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By now, cryptocurrencies have become an immensely popular means of investment, and more and more investors are heading to get their hands on the most valued of cryptocurrencies.
Bitcoin currently is leading the race, followed closely by several altcoins, such as litecoin, dash, ethereum, and ripple.
Cryptocurrency mining is the method of generating new cryptocurrencies, as a reward in exchange for solving complex problems on a computer setup.
This computer setup, popularly known as a ‘mining rig’, can be of many kinds, ranging from the simplest CPU of a home computer to a full-blown ASIC miner.
The scarcity of a cryptocurrency pushes people towards it.
The limited supply, in the face of rising demand, drives up the price of the cryptocurrency, and therefore makes it a coveted property that people wish to obtain.
When a cryptocurrency is mined, the Blockchain of the cryptocurrency gets added to.
The blockchain is an anonymous ledger of transactions, that ensures that there is a de-personalized, secure, and foolproof record of all the transactions related to that coin.
When a user mines cryptocurrencies, they receive a reward for certain units of cryptocurrency, each time a problem is solved.
The difficulty of solving each consecutive unit goes up as more and more units of the cryptocurrencies are mined.
The measure of the difficulty of mining a cryptocurrency is measured as the “difficulty metric”, which measures how much computing power is needed to mine a unit of the cryptocurrency. The difficulty metric of most cryptocurrency coins can easily be found online. For instance, you can see the real-time difficulty metric of Bitcoin at https://www.bitcoinblockhalf.com.
To maintain the scarcity of the coin, and hence its value, the reward allotted for each block of problems solved keeps on getting reduced.
This ensures that too much of the cryptocurrency is not put into circulation.
For instance, the reward for mining Bitcoins was 50 Bitcoins when the first block was mined. It halves after every 210,000 blocks are mined. So far, it has been halved twice.
As a result, the reward for mining a block now is 12.5 Bitcoins. As a result of this, only 21 million Bitcoins would be put into circulation in all.
In addition to the information on the Difficulty metric, the website given above also sheds light on information about when the next split is expected, how many Bitcoins are in circulation and how many are still to be mined, and so on.
Decisions to Take Before Incurring Costs
Before one goes on to set up their mining rigs, they need to give some thought to several key decisions, that would determine how much money they would end up spending, and whether or not they would get the optimum returns on their investment.
These decisions will involve optimising the investment, how much to spend, where to allocate how much of resources, some safeguards against future payments, and so forth.
As a result, decisions taken towards the optimization of resources would allow us to allocate resources in such a manner that doesn’t minimize resources used directly, but rather, brings the most out of the invested resources, which implies that less resources have to be used to obtain the same amount of outcome.
To begin, one needs to be very clear about their goals from the mining operation.
Mining Bitcoins requires vastly different equipment and preparation from mining some lesser known altcoins.
Similarly, mining for a short time duration requires different setups than long term mining operations.
Once this is done, an extremely important decision is to set a threshold of fixed costs and running costs.
While it is alright for the fixed costs to be slightly flexible, the running cost threshold should be kept as rigid as possible, since running costs are long term, iterative expenditures, and deviations in their budget are likely to cumulate into huge overheads.
Once the budgets for fixed and running costs have been fixed, one needs to identify the resources that they own, to see whether or not they need revamping to make them fit for hosting a mining farm.
For instance, a mining farm needs adequate space and adequate electric power. Mining generates a lot of heat and noise; it is imperative for users to ensure that the place where they intend to mine is well equipped for this heat and noise.
Further, it is also necessary to be able to provide the electrical requirements, if the circuitry of the place is not adequate, it can lead to short circuits, fires, and damage to equipment.
Now, perhaps the most important decision, is to piece all the above factors together, and choose the mining rig that you intend to use.
Mining can be done using CPU, GPU, FPGA, or ASIC miners. Each of these have their own distinct qualities, and it is important for a user to understand each of these before making a decision.
While ASICs are the most powerful and the most power efficient, they are exponentially more expensive than other miners. Moreover, they have a fraction of the retail value that FPGA and GPU miners have.
If you plan to mine Bitcoins, the only way to be profitable is to have high hashrates, which can be obtained either by using a combination of a small number of ASIC miners, or by using a large number of FPGA, or GPU miners.
Once all this is done, the costs determine for all the inputs can be checked against the difficulty metric offered by the preferred coins and their returns, to check the profitability of the whole operation. You should go ahead, if and only if the operation is profitable on the whole, by subtracting the fixed costs and running costs from the profits.
Choosing the right software is also of prime importance. One needs mining software that is compatible with a wide range of miners, and allows easy uplink to the mining pool.
This allows the user to maximize the amount of blocks that actually count towards their reward, known as the “accepted share”
Finally, a mining pool is selected, and you can begin mining.
Main Cost Heads
For ease of classification, costs are divided, according to economic theory, into two categories – running costs, and fixed costs.
The costs which are incurred once, which add to the investments and stocks of the spender are the fixed costs.
In this case, the money spent on the mining rig is a fixed cost. Further, the money spent on the place of mining, investment in land is also a fixed cost.
To add to this, money spent in the installment of a power supply unit, cooling units, software, etc are also fixed costs. These costs remain the same, regardless of the amount of operation conducted.
On the other hand, iterative costs, which are incurred throughout the course of the operation, and are needed to run the operation smoothly, are called running costs, or variable costs.
These costs increase in an increase in the scale of operation.
The biggest variable cost in the mining operation is the electricity costs that are incurred while running the mining rig, the cooling units, and so on.
So, if you mine more units of Cryptocurrencies, the fixed costs you incur will remain the same, while your running costs will increase.
Various users feel that the biggest expenditure in mining is, by far, the cost of the miner.
While this may seem true at the time of purchase, it is also true that the costs of running the whole operation are also extremely significant, and indeed, lowered running costs are the key to optimizing the efficiency of the mining operation.
To optimize the cost means to minimize the cost incurred to mine one unit of output, or, to maximise the output given one unit of input.
Following either definition, the key lies in categorizing resources such that we use the cheaper resources more, and the more expensive ones less.
The resources that one can trade off against each other are land, power, time, and form factor.
In places like China, where a lot of electricity and land is available for cheap prices, it makes sense to purchase powerful miners, which may not be as efficient as they are powerful, and run them, so that the revenue they generate is higher than the costs that are incurred on running them.
On the other hand, when electricity is expensive, like in most part of the world, it is better to buy a miner that is extremely efficient.
While this would mean that it would take a lot of time to produce revenue, the trade off here exists between time and electricity used, and in the face of electricity paucity, it is better to put in a lot of time, rather than spending lesser on electricity in the short run, and ending up with absolutely no tangible profits.
Considering all of these factors would allow you to make a final call about the type of miner that you would want to buy.
At the outset, it may seem that there is absolutely no sense buying anything less than a powerful ASIC miner, that returns high hashrates, and is quite power efficient.
If, however, you only plan to mine certain altcoins, for a short time period, an ASIC shouldn’t be the way to go.
Once you’re done mining, you would have a hard time selling off your ASIC miner, because it has absolutely no use other than mining cryptocurrencies of the same algorithm as intended for, and reduces their re-sale value drastically.
In such a case, it is better to go for a series of FPGA, or GPU miners, which can be used for different purposes once the mining activity has been completed.
Similarly, but conversely, if one is looking for a long term investment, in a coin whose difficulty metric is higher, it is better to shell out additional fixed costs and go for ASIC miners, rather than spending a bit less and buying FPGA or GPU miners, which probably won’t turn over enough to even cover the running costs of the setup.
Therefore, optimization of costs doesn’t necessarily mean spending too much; at times, spending a bit too less can also exacerbate the problem.
Further, one should choose a miner that allows the user to get the maximum accepted share uploaded to their mining pool, as fast as possible. For this, one needs to choose miners with direct connection capabilities, or spend extra to add these capabilities to the existing setup.
The electric supply should be ensured as adequate for the mining operation. Unless this is done, the power supply bought might also go waste.
Conversely, when you upgrade from an existing miner to a newer one, it is imperative to check whether your existing power supply unit is supported by the new miner or not, before rushing to invest in a new one.
In these manners, one can optimize the additional investments that are made, along with the investment made on the main mining rig.
Sometimes, spending additional costs on safeguarding can be a better way to save the user from spending more, and frivolously, down the road.
For instance, it is extremely wise to invest in circuit breakers for the whole mining farm, to ensure that surges and power abnormalities do not blow off the expensive equipment that you have already invested in.
Similarly, it is important to invest in good quality external cooling equipment if your miner produces a lot of heat, even if the miner has in-built fans and ducts.
The place where the operations are based should also be fireproofed, have fire extinguishers involved, and should physically be located such that there are no external factors that may interrupt the mining operation midway.
If possible, a user can also look into alternative sources that they may use to power their mining farm. Solar energy is the most popular form of alternative energy.
A wise strategy is to invest in a farm that is compatible with solar energy, and when some returns are obtained, invest in solar energy to reduce further costs.