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Review of the Role of Miners
We have learned in previous lessons about the emergence of cryptocurrencies, and the similarities and differences between the cryptocurrency industry and the fiat system of finances currently used by all nations today. Somewhat in the same way, cryptocurrency mining has similarities and differences with other traditional businesses.
In the fiat system of finances, currencies are printed by the central bank of that nation, pretty much to whatever extent they desire to print money. But when the money supply increases so does inflation, which of course decreases the value of the money in circulation. There has been a tremendous amount of academic study and empirical research dedicated to understanding how to prevent hyperinflation, which is the inflationary destruction of old currency as new currency is printed. Cryptocurrency like BTC etc., on the other hand, does not have a problem with inflation because there is only a specified limited supply of all BTC coins that can ever be mined.
Looking at CoinMarketCap, you can see the currency information contains the maximum supply and circulating supply among other attributes for each coin. This is designed from the start to be a tamper-proof system.
Looking carefully at maximum supply and circulating supply, you will notice that the maximum supply is greater than circulating supply. This is where cryptocurrency mining serves its purpose. The circulating supply continues to increase as it moves closer toward the limit of maximum supply.
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“Review of the Role of Miners § 2
For instance, out of the total 21 million BTC that are ever allowed to be mined into existence, number 17 million bitcoin was mined on April 26, 2018.
Not surprisingly, the most popular form of cryptocurrency mining is Bitcoin Mining, however there are many other mineable cryptocurrencies. At the same time, many other recent ICOs have steered away from a mineable token, but rather chose to go to market with a finite supply. Many ICOs have either chosen to initially circulate the maximum supply in the offering, or hold a portion of the tokens to introduce to end users at a later time.
Now let’s see exactly what cryptocurrency mining involves.
Explanation of Cryptocurrency Mining
You may recall, cryptocurrency didn’t start with Bitcoin. There were early versions like Digicash, R-POW, BitGold, and B-Money existing in the 1990s. But mining for cryptocurrency did not become relevant until the introduction and popularity of Bitcoin.
The first BTC was mined on January 3, 2009. The mining was done only by the tech guys who did it as a hobby, or as an experiment with new technology. And since there weren’t many people involved in the mining process, the equipment for mining wasn’t as sophisticated as it is today. One thing to keep in mind though, complexity of the cryptographic puzzles that were required to be solved were phenomenally more basic then; much less time was required.
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” Explanation of Cryptocurrency Mining
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Whenever there is a transaction on the blockchain, it is a given that one of the cryptocurrency miners must take responsibility to verify this transaction. That is one way the miners earn fees.
Cryptocurrency mining is a system whereby every cryptocurrency miner competes to solve complicated mathematical cryptographic problems associated with the block that contains the transaction data. Once the problem is solved, the information is broadcast to everyone on the blockchain and they move on to other transactions and repeat the process again.
Mining in ordinary English usage means digging into the earth’s crust to extract natural resources, but it is not like that at all for mining cryptocurrency. A cryptocurrency miner does not need a shovel; a miner needs a computer coupled with specialized hardware for mining the coins.
Did you know?
There are cryptocurrencies now that allow people to mine for them
just by using their android phone.
One such cryptocurrency is Electroneum.
(Up until May 2018, there were also apps on the iPhone store that allowed users to mine cryptocurrencies. This has however been suspended by Apple Inc.)
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“Technical Explanation of the Business Model
§2
There are two different kinds of people involved in crypto mining, namely those who invest in a mining pool, and those who mine the cryptocurrency on their own.
A personal cryptocurrency miner has to consider a few key things before starting to mine. There will be expenses for internet connectivity, electricity, and mining hardware. The hardware for mining isn’t just a typical computer for personal use. A good mining computer needs a specialized GPU (Graphical Processing Unit) or ASIC (Application Specific Integrated Circuit). The miner must have a hot wallet connected to an online cryptocurrency exchange. The miner must also be a registered member of a mining pool and reside in a country where bitcoin and cryptocurrency mining is not illegal. Some miners might try to operate illegally as long as they can, perhaps especially as happened in China, but the community has largely moved away from operating outside of the law.
The miner also needs a secure location to setup their mining farm. And finally, the miner needs to purchase a legal software package for mining. Due to the extreme volatility of cryptocurrency pricing, the profitability of cryptocurrency mining also fluctuates wildly. This unpredictable and extreme volatility make it much more prudent for large-scale miners than for individual private miners to engage in this business. The perpetually advancing technology always seems to require significant capital expenditures to survive and remain competitive.
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” Technical Explanation of the Business Model
§3
One thing a cryptocurrency miner will certainly need plenty of is self-confidence; and then confidence in the overall system as well. Cryptocurrency has evolved rapidly since 2009. The business model and inherent risk have grown proportionally. A miner needs a high degree of technical knowledge of both hardware and software. A miner also needs an environment with stable and cheap power. Without these factors a commercial scale mining operation simply cannot exist or function profitably.
Something interesting to note is that the owner of Bitfury (mining infrastructure provider) was accumulating a lot of Bitcoin when the price was quite low in 2014-2016. He was taking a long-term position on the value of Bitcoin, even before his mining equipment business grew to be what it is today.
While many citizens of different countries around the world have tried mining cryptocurrencies either personally or commercially, there is only one big elephant in the room. There is no country quite like China when it comes to either personal or commercial mining.
Statistics shows that payouts for crypto miners reached a peak of
$11million in December 2017.
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” Technical Explanation of the Business Model
§4
Small scale miners have struggled in recent years to continue mining at a profitable and worthwhile level. As we have discussed before, the cost bases of running a cryptocurrency mining business are split between the cost of the rig (your node), and the cost of electricity and pool fees. With a strong combination of computational power, the group has a chance to solve the next problem for the benefit of everyone in the group, because blocks are only awarded to the node(s) which solve the block computation first.
At the present price range of BTC (~$6500USD), using the strongest available machine that small-scale miners can buy (Antminer S9, an ASIC mining rig) a miner is able to earn approximately 0.03600399 BTC per month. At this price range, and typical electricity prices in most western nations, a private miner will struggle to make money with a home setup. Most likely, the miner will lose money due to the initial cost of setting up, rising power prices, increasing difficulty of solving blocks on the chain, as well as the relatively long payback period.
Cloud Mining
Aside from establishing a personal mining farm or investing in a mining pool, you could also participate in cloud mining. Cloud mining is the act of using shared processing power from data centers.
To participate in Cloud Mining, all you need is a computer (which would be used for communications), a bitcoin wallet, and membership in a cloud mining setup such as CloudHashing.
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“Technical Explanation of the Business Model
§6
There are three types of Cloud Mining:
Hosted Mining: This involves leasing the mining machine hosted by the provider.
Leased Hashing Power: This is the most popular type of cloud mining. In this type you lease an amount of hashing power, the same way you might lease some SQL computing power.
Virtual Hosted Mining: This is accomplished by having a private server coupled with the installation of the mining software. But what are the pros and cons?
Advantages:
-No need for personal responsibility or insurance over your mining hardware. You personally do not need to secure the environment or troubleshoot hardware issues. Those things can be quite technical and cost a lot of money for a specialized technician to do.
-You have no responsibility to sell the equipment when you are finished mining.
-You are able to stay on top of the latest technological developments as your infrastructure provider will need to continually upgrade the hardware to remain competitive in their space.
Disadvantages
High risk of fraud and inaccurate calculation of the computing or hashing power provided.
You lose control of the hardware and infrastructure specifics of your setup.
While you remove the risk of personal capital expenditure to purchase the hardware, you do give away some of the potential upside as you are simply sharing the mining capacity, you do not own it or control it.
Limited ability to influence the technical and infrastructure capital spending decisions of the hashing power provider.
Due to the volatility of cryptocurrency prices your mining provider might go out of business, leaving you with no computational power at all.
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“Key Challenges of the Present Cryptocurrency Mining Model
Over the years, as cryptocurrency mining has become more popular and proportionally difficult too, there have been a number of key challenges to deal with. We can say the six primary challenges we will examine are manageable; but they cannot so easily be eliminated, they are persistent existential areas of concern in the mining industry.
Increase in Price of Mining Hardware
According to 99Bitcoins, the top three pieces of hardware for mining are the Avalon6, AntMiner S7, and AntMiner S9. Over the years, the hardware used for cryptocurrency mining has become phenomenally sophisticated, seriously discouraging private miners.
There are different grades of mining hardware available in the market today; hashing power is the major difference between them. The hashing power of the hardware affects the raw ability to solve cryptocurrency puzzles. Note that cryptocurrency mining profits come from the ability to confirm transactions, and this is made possible via hashing, whereby the details of the encrypted transaction are solved, and the first person to solve the problem is declared the winner.
This hashing power of their hardware is one of the single biggest differences between miners. They must be willing and able to constantly upgrade and supplement their hardware, the capital stock of their business. One piece of commercial grade mining hardware costs between $3,000 – $11,000.
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“Key Challenges of the Present Cryptocurrency Mining Model
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Fluctuation in Cryptocurrency Prices
The price of BTC has of course been phenomenally volatile. BTC started with an opening price of $0.00076 and has risen to about $6,300 as of June 2018, with a mind-boggling series of up and down moves all along the way.
One major issue affecting the viability of cryptocurrency mining operations is the fluctuation of token prices. While the price of mining hardware is fixed or relatively fixed, token prices are incredibly volatile.
Imagine a miner setting up his business when BTC was $15,000, only to see it unrelentingly sink to, and stay at a low around $6,000. The miner’s revenue and earnings would be significantly lower, but the cost remains the same or in fact continues to increase. As a result, the larger you are able to scale your operations, and lower your cost per hashing or token, the more likely you are able to survive.
A key parallel between the business of cryptocurrency mining and traditional business can actually be found in the mining industry itself. The business models are the same. Mining companies constantly attempt to lower their all-in sustaining cost, so they can not only enjoy good times when commodity prices are high, but also so they can survive when prices inevitably crash.
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“Key Challenges of the Present Cryptocurrency Mining Model
§3
Governmental Policies
Since cryptocurrency and the blockchain are still relatively new technology that is influencing almost every corner of society, it has become a major regulatory concern of governments all around the world.
As you know, not all countries are supportive of the blockchain industry. Some countries are still deciding exactly what position to take on this new technology that seems ready to fundamentally disrupt capitalism as we know it today. Surprisingly, the Chinese government recently placed outright blanket bans on many aspects of the cryptocurrency industry. The Chinese regulators cited rather meaningless reasons like for the sake of “social stability”, etc., but for a country which is closer to communism than capitalism, it is particularly interesting.
Competition
As a result of the eye-popping profits made from cryptocurrency mining in the recent past, many people have flocked to the industry. This has only intensified the competition for the latest technology and mining rigs as well exponentially increasing the difficulty in solving the cryptographic puzzles on the blockchain.
Profits have been severely eroded over time. Only the largest and most sustainable operations are able to survive the unique nuances of the mining industry.
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“Key Challenges of the Present Cryptocurrency Mining Model
§4
Electricity
81% of the network’s hash rate is concentrated in China. This is due to a number of factors, but the most important one is access to artificially low-cost and consistent power. Chinese cryptocurrency mining operations are famous for their efficiency and output. The Chinese mining pioneers are well-known for placing their mining infrastructure quite literally next to a hydro dam or a coal fired power station to lower production cost.
As the cost of power fluctuates, and more likely increases around the world, the viability of mining itself will continue to become an increasing concern. And it only makes the situation worse if governments pass regulations prohibiting miners from operating in the most cost effective locales.
Community Adoption
The further adoption of cryptocurrencies by the general public would help support the price of cryptocurrencies and that would certainly benefit the cryptocurrency mining industry as well. Currently we have a lot of negative issues like exchange robberies, fraudulent ICOs, and doubtful public sentiment, all of which influence the final price of cryptocurrencies. The viability of miners becomes particularly tenuous if we do not eventually see an increase in community support and adoption of cryptocurrency.
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“Notable Commercial Cryptocurrency Mining Companies
There are still quite a large number of commercial scale cryptocurrency mining operations operating around the world.
The specialized pieces of hardware companies use in constructing their cryptocurrency mining rigs are supplied by AMD and Nvidia. These two companies are actually more well-known as being the suppliers of the world’s best graphics cards for Computer gaming and design work.
PeerNova
CloudHashing (a PeerNova company) was a London based cryptocurrency mining company established in 2013, and then merged with Highbitcoin, and is currently involved in Cloud Mining. The company sells bitcoin mining contracts and is easily one of the largest BTC mining companies.
Bladetec
Bladetec is a relatively new bitcoin mining company that raised ten million pounds from investors to purchase over a thousand ASIC mining computers. It offered investors with as little as five thousand pounds the opportunity to invest in a large commercial scale mining farm.
This company used a great pitch to investors explaining four different scenarios that would determine the return on investment for their mining business. Also, interestingly, this is a closed end company, similar to a traditional private equity fund, wherein the business will be wound up within a set time, two to three years.
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“Notable Commercial Cryptocurrency Mining Companies
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Bitcoin Suisse AG
Established in 2013, this Switzerland based mining company is involved in mining along with other services such as brokerage, asset management and payment gateway services. Most notably, Bitcoin Suisse AG is the payment gateway service provider for the swiss town of Zug. The company’s mining operations are primarily focused around ETH through their Alpereum Mine.
Bitcoin Suisse AG since 2014 have issued a line of physical bitcoin certificates which represent paper wallets. This would allow individuals to directly hand each other the pieces of paper, in essence, transfer the ownership of the wallet.
Notable Commercial Cryptocurrency Mining Pools
Although there are well over 30 recognizable mining pools worldwide, around 20 of those pools are operated by the most major companies. When the total hash power of all miners is calculated and averaged by country, China controls 81%, the Czech Republic controls 10%, Iceland & Georgia control 2%, Russia 1% with the remaining 2% shared among other countries.
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” The Future of Cryptocurrency Mining
Cryptocurrency has come a long way in a short time. The future growth of cryptocurrency mining will come through increased transparency and accountability on the part of the miners; and appropriately accommodating regulatory frameworks by the relevant authorities.
The present state of the cryptocurrency industry is riddled with market manipulation and devious actors. There are many legitimate people contributing to the positive spread of cryptocurrencies, but the industry must do away with unscrupulous individuals and activities.
Even major exchanges such as Coinbase, itBit and Kraken have been implicated in market manipulation, some degree of illegal behavior, or other questionable activities. Negative news has been a major force pulling the market down. In 2013, Charlie Shrem was imprisoned for using Bitcoin to promote money laundering, and funding terrorism, same as Ross Ulbricht. Mt.Gox the largest cryptocurrency exchange then went bankrupt due to token theft. BTC went down from a record $1200 ATH to as low as $100-120 as a result.
The future of bitcoin mining and the viability of the current business model is one of the most divisive topics in crypto today. So far, the industry has able to stamp out, or at least relegate rogue actors to irrelevance. But from now on, cryptocurrency mining will more likely be able to survive if the following characteristics further change in favor of the industry.
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“The Future of Cryptocurrency Mining
§2
Regulatory Clarity
Many large-scale miners look at things from the same perspective as sophisticated or institutional investors. They are extremely hesitant to invest money in commercial scale operations until they see a clear regulatory framework in place. There is still much uncertainty in the world about cryptocurrency in general let alone cryptocurrency mining operations. Investors want certainty; and certainly not risk without adequate compensation. The returns from mining operations are currently insufficient to offset the persistent regulatory uncertainty in the business world.
Japan and Switzerland are both cooperative and supportive of the cryptocurrency industry from a regulatory perspective. But they are less than ideal in some other ways.
China and Venezuela score high in other factors, but fall short in regulatory certainty.
Commercial scale mining is likely to move to countries that are at least supportive of cryptocurrency mining. Regulatory certainty would allow for miners to pitch a remarkably safer business to investors. Miners could stop worrying that they might be outlawed and required to stop mining at any time.
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“The Future of Cryptocurrency Mining
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Price of Power
The cost of power is the single largest ongoing and variable cost to a commercial scale cryptocurrency mining operation, besides that of regulatory compliance and staff. The initial capital spent on mining machines is often the greatest challenge to new commercial scale farms; but reliable and cost-effective power is an even greater concern.
Cost-effective power, especially in a country with business-friendly regulations, is becoming increasingly difficult to find. High oil prices and a greater focus on renewable energy has placed the unprecedented amount of power consumed by the mining industry firmly in the public’s mind. Cryptocurrency miners consume a tremendous amount of power to produce virtual coins. The availability of reliable and cost-effective energy will continue to be a vital lifeline to the industry.
Availability of Hardware
The world’s largest producers of ASIC and GPU machines, at the forefront of cryptocurrency mining, are Chinese companies. The Chinese government recently blanket-banned any activity involving cryptocurrencies. So now, these companies are in the process of moving overseas and diversifying their revenue streams. With this transition taking place, not only are mining machines harder to find and purchase, because supply is limited, but competition for machines is likely to intensify even more.
In Summary, Every kind of mining operation and all the producers are scrambling to obtain as many machines as possible. Without the machines you are unable to mine cryptocurrencies.
What is the current state of mining? To mine or not to mine? Get the answer after reading the full lesson: https://bit.ly/2NNPryI Learn more on best security tokens in 2019, best blockchain platforms and many more after finishing the UBAI courses. Contact me via Facebook to learn more:
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