Monday, 19 June 2017

CryptoCurrency - Exchanges, Wallets and Mining

Following on from my last blog entry, Blockchain re-awakening.......and of course the crypto-currencies, in this blog, we will look at the various exchanges, wallets and mining options I considered.

Let's start with Exchanges

These are no different to the stock market or currency exchanges at the airport. You can simply hand over a lump of cash and get it exchanged for crypto currency. Likewise, you can also sell your crypto and convert back into cash. Note: Tax laws may be applicable in your location, so you need to be aware of any implications.

There are a huge number of exchanges out there. All with slightly different features, fee structures, supported payment methods, and of course varying crypto currencies you can trade. You can search Google, but here are just a few to start you off;
In the end, the one I have started off with is Coinbase, as it appears to have a pretty good reputation, although they have had some load capacity issues lately due to the sudden spike in interest in the whole arena. A lot of exchanges have also suffered, which doesn't come as a surprise.

Depending where the exchanges are located they required different levels of validation of who you are. This is obviously upsetting a lot of privacy advocates, about how it is removing the anonymity within a decentralised system. However, from a fraud and crime prevention point of view you can see why they are doing this and it is probably helping to keep the legislators off their backs. along with the different levels of validation, comes different levels of account limits. i.e. if you have been validated with government documents, e.g. a passport, you can have higher purchasing limits.

The exchanges also act as a 'hot wallet' for storing your crypto currency, whether you wish to hold your currency with the exchange or move it out to another wallet is up to yourselves, but you have to factor in transaction costs etc.

Purchasing was as simple as entering a payment method, selecting the crypto you want and how much you want and this is then deposited in your account once the transaction has been verified through the blockchain. More on this later.

What about Wallets?

Wallets are essentially public key cryptography stores that hold the necessary key to validate and claim ownership of any coin on the blockchain. Holding references to addresses, transactions, keys, so it is pretty important you look after them. Just like if you lost your wallet in the street containing real cash, if you lost access to your crypto wallet, or someone else found the keys, you could lose all your funds.

Hot wallets, are typically online, at an exchange or other wallet provider. You can also have Cold Wallets, Vaults, Desktop, Mobile, Hardware wallets and Paper wallets. In the end, security is what ultimately matters, and many recommend you only keep a minimum about of currency in a Hot Wallet, i.e. enough for your day to day transactions.

Each type of wallet comes with its pro's and con's, and again, it is worth investigating your wallets. There is a big push towards Hardware Wallets, like the LedgerNano S, see, but as demand is high, these are hard to get hold off without having to wait a couple of months for the next production run or pay some serious markup online.

Other than just keeping currency in Coinbase, I have also used Jaxx, which is a multi-platform wallet that you can syncronise across a number of devices. There has been some noise lately that these are vulnerable and not secure. The reality is, that someone has to gain physical access to your device to gain access to your wallet, to then compromise the seed. So providing you maintain a high level of security across your computers/mobiles with strong passwords and pins where appropriate. as you should anyway, then the risk is minimal. Think of it like your ATM card, you need a pin to spend on that don't you?

Different wallet providers also support different crypto currencies, whether it is Bitcoin, Ether, Litecoin, Monero, ZCash, and all the others.

Send or receiving currency is as simple as entering an amount and entering the relevant wallet address. The wallet addresses are long strings of characters, so it is always recommended to copy and paste the address or scan the barcode to minimise the risk of a mistake and your currency heading of to a complete stranger. You can effectively say you have lost the currency if you send it to the wrong address!

And Mining?

Mining is the process of validating transactions on the blockchain. Transactions are bundled into a block and distributed through the peer-to-peer network. The mining equipment then processes the blocks to validate them. Miners are rewarded with new coins for their effort in maintaining the network. The process of mining is computationally intensive and can cost a lot of money. Particularly if you live in an area where electricity costs are high. Individuals can participate in Mining Pools, where they work together and share the rewards. Over time the reward for mining decreases and the difficulty level increases and depending on which coin is being mined, a limited number of coins will ever be generated.

GPUs are currently in high demand for building mining rigs, and this has resulted in many online retailers being completely sold out of them. Individuals are selling their GPUs for elevated prices on the likes of Ebay, or are selling pre-built mining rigs for thousands of dollars.

There is also a whole industry now set up associated with mining. You do not have to go to the hassle of buying, building and maintaining a mining rig, or dealing with the associated electricity bills. You can in fact buy mining contracts. These again need some research as there is also a lot of misinformation out on the net.

With me in the current process of moving house/moving country, my computing rig is currently boxed up and sitting in a warehouse waiting for shipment overseas, so I cannot mine myself at the moment. If you remember from my previous blog, I had mined Dogecoin back in 2014, and recently upgraded the PC to GTX1080ti GPUs for the purpose of video editing, but this could easily be used to generate coin as a mining rig. Depending on what the electricity costs are at the destination, and how computationally 'difficult' the various coins are to mine, then I may set it up to do this again. Not sure what coin though. There are calculators to work out returns, for example see this

As an alternative, I decided I would take a cloud miner for a spin. These are companies that sell you mining power for a price. I have heard many times, "why don't they just mine for profit themselves, it must be a scam", well, nobody knows what the price will do, or how quickly the difficulty rating of the mining increase or other factors such as geopolitical will influence the outcome. Would you spend millions of dollars building a mining farm and then take all the risk yourself?

I came across Genesis Mining in my search, and they had Ethereum contracts available. There other contracts for Bitcoin, Monero, ZCash were all sold out. When you do the math, there 2 year fixed price contract at current coin market value and difficult level of mining gave approx 2.5 month ROI, leaving the other 21.5 months to generate value. Of course, once again RISK plays a big part. If there is a collapse in the value of the currency, or the difficulty rating dramatically increases, you returns may be less or lower than your investment. If the price of the coin increases sharply in value, then ROI will be quicker and rewards may be higher.

I invested in a 100MH 2 Year contract (actually initially took a 50, then increased this too 100 a few days later), and currently see around 0.06 Eth generated daily, this does fluctuate. So put this against current market price of Ether and that isn't too shabby a daily return.

If you are tempted to take them for a spin, you can get a 3% discount off your contract cost using my affiliate code 'UFain1'. I have been with them for 10 days now and generated 0.51002079 or a spot value at time of writing of $180

For interest, here is a video on Ted of the founder of Genesis-Mining, talking about the formation of the company and a look inside the facility in Iceland (low electricity cost!)

The blockchain is the ledger of all transactions for that particular coin, you can see this information using sites such as you can see what is going on. This one is for Ethereum, and there are others for the other crypto currencies.

Another tool for Ethereum is this gives you and overview/snapshot on the status of the network.

As I have said before, do your research, calculate what risk you willing to take and always don't invest what you cannot afford to lose. There are several cloud miners, wallet providers, exchanges out there and it is a 'minefield', so read, read and read some more to make your own informed decisions.

When I get my PC back from shipment, I'll maybe popup a blog on mining with it, or offline wallets or something like that!