Is Now a Good Time to Get Into Mining?


Is Now a Good Time to Get Into Mining?

In short, no. Let me explain why below.

While I love mining and it is one of the reasons I run this blog, I have been in this “hobby” long enough to know when the time is right to get into building rigs and when the time is not right. Right now we are in the waning days of what has probably been the most profitable period of mining that the cryptocurrency space has ever known. Before I get into the reasons for my feelings on this, let me give you a brief background on my involvement in the cryptocurrency space to give you a better understanding of why I think this way.

I first heard about Bitcoin in early 2010 and actually first mined it on my CPU earning a small sum of coins. I was hit or miss about mining it back then, meaning I would mine for awhile and then not look at it again for a few months, as at that time it was simply little more than a novelty for most of us. I was already into distributed computing and was sharing computer resources for projects such as Seti@Home and Folding@home and various other shared computing projects. Dating myself a bit here, but I have had a computer running the SETI@home program since the year 2000. So I have been in distributed computing in one form or another for the past 17 years!

There had been other attempts to monetize spare computing resources before Bitcoin came along, and at that time most of us treated it much the same as those other efforts. Sure you could earn a few dollars here and there, but back then Bitcoin was literately trading for pennies each, so it was nothing to send 1,000’s back and forth as you were only transferring a few dollars in value. This is also one of the reasons why the famous 10,000 BTC pizza story fascinates people now, but again that guy is no worse off than any of you reading this as everyone of us could have bought a few dollars worth back then and literally been millionaires now.  If only we had known… So I don’t spend too much time about thinking about “what-ifs”, but instead learn from my experiences and and grow.

Getting back on track, I got back into Bitcoin more intently again in 2011 when it was moving to GPU mining. It renewed my interest since now I could use a few of my old distributing computing rigs to mine Bitcoin instead. This is where I became more involved in the hobby, but again the dollar amounts were fairly low. I remember buying new graphics cards thinking it was pretty amazing I bought them with my free Bitcoin money at the time, but the amount of Bitcoins I had to sell back then to buy a GPU would make most people faint at current prices.  For the most part it was a fun way to make a few extra dollars but not many people took it too seriously. This continued until April 2013, when Bitcoin first hit a high of $277 on Mt. Gox and almost as suddenly dropped back down to under $100.

This was my wake up call that some of the insane calls that BTC was going to be the next big thing didn’t seem so insane anymore. I sold off a nice stack of BTC and promptly bought more mining rigs. Back then you could still mine BTC on a GPU rig, although I think ASICs were starting to come in to play somewhere around that time. For the rest of that year I bought both GPU rigs, some USB mining sticks, and later on the grid-coin orbs, and blades.

I knew this was actually going to be something when it hit $1200 on Mt Gox, but I could also see that the fevered pitch was about to end, and end quite suddenly. There were YouTube videos going up from people who the week before were working as plumbers or landscapers, and were now telling you how you could build these magic money machines. Yes, I knew at that time it could not keep up, and with the increasing price of hardware I quit buying rigs and started to sell off my GPUs and the less efficient BTC mining hardware.

Well the rest is history, one that I am sure you all are familiar with. Late in November 2013 Bitcoin peaked, bringing some alts such as Litecoin along with it, and started to drop in price. Discounting the extreme violent dips, it was a slow decline at first until Mt. Gox finally went under in early 2014, then the price crashed to around $100 again. Well my foresight had save me some headaches (and money) and while most people were giving up on BTC saying it had its day in the sun and it will slowly dwindle down to 0, since I had been at this price (and lower) before, it was still sky high in my opinion.

Now I am not saying I timed all of this perfectly, as I sold too early and also bought back in early, and probably easily could have made 10x what I did with perfect hindsight, but I still came out pretty good. What I came away from that time in my life that may be even more important to the current situation is the experience and knowledge of now having lived through 2 cycles (and currently on the third) of this boom bust cycle.

Getting back to the main point of the article then, at least for the mining aspect, is we are past the peak and are starting to rapidly decline in profitability. My very strong advice to anyone considering investing in mining hardware at this point in time is to wait. If you are wanting to to invest, I would suggest researching coins instead and just buying them directly as mining will quickly turn into a losing proposition.

Let’s work through a quick example to help illustrate this.

Assume a person has $3,000 and wishes to invests in a mining rig. This amount could buy a quite capable 4x GTX1080TI system with motherboard, PSU and everything needed to get setup and mining right away. At today’s profitability you could mine around 0.0613 Zcash per day, yielding around a $9.00 profit after costs. I am using Zcash for an example as Equihash is one of the more consistently profitable coins with the Nvidia line. For those who would argue why I didn’t use AMD in my example, at this point in time those results would be even worse.

So let’s further eliminate electricity costs as I can hear some of you even now chime in with “but I get free electricity”. Fair enough, so the best case scenario is you clear $10/day with this rig. So baring anything else, even at today’s profitability it will take 300 days just to get your investment back, also called ROI.

Now I also hear some of you chime in further, “but what if Zcash, ETH, or whatever coin you like climbs in value again?”

Ok, glad you asked. So you are relying on the coins to recover back to their recent high value to make your case for justification to get into mining. Sounds reasonable, after all if I can make $10/day with this rig today if Zcash goes back to $400 I will make $20-$25 a day, right?

In a word, no. Here is why.

The other half of the equation that nobody really talks about (in truth a lot of old timers do post about it but no one listens) is a coin’s difficulty factor. A very brief description of difficulty is the mechanism that keeps a coins emission levels (coins mined per day) at a constant rate. Without a difficulty multiplier, a coins entire supply could be mined in a very short amount of time simply by increasing hash power. Since most coins rely on a certain scarcity with a set level of inflation to hold their value, the difficulty adjustment helps keep the coins issuance at a set level when difficulty increases.

In even simpler terms, once hash-rate increases, difficulty will also increase to keep the amount of coins mined each day at a constant rate. So as more people add mining rigs to get in on the action, the network protects itself by increasing the difficulty level to a point that the time to find a block remains the same and the overall coins issued each day remain constant. So instead of getting more coins as you and everyone else adds rigs, you are actually getting less coins for your efforts. This is why with even a modest rig you could mine 5 ETH per day back in early 2016, now it would take you about 100 rigs to earn the same 5 ETH.

Now difficulty can, and has decreased in the past, as well, but it is a lot slower to come down and often lags price declines by a significant margin. The reason why is pretty much the same reason as why people are still interested in buying new rigs in that they all feel that the coins will recover and in short order everything will be back to making loads of money again.

Now lets get back to the example. So say Zcash doubles in value returning to around $300 per coin. Well we not only need to look at its trading price, $300, but also the difficulty that Zcash is now at. So say a month ago you could mine 1 ZEC per day when it was at $300, you were making $300/day, simple right. But now that the difficulty is higher, as everyone wants to get in on the mining action, the difficulty has also doubled, meaning you are only mining 0.5 ETH per day instead. So even though the price returned to $300, your daily profit is now only $150.

So you might be thinking, well ok but since everyone will have lost the same amount in profitability, interest in mining will wane and difficulty will decrease. The problem is that even using the example (assume multiple rigs) $150 profit per day mining is still quite good and people are continuing to add rigs, thus driving up difficulty. If the price increases this effect will become even more pronounced. So in the end this becomes a Queen’s Race of sorts, meaning you need to continually keep add hashing power just to remain at the same level.

Now since it is a condition of why investing in mining gear is worth it, we can automatically assume you feel the price of a coin will increase in value. Again using the previous example let’s use Zcash for our comparison.

So we have determined that investing $3000 in a mining rig will start out making about $10/day in Zcash and no matter if the coin’s value goes up or down the mining profitability will decline over the long term. At best we can hope for a break-even in 300 days, at which point we will own a depreciated rig maybe worth $2000 on the used market. So in 300 days we have lost $1,000 in value, and will need another 100 days to truly break even and recoup the original investment. Of course by then the rig will be worth less, but I hope by now you can see where this is going.

Now if instead we really felt Zcash was going to be worth 300 or 400 days from now that it is today, after all why invest in mining something you think is going to go down, we simply bought Zcash coins outright. At today’s price ($180), $3,000 would buy you about 17 coins outright. If in 300 days Zcash was worth just $200 your investment would be worth $3,400. If you think it will recover to recent highs past $400, well you would have more than doubled your investment with it now being worth $6,800.

So in these two scenarios we a could invests in a rig and in 300 days it pays for itself but is only worth $2,000 (a $1,000 net loss), or buy the coin directly and have anywhere from $3,400 (modest profit) to $6,400 (outstanding profit).

Now as I mentioned at the beginning, I am a miner and continue to mine and probably will buy new hardware and mine again in the future. If you want to buy a simple rig and mine for a hobby just to see what it is about, go for it. But I hope by now you can see why it is not prudent to be considering investing sizable amounts of money into mining rigs at this point in time.

Compounding this is that all of the GPUs and related mining hardware are also at their all time highs as recent demand had dried up supply and drove prices to insane levels. So by getting into  mining now, you are not only entering just as the profitability curve is starting to make a rapid move in the downward direction, but are also going to be paying 1.2 to 1.5x as much for the hardware. These two factors combining is going to make any investment in mining gear a complete disaster.

It is my strong opinion that the second-hand market will soon be flood ed with cheap gear ad more and more people come to realize this. Things don’t happen instantaneously, and there will be a period of lag as recent miners hold on to hope that everything recovers, but since the deck is stacked against them it is only a matter of time before most people start getting out. I would say this Winter would be a good time to start looking around for deals, but again you will need to look at the overall market before making any decisions. It took 3 years from the last mining hysteria days to the current one we are still in, so do not expect for a good entry to reappear until at least sometime in 2018, if not even into 2019.

 

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