I am not telling you how to succeed at bitcoin mining; I am asking. In this post I will be talking to myself, trying to come up with an answer. Feel free to join the discussion with a comment below!
As stated elsewhere on this blog, I am not hoping to get rich by mining bitcoins. I am happy to own a small business that provides me with sufficient income and a nice amount of spare time for various projects. Instead, I hope bitcoin mining will help me get a better understanding of the people who are mining and using cryptocurrency. After all, someday some of them might become my customers and they might want to pay me in bitcoins. So I need to understand for myself how earning bitcoins works in practice, what sucks when using bitcoins to pay for stuff and what would make a bitcoin user’s life easier when spending.
I am writing this post about a week after the bitcoin reached its highest ever position against the US dollar, clocking at more than 2,900.- USD per BTC, after which the whole cryptocurrency marketing cap swiftly crashed from $49B to $36B in a matter of days. With a volatility such as this, it is impossible to make long-term predictions. So what can I use as an indicator of success if not profit?
Trying not to lose money
This looks like the safest route to take. If I assume that the long-term value of bitcoin is zero, I can live with that but I am still left with some very real expenses that I’ve made. So let’s try to take care of these first.
At the very least, I need to pay my electricity bill. So from each NiceHash payout I get, I will sell enough BTC to cover the cost of electricity for that month.
Paying for the mining hardware
This one is a bit easier for me, because I am an avid gamer and I have a 2-year old GTX970 that I consider paid for already. But to put some skin in the game, I still will deduct the cost of my old video card at current second-hand price level (~180 USD) over a period of 6 months.
If my monthly income from bitcoin mining allows me that expense, I will mark this as a sign of success. If it is not enough, or if my card dies before the 6 months are through, I will consider this a failure.
Putting bitcoin mining in perspective
If the market allows me to pay for my electricity and old hardware, what is the best course of action onwards? I have enough spare parts from older machines to make a new box and put it to work but I will need a GPU.
Is trying to spend the earned bitcoins on more hardware the better path to take, or is holding to the money and letting it grow a better solution? Or are there other possibilities?
Buying more hardware at the top of what is most probably a huge bubble means an almost certain loss of money (bad scenario) or a slower RoI (neutral to optimistic scenario).
Holding on to the bitcoins may bring either 0% profit (but still, no material loss for me if I can pay for my electricity) or up to 20% per month if present growth continues. This looks like the ‘safest’ option: little to no material loss in a bad scenario, nice passive income in a neutral or optimistic case.
Buying more bitcoin instead of hardware for the same money is probably riskier but more profitable bet than buying more hardware. Bitcoin value may quickly drop, but can hardly reach zero very quickly… or can it?
The largest daily drop of BTC value I know about is about 50% and it happened when China blocked the trading of bitcoins back in December 2013. But recovery was relatively quick. Since the beginning of 2017 I see at least three cases when BTC value dropped by at least 1/3 in a matter of days (but in all cases it also recovered quickly and kept growing).
Compared to that, a video card loses permanently 30% of its value as soon as you buy it, unless the mining market keeps on growing so fast that manufacturers can’t keep up with demand. But in such case I’d be paying a higher price premium, wouldn’t I? This is exactly what happens right now with AMD RX5xx series cards and (to a lesser extent) with Nvidia GTX1070. So perhaps it is appropriate to state that the permanent loss is between 30% and 50%. Oh, and if the bitcoin market collapses and people lose interest in mining, they will dump all these video cards onto the second hand market, destroying their resale value.
To me, buying more bitcoin seems slightly less riskier and gives me more freedom to respond to market changes. But there is another possibility that I haven’t mentioned yet:
Buying hash power to mine for bitcoins is an alternative to buying bitcoins directly that I don’t understand. There are a myriad of services offering this, but I need to figure out the pricing and operation models.
The thing that confuses me the most is why would a mining farm have initiative to sell you hashing power rather than using that hashing power to mine themselves. It is obviously a better RoI for them to get your money while you’re chasing them digital coins, but how bad is it?
Do you agree with anything I’ve said so far? Or am I just another dumb f**k who doesn’t know what he is talking about? Let me know in the comments below.