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Can You Make A Profit With Bitcoin?

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There continues to be a lot of information – and even more hype – about whether an individual can make money with Bitcoin today. I hope that what you can read here will help you better understand Bitcoin in general and also help you make some intelligent decisions about how to invest to build your own Bitcoin Fortune.

Why Bitcoin?

Why is it popular to think that you can make money with Bitcoin? Probably the best reason is that Bitcoin has increased in price dramatically since it was introduced. Coming more into the present days, the market value of Bitcoin in terms of US Dollars has grown about 390% per year on average for the past five years. You can see the change in Bitcoin value in USD on the plot below.

The other reasons to use Bitcoin are that it is the most well known, and firmly established virtual currency available. In addition, Bitcoin is considered the “Blue Chip” of the industry and is becoming more and more commercially available. Finally, the market cap of Bitcoin at US$276’273’565’440 (20 Dec 20’17) is by far and away larger than any other virtual currency.

btcusd-20-12-2017The current price is around $17’500 as shown on the chart. One of the critical things in this perception of constantly increasing price is that every the large decline is countered with even stronger gains afterwards, above previous highs. The other factor is that the design of the Bitcoin mining process is for continuing inflation against the USD. The average gain across the five-year period 2013-2017 is 388% per year. This year (2017) BTC gained close to 20 times its value (from $908.8 on Jan 1 to a projected $17’670 based on the futures price about mid-day on 20.12.2107 ¦ $17’670 / $908.8 = 19.44).

Bitcoin Mining

One real question is whether it is possible to make more profit doing what is called Bitcoin Mining. The consensus answer today is that – depending upon how you define “profit” – the answer is probably “No”. For my purposes (coming from many years of industrial practice and evaluation of projects for profitability), this means that you will never be able to recover the cost of your operating expenses and your capital costs (“OPEX” and “CAPEX”) completely. In some cases (depending upon the size and efficiency of your hardware and the cost of your electricity), it is possible to recover your OPEX but the recovery of your CAPEX will require longer than the operational life of your hardware. One note here – an industrial installation should be able to take advantage of the economy of scale when they build “industrial-sized” facilities. These operations should make profits after paying OPEX and CAPEX.

But those of you who have been reading up on Cloud Mining will probably say – “but that does not apply to “Cloud Mining, right?” Well, that probably depends whether you are the scamee (the person being scamed) or the scamer (the person scaming the unaware sucker). The vast majority of the people involved in Cloud Mining are one of those two categories, and only the scamers are presumably making money on the deals.

Here are a few quotes about the situation with enough information that you can probably find the sources of the quotes yourself, if you are that interested.

Take Advantage of the New Cryptocurrency Economy – HODL!
Yes, you read that right, hodling. This is the practice of holding on to a long-term investment without giving in to the urge to sell, it is misspelled deliberately for dramatic effect to mimic an investor frantically trying to type the word “HOLD!”

If you plan to join the legion of cryptocurrency “hodlers”, the stepping stone should probably be the “Blue Chip” of cryptocurrencies, which is the Bitcoin of course – With a market cap far exceeding any other cryptocurrency, Bitcoin Hodling is the way to go.

Many cryptocurrency investors claim that they have made more money from holding onto an investment long term instead of trading. It might be best for everyone to just HODL the cryptocurrency, and only trade if you have previous experience, trading is not for noobs.

Investing.com 20.12.2017

“If you don’t have the time or the money – stay away from mining and just invest in buying Bitcoins for the long run.”

Ofir Beigel
Owner at 99 Coins ltd
https://99bitcoins.com

“With rising bitcoin exchange rates it might be more profitable to buy bitcoins than to mine.”

http://www.bitcoinx.com

“In other words, mining won’t be profitable at a small scale unless you have access to free or really cheap electriciy.”

Jordan Tuwiner
Bitcoin Worldwide
https://bitcoinworldwide.com

“I keep the bitcoin I mine in bitcoin, because only an increase in the value of bitcoin could make the project profitable overall.”

Henry Berg, Engineer
Quora
https://www.quora.com

And here is some information about scams in the business:

“So how do you identify a Bitcoin scam? Well it’s really difficult for anyone to know and the scam artists are becoming more clever. Here at CryptoCompare we do all the hard work so you don’t have to. We trawl the web and if we have any doubts about the Company offering the Bitcoin cloud mining contract it does not appear on our list. The same goes for mining equipment – if we haven’t got one and tested it – or seen sufficient evidence of its existence or a decent track record for the Company – only then will we list it. We also list all the Companies that have had dubious reports on forums from the community.”

CryptoCompare
https://www.cryptocompare.com

It seems that the only way to have a good chance in making a profit in Bitcoin is either

  1. Forget about mining in any way, buy Bitcoin on a routine basis and hold it, hoping that the exchange rate to your basis currency will continue to increase consistently over the medium run, or
  2. Join an established organisation that is into mining with inexpensive electricity, very inexpensive (or free) cooling or even recovering energy from the heated air, and sufficient financial resources to acquire efficient hardware and keep it up to date – this will be a good-sized company so that individual movements by the partners will not have any impact on the other partners.

The question is, “How do I do that?”

Assuming that we are only talking about good operations – in other words, no scams – It is not as simple as it sounds because there are two pieces to the puzzle, putting money into the organisation, and maintaining a functional operation.

Today almost none of the financial facilities involved in Bitcoin have the flexibility that is required to exchange your base currency into Bitcoin, maintain the Bitcoin in a wallet for little or no cost, and then be able to return your Bitcoin to your base currency or some other one without major efforts on your side. There are a few who can do most of the job, but you need to look carefully at all the details.

But before we get into that, is it really worth while to investing in Bitcoin with the intent to score significant increases in terms of your base currency? I think the answer is “yes”, based on both Bitcoin history and the situation of how the quantity of Bitcoin production is controlled. To find out more about how the quantity of Bitcoins possible is limited, I suggest that you read up at https://en.wikipedia.org/wiki/Bitcoin.

The Bitcoin price history versus the US Dollar trends relatively consistently upwards. People are fond of pointing out that if you had bought X amount of Bitcoin in year Y, you would now have US$1’000’000 in Bitcoin today. You can make your own chart and/or comparison using data that you can find in the Internet with a simple search for “USD-Bitcoin” in your favorite search engine. It was extremely interesting at the start of this writing (beginning June 2017) since there was a strong run-up in the spring, and then a mini-crash the past two weeks (end of May 2017) and now an apparent recovery against the US Dollar.

How do you invest into such a maelstrom of price movements? My simple-minded theory for those of us who are neither financial wizards nor particularly brave when it comes to investments is the following.

I pick an amount that I can afford to invest on a routine (daily?) basis. So, let’s say $1.00 per day over a one to three year time period. This works out to $30/month roughly. What you are doing with this routine investment is called “price averaging” or “dollar cost averaging”, and what it does – without any special calculations or maneuvers – is to invest at a relatively low average price of Bitcoin in USD. How’s that work? When the price is low, you get more Bitcoin per dollar and when the price is high, you get less (but more expensive) BTC per $.

RESTART HERE !!!

If You Can Do This Without A Penalty

Using the average rate from the past three years from mid-year to mid-year, the rate of BTC increase against the USD has been about 90% per year (see attached table 1). If you calculate the total USD value of the BTC bought with $1 each day, assuming 90% per year, the result after the first 30 days is $35 rounded off, so I have converted $30 into $35 in the period of one nominal month (see attached table 2). Not so exciting, right? But if you look at the first year’s results, it becomes more interesting ($1’920). One thing to note here is that the end value can rise above that or fall below that, depending upon the exchange rate for BTC against USD. See the table of BTC versus USD to do the calculation yourself (navigate to http://www.ariva.de/btc-usd-bitcoin-us-dollar-kurs/chart?t=3years&boerse_id=167 or some similar table).What that means is – and this is important – you can still lose money over the short to medium term. An example (on the plot on the first page): imagine that you had bought Bitcoin at $850 in the last quarter of 2014, and then wanted to or were forced to sell one year later at about $425. That is a 50% loss! But if you had been able and willing to wait until the last quarter of 2016, you could probably have sold the Bitcoin for $875 to $950, more than 10% increase over two years. Of course, “hind sight is 20-20,” and you cannot always pick the circumstances.

Going a little further in this example, if you had utilised the dollar cost averaging, your average BTC price would probably be about $400 and you could sell it all in the last quarter of 2016 and double your USD input from two years,not just a bulk purchase.

The real question is how to do this?

I have worked out a program that is about as simple as I can make it for the time being.

  1. I transfer my monthly amount by credit card into the USD funds in my Payza account routinely so that I always have enough $ to make the daily transfer and cover other non-investment expenses as well. When I have time to plan, a bank transfer is less expensive, but takes more time (maybe as much as a week but probably less) whereas the credit card is generally a same-day transaction, but costs around 4-1/2%.
  2. I then exchange $1.00 into BTC on a daily basis. At today’s rate, that would be roughly $2500 per BTC, so I should have 0.00040000 BTC in my BTC wallet today.
  3. I watch the amount of BTC and the dollar value grow and make the transfer every day. If I have few extra dollars, and the price drops below my average cost, I may buy some extra BTC at the low price to lower my average price. If I have “extra” BTC available, I have the option to store the “other” BTC either somewhere else or in the Payza wallet. Generally speaking, I do not move money if I don’t have to – it just costs more fees.
  4. That’s how I accumulate BTC at a reasonable – dollar averaged – price.

When I want/need some money from my Payza account/wallet, I will exchange BTC from my BTC wallet to my USD (or Euro) account and move the money out of Payza. It is also possible to move BTC to other BTC accounts/wallets, if necessary, using the same mechanism, and it is generally less expensive in fees.

The Bitcoin Fortune Builder “Cheat Sheet”

Here is the program in short form. I suggest you copy it and print it out if you have questions about what you are supposed to do.

bitcoin-fortune-builder-cheatsheet-550x208

How to Spend It

One other note here: if you so decide (after you have some BTC inventory), you can withdraw some BTC on a monthly basis (for example) – starting maybe after year 2 or 3 – and if it is not too much (figure on about 1/3 of the “increase” column value), you can maintain the BTC balance while having a nice little income every month. See the later discussion on how to enjoy the fruits of your efforts.

More Questions?

This will be a FAQ if I get some questions.