Essentials you need to know
Handling a Bitcoin wallet is all you need to know to use Bitcoins as a currency, but there are plenty of opportunities to make money as well.
Some people have made tremendous amounts of money, especially those who invested in the early days, but you shouldn’t look at this as a get rich quick scheme.
Those early adopters were taking a big risk with their money, one that most people didn’t think would pay off, and they have been rewarded for it.
Now that the risk is much lower, you cannot expect the same level of returns. But that doesn’t mean all of the chances to turn a profit have dried up. You can still make money through Bitcoin mining, running your own wallet service, or investing in Bitcoins.
I earlier wrote about how miners generated new blocks and were rewarded with Bitcoins? Well, there’s no reason that you can’t share in the reward. You’ll need some hardware, and probably a team of people to work with, but you can bring in a steady stream of revenue without actually doing much work.
The first thing that you have to understand about Bitcoin mining is that your CPU is irrelevant; what you really want is a blazing fast GPU. The CPU (central processing unit) is like the president of your computer. It makes lots of decisions, it has to switch gears quickly, and it has to prioritize competing claims on its resources.
It’s built to be fast, but even more than that it’s built to be agile. A GPU (graphics processing unit) is an entirely different animal. In a normal computer it has one job: rendering graphics. It’s a tough job, but it’s also repetitive.
If the CPU is president, the GPU is the workhorse that is excellent at his or her job but has no idea what the rest of the company is doing. For Bitcoin mining, you really just want the workhorse.
The best approach is brute-force, trying out solutions one after another until you chance upon the right one, and the workhorse can do that better than the president. Now you need to decide what your goals are. Sometimes gamers will buy the best GPU on the market, let it mine whenever they aren’t playing with it, and pay off the GPU over time.
They haven’t really come out ahead, but they got an awesome new GPU for free. That’s good enough for some people, but if you want more you’re going to have to approach this as a business.
The first thing is to do some market research. How much computing power are other people using? What kind of results are they getting? Are you willing to invest enough money to compete with them? Look around forums and talk to people about what they’re up to.
It might seem like they should keep their mouths shut, but there are enough miners who want to brag about their gear that you can actually get people to open up pretty easily. Next, look for groups of people who are working together.
By combining your computing power you will have a much better chance of winning the ten-minute race and getting the new Bitcoins. You’ll have to split up the Bitcoins (and you’ll need to agree ahead of time how to do the dividing so you don’t fight later on), but everyone should benefit from this arrangement.
Q: But if I join a group of Bitcoin miners, don’t I have to share the profits? Yes, but if you don’t join a group there probably won’t be any profits in the first place. If you can’t afford to invest heavily in hardware, joining a group of miners is probably your best option.
You should also remember that it’s not just the value of the Bitcoins that your group will be receiving; you can also collect transaction fees.
These fees are small, currently, they are restricted to no more than 0.05 BTC and are generally much less than that, but they are also passive income. Like mining, once you have your gear set up and running you don’t need to do much else.
BitcoinX has an up-to-date list of mining software for you to choose from, but because the whole process is brute force, the GPU that you use is much more important than the piece of software you ultimately decide on.
The other way that you can make money with Bitcoins is to start your own wallet service.
Now you have to make an honest self-assessment: do you have the technical savvy to keep people’s data safe and secure? Even if you don’t know how to do it right now, are you confident that you can develop those skills, or do you think you might be getting in over your head? Even if you don’t know how cyber-security works, that doesn’t mean you can’t run a wallet service, but it does mean you will need to hire someone to advise you on security issues.
Bringing in a specialist is an additional cost, but it doesn’t mean you can’t make money and you shouldn’t let it hold you back if this is what you want to do.
I recommended that you only work with a wallet service that you trust, and most people feel the same way, so before you get off the ground you’re going to have to develop your reputation in the Bitcoin world.
Get active in the forums, get used to how Bitcoin works, and let people know that you are thinking about starting a wallet service. You can charge a small amount for transaction fees, or you can charge a subscription for users, or even some combination of the two such as a free service with fees and premium service without them.
The exact structure is up to you, as long as you stay competitive with other wallet sites. I’d recommend starting small, and then growing your business by providing awesome service to your clients.
They’ll recommend their friends, and you will start to earn a decent income. It will take time because there is no substitute for a good reputation in this community, but this is one of the better ways to earn money through Bitcoins.
The option that’s gotten the most press, far more than mining or running a wallet, is investing in Bitcoins as a new commodity. As we’ve mentioned, some people have done great investing in Bitcoins, but you should approach all investment opportunities responsibly.
Don’t put in more money than you can afford to lose. On some level, every investment is a risk. Houses burn down, companies go out of business, and money under the mattress gets stolen.
Decide how much you can afford to lose, and start there. You can steadily add to your investment over time, so don’t feel like you have to start off with a large investment.
Don’t put all of your risk in one place. In terms of Bitcoins, this means two things. First, don’t put all of your money in Bitcoins. There’s nothing wrong with them, but I’d give you the same advice about anything else. Don’t put all of your money in gold, oil futures, or GM stocks.
Any of those things could plummet suddenly, so you should spread the risk around. Second, don’t keep all of your money in one wallet. If something happens to it you don’t want to lose all of your savings.
In the past, I would have said the same thing about banks, but now accounts are FDIC insured up to $250,000. If you have a few million you might want to spread it around so that FDIC insurance covers more of your money, but that’s less of a concern. Bitcoin doesn’t have any equivalent of FDIC insurance, so using multiple wallets is incredibly important.
Q: Why haven’t big companies gotten involved and pushed people out? There are reports of major traders like JP Morgan and Goldman Sachs visiting Bitcoin exchanges. Since trading is anonymous, it’s impossible to know if they’re getting involved or just keeping an eye on a future opportunity. Most guess that if they are not involved yet, they will be eventually.
But you shouldn’t worry about huge banks going all-in on Bitcoins simply because they have better things to do (if you had a couple billion lying around, you’d probably feel the same way).
With those caveats out of the way, it’s time to decide on your investment strategy. Are you in it for the long haul, or are you trying to get in and out and make a few bucks? Both are okay, but you should be clear on your plans ahead of time. If you want to make money quickly, you will need to spend a lot of time online looking at exchange rates.
The goal, as they teach in every Business 101 class, is to buy low and sell high. As a day trader, you are looking for sudden spikes for selling and sudden dips for buying.
It’s easier if you work in just one traditional currency such as dollars or Euros, but it’s possible to make more money if you are freely trading amongst all three. If you go this route, keep careful tabs on how much money you’ve earned or lost.
It’s easy to get emotionally involved in the process and feel like you’re doing well when you really aren’t. If you find that you are consistently losing money, you either need to try a different approach or accept that you don’t have the knack for day trading.
If you are particularly disciplined, you can even start off with some virtual trading. Give yourself an amount of money and then just note when you would buy or when you would sell, and calculate the changing value of your portfolio (don’t forget about those transaction fees).
After a few days, see how you did and try to find ways to improve your performance. A dry run can expose flaws in your plan before you burn through your savings.
If you want to take a longer approach to Bitcoin investments, then you really just need to decide on two numbers: how high or how low does Bitcoin have to go before you sell? Choosing the high number determines how much money you consider a good return on your investment, and the low number is how much you are willing to risk.
Checking prices once per day is enough to keep tabs of a long-term investment, though you should rush to the exchanges if you hear about any major news that could affect Bitcoin. One last thought; it doesn’t always make sense to go along with the herd.
If Bitcoins are plummeting you might want to sell what you have to limit your losses, but when everyone else is worried that they might cease to exist, it could be the best possible time for buying in.
If the Bitcoin is ever severely depressed in value, then you will have the opportunity to make a high-risk, high-reward investment, just like the early adopters did.
This is not saying you should do it, but you should be aware of the possibility so that you can make your own decision, instead of just going along with what everyone else thinks.
We’ve mentioned before that every new block puts more Bitcoins into circulation, currently 25 BTC per block, but that amount will continue to half until it effectively reaches zero, and then no new Bitcoins will be produced. In theory, there will be 21 million BTC in circulation at that point, but the reality is that there will be quite a bit less.
Every time someone loses a wallet or a private key, the Bitcoins that were lost are truly lost. Not just to that individual, but to the entire Bitcoin economy. Even before new Bitcoins cease to be produced, the stream will slow to a trickle, and the value of the currency will begin to deflate.
In other words, Bitcoins will become worth more and more over time. There are plenty of examples of out-of-control inflation, just think of post-war Germany or Zimbabwe a few years ago.
But, we’ve never seen steady deflation before. It’s a unique situation and one of the reasons that some people are making long-term investments in Bitcoins. You’ll have to do your own research and make up your own mind about this, but if you believe that Bitcoins will still be used twenty years from now, then they will almost certainly be worth quite a bit more. Compared to traditional currencies, which will certainly be worthless, that’s a pretty good deal.
That’s a great question, and frankly, no one knows the answer. The only consensus is that there will be slow, steady deflation.
Most economists agree that steady deflation is bad for a currency, but then most economists thought that the world economy was perfectly stable in 2007 — therefore take their opinion with a grain of salt. The reality is that there has never been a steadily deflating currency, so we’ll just have to wait and find out.
Bitcoin is still a relatively new concept, and everyone involved continues to learn more about how it works in the real world, but now you have everything you need to get started on your own.
Like most things in life, the best way to proceed is to dive right in — but without taking on more risk than you can afford. So get a Bitcoin wallet, or subscribe to an online wallet service, and get yourself some Bitcoins.
Start following the exchanges and meeting other Bitcoin users in forums. The community is lively and there are lots of people who will be happy to help you find your bearings.
While you’re meeting new people and exploring this new online community, take some time to decide what you really want out of Bitcoin.
Whether you want some passive income to supplement your normal job, an online business that you can run from home, or the chance to make serious long-term investments, you can approach from the Bitcoin world from lots of different angles.
All investments have risk, and Bitcoin is no different, but it’s an exciting time for this new digital currency, and you can still get in before it takes off into the mainstream.
Set your priorities, make a plan, and then follow through. The future of Bitcoin looks very bright and now is your chance to take advantage of the world’s first digital currency.