Understanding Cryptocurrency Mining
- What’s PoW Cryptocurrency Mining?
- Why Should you Mine Cryptocurrency?
Understanding How You Can Mine
- What Hardware Do I Need to Start Mining?
- How to Choose a Mining Pool
- Alternative to Mining on a Pool: Sell Hashing Power
- Configuring Your Mining Machine
Understanding How to Mine Profitably
- Where to Host Your Miner: Colocation vs. Cloud Mining vs. Home Hosting
- Considerations to Increase Profitability
Understanding Cryptocurrency Mining
What’s PoW Cryptocurrency Mining?
Mining cryptocurrencies has two main functions: adding new verified transactions to the blockchain digital ledger and issuing new coins.
Each time a cryptocurrency transaction is made, miners compete to secure and verify the operation. To do so, miners have to solve a complicated mathematical problem that adjusts its difficulty to ensure a stable issuance rate. Once the miner finds a hash – the output of a hash function – that is lower than the target defined by the blockchain protocol, the miner is entitled to receive the block reward. This block reward is a coin of the cryptocurrency being mined.
As more miners join a network, the mining difficulty rises, making it more difficult to be the block finder. This increase in complexity makes the process of mining time consuming and extremely energy intensive. Because of this, miners are always looking for the cheapest electricity rates and the most efficient mining hardware.
Why Should You Mine Cryptocurrency?
Mining cryptocurrency provides the miner with three key benefits: the cryptocurrency reward, transactional freedom, and the unique functionality of the crypto that they mined.
Miners are probabilistically expected to obtain cryptocurrency when they expend hashing power toward the cryptocurrency’s blockchain. Like other financial assets, this reward holds value on the open market. Recently, cryptos that are sufficiently liquid are being used as a method of payment.
Cut Out the Middleman
Mining cryptocurrency enables transactional freedom by removing the need for intermediaries. By definition, blockchain technology allows cryptocurrency to be decentralized because it is governed by the entities mining and transacting with it rather than government banks and financial intermediaries. Therefore, cryptocurrency transactions allow consumers to avoid fees associated with intermediaries, like PayPal or contract attorneys, and currency value alternation caused by monetary policy.
Miners can achieve the unique functionality of the cryptocurrency that they are mining. For example, Monero offers a discrete currency that ensures that others cannot see your balances or track your activity. On another hand, LBRY enables a content sharing and publishing platform that is owned by its users instead of a third party.
Cost of Mining
Mining cryptocurrency does come with its trade-offs: the cost of electricity and hardware, and diseconomies of scale.
Mining cryptocurrency requires a large volume of electricity due to the computational intensiveness of the task. While electricity costs vary drastically across geographies, researchers at Bitcoinist assert that miners are most profitable when they locate their mining hardware in low-cost regions such as Venezuela or Eastern Europe, a task that can be difficult given the shortage of mining farms in said regions.
Adding to the economic strain, the upfront cost of hardware is not cheap. Investing in top-end cryptocurrency miners can cost as much as $5000 and take numerous months to break even, dependent on the amount of hash power on the network, prevailing market prices, and electricity costs, which may not be within everyone’s budget.
Lastly, cryptocurrency miners face diseconomies of scale. As additional miners begin to mine a specific cryptocurrency and the finite quantity of remaining blocks decreases, the expected payout per volume of mining hash power expended decreases. Moreover, as increasing demand for electricity caused by increased uptake of mining and societal energy consumption fuel upward pressure on electricity costs, profit margins of miners are at risk of decreasing further over time.
Understanding How You Can Mine
What Hardware Do I Need to Start Mining?
Mining cryptocurrency requires one to purchase specialized hardware, two types of which exist: graphics processing units (GPUs) and application specific integrated circuits (ASICs).
Option 1: Choosing a GPU
Mining a coin requires the miner to use an algorithm that corresponds to that unique coin. The degree of mining efficiency that a GPU exhibits when mining a certain algorithm is based on the GPU’s specs. Therefore, a GPU miner should choose their hardware based on the type of algorithm that they want to mine with. Thereafter, one can select the hardware based on the degree of brand reliability, power consumption, and price. For example, AMDs come well recommended when mining with cryptonight and cryptonight-heavy algorithms for coins such as Monero and Loki, whereas NVIDIAs are noteworthy with respects to Equihash and Ethash algorithms used for Zcash, Zencash, and Ethereum.
Custom GPU Rig
For individuals looking to build a custom GPU rig, they must consider a number of components, including the graphics processing unit (GPU), power supply unit (PSU), motherboard, risers, and rig frame. Additional elements will lengthen one’s breakeven duration. A detailed configuration description can be found in this article from our friends over at Coin Central.
For those with limited hardware knowledge or time to build a GPU, they can opt to purchase a pre-built mining rig for a slightly higher price. Some pre-built rig manufacturers provide a six to twelve-month warranty, and there are several noteworthy pre-built rigs worth considering.
Option 2: Choosing an ASIC
An ASIC is a machine that is designed to mine a select type of cryptocurrency and algo. There exists a copious quantity of ASICs, with the amount of options generally correlated to the demand for a particular coin. Though Bitmain manufactures the majority, competitors such as Innosilicon and Halong are looking to expand their footprint in the space with new ASIC releases.
Know Your End Goal
When choosing an ASIC, you must first decide your objective: to obtain a specific type of coin or to opportunistically purchase machines to capitalize on disproportionately high profits.
If you are obtaining an ASIC to mine for a specific type of coin, you would begin by choosing the coin and then identifying what algorithm is used to mine the coin. For coins’ algorithms that are not supported by an ASIC manufacturer, one’s only option is to mine with a GPU.
Once you outline all the potential ASICs that are available for the select coin, you can compare them. Key metrics of comparison include hash rate (revenue potential) relative to electricity usage (variable cost), initial equipment cost, and the date by which you would be able to receive the ASIC (a function of release date and shipping speed).
Some speculators purchase an ASIC to earn higher profits that are generally realized by the first-movers on new ASICs. Typically, the most profitable machines with the shortest breakeven period are new releases since they can out-hash incumbent GPUs. Other opportunists seek to scoop up used or old machines for a discounted price. If this is done during a bear market when some miners find it unprofitable to mine yet the market does rebound, the owners of the machines may be able to receive a return on their investment despite their ASIC’s relatively low hash rate-to-electricity cost.
Before You Buy
Regardless of one’s intention when purchasing an ASIC, it is essential to be wary of potential sticking points. First of these is the miner’s projected breakeven period based on hash rate relative to electricity cost. Another is the probability of whether another manufacturer will release an ASIC to mine the same type of coin in the near term, as the higher competition will decrease your current ASIC’s profitability due to increased network difficulty.
Key Differences Between GPU and ASIC Machines
On a high level, the following factors differentiate GPU miners from their ASIC counterparts:
- Flexibility in mining different coins: GPUs can mine multiple algorithms and coins, whereas ASICs are made to mine a single coin or algorithm. This means that GPUs can be adjusted to mine whichever coin is most profitable at a given point in time, whereas ASICs can become a cash-burner or paperweight in the case that mining their respective coin becomes unprofitable.
- Risk-return preference: While GPUs offer additional flexibility, the lower risk generally comes with lower returns relative to an ASIC when mining the same coin under the same market conditions.
- Re-sell value: GPUs tend to have a higher re-sell value as they can be used to mine multiple coins and their hardware can be reused for computational purposes unrelated to mining cryptocurrency. ASICs on the other hand generally depreciate at a quicker rate as they lose their lucrative profitability in a short period of time.
- Ability to host the machine locally: Another consideration between choosing GPU mining or ASIC mining is your ability to host your machines locally at your home or office. While many GPU miners set it up in their home, ASIC machines in bulk are generally intrusive devices in the household as they require significantly more power, create loud noise, and emit more heat.
How to Choose a Mining Pool?
At its core, mining is the process by which computational power (hash power) is used in an attempt to unlock a block in a blockchain. Each block unlocked provides a reward. The more attempts (hashes) you can perform per second, the higher the probability that you will obtain the reward. Because miners by themselves typically don’t have enough hashing power to frequently find blocks, they join a pool that combines the hash power of multiple miners to hash blocks.
With greater collective hashing power, it is easier to find blocks with decreased variance. The reward is split among the miners relative to the proportion of hash power that they contributed to the pool. The pool operator collects a small service fee. Choosing the right mining pool is crucial for the efficiency of a mining operation.
What to Look for When Choosing a Mining Pool:
- Payout structure of preference: A pool can payout rewards to its miners based on a Pay-Per-Share or Pay-Per-Last-N-Shares basis, two methods with their own costs and benefits.
- Team trustworthiness and pool reliability: Given the lack of governance and infancy in the crypto space, it is vulnerable to unethical practices by service providers. This danger increases the importance of choosing service providers that have credible development teams.
- Extra features: Quality pools generally offer enhanced UI and UX design, equipping users with functionality that allows them to monitor their performance.
- Fee: Generally, service fees range from 1-3% and exist to pay for the pool’s operating expenses and the interface functionality provided to users.
Alternative to Mining on a Pool: Selling Hashing Power
On pools, miners use their own hashing power. The coins they mine get deposited into their wallet where they can then trade them for another coin or hold on to them.
A growing user base is opting to sell their hashing power rather than use it to mine on pools. This transition is made possible with hash exchanges such as NiceHash and Genesis Mining, both of which are platforms that enable users to buy and sell hash power while taking charging a service fee. On NiceHash, one can use any ASIC or GPU to supply hashing power. In return for selling your hashing power, you receive BTC. This structure allows GPU miners and people with machines that mine specific algorithms that are not BTC to earn a return in BTC.
If you want to own BTC and don’t have an S9, T1, or other BTC miner, then selling you hashing power makes sense. However, if you are looking to hold your coins, typically the most profitable way to mine would be to join a pool with its lower fees.
Configuring Your Mining Machine
Once you purchase your ASIC or GPU miner and choose whether you want to direct the hash power toward a pool or an exchange, your last step is to configure your miner. A simple sequence of steps are followed to do this:
- Power on the miner by plugging it into a power outlet
- Connect the miner to the internet via an ethernet cable
- Find your miner IP via your router or IP scanner software
- Input three parameters (check your pool for different setup scenarios):
- Pool address
- Wallet address (check here if you need some help setting one up)
- Done! Now you’re mining!
Understanding How to Mine Profitably
Where to Host Your Miner: Colocation vs. Cloud Mining vs. Home Hosting
Housing and Colocation
When miners start off, they usually ship the ASIC to their home and begin hosting it. They quickly realize how intrusive and likely unprofitable it is to host an ASIC is in your home. Instead, people will host their machines at a colocation even if they only have one or two. Colocations, or “mining farms,” are data centers located in low-cost electricity regions that offer hassle-free, profit-maximizing mining for your rig.
Put simply, cloud mining is buying straight hashing power rather than buying a machine that creates hashing power. This method is similar to the buyers on the Nicehash market. Since you don’t have to invest in the hardware, it’s a great way to get into mining at a low initial cost. It’s also hassle-free and involves less risk. That said, if you are investing a lot more money into mining, it can be more profitable to buy a mining machine for yourself.
For those who are more interested in mining and the technology as a hobby rather than strictly to make a return, hosting in your home can be a lot of fun. It is cool to see the hardware and work with it.
Considerations to Increase Profitability
Given the burgeoning competition in the mining space, a growing concern is that it’s becoming increasingly difficult for miners to be profitable. To combat this, there are several variables to keep in mind to ensure that you achieve a profitable mining operation:
- Consider a Colocation (colo): The hosting cost at a colo such as Minery, may be cheaper than your local electricity rates, allowing you to increase your operating margin.
- Maximize Up-Time: When it comes to mining, NOTHING is more important then up-time. Every minute your mining rig is offline, you are wasting electricity costs and missing out on the opportunity to obtain crypto. It is crucial to build robustness into your design by investing in materials and testing to prepare your rig for a scenario where it overheats or fails otherwise
- Monitor and Alerts: Software such as the one at AwesomeMiner that lets you know when your miners are down so that you can act ASAP.
- Thermodynamic Efficiency: Choose a location and cooling method that allows you to avoid overheating while minimizing your electricity consumption costs.
- Efficiency Bumps
- Explore overclocking on ASICs and GPUs as an option to increase your hash rate (but be mindful of the setbacks with overclocking.
- GPU Bios Modification (Mod) can enable a significant bump in performance
- For those with the technical competency, test different types of mining software and compile the miner software yourselves to avoid paying fees.
- Consider Discounted Hardware: Keep an eye out for deals on GPUs and ASICs which may mean buying second-hand equipment.
- ASIC Arbitrage Opportunities: Leverage the following tricks to save money on ASICs:
- Purchase Bitmain coupons for 20% of the coupon price. Historically, it has not been uncommon to find a 100 USD Bitmain coupon selling for 20 USD or less.
- Try to buy miners that are in the first or second batch to ensure best ROI possible.
The long-term profitability of mining a cryptocurrency diminishes over time as network hash power and difficulty increase. The sooner you enter into a market, the higher your likelihood of a profit, but it’s essential to do the due research before diving into an endeavor. However, with the right set up and equipment, even a novice can become an affluent miner.
Author, Guzman Pintos