Is Mining Worth It?

Short Answerprobably not

Long Answer: maybe?

Mining cryptocurrency is the long and arduous process of dedicating computational processing power to "solving" an algorithm for answers via guess and check mechanisms. Proof of Work (PoW) systems rely on brute force approach.. The miner plugs in numbers and they are assessed if accurate or not. 

This method of block chain transaction processing was the very first model proposed by Satoshi. Although this technology was created over 10 years ago, the idea of PoW is very prevalent in the projects we see today. However, there are some logistical problems with mining that we will discuss later.

Another factor to consider is the other tech and opportunities available. Proof of Stake (PoS) is a different protocol for processing transactions on the block chain. This was developed much more recently then Proof of Work, and has promising application when considering the evolution of crypto usability and adoption. If you want to learn more about the differences between the two, read this old blog post to get acquainted.

The Logistics

Lets discuss the factors that should be considered when evaluating if Bitcoin mining is the right kind of investment for you. Many of these factors depend on where you live, and you need to take that into consideration. The most important overall concept is marginal cost of production.

Marginal cost of production is a fancy term to describe the monetary cost to produce one unit. In this case, it is the amount of work that has to be done to produce one Bitcoin. Of all metrics to determine if a mining operation will be successful, this is the one you need to watch.

Equipment

If you want to mine Bitcoin, then you will need the correct equipment. In theory, all you need is a computer processor or GPU (graphics processing unit). GPUs are the more preferred method because they can produce a higher hashrate (measurement of processing power dedicated to the network). This is part of the reason why the price of GPUs has become so heavily inflated! All about supply-demand. 

When considering larger scale operations there are more efficient and elaborate equipment available. Bitmain is a company that offers a wide arrange of products orientated towards industrial cryptocurrency mining. These "Ant miners" are widely considered the industry standard for hashrate, quality, and price.

Storage

This is the other factor that can play a major role in determining if a mining operation is profitable. You need to be able to store your mining rigs, electric operations this is can be a very limiting factor.

Garages, sheds, shipping containers are the most popular options I have seen. There is even a cheeky company that uses GPUs as an aesthetic space heater. Storage can be the most financially demanding aspect of a mining operation.

Heat Production and Device Strain

These antminers/GPUs/CPUs are always in a state of overdrive so to speak. The calculations they have to do are very demanding and introduce other complicating factors into the equation. Need to understand the full picture before you can determine if it is a good idea! 

First is heat production. Any device that you mine cryptocurrency with will become very hot if left unassisted. There are many different solutions to this... Mass AC in an inclosed space like a shipping container.. Water cooling with submersible friendly units. Here is a cool video to get a tour of a high tech mining facility! 

The next logistical problem is the factor of device wear and tear. It is not worth it to mine on your single GPU which happens to be in your gaming computer. You will wear it down and the BTC  you could extract will not cover the cost. Further, this problem is only exacerbated when mining on a larger scale because then even more devices will require replacement over time as they deteriorate from the intense demand. 

Electricity

Someone has to keep the lights on! The cost of electricity is an important factor to determining your marginal cost. Further, this is also a key point of optimization for the entire business operation. Heating/cooling processes, device power demand and the logistics of storage all determine your net electricity requirement.

Mining in countries where electricity is very expensive will affect your bottom line. Here is a graph providing some insight into regions where mining is the most profitable. 

This graph was also collected when BTC was 11.3k USD, and now that it is much lower (~8600 on April 30th 2020), there is even more pressure on the lower efficiency operations.

One side note is that solar panel based operations are viable if you have the capital to establish the infrastructure. Renewable energy like solar panels only has the initial setup cost before you can titrate your rigs with "free electricity"

Sidenote: Miner Capitulation

The halving is less than a month away. When the block reward gets cut in half there is going to be extreme pressure on the mining operations with already narrow margins.

This event has very serious implications for price action, but that is a blog post for another time!

So.. Is it worth it?

Unless done on a very large and efficient scale by an experienced operator, mining in this day and age can be a risky investment. Many years ago the beginner could likely dive in without much trouble because the cost to produce one BTC was much lower. However, as the supply expansion decreases, it becomes harder for miners to become efficient - especially if the price of Bitcoin is relatively low. 

For most of the retail investors out there, mining is not a good passive income instrument because of the logistical problems we mentioned before. Heat, storage, electricity and device deterioration are important factors that must be considered. The cheaper the cost to produce one BTC the more likely that the operation will be successful. 

PoS.. A worth alternative?

Proof of Stake protocol operates in a much different manner. Hosting a node allows for passive income but without the same demand as before. All it requires is a basic server to "host" your wallet on the blockchain. This can be achieved with a Raspberry pi device, laptop, or even outsourced and rented from other tech savy companies.

If you want to learn more about node hosting, here is a link to an Instagram post we made recently which can provide more insight. 

This is a snapshot from a node I host for the Horizen network. 24H payments made to a wallet that I control. Funds never leave my own private key. True passive income! 

Lets wrap this up! 

Hopefully I have provided some insight into this problem. Mining used to have a much much much lower cost of entry to be profitable then it does now. With the supply/demand changes that halving exerts, that pressure is conferred to the miners. As the Bitcoin network continues to mature we're going to see just who is the most efficient operators in the space. 

Consider your technical expertise, electrical costs, investment capital, storage and cooling problems if you are considering mining. 


1 comment

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