Understanding Bitcoins: Cryptocurrency Mining Equipment and Preparation

In the previous post of this series, I explained that you can make your own money in cryptocurrencies. That’s right, you make your own money. Feel free to read it again so I don’t have to repeat myself.

This may not be for the faint of heart, though, and will require that you do some research. In the end, your cost may exceed your earnings, so you don’t want to based your pension on mining coins unless you’re prepared to spend considerable time preparing.

For the purposes of this article, I’ll be using examples from mining Litecoins. Litecoins is a cryptocurrency, a younger and much smaller brother of Bitcoin, that uses a slightly different algorithm for mining than its big brother. I’ll explain more later in the article.

Oh, and the article is written in mid-April 2013, so chances are high that the numbers will be wildly different at a later date (better or worse; it will likely be different).

Mining for Money

In terms of cryptocurrencies (of which Bitcoin is the major player), mining refers to the process by which new money come into existence. This process is performed by performing massive amounts of calculations and then by sheer luck ending up with a certain result that matches a pre-determined value. I explained this briefly in the article Making Money!

This may sound strange, but works very well and is a very fair way of distributing money. You get more money if you put in more computational power.

It does, however, favor the geeks who are willing to spend the time to do the mining. Mining for coin is certainly not as easy as double-clicking Setup.exe and accepting all the defaults.

You need to make sure you have the right hardware. Technically, you can mine on any computer, but chances are you may be spending more money in electricity than you gain from the venture. Next, you need the right software and the patience to learn how it works, and to be honest, it’s quite hostile at times.

Finally, you need to get your expectations right. It’s easy to get blinded by the initial earnings you can reap from coin mining, but you’ll likely have a rude awakening before long unless you know what to expect.

Let me elaborate on these details.

Hardware

TL/DR; If you don’t have a high-end graphics card, you won’t make money.

The first consideration you need to make is what hardware to use. Now, you may have a brand new laptop that you’d want to use to mine or you have an old PC laying around that’s collecting dust, and you want to see whether you can get some money from it.

Chances are, you won’t make any money, and in fact may lose money due to power cost, unless you have a high-end graphics card, and preferably one from AMD.

The reason for this is simple; the computational tasks you need to perform are perfect for the graphics processing unit (GPU) of your graphics card, but utterly inefficient for a CPU. Your CPU is designed to perform a wide variety of tasks while your GPU is designed to do only one thing; crunch numbers by the billions. You can read more about why a CPU is inferior to a GPU in the Bitcoin Wiki.

A good high-end card, though, may pay for itself over a few months, so if you’re planning on upgrading your gaming PC in any case, then you may actually get the graphics card partially of even fully paid for by using it to mine coins.

By high-end graphics card, I mean the top two or three cards on the market. You always want to get an AMD card, for example a Radeon HD7950, over an nVidia Geforce card, for example, because the Radeon cards have more ALU pipelines than Geforce. If that tells you nothing, think of it as AMD having more but simpler ways of doing calculations. This means you can get more simple stuff done per second, often by a factor of 4-5 in favor of AMD, which is all that matters in coin mining.

How much money can you make from a card? Well, it greatly depends and it goes down over time. It’s impossible to accurately predict how much money you will make, but you can get a pretty good estimate by using numbers from a mining hardware guide and putting those numbers into a mining profitability calculator.

Note: The Dustcoin mining calculator at http://dustcoin.com/mining will show you the profitability of several cryptocurrencies so you can pick the one that gives you the most money.

Give Me Power!

TL/DR; You want enough power and a good PSU. A cheap or bad one may cost you money or lost revenue.

And important consideration in mining profitability is your power consumption. This is a reason why older machines perform far worse; they are simply less power efficient.

When you start mining, your power consumption will skyrocket. At idle, a GPU may consume 40-60 watts, but at full peak, a 7950 can easily drain 250 watts or more if you overclock it.

As such, keeping tabs on your power cost is vital to figuring out whether you will make money. For most older computers, they consume so much power and generate so little computational power that the calculations simply don’t add up.

As an example, my rather old Intel Core 2 Quad Q6600 CPU will generate around 14 kilohashes per second of computational power, but will consume 105 watts of power. Putting that into the mining calculator at at present, I will earn a whooping US$0.27 per week mining Litecoins. However, my new 7950 GPUs generate around 550 kilohashes per second (around 40 times as much as the CPU) consuming around 200 watts of power at peak. Put that into the calculator, and at present, it will generate around US$83 per week.

Note: Yes, those examples contained a lot of new terms. I’ll explain in a moment.

Because you need a lot of power, you also need to make sure your power supply unit (PSU) can cope. If you are building a new machine for the purpose of mining, that means a high-end PSU too. Expect around 200-250 watts per GPU plus 100-150 watts for the rest of the system. Also make sure you have a quality PSU; in terms of system stability, not all power is equal, and a bad PSU may seriously affect your mining operations and reduce profitability by giving you less than peak performance and possibly downtime.

Software

TL/DR; If you hate tweaking settings through a user hostile interface, you are out of luck.

The choice or software for mining is simpler, because in reality, there are just a couple of options. You can either use Reaper or cgminer. At the time of this writing, Reaper seems to be a dead project and the normal download links are dead, so cgminer is your weapon of choice.

cgminer is a free tool that is incredibly well designed once you get to know it. However, it has a console user interface and you need to know what you are doing to work it properly. Not using it properly means you lose a lot of hashing power, as much as 40-60 percent. It requires constant tweaking until you get it to run at peak efficiency.

As an example, with its default setting, my new GPUs do around 250 kh/s, while properly tweaked, they run at over double that.

cgminer

There is a nice graphical user interface version that will give you an easy way to just get started, but I highly recommend not using that. As for a non-tweaked cgminer, it will simply yield lousy results and you’re throwing money out the window.

In other words, you should expect to spend a fair amount of time tweaking settings and learning what yields the best results, or you should avoid the whole thing; it simply won’t be worth it.

Expectations and Results

After you’ve set up your mining operation, it’s time to start evaluating the results of your hard work and time to understand some of the terms I used earlier.

First, you need to understand that there are two types of mining for cryptocurrencies; SHA-256 and Scrypt. Every currency uses one of these methods, but both share the property of being far more profitable on a GPU than a CPU.

For SHA-256 based currencies (like Bitcoin, Namecoin, and PPCoin), you usually evaluate your efficiency in millions of hashes solved per second, or MH/s. For Scrypt based currencies (like Litecoin and Novacoin), you usually evaluate your efficiency in thousands of hashes solved per second, or kH/s.

Note: A further difference is that Scrypt based mining is resilient against ASIC mining due to memory requirements. ASIC mining refers to using specialized chips that do hashing very fast, by several orders of magnitude.

This does not mean that Scrypt based mining is 1,000 times slower or less efficient. In fact, at the time of this writing, the Scrypt based currencies are more efficient than SHA-256 in terms of return on investment. You can check Dustcoin for the relative efficiency of the various currencies.

Of course, the only proof is in the pudding, so the ultimate evaluation of your result depends on whether you make more money than you spend.

What Will I Earn?

Patience, grasshopper, it’s not as easy as giving an amount X which works in all or even most situations.

First of all, you need to understand that mining profits adjust based on the need and power of the network. The more power combined, the more difficult it becomes for everyone to find a correct solution to the problem. Thus, the more profitable mining becomes, the more people will want to mine, and the harder it gets, reducing profitability. Then, when people stop mining from lack of profitability, the difficulty decreases, and profitability rises again.

Note: Mining power moves between the different currencies in response to profitability. You can check the relative profitability on the Dustcoin mining calculator.

Due to this self-regulating characteristic,

What is your electricity cost? If you are mining on inefficient or older hardware, chances are your output is going to be less than the cost of your power drain. At the time of this writing, mining using your CPU is already obsolete, and for SHA-256 mining, even GPUs are falling behind the efficiency of ASIC miners.

What is the cost of your hardware? If you are purchasing new equipment to mine for currencies, you need to account for the cost of hardware over time, and this becomes a bit more complicated due to the self-adjusting difficulty of mining operations.

Let’s say you buy a new Radeon HD7950 card for $250, and put it through the hoops of tweaking until it reaches an output of around $10 per day. “Great”, you think, “I’ll have that baby paid off in a matter of weeks”.

Well, sorry to burst your bubble, Sunshine, but because the difficulty increases as more hashing power is added to the network, so does your profitability. At times, the difficulty has increased by 80-100% during a week, meaning your profitability may have dropped to $5-6 per day by the end of next week.

And yes, this will keep happening.

Oh, and let’s not forget that the reward for finding a block (which is how new coins are minted) goes down on a regular basis. That means that at predictable intervals, the profitability halves.

Get Rich Quick!

Here’s the bottom line, and I’ll elaborate on this further in a later article. If you think the price of cryptocurrencies is going to go up, there’s really no point in buying mining equipment. This may sound counter-intuitive, so let me explain.

First, though, allow me to thank Deprived over on Bitcointalk.org for explaining this somewhat counter-intuitive idea.

Let say you buy a Bitcoin right now at $250 because you think the price per Bitcoin will go up, and the future proves you’re right, sending the price per Bitcoin to $500 after a month. Now you can sell your Bitcoin and buy twice the processing power that you could when you started, because your equipment will be denominated in dollars.

Note: Denominated simply means its price is set in a certain currency

You won’t be nearly able to mine coins enough with your new equipment to warrant a repayment in a month. Most likely, you are looking at several months, probably more, before your investment has repaid itself. Of course, this also means that the Bitcoins you have mined will be more valuable.

Now, if you think the price per Bitcoin will fall, however, then buying your equipment now will mean you safeguard yourself against a drop in BTC prices because you’ve not invested anything in Bitcoins per se. Let’s say the price of a Bitcoin drops to $125; you can now buy two Bitcoins for the same dollar amount, so sell your mining equipment and buy two Bitcoins instead. Again, with the reduced Bitcoin value, your mining operation has likely produced a loss.

I’m not going to give financial advice, because I really suck at it, but you need to understand that the prospect of making your own money is more complex than you think. If you’re not willing or able to properly evaluate the investment before you begin, your chances of getting rich as opposed to losing money is minute.

Thanks for reading, and don’t forget to tip your waitress.

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Bjørn Furuknap

I previously did SharePoint. These days, I try new things to see where I can find the passion. If you have great ideas, cool projects, or is in general an awesome person, get in touch and we might find out together.

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