What is Mining? - Layman’s Terms

Day by day the mining sector is becoming increasingly more competitive and complicated. Nevertheless, anyone who is interested can still easily start mining cryptocurrencies and hope to make a good profit. This article aims to answer the most pressing questions surrounding this phenomenon.

What is Mining in Simple Terms?

It should be stressed, that all cryptocurrencies are based on a blockchain, supported by the network which is the foundation of the system. Miners facilitate transactions while also confirming and creating new cryptocurrencies.

Now let’s talk about mining investment types.

They can be divided into three categories:

Each type contains its own risks.

1. When you invest in ‘buying devices’ these are the following risks:

Location risks. Devices can be stolen. In some countries graphics card robbery instances are fairly common which could lead to problems with the police as they can arrest a device to find out what actions the machine performed.

It’s advisable to research several locations before settling on a particular geographical area with the acquired equipment. In Russia for example, there are many risks as equipment is difficult to import and export, though electricity is cheap. In Europe, and in particular in the Nordic countries, it's safer to mine. Also, the climate is colder there, making it a good place to build a data center. The electricity bills are also favorable and cases of equipment robbery are far less common.

Hardware risks. According to statistics, mining equipment goes out of service in up to 20% of cases and it's very difficult to exchange it under warranty.

Electricity Costs. The money you pay for electricity is a priority in this scenario since the power is always running. Finding a safe place with a low electricity bill will boost profits.

Qualified Employees. Employing people who know what they are doing is important in any sphere, be it theoretical physics or agriculture. Mining is no exception.

Long Start-up Time. Starting a mining operation from scratch is a lengthy endeavor and will require time before the actual mining can begin.

When buying devices, the entrepreneur is responsible for everything: the search for a location, negotiating with electricity companies, hiring new employees and so on. A time-consuming process that can't exactly be called easy-money, though all the profit for the hard work goes to you.

2. Buying devices & colocation: Which involves placing the mining equipment into an existing warehouse alongside someone else's. But additional risks may arise.

Hardware risks. Choosing the required equipment and maintaining it arises in this option as well. So its good to be aware of the approximate life expectancy of the purchased equipment.

Partnership risks. One has to be fully aware next to whom their equipment is situated and with whom they share the hired space. Choosing a good and trusted partner is essential when it comes to colocation.

An entrepreneur pays the fees to house the equipment, these also include electricity and maintenance costs. This option is less time-consuming and one doesn't need to be so deeply involved in the process, yet because of this, the costs are higher.

3. Buying hashrate carries low risks and involves purchasing part of the overall computing power that can mine at a greater efficiency.

Partnership Risks. One of the main risks here is the trustworthiness of the people one buys the hashrate from.

It's the most expensive of all the options described here, but it also carries the lowest risk and involvement in the process. All you do is hand over the money.

The only potential stumbling block could indeed be the company, in which the hashrate is being bought. The partner needs to be reliable.

Let's now consider the advantages and disadvantages of ASIC and GPU mining.

Primarily, ASIC exercises one mathematical function and is confined only to mining a specific coin. The main risk of acquiring such a processor is that its efficiency is rather low and eventually it may not be capable to mine. Also, the device can break and it will be difficult to change under warranty. It should also be stressed, that ASIC mining is a specialized mining business which can be very profitable, but at an appropriate time.

Also, ASICs are created by just a handful of companies around the world, with Bitmain creating a form of a monopoly.

Many people think that it’s more effective to mine some coins with GPUs.

When investing in GPU mining, there is less risk that the device will be completely devalued because they can be used for many tasks:

However, there are some disadvantages surrounding the purchase and usage of GPUs for mining:

Speaking about mining investing, one can note, that there are two types of investors: professional and unprofessional investors.

As a rule, professional miners purchase equipment, that bring money in the long-term and in this case, two factors are important:

OPEX is mainly concerned with the depreciation of video cards as its vital, for professional investors, that cards last longer. Besides, the greatest part of the variable expenses is electricity consumption. Since the equipment is always turned on, a lot of energy is consumed.

Professional miners tend to always hedge, i.e. immediately sell off their cryptocurrency. Future hedging should only be done when there is certainty that more currency can be mined.

For example: one buys a farm, with its own equipment and there is confidence that the miner will produce a certain number of ethereum in a month. Let’s suppose it will be 10 ethereum and in ‘Month X’ costing $700, they could have been sold in advance if $700 is considered to be a good price. A short position can be opened to sell 10 ethereum at $700, meaning a profit of $7,000. So the task now is to mine 10 ethereum.

Now onto the next scenario: if the currency price was $500, the proposed money can still be earned if the rate grows. Otherwise, less than the original prediction will be earned, but it’s still better than nothing. So, risks should be hedged, accepting the income that is satisfactory, given today's currency rate.

It’s also possible to sell cryptocurrencies within the next two months. In this case, confidence is needed in the amount that will be earned from a long-term perspective. It should also be stressed that planning for a longer period than two months is rather complicated as no one knows for sure what will happen in the future, with the equipment, the graphics cards, and the technological developments. So, long-term planning is impossible in this business, in particular, planning in terms of hedging since it’s extremely dangerous. Speaking of key currencies, an average for the past 2 years can be estimated. This can be done by looking at how mining complexity has been changing and how much ethereum was gained as the result of it. Only through this long-term planning can be compiled.

It’s also important to have the ability to count the current amount of coins available, and whether mining activities continue to be profitable.

You can find the rate of profit for one megashash of ethereum or terakhash of bitcoin. This is the rate of profit you compare with the electricity expenses.

For example:

The Comino mining device consumes 750 watts of energy to produce 200 Megahashes.

Let's consider what are the current cost if Comino earns $3,500 a year. Then, multiplying 750 watts by 24 hours and then multiplying by 365 days and by the price of electricity which could be 0.03 cents.

Also, it's very important to come up with a forecasts for the current day. Profitability of mining varies and depends on the price of the crypto. When the price grows, more miners appear and therefore complexity grows. So, the more miners are connected to the network, the more difficult it will be to gain for example ethereum pr other currencies.

When the profitability rate is high, a lot of megahashes are added to the network.

So, it's better to buy when the profitability rate is low. Hence, greater profits can be earned through mining when the margin is higher than the energy consumption.