CRYPTO MINING BUSINESS

It's not all about shooting for the moon.

Apr 02, 2023

In business, always be alert. Even if sand falls into a good hunter’s eyes, he has to keep his eyes open. Otherwise, as the hunter is scrambling his eyelids to get rid of the sand, a hunt for him can catch up with him.

If the price of bitcoin does not rise, there will be a lot more pain, and mining firms that are only marginally profitable today will be deeply in debt.

Key Insights

Cryptocurrency mining produced increasing revenue over the years, leading to 63 million U.S. dollars on a single day in 2021.
Mining Bitcoin made increasingly more money at the end of 2020, but profit growth seemingly stopped during March 2021.
Some mining companies have kept the bitcoin they mined, preferring to fund operations with debt and other cash, which works great until it doesn't.
Performance in this mining business is dependent on whether the overall crypto market is bullish or bearish.
Many a mining company fail because they think and believe they are in the business of mining. But they did not realise they are in the business of timing.
Timing the markets involve predicting the direction of price of the crypto mined, and the price of electricity used for the mining.
Mining is a power-hungry process. Bitcoin energy consumption was the size of a small country.
Germany's electricity rates were more than ten times more expensive compared to other countries, like China, which until late 2021 had the largest crypto mining industry. IP addresses from so-called hashers who used specific Bitcoin mining pools in 2021 indicated that the majority of Bitcoin mining took place in the United States.
As a cryptocurrency maximum supply approaches, the algorithm demands more and more computing power for mining. This in turn makes mining more difficult, which drives up the cost of mining rigs.

Cryptocurrency mining has come a long way since the advent of Bitcoin in 2009. To understand its evolution, we can look back at the history of mining in general.

Mining, in its most basic form, refers to the extraction of valuable resources from the earth. In ancient times, mining was often done by hand, with people using primitive tools to dig tunnels and extract minerals. The invention of the wheel and other technological advancements enabled people to extract minerals on a larger scale, but the process was still very labor-intensive.

Fast forward to the 19th century, and the Industrial Revolution brought about a new era of mining. Steam engines and other machines made it possible to extract minerals more efficiently, and mining became a major industry. However, the process was still largely centralized and controlled by a small group of wealthy individuals and corporations.

Now, let's bring it back to cryptocurrency mining. When Bitcoin was first introduced, mining was a relatively simple process that could be done on a standard home computer. As more people became interested in mining, the process became more complex, and specialized hardware known as ASICs (Application-Specific Integrated Circuits) was developed to increase mining efficiency.

The mining of cryptocurrencies is becoming a multi-billion dollar industry, with gigantic mining farms employing specialized machinery and consuming enormous quantities of electricity. This development is similar to how mining has changed over time, from a manual and regional process to an industrial and global one.

Background

Mining bitcoin involves solving complex mathematical equations using powerful computer hardware. The first Bitcoin miners used their CPUs to mine the cryptocurrency, but as the difficulty of the equations increased, they turned to more powerful GPUs and eventually specialized mining hardware called ASICs.

As Bitcoin gained popularity, other cryptocurrencies, such as Litecoin and Ethereum, were also created, each with their own mining algorithms and methods. Today, there are hundreds of different cryptocurrencies, each with its own unique mining process. Mining for cryptocurrencies is not without its challenges and dangers, just like ancient mining. Mining requires a significant amount of energy, and the competition among miners for rewards can be intense.

Mining facility

After solving a mathematical puzzle, the solution (a new block) feeds into the Bitcoin network, and the reward was around 50 btc for every new block created. Now that it is 6.25 btc for every block created, and the value of these digital assets has soared, more people have become interested in mining them, leading to a surge in competition.

Typically, crypto mining operations go where energy is cheap. Currently, Texas has some of the lowest kilowatt-hour prices in America. There are also environments like Iceland, Canada, and Russia that are cooler and have less dust. The miners like to run at this temperature. Here are guidelines for setting up a mining facility:

1. Select a Location

Choose an appropriate location for the facility based on criteria including ease of access to dependable power and internet, a pleasant environment, and proximity to suppliers of mining equipment.
Make agreements with the property owner or landlord and acquire all required licences and permissions.

2. Choose a mining tool

Based on the cryptocurrency to be mined, the budget allocation, and the expected returns, choose the type and quantity of mining hardware to be employed.
Ensure that you buy the mining hardware from reliable vendors and that all of the equipment has been correctly inspected and set up before installation.

3. Install Mining Hardware

Install the mining hardware in the designated location, ensuring that all equipment is properly racked and wired.
Install cooling systems and ensure that the environment is suitable for optimal performance of the mining hardware.

4. Set up Power and Internet

Establish reliable power and internet connections, and ensure that backup systems are in place to minimize downtime in case of outages.
Set up remote monitoring systems to enable real-time monitoring of the facility's performance.

5. Configure Mining Software

Install and configure mining software on all mining hardware, ensuring that the appropriate mining pools and algorithms are selected.
Optimize the performance of the mining hardware and ensure that all software is updated regularly.

Mining pool

In order to improve their probabilities of discovering and mining blocks on a blockchain, miners are able to pool their computational resources through the use of mining pools. If a mining pool is successful, the reward is divided among the miners in accordance with the resources they have provided to the pool. The majority of cryptocurrency mining software includes a mining pool, however nowadays, crypto aficionados can band together online to establish their own mining pools.

Miners are free to switch pools whenever they feel the need to do so because certain pools pay out higher rewards than others. Official crypto mining pools are regarded by miners as being more dependable because they regularly receive updates and technical help from their host firms. But picking a reputable and trustworthy mining pool is crucial, as joining a poorly organised or deceitful pool can lead to financial losses. Below are the SOPs for setting up a mining pool.

1. Choose cryptocurrency to mine

Identify a popular cryptocurrency with a high mining difficulty and a stable market demand.
Research and identify potential mining pools that support the chosen cryptocurrency.

2. Install Pool Software

Install and configure mining pool software on a dedicated server.
Ensure that all required dependencies are installed and that the server meets the minimum hardware requirements.

3. Configure Mining Software

Provide clear instructions to miners on how to connect their mining hardware to the pool.
Set up user accounts and provide miners with the necessary credentials.

4. Promote Your Pool

Advertise your pool on relevant mining forums and social media platforms.
Provide incentives for miners to join your pool, such as low fees and regular payouts.

Mining profitability

According to Moore’s law, every mining company assumes a consistent long-term profitability just from selling mined cryptocurrency only. However in reality, profits can be achieved for one year because value of the crypto mined when sold (without HODL) is more than operating costs of the mining farm. After a year, operating costs usually equal or exceed the value of the crypto mined. So the only way to remain profitable is when the crypto mined appreciates in value. The mining company stops selling then HODL.

Most mining companies are very bad at timing. They are not that grounded with the knowledge of when market is in a bull/bear phase. So what happens to the mining farms, if after one year of mining, they still hold on to the crypto mined believing the crypto market that has entered a downtrending phase will recover?

That explains one of the reasons the stock prices of the five biggest public miners by hash rate; Core Scientific; Riot Blockchain; Bitfarms; Iris Energy and CleanSpark traded down 99%, 85%, 91%, 92% and 79% respectively last year. This does not necessarily mean that mining business will disappear. What it definitely means is that the industry is due for a bit of restructuring that will leave it better than before.

Net Coin Value (NCV)

This method can provide valuable insights into the profitability and performance of a farm, which can inform decision-making and help optimise operations for increased profitability. Let's consider a hypothetical mining farm that is mining Bitcoin (BTC). The farm has a hash rate of 100 terahashes per second (TH/s), and is located in a region where electricity costs are relatively low at $0.05 per kilowatt hour (kWh). The current BTC market price is $50,000 per coin, the current network difficulty is 25 trillion, and the block reward is 6.25 BTC.

We can use the following mathematical expressions to calculate the daily revenue, daily operating expenses, and daily net profit of the mining farm:

- Daily revenue = current BTC price x number of coins mined per day

- Number of coins mined per day = (hash rate x block reward) / network difficulty / 86400 seconds per day

- Daily operating expenses = electricity cost per kWh x total power consumption of mining farm

- Total power consumption of mining farm = hash rate x energy efficiency of mining equipment.

Using these expressions,

Number of coins mined per day = (100 TH/s x 6.25 BTC) / 25 trillion / 86400 = 10.32 BTC

Daily revenue = $50,000 x 10.32 BTC = $516,000

Total power consumption of mining farm = 100 TH/s x 0.1 watts per gigahash (W/GH) = 10,000 kW

Daily operating expenses = $0.05 per kWh x 10,000 kW x 24 hours = $12,000

Using these values, we can calculate the daily net profit of the mining farm:

Daily net profit = daily revenue - daily operating expenses = $516,000 - $12,000 = $504,000

Finally, the Net Coin Value (NCV) of the mining farm:

NCV = daily net profit / current BTC price = $504,000 / $50,000 = 10.08 BTC per day

This means that our hypothetical mining farm is generating approximately 10.08 BTC per day, after deducting operating expenses.

Mining farms need to carefully monitor their expenses (mining rigs, facility, equipment, delivery costs) and profits to ensure that they are making a profit and are able to cover their operating costs (electricity, rent and taxes, labour, delay in the delivery of mining rigs purchased, security). Everyday these costs increase, the profit realised from selling mined coins decrease over time. This means that mining farms need to be able to adapt to changing market conditions and adjust their strategies accordingly.

One way that mining farms can do this is by generating data on their periodic NCV. By analysing this data, mining farms can make informed decisions about when to sell their mined coins, selling price or even to pause mining. In addition, mining farms may also consider diversifying their investments by using some of their profits to invest in other areas, such as real estate, stocks, or other cryptocurrencies. This can help to mitigate risks and provide additional sources of income that can be used to cover operating costs or pay off debts.

Overall, mining farms need to be able to balance their income and expenses to ensure that they are able to operate profitably over the long term. This requires careful planning, analysis of market conditions, and the ability to adapt to changing circumstances.

Market analysis

In a bear market, the last thing a company wants to do is shutting down their machines as that will push back time to recoup their initial investment. To avoid this, a facility must understand their operating threshold. It is the minimum price of bitcoin and maximum network hash rate at which they are willing to mine.

A miner begins by figuring out the price at which total costs are equivalent to the value of bitcoin that's been mined. The miner would be mining at a loss at any point below this break-even line, while any point above represents a profit. The same is determined for break-even hash rate assuming that the price of bitcoin remains constant. This procedure usually is discretionary because some miners are willing to run at a minor loss whereas others may opt to stop working as soon as they attain break-even.

Conversely, if the price of Bitcoin rises too high, more miners may enter the market, increasing competition and reducing profitability. Here are the types of analysis:

Technical analysis: It involves the use of candlestick charts, chart patterns, indicators, volumes to identify potential bull or bear market.
Fundamental and Sentimental analysis: This involves analyzing the underlying factors that influence the price of a cryptocurrency, such as its technology, use cases, and adoption rate. Fundamental analysts may also consider regulatory changes and other macroeconomic factors that could impact the market.
Regulatory Environment: The regulatory environment for cryptocurrencies is constantly changing, and mining farms need to stay up-to-date on any new regulations or restrictions that may affect their operations.
Forecast of Electricity price: Electricity represents up to 90% of crypto mining costs. The process of predicting future electricity costs by utilising mathematical models is known as electricity price forecasting. In order to minimise risk or increase profits, a mining company that can reasonably foresee the variable wholesale prices, can alter its bidding strategy and its own production or consumption schedule.

Conclusion

Cryptocurrency mining has come thousands of years since the days of the pharaohs, who mined precious metals and gems from the earth to fuel their economies and build their empires. Today, the mining of cryptocurrency continues this tradition of extracting value from the natural world, albeit in a digital form. While the tools and technologies have evolved over time, the basic principles of mining remain the same: the investment of time, resources, and effort in pursuit of valuable rewards.

For those who are willing to invest in the mining business, the potential rewards can be significant - but it's important to approach this endeavor with caution, preparation, and a long-term perspective. Just as the ancient miners relied on their ingenuity and persistence to succeed, so too must modern-day cryptocurrency miners adapt to changing market conditions, regulatory landscapes, and technological advancements. By doing so, they can build sustainable, profitable mining operations that can stand the test of time.

Everything Blockchain

Discussion about this post