Crypto currencies are a relatively new class of assets. There are a couple of ways in which you can go about acquiring them – mining or outright purchase. Mining is when you use a computer setup to produce crypto currencies on your own. Trading or purchase is when you buy these currencies from the market. This article explores both the approaches.
Factors affecting mining of crypto currencies
You need to have certain amount of know how when setting up a mining rig. This could be hardware related know how where you will be faced with questions such as which GPUs to use for the mining operation, which motherboard and CPU to use, what materials to use for the Rig, how to optimise heat distribution et cetera.
Or it could be software related know how where you decide on matters such as whether to use Windows or Linux, which mining software to use, which platform to use to create your cryptocurrency wallet and so on.
Of course you can always research the internet and get yourself acquainted with any of these things, but there is no coherent source of knowledge which gives you everything at one place. So for example you may find yourself reading different forums for setting up of a GPU versus tuning of one.
We don’t mean to scare you and all of this is completely doable. We are just telling you that unless you are a computer hardware and software person it will require some amount of research on the internet and asking other people to be able to set up a mining rig.
Cost of power:
Cost of power, along with cost of equipment(which we will come to below) is usually the make or Break factor in deciding whether to set up a mining operation or not. Chances are that if you live in a developed western country or a metro city in any part of the world then power rates for you will be high enough so as to completely or at least partially offset any profit you make from the mining operations. In other words the high cost of power will cause your mining operation to either make no profit, loss or very slim profit.
Mining operations are best setup in remote rural areas where there is reasonable assurance of 24 hour power supply and the power rates are low enough so as to guarantee profitability. Even if there isn’t 24 hour power supply at such a place, still be able to get by by installing a diesel generator or an inverter.
Equipment cost is yet another cost which influences your decision to mine for cryptocurrency. There are some countries which do not manufacture computer equipment & import it at a high rate of taxes and custom duties. This makes it an viable to import a fully finished Crypto mining unit. To give you an example, the $5,000 ASIC Bitcoin miner becomes $10,000 worth after importing into India, due to a very high rate of ttaxes and duties. This completely erodes any chances of profitability and sends your cost soaring to the sky.
This is where a little bit of hardware know how can come to your rescue. If you know how to assemble computer hardware or can learn to do so from the internet or from a teacher then it will become much more cost effective for you to build a mining Rig. This is because the cost of imported computer components is usually much cheaper than the cost of a fully finished product. You can use this your advantage by using imported cheaper components to build a machine that costs much cheaper than buying a fully finished imported machine.
In fact in some cases (like the $5,000 ASIC miner case described earlier), building a machine yourself maybe the only way to setup a viable operation.
Once your setup your equipment for mining cryptocurrency doesn’t mean your job is over. In fact it is just about getting started. Mining equipment requires regular maintenance. It runs 24/7 so can get extremely hot. Heat may cause components to break down and this may need to be replaced or repaired. Ofcourse this isn’t a major cost provided you bought your equipment under some kind of warranty. But it is something you definitely have to bear in mind before you take the plunge.
If you haven’t bought your equipment under warranty though, then this would be a major source of nightmare, headaches and expenditure for you. Computer components don’t tend to be cheap by themselves and if you find yourself replacing them too often then it’ll burn holes in your pocket.
Many people get bright ideas like importing equipment for dirt cheap from aliexpress Alibaba. But what they miss seeing is that there usually is no warranty associated with these components and if something where to go wrong then you essentially end up throwing away the equipment. These end up becoming very expensive throwaways!
Your personal bandwidth:
Mining equipment isn’t something that you install and forget. You have to log into your machine on a daily basis and check its health. Apart from equipment failure (which is a really serious issue) minor issues tend to crop up all the time. Your machine may experience crashes and downtime, your software & drivers may get corrupted, you may be exposed to hack attacks and so on.
You will need to regularly check that your machine is operating as it should be operating & and resolve any issues that have cropped up. Any amount down time is bad for you as you lose mining revenue. It is in your interest to keep the machine learning 24/7/365 & maximize productivity.
Apart from attending to issues, you will have to keep the machine and its surroundings clean and make sure dust & dirt doesn’t accumulate as it tends to affect performance. This will draw from your personal bandwith or you will have to appoint a care taker for your machine, which will again add to the cost.
In mining parlance, ‘profit’ usually just refers to the operating profit that is your monthly mining revenues-monthly operating cost like power, internet, maintenance etc. This monthly operating profit is the amount that you first save up towards the hardware cost of your rig. Only when your operating profit has compensated for the cost of the your hardware & software will you make actual profit.
Thus any mining rig you make will not turn profitable overnight. Depending upon the size of your initial investment and your monthly operating profit you will have to wait for a time period of at least 6 months to year in order to recover the cost of your investment and on actual profit. This is a long time period during which a lot can go wrong. Or right. Currency prices may fluctuate energy prices may do so too. You are mining operation may turn insanely profitable or loss making overnight. The longer your initial investment recovery period is the greater the risk that your investment faces.
How long can you hold it for:
We’ve always found this part of miners’ behavior to be rather puzzling – they almost always seem to want dispose of their generated currency on an immediate basis. They’re reluctant to hold it over the long or even medium term.
Let’s say you buy a given currency (not necessarily crypto currency) for $5. The price forecast is for the said currency is to be worth $10 by the month end, (which would double your money) & $100 by the year end (giving you 20x returns). When would you rather sell off your currency? We know when we’d sell off ours!
Also at times, the $5 may become $3 but that doesn’t spoil the long term picture. In the long term you can definitely expect the price to be more than $5. But people needlessly panic, start saying that mining has become unprofitable. Relax, it’s just a short term fluctuation! You need to keep calm & hold rather than sell your currency! Wait till the storm passes over & sell only when the price is in your favour.
This last use case of price dropping below your purchase price can happen even when you decide to just buy crypto currency instead of mining.
Factors affecting buying of crypto currencies
How does know how affect buying of cryptocurrency? You’ve got to know the right time for buying it. For this you need to have done your homework – what has been the recent price trend, what has been the long-term price trend? When were the highs, when were the lows and most importantly, given all this when is the right time to buy?
Cryptocurrency as an asset isn’t any different from stocks or commodities. In order to make profit you have to buy as low as possible and sell as high as possible. You’ve got to refrain from getting carried away by market sentiment and making knee jerk decisions.
Current exchange rate:
Like we said above, you need to buy as low as possible and sell as high as possible. For this you need to keep an eye on the current exchange rate. Having studied the history of your preferred cryptocurrency’s exchange rate, you need to have specific price points in mind when you will buy and when you will sell.
Since we are evaluating mine versus trade of cryptocurrency, you’ll have to consider weather given the current exchange rates it is more expensive to buy than to mine. More specifically you need to compare the monthly operating cost of mining a unit of cryptocurrency vis a vis buying the same unit. If the cost of mining is higher than the cost of buying then you definitely need to buy. If it’s the other way round then you can analyse further whether the monthly operating profit can recover your investment and make a profit within a reasonable amount of time.
Governments around the world have been clamping on crypto currency trading. The severity of the clampdown varies by country to country. China and India for example have made it impossible to trade between fiat (₹, $, € etc) and crypto currency. Japan and South Korea have somewhat legalized the use of crypto currency but also also created regulations that govern the functioning of crypto exchanges. In US and much of Western Europe, crypto currency is pretty much unregulated.
The point here is that whether you can buy and sell crypto currency by exchanging your fiat currency largely depends upon which country you live in. If you live in India or China you can’t do this through a crypto exchange. This does not mean however that you can’t exchange currencies at all. Peer to peer networks exist for facilitating the exchange. But they’re somewhat of a grey zone. Also the rate you’ll get won’t be so competitive.
If you live in a heavily regulated market, you might be better off just mining rather than buying.
Mining generally is a medium to long term option for procuring crypto currency. You need to have a lot of initial investment i.e. the hardware, software and peripherals that you need to purchase to get your rig up and running. The currency you mine needs to not only cover the daily operational costs of running the rig (power, internet etc), but also the cost of purchasing the initial hardware and software. This can take well over a year or even more depening upon your initial investment and then profitability of the currency you’re mining.
In contrast, trading is generally a short term option. You may buy a currency for higher than what it can be mined for, but you can make some quick margins by selling it off within a short period. You can conduct such trading activities on a daily basis & earn daily margins. Mind you, the margins may not always be positive. Sometimes you may have to sell for lower than what you bought the currency for, thus making you a loss.
Conclusion & Caveat: How to decide whether to mine or buy crypto currencies & whether to go for it at all
Everyone’s objectives and priorities are different when they decide to get involved with Crypto currencies. You need to be able to decide for yourself what yours are and accordingly select one way or the other – mining or trading.
We’d like to end with the Caveat that Vitalik Buterin – Founder of Ethereum has often repeated. Crypto currencies are a new class of asset and can become zero value at any time. Exercise extreme caution and do it at your own risk. This article in no way encourages you to get involved.
Got questions or comments? We’d love to hear from you!