by tracking agency ‘ICORating’ suggests that a majority (55%) of these initial coin offerings have failed within just the second quarter of this current year.

Potential reasons for this include a ‘bubble’ effect resulting from the artificial inflation of token prices which in actuality hold little to no real value, inability to acquire funding or meet expectations, and the difficulty of gaining attention and penetrating a highly competitive space.

Considering the reported failure rate of ICOs at present, it would be reasonable to exercise caution when considering investment in any of the influx of new tokens on the market (no doubt exacerbated by recent decisions made by Coinbase).

A Utilitarian Perspective

This writer reccommends that you apply critical thinking, solicit the advice of experts and knowledgeable friends, do your own research and cross-reference it with those of pundits and your peers, and do not let anybody encourage you to make any premature decisions. This is all simple advice easily taken for granted, but timeless nonetheless.

We host our own series ICO Analysis / review articles at Hacked.com: articles that break down each project into its fundamentals: such as the strength of the team, technical theory and existing products, and other factors. All of these fields can be incorporated into your own research and analyses. Additionally, I myself frequently publish interviews with a wide range of leaders and experts.

If a coin has no real actionable purpose, inexperienced leadership, technical fallacies, poor communication, or any combination of the above plus more – then there is a good chance that said coin holds no real value, beyond they professed by its proponents.

Looking at Trends

We can’t predict the future, however there are some observable indicators and trends which could point towards the next coins to be chosen by top platforms.

After the PR nightmare surrounding Tether of late, there has been something of a rush of new contenders attempting to become the next stable-coin (a fixed-value token used for off-setting bear markets, or to be used as an intermediary. One of the most talked about of these is the Winklevoss twins’ ‘Gemini Token’.

Adjacent to the ‘Gemini Token’ is the unique investment orientated token from BitMart exchange entitled the ‘BMX Token’. Like a stable coin it can be used as an intermediary for exchanges with other forms of cryptocurrency, however it has the added benefits of affording token-holders discount on all on-platform transactions in addition to being able to stake these coins towards potential new coin listings in the future.

I have also frequently borderline evangelised Terra Virtua on this site and beyond.

As a disclaimer I have no holdings or stake in any of the above companies or tokens. Additionally, I possess a small and transient amount of Bitcoin.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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