Tuesday, January 21, 2014

Introduction to Cryptocurrency: Converting Your BTC into USD (and Vice Versa)

I've been involved with cryptocurrencies since mid-2011, so I suppose there's a lot of things that I take for granted. For instance, when I tell people that one Bitcoin is worth roughly $830 (as of 1/21/2014), many of them will look at me askance and say, "Well, in theory it's worth that much -- but you can't really get that much money for Bitcoins, can you?" The answer is that yes, you can...but it might take a few more hops, skips, and jumps to get there than you'd like.

In the early days of Bitcoin -- and in fact all the way up until the spring of 2013 -- getting USD for your BTC was usually done by way of MtGox. In fact, at the time there was basically MtGox, and then there were a bunch of little exchanges that most people didn't give any attention. Many of the old exchanges have actually gone the way of the dodo bird (RIP TradeHill, which now lives on as an auction site for Avalon ASICs apparently), but not surprisingly new exchanges have popped up to take their place. Today, MtGox continues to do a fair amount of trade, but unless things have changed it's next to impossible to get USD out of MtGox, so my fellow Americans have moved elsewhere. Can I really miss being able to sell BTC on MtGox, transfer that USD to Dwolla, and have it show up in my bank account a few days later. But the time delay really isn't that bad for the other alternatives.

What I've found during the past six months is that the easiest way for me to get money into/out of the cryptocurrency world is to first exchange any alt-coins into BTC, and then send the BTC to Coinbase.com. I created an account at Coinbase probably seven months back, and it took maybe a week or so to get verified. Since then, I've exchanged plenty of BTC for USD, and right now it usually takes just two or three business days for the money to show up in my bank account. The only real difference from what I used to do with MtGox and Dwolla is that Coinbase charges a 1% transaction fee, plus their rates are generally 1-2% lower than what you'd get on the major exchanges. It's less than perfect I suppose, but since they're providing a very useful service I'm okay with that.

You can also buy BTC through Coinbase if you want, which as a way of investing money into BTC might be faster than trying to mine Bitcoins. I prefer to hedge my bets by going the mining route, however, as the hardware I purchase to mine alt-coins still has value even if BTC drops in price to $500 or even $5. If you want 10 BTC as an investment, as an example, you could buy them right now for $8300. Mining 10 BTC on the other hand will take either a large amount of hardware, some really good luck, or lots of time -- and perhaps all of those in varying degrees.

Okay, tangent time: let's look at building a mining rig once more. Take the same $8300 and you can buy about four good mining PCs -- let's equip each one with three Radeon R9 280X GPUs, Core i5-4670K CPU (for additional mining of alt-coins), a good Z87 motherboard (three x16 PCIe slots, two additional x1 PCIe slots, and on-board power and reset switches), 80 Plus Platinum 1200W PSU8GB RAM, and a small 60GB SSD. If you install Xubuntu, that comes to $2075 by my calculations, and you'll still have to figure out the case aspect and order some PCIe risers (I'd hit the local Home Depot/Lowe's for the case parts and cobble something together, personally). Four of those will provide a total hash rate of around 8400 KHash/sec for scrypt mining, plus you can do another 2.8 MHash/sec mining Frozen.

With the right pool selection, you should get around 0.08 BTC per day from the scrypt mining, and potentially another 0.02 BTC from the Frozen mining, so about 0.1 BTC per day. One month will then generate around 3 BTC, so three months and you're pretty close to matching your $8300 BTC purchase -- and you still have the hardware sitting around! Even with absolutely horrible prices, I suspect you could still get $4000 for the computer hardware in four months, so in four months you could end up spending around $4300 on the hardware (after selling it for $4000) and $300-$400 on power, and you'd have 12 BTC. Try and match that return with any other investment!

Wrapping things up, I mentioned MtGox earlier as one of the major Bitcoin exchanges. For the purpose of being thorough, I want to also quickly run through the other major exchanges (that I use/know about). The biggest exchange for BTC these days appears to be BTC-e, which is where I do a lot of my trading. Right behind them is BitStamp, and of course there's always BTC China. Outside of those four, the only others I ever really visit are Vicurex, CryptsyCoinedUp, and CoinEx. If you haven't frequented any of these, let me just say a few things. First, they're typically far less responsive than MtGox, BTC-e, and BitStamp -- page loads usually take a few seconds, and perhaps as long as 15-20 seconds. That's bad, but the good news is that all four of these trade in a bunch of alt-coins, so if you're looking to convert some lesser known currency into BTC, those are good places to start. Otherwise, you're stuck searching for the official forums for whatever alt-coin, and once you find those you need to get someone to do a trade with you. If you're going that route, I recommend using an escrow service -- typically a forum admin -- to ensure you don't get scammed.

Now just to be clear, Coinbase isn't the only way to get money into or out of the cryptocurrency market, and if you live outside the US you'll definitely need to look elsewhere. Trying to dig up other ways to buy/sell BTC for every country is way beyond the scope of this blog post, however, so if you have a favorite way -- even in the US -- by all means post it in the comments. If you do use something else, I'd also like to know the typical delay between a deposit or withdrawal, as well as how the exchange rate compares to other places. I suspect there are better options than Coinbase, but they may not be quite so convenient.

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