This chapter explains the various methods you can use to make money with bitcoin. Investing in bitcoin is the most obvious answer, but there are other ways at your disposal as well. Not all of these methods cost very much money either, so read through and see which method suits you best.
Bitcoin mining is a slightly misleading name. No one swings a pickaxe into rough stones in order to find additional bitcoins (at least, I hope no one is trying that). Bitcoin mining actually means adding more bitcoins to the digital currency ecosystem.
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There will be a total of 21 million bitcoin in circulation by 2140, and there are roughly 15 million in existence at the time of this writing.
How bitcoin mining works
So, how do new bitcoins come into existence? All the additional bitcoins have to be generated through a computational process called mining. You do it by letting your computer hardware calculate complex mathematical equations, which can be done at any given time of the day.
Doing so enables you to become an integral part of the bitcoin network, not only by securing the network through your dedicated hardware but also by generating more coins to put into circulation
There are certain similarities to how other resources — such as gold — are mined: The available supply is slowly increased as more is being put into the mining process. That said, the way bitcoins are mined is by solving complex computational problems, which require more resources as time progresses.
To ensure that no more coins are generated every day than originally intended, the mining process is linked to a difficulty rating.
This rating goes up as more computational power joins the bitcoin network, and decreases when there are fewer miners competing for network blocks.
A short history of bitcoin mining
Over the years, bitcoin mining has seen a tremendous evolution in terms of the required hardware to mine bitcoins. Very little hardware was required when bitcoin launched in 2009, as there was little to no interest in the project.
But as more and more people caught wind of bitcoin and joined the network, the computational power increased exponentially.
The mining difficulty parameter (which determines how much computation power is required to solve the mathematical equations associated with generating bitcoins) adjusted accordingly, in order to make sure new blocks
on the bitcoin network were still ten minutes apart.
The reason for keeping bitcoin blocks ten minutes apart is to collect as many broadcasted bitcoin transactions into one block and validate these transactions at the same time.
In 2009, the first versions of the bitcoin client had a built‐in process that would let anyone running the software mine bitcoin with their computer’s central processing unit (CPU) — the main processor in a computer.
Because every computer has a CPU, and only a handful of people were mining bitcoins at that time, there was very little competition.
In fact, most of the coins in the first few months were mined by Satoshi Nakamoto, who also gave away some coins to other people in order to allow testing of the bitcoin network.
It didn’t take long for one of the miners to figure out that the mining feature could be adapted to use a graphics processing unit (GPU), rather than just a CPU. Because a GPU — also called a video card — is specifically designed to solve complex mathematical tasks, it is able to mine bitcoin more efficiently than a CPU.
However, that performance is offset by a large increase in electricity use, as GPUs draw a lot more power from the wall compared to CPUs. This change was the first chapter in a long and storied bitcoin mining arms race.
Developers and engineers started tinkering around with the idea of creating a new piece of hardware that mined much faster and more efficiently than GPUs and CPUs. Field Programmable Gate Arrays (FPGAs) saw the light of day a few years ago, and they outperformed CPU mining by quite a margin.
Furthermore, any FPGA could mine nearly as fast as a GPU available at that time — while using far less electricity to complete the task of mining bitcoins.
When reading up on bitcoin mining these days, one term people often come across is ASIC, which stands for the application‐specific integrated circuit. This is a microchip designed specifically to mine bitcoin.
The first bitcoin ASICs started hitting the street in early 2013, and they outperformed GPU and FPGA mining by such a the margin that miners scrambled to get their hands on one of these shiny machines.
But ASICs have a major downside as well: They are very power hungry, they make a lot of noise, and they generate a ton of heat. On the flipside, a Bitcoin ASIC miner is vastly superior to any other type of hardware in existence today and remains quite costly in some cases.
As these new devices started popping up, the need for electricity increased exponentially. As a result, mining bitcoins is extremely unprofitable in most parts of the world, unless you have access to cheap or free electricity.
In most cases, the investment cost of bitcoin hardware, combined with the electricity costs, make it impossible to make a profit by mining at home. But there is a solution to that problem: Bitcoin cloud mining lets you mine bitcoin by purchasing mining power from a machine hosted in a different part of the world.
Cloud mining has become somewhat popular in recent years. It allows you to mine without needing to buy and/or host the hardware yourself.
Most bitcoin cloud mining providers charge a daily or monthly fee to cover electricity costs. Cloud mining allows a user to start earning money directly, rather than waiting on the delivery of some fancy machine.
In the future, as with all computer advancements, microchips will be made smaller without sacrificing computational power.
And with smaller chips, more of them can be fitted onto a board, increasing the machine’s overall mining power. Engineers are trying to reduce the energy use of these microchips too. Making mining more energy efficient could lead to more profitability in additional parts of the world.
Trading bitcoins is one of the easiest and most lucrative ways of making money with digital currency. The bitcoin price is volatile, which means it goes up and down on a regular basis. Experienced traders can profit by predicting price increases or decreases.
Successful bitcoin trades can earn you a decent amount of money over time, but be aware that things can go the other way as well. Always trade at your own risk, and only use the money you can afford to lose.
Day trading versus fiat
Day trading is buying and selling financial instruments — such as bitcoin — within the same trading day. Fiat currency refers to a national government’s legal tender.
Using bitcoin allows you to trade in several different ways. The most obvious way of trading is exchanging bitcoins to and from any of the local currencies it can be traded against. In most cases, people decide to go after the major fiat currency markets because they generate a lot more trading volume compared to smaller currencies.
Hence, the biggest fiat trading market is China, where BTC is traded against Chinese yuan (CNY). Depending on where you live, you may or may not have easy access to CNY for trading purposes.
However, a quick call or trip to your local bank may provide you with some very useful information on how to obtain Chinese yuan and at which exchange rate — assuming you are planning to go through with playing the Chinese bitcoin day-trading market.
Other major currencies can be easily converted to and from bitcoin as well, thanks to the multiple exchanges supporting these currencies; at the time of writing, these currencies include the following:
✓ British pounds
✓ Canadian dollars
✓ Russian rubles
✓ U.S. dollars
If you already own bitcoin, there is no need to obtain any type of fiat currency prior to starting your day‐trading experience.
Transfer over the bitcoin balance you want to play around with to your favorite exchange and start trading against the fiat currency of your choice. Bitcoin is well known for its volatile nature, so there are gains and losses to be made each and every day.
Sometimes those losses or gains will be big, whereas at other times they may not be. Alas, that is the life of day trading. Still other options, besides buying and selling Bitcoin directly, allow you to speculate on the bitcoin/fiat currency markets.
Several trading platforms exist that let you speculate on the increase or decrease in bitcoin price versus a certain market — and they even accept bitcoin as payment. These include:
Even though quite a few merchants accept bitcoin payments, nearly all of the funds are converted to fiat currency directly. This is done in order to protect the merchant from any bitcoin price volatility that may occur, which is one of the reasons why so many shopkeepers are happy to join the digital currency train.
On the other hand, these conversions from bitcoin to fiat currency also create a side effect, as there will be sell pressure across the major exchanges. Bitcoin payment processors need to liquidate those bitcoin payments as soon as possible to pay the right amount to the merchant.
As a result, there can be a few hefty BTC sell orders going through at certain times, which create a perfect opportunity to scoop up some slightly cheaper bitcoins.
It has to be said, however, that speculating on the bitcoin price is certainly not for the faint‐hearted and should be approached with a great deal of caution.
Granted, the traditional factors influencing fiat currency also influence the bitcoin price in some way; of more danger is the way in which a new scam, or a major vote of confidence for or against bitcoin, can both shake up the price quite a bit. Yet there is not always a clear reason for a bitcoin price change either, as these things just happen.
Day trading versus altcoins
Okay, so you have an idea of what day trading is from the previous section (if you skipped it, flick back to get a definition). Let me introduce altcoins — also known as alternative currencies. These are bitcoin clones, bitcoin rivals (boo, hiss!). By the time you’re reading this book, there will be well over 4,000 different altcoins in existence.
If you do not like to trade or speculate on the bitcoin against fiat currency markets, you could trade against altcoins instead.
Altcoins seek to improve on the ideas bitcoin represents. Some people feel the need for more anonymity, whereas other developers want to explore the boundaries of the underlying blockchain technology.
Rather than submitting their ideas to the bitcoin developers, they use the bitcoin code, change the name, make some minor tweaks, and launch it as a brand new digital currency.
Over the years, only a dozen or so altcoins have managed to stay relevant over time, mostly thanks to a strong community and the integration of some unique features that have not made it to bitcoin core (yet). Nevertheless, none of these altcoin communities is as large or as supportive as the bitcoin community.
But that doesn’t mean there is no speculation going in the altcoin scene either. And this is why so many day traders prefer to speculate on the altcoin markets, as there is a lot of room for quick profits and quick losses.
Most altcoins are created by pump‐and‐dump groups. What this means is that developers create a lot of hype for their coin and promise unique and interesting features. As people find out about these promises, they are more eager to buy coins at a low price, which in turn pushes the price upward.
A few altcoins that have people who are actively working hard outside of pump‐and‐dump groups include Litecoin, CasinoCoin, and Guldencoin.
Rather than pushing up the price by buying coins, some altcoin developers encourage community members to put down a lot of money for a valueless altcoin. And once the price is high enough, these developers cash out, take their money, and work on a new coin for next week.
There are many altcoins to go around, and most of them will never serve an actual purpose. However, if you can catch a few cheap coins before the price increases, there is a nice amount of profit to be made. Never become too greedy though, as prices can plummet even faster than they rise.
Crowdfunding with Bitcoin
Rather than relying on one investor, or one major source of funding, a crowdfunding campaign allows you to decentralize the funding process by acquiring backers and supporters to provide money up front.
By accepting bitcoin as a payment method for your campaign, you can decentralize things even further and reach a global audience.
Bitcoin provides businesses and individuals with a powerful tool to raise funds for an upcoming or existing project. Considering the fact that bitcoin is not taxable in most countries, many people view it as a safe haven for “tax‐free” funding.
When you convert the raised funds to fiat currency, you may be taxed on them, depending on the amount you receive.
When crowdfunding, never list a fake project or claim to do something with the money you never intend to fulfill. Even though bitcoin is a non‐reversible payment method, people will hunt you down if you try to run off with their money.
Luckily for bitcoin enthusiasts, most crowdfunding projects so far have been legitimate, and most have delivered on their promises as well. Depending on what type of project you list, it may take additional time to reach your goals, especially if it involves blockchain technology development.
But not every project is using crowdfunding platforms for the right reasons. Some people view crowdfunding as a way to get some funds quickly, without ever having to pay it back. Even though most platforms implement security against misuse, there is always a minor chance of a project not delivering on the promises made.
But that has nothing to do with bitcoin per se — it can happen with any type of crowdfunding campaign. Simply look at how many people backed projects in Kickstarter and never received the item for which they pledged a certain amount. Check out www.kickstarter.com/help/stats for more.
Whenever you help crowdfund a bitcoin project, always determine whether you are entitled to some form of reward. Crowdfunding is not the same as buying a share of a company or product at a cheaper rate. It simply means you’re willing to spend money in order to make someone’s dream come true, which may or may not include a reward.
However, you should not partake in a crowdfunding campaign just for the reward. That’s not why this system
was invented in the first place.
Understanding ICOs and IPOs
Initial coin offerings (ICOs) and initial public offerings (IPOs) are not droids from Star Wars. They’re financial terms:
✓ ICO: Potential investors are given the chance to purchase a part of the altcoin’s total supply before the mining process begins. Most investors do so in the hopes of seeing the price per coin increase in the near future.
✓ IPO: An IPO takes place when a bitcoin or altcoin company or project hopes to raise additional funds for its operations. Investors receive a share in the said company and earn interest, paid out in recurring dividends.
Both terms carry a slightly negative connotation in the world of bitcoin crowdfunding because multiple false promises and scam projects have been associated with ICO and IPO promises. That said, both are being used for legitimate purposes as well.
For example, whenever you’re planning to create a new use case for blockchain technology which uses its own token (another word for coin), you are effectively holding an ICO. Per certain amount invested, the user will receive X amount of tokens in return to use on the new platform once it has been launched.
You are effectively offering your backers a tangible reward, even though it may not come in a physical form. Whether these digital tokens will gain value over time completely depends on the success of your project.
But you are also incentivizing backers to spread the word about your crowdfunding campaign, which will go a long way in terms of developing a successful platform.
You don’t have to hand out digital tokens for people who want to back your project. However, investors — both small and large — like nothing more than some sort of return on investment, preferably sooner rather than later.
Using an ICO/IPO may help you in that regard, entirely depending on the magnitude of your project and what it entails exactly.
You’re putting additional stress on yourself whenever you’re creating — or investing in — a project that involves an ICO or IPO. As an investor, you will need to keep track of the progress and make sure you’re given the coins you have paid for.
And as a developer or project creator, you have responsibilities to live up to, including the distribution of these digital assets to the right people.
Creating a crowdfunding campaign with an IPO/ICO generates both excitement and expectations at the same time. Although people will see the value of your project, they are also speculating that the digital asset price will increase once your project goes live. And if there is one thing that can be said for people who trust you with their money, it’s that they’re not always the most patient bunch.
Offering company shares
Rather than offering potential investors digital assets, you could opt to grant them a share of your company or project in exchange for their money. When taking this approach, you can ask for as much or as little per share as you personally like, but you have to ensure these shares represent some value.
You can give your company shares value by paying weekly, monthly, or even quarterly dividends to shareholders. Once again, by doing so you incentivize potential investors to spread the word about your company or project, which is essentially an invaluable form of free marketing for whatever you are trying to achieve.
To make the offer even sweeter for potential investors, you can choose to pay out dividends in bitcoin. Even though these amounts will be very small in the early days, investors will start to see some form of the return of their initial investment.
Plus, it will give everyone a public hint of how the company/project is faring and what can be improved in the near future.
The same principle of paying dividends in bitcoin can be applied to potential investors who want to stick to traditional payment methods, rather than buy bitcoin first.
Once they have sent you the designated funds, you can still pay their dividends in bitcoin, in order to get them acquainted with the monetary aspect of this digital currency, assuming they are willing to agree to those terms.
Holding Bitcoins for the Future
Bitcoin attracts a lot of speculators from all over the world. Considering that the bitcoin price fluctuates constantly, you could gain a lot of money by buying bitcoin at a relatively low price in the hopes of earning a profit in the future.
Keeping in mind there will only be 21 million bitcoins in existence by 2140, it only seems logical that the price per bitcoin will increase over time. Whether or not that will actually be the case remains to be seen.
Driving your investment
Bitcoin is often referred to as an investment vehicle, even though that term is thrown around quite loosely by many people.
In the early days of bitcoin, people would buy up cheap coins in the hopes of not only growing the network by giving out free BTC, but also because the price per coin would hopefully increase. And that certainly fits the description of an investment vehicle.
That said, the bitcoin price has come a long way since the digital currency’s inception in 2009. In the early days, every bitcoin being mined was virtually worthless, a trend that continued for quite some time until the network started to grow and more people shared an interest in bitcoin.
As interest in bitcoin grew, the market price experienced a slow but steady uptrend between 2010 and 2013. 2013 was an especially interesting year for bitcoin when the price per coin rapidly increased and reached an all‐time high of U.S. $1,163.
As was to be expected, this price could not hold its ground, and the value started dropping again slowly after.
10,000 bitcoins for two pizzas?
The whole “value of bitcoin” debate started picking up mainstream media attention when a user named Laszlo on BitcoinTalk (www.bitcointalk.org), an online forum where like‐minded souls can discuss bitcoin, offered a bounty of 10,000 BTC for two pizzas.
Another BitcoinTalk forum user offered to order two pizzas from Dominos and have them delivered to Laszlo’s house in exchange for the bounty.
On that day, the very first “official” bitcoin transaction for a product and service was recorded on the blockchain. May 22, 2010, and now the date 22 May going forward is known as Laszlo’s Pizza Day around the world, celebrated with events in various countries.
And in fact, some bitcoin enthusiasts to meet up on May 22 to enjoy a slice of pizza together while discussing everything related to bitcoin and the blockchain.
After that day, more and more people started to see the potential value of bitcoin, and investors scooped up as many coins as they could.
Wealthy individuals, such as the Winklevoss twins (of Facebook‐founding fame), set a goal of having 1 percent of all bitcoins in circulation in their possession at all times. Quite an ambitious goal, especially when you take into consideration there will be a total of21,000,000 coins by 2140.
Until the end of 2014 and early 2015, the bitcoin price kept falling lower and lower, despite an increase in merchant adoption and the number of wallets created. Some financial experts saw this as the downfall of bitcoin, whereas others saw it as merely the beginning of a new era for the disruptive digital currency and perhaps of some currency speculators being shaken out of the market.
In simple financial terms, there was a bubble in the bitcoin price followed by a crash which has seen the price return to levels comparable prior to the bubble.
At the time of this writing, it remains unclear who was right. But one thing’s for sure: Reports about bitcoin’s demise are greatly exaggerated. The figure below shows the ups and downs of bitcoin’s price through the years.
Hoarding your booty
So many people own various amounts of bitcoin as an investment that a new problem has been created: Investors who bought bitcoin at a low — or very high — price are holding on to their bitcoin balance in the hopes of recouping their investment or making a profit.
With so many coins being kept out of active circulation for an unknown period of time, this raises concern regarding the future of bitcoin. As the price keeps drifting horizontally on the charts, rather than vertically, the sudden demand seems to have slowed down.
On the other hand, with multiple people holding a vast amount of coins, bitcoin could be only one sell order away from plummeting to pre‐2013 values.
As is the case with any form of major investment, there’s always a chance that someone liquidates their assets because they’re getting impatient. And bitcoin is no different in that regard. Strangely enough, hoarding also creates a positive side effect.
Bitcoin is one of those digital currencies that has a fixed supply of coins to be released. By the time you’re reading this book, we will be at 75 percent of the total amount being in circulation. Even so, there is still quite a scarcity, as not all of these coins are being spent or sold to other investors.
That leaves interested parties with a smaller amount of coins to purchase, which should, in turn, eventually, push the price up again. Depending on how much some of the original coin hoarders paid for their stash of bitcoin, it may take a long while until the BTC price settles at a point where they consider selling off some assets.
Regardless of how you look at the situation, hoarding is a problem in the bitcoin world. But keep in mind this digital currency is only six years old, and there is still a lot of time left to grow and gain more adoption on a global level. How that will affect the hoarding problem, as well as the views on bitcoin as an investment vehicle, remains to be seen.
Check out the bitcoin price chart at the following website for up‐to‐the‐minute info on what your BTC is worth. We recommend setting the view to 1W (one week) for the most comprehensive picture over time: https://bitcoinwisdom.com/markets/bitstamp/btcusd.
Rather than buying bitcoin from an exchange, there are other ways to obtain bitcoin. There are several ways to “earn” bitcoin while you actively contribute to the community and learn about new aspects that may be of interest to
you in the future.
Earning through forums
Most online bitcoin discussions take place on the BitcoinTalk forums (at www.bitcointalk.org). And as this forum has
grown in popularity over the years, opportunities to make money have arisen as well. Especially for new and established bitcoin companies, the BitcoinTalk forum is an interesting place to advertise their business.
Forum signatures (placed at the bottom of forum profiles and visible on every post a user makes) allow BitcoinTalk users to earn a small number of bitcoins every time they make a constructive post or topic on the forum.
The person organizing this forum signature campaign keeps track of the number of posts you make during a week and pays them according to the amount at an agreed upon time.
Engaging in discussions with a well‐constructed opinion or answer is one way to do that. Or if you have a question you would like to see answered, the creation of a topic also counts as one post.
Additionally, you may be rewarded for every constructive reply on your own topic. Rewards for forum signature campaigns depend on various factors.
First of all, the company looking for people to advertise its service may have a small or large budget, and the payout per valid post correlates to that amount. In some cases, that amount can be next to nothing, whereas in other cases, it might be quite substantial.
This all depends on which product or service the company is looking to promote, and how much user interaction it receives based on the forum signature campaign in general.
Secondly, some forum signature campaigns limit the number of posts you can make during a payout period. A payout period is an agreed‐upon amount of time during which the user can make posts to promote the signature campaign.
Most signature campaigns payout users on a weekly basis and the company running the advertisement can decide to only allow a maximum number of posts per week. Any post over that amount is not rewarded.
One of the most important factors to determine whether or not a forum signature is right for you depends on your own user rank on BitcoinTalk. Members who are active and often participate in conversations will see their forum rank increase. The higher your forum user rank, the higher your forum signature payout per post will be.
Legendary users (users with a level of “forum activity” of over 850) and Hero users (users with a level over 500) usually earn the most of any user class and are hardly ever limited to a maximum amount of posts per payout period.
Spamming the forum with clutter and short messages can lead to being banned and disqualified from the forum signature campaign.
More information on BitcoinTalk signature campaigns can be found at https://bitcointalk.org/index.php?board=52.0.
Earning through jobs
Several platforms exist where you can find a job that pays in bitcoin. Whether you want to make a career out of working for bitcoin is a different matter entirely, but completing micro tasks is a great way to build a reputation and earn some money on the side.
Unfortunately, hardly any of these tasks pay a substantial amount, though some opportunities can lead to other doors being opened in the future. And those doors can lead to interesting job opportunities, even though those are more the exception than the rule.
One thing to keep in mind when completing any sort of task in exchange for bitcoin is that you have to deal with legitimate people and companies only. If a specific task needs to be completed for a certain company, your chances of getting paid are much higher compared to dealing with random individuals.
Additionally, there is no such thing as getting paid up front in the bitcoin world. Similar to how regular jobs work, you have to provide the service or goods first before you get paid. There are usually no written contracts between both parties to warrant a payment, so tread carefully when jumping at an opportunity.
Bitcoin is still a brand new industry, and many companies think they have what it takes to deliver the “next big thing.” As a result, people who find their job in the bitcoin world right now — and surely in the years to come — will not only receive their wage in BTC, but company shares (or stock) as well.
Working from home is a possibility, though most jobs require a physical presence wherever the company is located.
Depending on your location, any form of bitcoin income might be subject to taxation. This situation is different for every individual country. We advise you to check with your local government or tax revenue office to see whether bitcoin is taxable in your country.
Earning through faucets
One of the easiest ways of earning parts of a bitcoin comes in the form of so‐called faucets. A faucet is a website that lets users claim a tiny amount of bitcoin in a certain time period, which can range anywhere from minutes to days.
Don’t expect to get rich overnight by visiting various bitcoin faucets, because most of them will pay next to nothing. Then again, you’re doing nothing to earn it.
Bitcoin faucets operate on a simple principle: They keep on giving out tiny chunks of bitcoin as long as there are advertisers willing to spend money to have their banner hosted on the faucet website (clicking the advertising banners generates small revenue for the hosting website).
Fractional amounts of bitcoin are regularly distributed, and the funds have to come from somewhere.
In most cases, bitcoin faucet operators pay out of their own pocket for the first weeks or months until they can attract enough traffic and secure some advertising deals for their website.
For the novice user, bitcoin faucets are a great way to collect fractional amounts of bitcoin. However, visiting bitcoin faucets all day long would still only get you $2 or $3 maximum, so there is the trade‐off in terms of whether it is worth your time.
In most cases, it isn’t worth your time, because there are more productive ways to earn bitcoin, such as forum signature campaigns or completing micro tasks (see the previous sections for more on these). You can find more information on bitcoin faucets at https://en.bitcoin.it/wiki/Bitcoin_faucet.