Saturday, April 27, 2013

Is Bitcoin Mining a scam?

Looking at the offerings by BFL (Butterfly Labs) and Avalon I am highly skeptical.

The use ASICs to process hashes for the Bitcoin system seems to be based mainly around the amount of money that you can make by winning the lottery in coming up with the fastest machine to do so.

It is not that I think ASIC's are not useful in processing large amounts of data and generating hash codes for use in a system such as Bitcoin. Quite the contrary, ASIC devices and the cores in computer GPUs are very capable of doing such work.

I am more concerned that there is little discussion that can be found on how ASIC chips are actually used to generate the hash codes and more than that how the codes are then used by the Bitcoin system. There is far more emphasis on the generation of hash codes than there is on the effectiveness of a P2P payment system that does not depend on a specific countries balance of payments and is virtually a "vitual currency", that should be immune to regional fluctuations and the health of any particular economy.

I have yet to see a business plan that describes the logic behind participation in this project. I seems to be taken as read that all you need to do is throw money at hardware, that has not been fully explained, plug it in, connect it to the Internet and then wait for the Bitcoins to roll in! If there is any discsussion about the financial side of things this revolves round the cost of the equipment, the number of hashes per second that it can generate and the cost of the electricity that the "Bitforce" box takes to run. A ROI, Return on Investment, is then calculated from those figures. The fact that viability of being the fastest, or being part of a pool that is the fastest, is a sound business propsition is NOT mentioned. It this "lottery" was abandoned then the whole scheme is then a nonsence.

Returning to a discussion about the hardware. There has been a lot of talk centered around the fact that the vendors of equipment to process these vast numbers of Hashes at ever increasing speeds have failed to deliver product. There seems to be a race to make the fastest box. There is no discussion around that if an owner of such a box, if they exist, will only be one of possibly many that have the same box and the lottery "pool" will be diluted. There is no discussion that describes the business model that a lottery can further the operation of the Bitcoin currency, only that there is a lottery and you are supposed to be able to earn Bitcoins by producing hashes. To me this is generating revenue out of thin air! At the end of the day the  money has got to come from somewhere and this is little more than a High-Tech pyramid scheme, the top of which is inhabited with those with the fastest machines. Those at the base are those that fund the scheme by purchasing the equipment to get higher up the pyramid.

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