Dealing with Cryptocurrency has its interesting dynamics. There are, however, many hidden facets making it still a mystery to the masses. Not knowing about it makes you prone to, get rich-schemes or outright scams.
We are all by now aware of the mania caused by the soaring prices and then, the subsequent decline that followed early this year.
What we don’t pay attention to, however, is just how complex it is to physically “acquire” and store these Cryptocurrencies.
Mining coins can be described very basically as the process where users “or miners” become part of a Cryptocurrency network. This by making hardware (processors & graphics cards) available to support that specific network’s operations.
As a miner, you contribute towards the working of the Blockchain. The technology requires millions of calculations to validate transactions into what are known as public ledgers.
There are three main ways to mine these coins but we will not be highlighting them in this post. The matter to be covered here, however, is the business aspect: how the Blockchain has created a new line of commercial entities and ‘profit-takers’.
These modern tech “enterprises” offer you a specific or cluster of altcoins and tokens as a reward for helping them maintain their Blockchain.
Sounds like a win-win situation right? Or is it?
Mining is hard
If you have actually looked into the methods of mining, you will discover that only those with high-end hardware are able to produce enough energy to power the Blockchain. This is called “hash power” or “hash rate”. This is kind of like horsepower for cars, but for PC processing.
There are sites that illustrate how to calculate potential profits such as one conveniently called ‘what to mine’.
The opportunity cost of operating the customized computer systems (known as Mining Rigs), will have to be offset with the cost of acquiring hardware such as the Antminer S9i. Then there are energy costs associated with running the rigs for long periods of time.
Your profit would, therefore, be the balance of the costs versus the revenue involved in mining coins.
The mining profit = revenue (quantity multiplied by the price of the coin in local fiat currency). Then subtract the cost of the mining devices + annual electricity costs (measured in local currency per KWh).
The problem with going at it alone is that it is very hard to break even. You are also faced with a conundrum: the more powerful your hardware is, the more electricity it consumes.
It also takes a lot longer to acquire the coins which you are awarded by the respective blockchain network after successful hashing is completed.
To make it worth your while you would hope that the coin you mine’s market value exceeds the costs of the monthly/annual electricity bill.
There a now hundreds of these so-called Crypto/Tech companies spurting up by the day. Their modus operandi: to relieve you of the burden of the high electricity and hardware costs. This in exchange a monthly or once-off fee.
In return, they promise to mine coins and provide you with daily or monthly profits. They can do this because they presumably have more powerful mining setups and therefore, larger economies of scale.
Some of these establishments use big rooms, whole buildings or even warehouses to run thousands of mining rigs throughout the year.
The payments you make supposedly help them with maintenance costs and pay for the said electricity bills. They are also usually stationed in countries where the cost of electricity is very low.
You are likely to, however, run the risk of dealing with the occasional Ponzi-scheme – setup. Such companies dive at the opportunity to swindle those not familiar with Blockchain and Cryptocurrencies.
By dazzling you with the price increases and potential astronomical returns, they take your money and make a run for it!
You can also ponder, it is incredibly difficult and expensive to mine Bitcoin these days. If these setups are actually just people who have already made their millions from acquiring Cryptocurrency.
The acquisition naturally, would have been when they were dirt cheap, and are now offering the residue to make more profit off unknowing investors.
A working example
How it would work is: let’s say you owned 100 Bitcoins mined in 2010 for the opportunity cost of $100 each (cost of electricity). You then sold half at the height of the Crypto ‘bull-run’ in January 2018 when they were worth $19 000 each. You would have been $945 000 richer.
So, with almost a million bucks in the kitty and another 50 units of coins (which would be now worth a lot less); the natural inclination would be to look at ways to make the extra coins ‘work for you’.
And what better way than to be your own boss and head a Crypto company! You can with your new setup, sell off the residue of Crypto coins in bits for profits in cash.
This is likely what some of these companies offering you coins for an opportunity to get Bitcoins. This under the false pretence of partaking in a ‘mining operation’. Meanwhile, in reality, the actual mining probably took place almost a decade ago!