Want to make money mining bitcoins? Criminals have you beat

Want to make money mining bitcoins? Criminals have you beat

Summary: Bitcoins are becoming the "national currency" of criminals the world over and are becoming an increasingly poor investment for legitimate miners.


Bitcoin is an interesting beast. It seems like something out of a William Gibson cyberpunk novel. It was created by a shadowy figure that could be an individual or a cartel. It's infinitely traceable but ownership is completely anonymous. It has value; at the moment I write this, each "coin" is worth $869.61 and the total dollar value of existing bitcoins worldwide is almost $11 billion.

Unlike traditional currency, it exists outside of national control. Like precious metals, it can be mined, but unlike precious metals, you can't hold it in your hand.

It's real, in that some merchants and services will accept bitcoin as payment. It's virtual, in that it exists only as a series of entries in a global data structure.

And it's become the new best friend of criminals the world over.

You can gain ownership of bitcoin in three primary ways: you can buy them, you can get paid in them in return for a product or service, or you can make them through a process called bitcoin mining.

The first two approaches: buying bitcoin and getting paid in bitcoin are interesting, in that any item that can be bought and sold is interesting. Bitcoins might be, to quote Paul Krugman, storehouses of value, or they could someday go "poof" and simply be bits worth less than two bits.

The bitcoin system is set up to limit the total number of bitcoins that will ever be available in the world pool. That limit in total availability artificially forces value on each coin because the resource is designed to have scarcity built into its DNA.

What's propping up the value of bitcoin is both buzz and the limited availability, combined with a decidedly libertarian political flavor and, well, its almost perfect fit with the needs of illicit and illegal transactions. And that brings us to both bitcoin mining and crime.

Bitcoins come into existence as the result of increasingly complex calculations that incur both computing hardware and energy cost. The bitcoin system requires that each new bitcoin is incrementally harder to "mine" than the preceding coin. What this means is that each new bitcoin requires more and more calculation power than the coins that came before.

When bitcoins first blinked into existence, they could be mined by a few spare computers, just left to crank away. Now that there are so many more bitcoins in circulation, those computers can barely mine a fragment of a bitcoin in anything resembling a reasonable amount of time.

Given that bitcoin mining is designed to always need more computing power thrown at it, a market sprang up for custom bitcoin mining computers, machines built with custom ASIC (application-specific semiconductor) chips designed to optimize the processing of bitcoin mining algorithms.

As more and more bitcoins are born into the world, more and more processing power is required. The custom bitcoin mining machines have become increasingly expensive to purchase, and — also very important — increasingly expensive to operate as they eat raw electical power at a phenomenal rate.

All of this makes a sort of elegant sense. They take more work to create, so the rate of supply of new bitcoins slows down over time as the cost to produce them goes up along with — at least in theory — the overall value of each coin.

That means that each coin has a cost of production. The profit attributable to each coin, therefore, can be calculated as the net selling price of the coin, minus the cost to produce.

At least that's the case for people and companies who mine bitcoins and who are unwilling to break the law. The game (and the profit structure) is completely different for criminals.

All your coin are belong to us

Think about what it takes to produce bitcoins, the means of production: processing power. Law-abiding bitcoin miners spin up this processing power either using ever more powerful, special purpose computers or -- in a relatively new trend -- rent bitcoin processing time from service providers who sell timeslices of their processing power plants.

Now think about the cost items. You have the cost of the mining computers, storage space, and energy for cooling and powering the mining machines. The profit in bitcoin mining is all about making sure that the selling price (or stored trading value) of the mined bitcoins is greater than the cost to mine them in the first place.

As the Bitcoin mining profitability calculator shows, profitability is all about getting the hash rate (speed of calculation) high enough, while the cost of hardware and energy is low enough. Even so, because bitcoins become more difficult to create, the existing hardware (no matter how large its current hash rate) will quickly obsolete.

This means that a law-abiding miner will have to constantly upgrade and discard hardware, simply to keep up with the ever-increasing difficulty rate inherent in bitcoin mining.

Breakin' the law, breakin' the law

But what if you're willing to break the law (which, for the record, I do not advocate)? Do the production cost ratios for bitcoins change?

That's what we'll discuss on the next page...

Topics: E-Commerce, Government, Government US, Privacy, Security


David Gewirtz, Distinguished Lecturer at CBS Interactive, is an author, U.S. policy advisor, and computer scientist. He is featured in the History Channel special The President's Book of Secrets and is a member of the National Press Club.

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  • Bitcoin

    Once Bitcoin becomes synonymous with money laundering, extortion and tax evasion you can pretty much kiss the value of your Bitcoin stash goodbye, because governments the world over will clamp down, and Bitcoin will lose much of its appeal.
    • Details

      Imagine a world where you can rent untraceable, fast net connections by the hour, on commodity hardware which you assemble yourself using commodity parts and a 3D printer. The net connections are provided by "sippers" -- drones of various kinds which steal bandwidth from an almost unlimited numbers of poorly secured access points, then beam connections to each other with no logging.

      Now - please explain, in detail, how law enforcement is going to stop that... ?
      • Er...

        "Imagine a world where you can rent untraceable, fast net connections by the hour..."

        You've already assumed your conclusions in your premise.

        I can prove that Angelina Jolie sleeps in my bed every night as long as you "imagine a world in which I'm Brad Pitt."

        See how it works?

        So, yeah, if I accept all your premises, you're right.
      • I don't know, ClearCreek

        but then again, if you believe everything that's been written on the NSA of late, they've been doing things many cyber experts claimed were "impossible".
      • pearls before swine

        Sorry your efforts to explain eluded dsf3g. Even his reply to your effort concluded that even further. But this is why the rich get richer and the poor get poorer. Peace
  • Scams, scams and more scams

    You have to watch out for companies selling mining hardware as there are scams out there, like xtrememiners 7.5TH/s ie a scam, you will pay in bitcoin only and never receive anything.

    I also have a theory that the "legitimate" mining hardware companies are also scamming. Butterfly labs for example, why the long wait? Previous people waited over a year to get their orders I hear. In that mean time I bet what they are really doing is getting you to pay for all the hardware and then they run the mining cards for lets say 3-6 months making the $$$ while its easy, then when its time for new hardware they ship you the used hardware, it will still look brand new!

    I feel the best bet is to buy the parts and make your own, to get ahead of the curve. Anyone have information on that? I would like to build my own or team up with someone.
    • We tried

      Technically the big boon these days would be on FPGA. Unfortunately, you need to know advanced electronics to do that, specific EE languages and the appropiate FPGA processor is quite expensive. We did find an EE team... But they charged a lot to develop the software side. We gave up on that approach. But if you do have the time to monkey around with that, it might just be worth it!
      • im a software developer :)

        What u need?
        • HEy

          i think you are the right person to talk to if i can put my trust into you
          i need i software/generator that can proide me with frist bit coins.
      • FPGA?

        FPGA is old technology for Bitcoin mining. Now it is all about ASICs.

        Using a bot to take over CPUs is just not worth the effort compared to the thousands of ASICs out there created solely to mine bitcoins.
  • The Law of Unintended Consequences at work

    I doubt the inventor of the algorithm thought Bitcoin would be especially attractive to criminals, but it's hard to predict how any significant invention will be utilized (which is the caution against radical reforms of all sorts).

    The experiment continues.
    John L. Ries
  • Flawed, please take this with a huge grain of salt

    The conclusions drawn here are very flawed. Now that the difficulty of mining has risen (by design) to the point where the energy cost outweighs the current value of the bitcoin produced, the value of mining has shifted entirely into that of collecting transaction fees from the mined bitcoin in perpetuity. This is a brilliant design feature of bitcoin that is the primary reason to mine bitcoin and to keep the network running. I strongly urge everyone to educate themselves on how bitcoin works before drawing conclusions and "advising law enforcement" of anything. Like anything else, criminals will seek to gain by using their botnets in any way they can, but bitcoin is not in any way something just for criminals. Please see bitcoin.org.
    • Nobody said it was just for criminals

      Not even Ken Hess has gone that far. But Bitcoin does appear to be a natural medium of exchange for the underground economy, a large part of which *is* criminal.
      John L. Ries
      • you know what else criminals use?

        the fact that criminals use bitcoin is hardly a reason not to use it.

        criminals also use the us $. they also use gold, silver, and every currency that has existed for criminal activity. computers, phones, cameras, etc. all used for criminal activities.

        just because it is possible to launder money, doesn't mean it's impossible to get caught. there are ways of tracking which addresses are associated to real people, which makes bitcoin not nearly as anonymous as this article implies. but just like the usd, people will try to launder, and the us government will try to catch them. same for any other country.

        bitcoin has a lot of uses that are but criminally related as well, just like all those mediums I mentioned above.
        Danny Newman
        • Criminal Seigniorage

          If criminals make up a large portion of early adopters and users (Silk Road etc) then their early position in the adoption of Bitcoin as a store of value will give criminals, the anonymous Satoshi and (ironically) the US government massive seigniorage. Libertarian fail.
        • The thing is...

          ...playing down problems for public relations purposes doesn't make them go away. I read once that the reason why organized crime in Russia and elsewhere in the former Soviet Union is so bad is that during the Cold War, the Soviet authorities usually turned a blind eye to it as Marxist-Leninist theory said it shouldn't exist in an advanced socialist society, and they didn't want to give the "class enemy" a propaganda weapon.

          Problems exist in every system. It would be surprising if Bitcoin were an exception. But responsible advocates and stewards face the problems head on and try to solve them, instead of downplaying them, covering them up, or outright denying them; as doing one of the last three tends to make the problems worse.
          John L. Ries
    • poisoned by the concept of fiat currency

      I agree with you nickmatic. I think it's funny that this limited availability is portrayed as some kind of flaw, like Gerwitz lamenting that he can't put a money-making machine in his garage. And his comment "limit in total availability artificially forces value on each coin". Limited availability causing increased value is hardly "artificial", it's econ 101. I guess people prefer seeing the value of their currency derived from an unlimited supply of it. Hrm.

      This article is rife with juicy quotables. Another one I enjoyed is "[bitcoin is] becoming ever less profitable for legitimate traders". How and why should a currency be inherently profitable for traders? I trade dollars every day, and the only "profit" I get is the item or service I get in return. I didn't realize until now that this was a problem.
    • Bitcoin/Litecoin have no scalability

      No scalability; Bitcoin/Litecoin and clone Alt Currency branches support architecture is fundamentally flawed. The block discovery difficulty and hash rate power/costs to mine coins has increased to the point that you need a small server farm to achieve a small amount of profit. Recent cloud farming services have moved in because they can operate more efficiently to keep mining profitable.

      Lack of scalability (en.bitcoin.it/wiki/Scalability) and future network support is Bitcoin’s and other clones “albatross around their neck.” As of Sep 11, 2014, 13,250,900 out of the total possible 21 million Bitcoin’s are in circulation. Bitcoin’s support network is rapidly approaching a point where large scale mining will no longer be profitable. You don’t need to be an economist to realize that when doing something is not profitable, people stop doing it.

      After coin mining is no longer profitable, the support networks processing power will shrink and verifying huge block chains will take much longer to process, making it unusable as a functional daily currency. Bitcoin could eventually become the sole digital currency (gold standard) that others are valued against. Observing current markets, it’s well on it’s way.

      NXT’s nxt.org support architecture makes more sense, it’s eco-friendly and processing power is scaleable to achieve fast block processing times. Trust, transaction speed and security are ultimately the deciding factors that will make any digital currency viable. Depending on peoples acceptance, it’s marketplace could eventually be a serious competitor to PayPal and eBay, due to lower transaction fees.
  • Why Bother?

    Why go to the trouble when you can move and launder money very easily, out in the open, and right under our noses? Buying and selling merchandise for FAR above actual value is happening all the time on auction sites. Just do a few searches on eBay and sort the results by price from high to low. On a lot of those searches you will find items that may be worth $100 being sold for $10,000. Don't tell me that ain't money laundering.
    • Wow

      This is why I read the comments ... [does a high five with ShortyStuff]. I've always wondered about that -- who would pay those crazy prices I sometimes see?

      Voila - money laundering.