If you’re following the cryptocurrency mining scene at all, you’ve probably noticed that there are digital currencies other than Bitcoin and Litecoin. Quite a few of them, actually. Bytecoin, Terracoin, PPCoin, Feathercoin, Freicoin, Novacoin… the list goes on and on, and it seems like there is a new addition weekly.

The sad reality is that virtually all of these coins bring nothing significant to the table when compared to Bitcoin. The Bitcoin code is open-source, which means that anyone with a few hours of time on their hands can make some minor adjustments and fork off a brand new virtual currency that is nearly identical to the original in everything but name.

But why would somebody make a near-clone of Bitcoin? Why would anyone use a knock-off currency when they could just use bitcoins instead? Read on for some answers about altcoins, and how you can profit from them as a miner.

(If you’re just interested in the “profit” part of this article, skip to it here.)

Why are there so many altcoins?

So what’s driving the development of clone after clone of Bitcoin? The answer is greed, more or less.

Nearly everyone is familiar with the meteoric rise in value of bitcoins, and the stories of bitcoin millionaires that were created when the hoards of digital coins they created or purchased for fractions of a penny were suddenly worth over $100. However, jumping on the bitcoin bandwagon now is quite a different story than it was four years ago. The barrier to profitable mining gets higher every day, and the current high price of bitcoins makes buying them directly prohibitive as well.

But what if you could simply “reset” Bitcoin? Make it 2009 again, when mining hundreds of coins a day on a modest computer, or purchasing huge sums for a pittance were both possible. That’s what the people creating these altcoins are trying to achieve. They’re hoping that their new coin takes off like Bitcoin did, giving them the opportunity to amass a future-fortune’s worth of them now, when it’s still easy.

Well, some of the altcoin developers probably hope that happens. Others are simply executing classic “pump and dump” scams with their newly-minted coins. Create a new coin, mine a massive hoard of them, do some clever “marketing” to make it look like the next big thing, then sell the coins when the price spikes.

But surely people don’t keep buying into these new coins, over and over?

It seems absurd, doesn’t it?

But one look at the alternative cryptocurrencies sub-forum over at bitcointalk.org should demonstrate to you that there are seemingly always people willing to buy brand-new digital currencies. Why? I can only assume that these people don’t want to miss out, “just in case” the new coin really does become the Next Big Thing^TM.

The result is that with the release of most new altcoins, there is a flurry of activity at release while people scramble to get their hands on as much of the new currency as possible, either via mining or paying for large sums directly with bitcoins. Many times, the price of the new coin rises to levels that the more economically-oriented among us might consider insane.

And that is where you come in.

Ok, I get it—but how do I profit from all of this?

If you’ve read my mining guide, then you know that I recommend mining litecoins. And if you just want to keep things simple, that is still your best bet.

But if you’re interested in managing your mining operation a bit more closely, then there are potentially large profits to be made by mining other altcoins in the short-term, when conditions are right. For example, this past weekend, mining CHNCoins (a new coin released about a week ago) was over 800% more profitable than mining litecoins. Don’t want a bunch of CHNCoins? Neither do I. So trade them for bitcoins on an exchange as you mine them. One of the rigs from my guide would have effectively produced nearly 1.5 bitcoins a day using this method, a feat that would take about two weeks while mining bitcoins directly!

You’re probably wondering how to spot these opportunities. It’s easy. There are a couple of excellent online resources that do most of the work for you. My favorite one is CoinChoose. CoinChoose is a real-time cryptocurrency profitability monitor, and it’ll continuously rank the various altcoins according to which one will make you the most money at this instant. At the time of this writing CHNCoin is still on top, about 30% ahead of litecoin at #2 (a far cry from the situation this past weekend, but a lot of miners switched to the new coin, shooting the difficulty up and lowering profitability down to saner levels).

If you see that an altcoin has a profitability lead over litecoin that is compelling enough for you to make the switch, you’ll need to modify your cgminer script. This is pretty simple, too. If the altcoin is a scrypt-based currency (check the “algo” column in CoinChoose), then all you need to do is point cgminer at a new mining pool (sign up for a new pool for the altcoin you’re interested in first). You’ll probably want to keep your usual litecoin pool as a failover. If it’s a SHA-256 -based coin, then you’ll need to remove the “–scrypt” switch from your cgminer startup script in addition to changing the mining pool.

So now you’re mining a bunch of god-know-what altcoin that you don’t actually want. Solve that problem by signing up at Vircurex or one of the other cryptocurrency exchanges. Cashout from your new altcoin mining pool directly to your Vircurex address (so you don’t need to setup a wallet for the new coin). On Vircurex, trade your new coins for bitcoins (or litecoins), and then send them to your normal bitcoin/litecoin wallet.

It sounds like a lot of work, but once you have your exchange account(s) set up, and accounts at a few different mining pools, it doesn’t take more than a few minutes to switch over to a new currency. Make sure to save copies of any cgminer startup scripts that you create for new currencies so you can switch back to them later if necessary.

To summarize:

• Check CoinChoose often.
• If an altcoin is significantly more profitable than litecoin, switch your miner(s) over to it by signing up for a mining pool that deals with that particular altcoin and pointing cgminer at it.
• Sign up for Vircurex, Bter.com, or another cryptocurrency exchange.
• Cashout from the altcoin mining pool directly into Vircurex (you can generate addresses within the “accounts” section of Vircurex for this purpose).
• Trade the altcoin for bitcoin (or litecoin, or whatever you want) on Vircurex.
• Profit!

Just make sure to keep an eye on CoinChoose whenever you’re mining something that isn’t litecoin. The profitability of the smaller coins is extremely volatile, and usually good opportunities don’t last more than a few days.

And if you’re comfortable with a little bit of light scripting, you can automate the entire process of mining the most profitable currency and converting your gains into bitcoins by using CryptoSwitcher.