7 Reasons Why You Should Not Mine Crypto – Part 1

November 4, 2017

 

You may have heard of mining as a lucrative way to generate a passive income. What better way to do so than invest in a set of mining rigs that produces a hefty profit in return for a “few thousand pound” initial investment and a monthly electricity bill.

Think twice.

There are a number of challenges and extra costs that will make your calculations look significantly less attractive. Better to discover them now than later.

  1. Decreasing rate of token generation

Historic profitability of miners is a false indicator as to how many digital tokens your installation will generate over time.

As a matter of fact, the only certainty is that productivity and reward generation will be decreasing with time.

A majority of blockchain ‘proof of concept’ environments are designed to self-regulate the distribution of tokens by increasing the network difficulty and the rate at which one unit of digital currency is being extracted.

This became particularly evident towards the end of “generation #1” bitcoin miners. Initially, the average home PC was able to solve transaction blocks and produce a few tokens per day using a standard CPU. With increasing competition, that no longer was the case.

The industry quickly realised the benefits of optimal component selection and increases in scale to boost performance. As a result, the 2nd generation – specialised GPU miners – were developed. Soon enough, investing in the companies that produced the mining rig chips, were more profitable than mining itself!

At present, we are way past that stage. A large quantity of premium video cards alone is not enough to have a stake in the game. The big players have their multi-mullion dollar highly specialized mining rigs situated in enormous thermally controlled hangars, with 24/7 surveillance ensuring any downtime is resolved as soon as possible.

Even then, some of the mining giants can’t keep up with the rate of change and the high touch maintenance required to keep these facilities running.

Kraken, one of the largest cryptocurrency exchanges, decided to exit the mining business and sell their $10m dollar facility almost 2 years ago.

  1. Miner downtime is a real issue

In practice, the amount of time that your rig is non-operational is more frequent and more costly than you may have first anticipated it to be. The more complex the setup, the more components need to work seamlessly and in sync. This quickly advances into the software realm of relentless patches, upgrades and tweaks, ultimately resulting in higher chances of malfunction.

Any malfunction translates into downtime and loss of revenue. In turn, this requires prompt part replacement, software tweaks and reboots. Certain issues are easy to fix but others require an intermediate level of expertise to get the miners up and running again – not to mention the extended periods of power outages or lack of internet connectivity, which are out of your hands to deal with.

  1. Mining an altcoin to receive higher ROI is not a viable option

First, once your specialized currency miners become obsolete due to exponentially increasing difficulty and growing competition you could re-configure your miners to run calculations for a newer, less saturated blockchain.

But so will everyone else. Litecoin is the ‘go to’ example. In no time after receiving the mining community’s attention the blockchain overheated, network difficulty spiked and the large majority of smaller players were weeded out.

Secondly, not every rig is compatible to run on every type of blockchain, and not every blockchain enables mining grants that feature continuously. In the next few months, Ethereum is planning to move from a proof of concept to a proof of stake protocol called ‘Casper’, effectively meaning that physical mining will cease and be translated into a virtual validation process.

Thirdly, be aware that not every blockchain will follow the price pattern of Bitcoin, Ether or Litecoin. The value proposition of different blockchains is difficult to assess and price spikes are not guaranteed. Bear in mind, that there are over 1,000 different types of cryptocurrencies at the time of writing this article.

Which newcomer would you choose to invest your time and money?

Lastly, there are blockchains with a lot of potential (e.g. Stellar Lumens) that are designed as ‘proof of stake’ concepts and where mining is not permitted, and you would be better off investing directly in the currency based on your own independent research.

For Part 2 of this article and the rest of the reasons to why we advise staying away from investing in a mining station, please stay tuned and follow our activity on Facebook.

Leave a Reply

Up ↑

%d bloggers like this: