Cryptocurrency mining can seem uncomplicated on the surface. In the case of Bitcon, miners perform the essential tasks of supporting the global network, enabling transactions, and protecting the ledger.
Look deeper into that short list of essential tasks, however, and it becomes clear that crypto mining comprises many disciplines. A dynamic crossroads of politics, technology, finance, physics, and energy, crypto mining runs at a fast pace and never stops — operating on weekends and holidays, 24/7 and worldwide.
It’s a multifaceted profession, making it all the more important for bitcoin miners to elevate one aspect of their game plan above all others: efficiency. If efficient operations aren’t baked into their business from Day One, miners can’t succeed. And with conditions changing constantly in every component of the mining ecosystem, efficiency must be constantly recalibrated in order to remain profitable.
The most recent development to impact all bitcoin miners is the halving, the latest of which took place on May 11, 2020. A pre-programmed step in the bitcoin lifecycle, each halving–taking place every 210,000 blocks or approximately every four years–results in a 50% reduction in the bitcoin reward that miners receive for successfully mining a block.
Economics that result at this juncture are stark and speak for themselves. With only 21 million bitcoins total to mine, and approximately one block every ten mines being completed, the rewards per bitcoin are always limited. With each bitcoin halving, there will be half as many coins mined as previously, which automatically means all mining equipment will be used to mine fewer coins, and likely solving more challenging proof-of-work (PoW) computations.
In light of this reality–absent of a significant spike in the price of BTC–finding innovative new ways to improve operational performance is integral to miners’ survival. Maximizing efficiencies means moving forward, while missing out on them could very well mean closing up shop.
Who’s Mining Now
The demographics of bitcoin miners has seen a significant shift since the profession was brought into being by Satoshi Nakamoto’s famed Bitcoin whitepaper.
After the first block was mined in January, 2009, miners have grown from one–Satoshi themselves–to a small group of curious cypherpunk enthusiasts who caught on early and mined using everyday CPU’s. As the computational difficulty increased, gamers came into the fold, who realized that their high-performing GPU-equipped graphic cards could make them extra money by tackling the steadily increasing hash rate required to execute Bitcoin’s energy-intensive PoW consensus mechanism.
Bitcoin mining has come a long way to today, where high-powered application specific integrated circuits (ASIC) dominate what has become an $8 billion industry. Very few profitable individual miners still exist, crowded out by increasingly sophisticated entities that are competing for the revenue from block rewards and transaction fees. Mining farms of 100,000 machines or more–spanning multiple geographies–are in operation, sometimes working in concert with mining pools that aggregate the hash power of many miners. The growth of crypto mining is attracting not only the miners themselves, but institutional investors in search of a better way to mix digital assets into their portfolios.
Calculating the Costs
In their pursuit of profitability, bitcoin miners have a short list of key variables to consider. In general, miners must first work out their Capital Expenditure (Capex), which covers the cost of the machines themselves and the related infrastructure, such as the equipment that supports the machines, the physical facility that houses the equipment, and even the real estate beneath it.
Next comes Operational Expenses (Opex), the day-to-day expenses miners incur to keep their machines running. The primary Opex is always the cost of electricity, with the lowest cost per kilowatt hour (kWh) as the objective. From there, other Opex considerations come into play including personnel, maintenance costs, cooling and security.
While miners have a certain level of control over Capex and Opex, other forces crucial to their profitability demonstrate a life of their own. The cost and supply of mining machines from suppliers like Bitmain and Canaan, the hash rate a miner holds relative to the hash rate of the total Bitcoin network, and the price of bitcoin itself can all help–or play havoc with–a miner’s ability to make money mining crypto.
Optimizing Operations to Improve the Balance Sheet
These calculations underscore why efficiency is the deciding factor in miner survival. Those who can best improve their cost efficiency ratio are also best positioned to survive downturns in the pricing of BTC. A keen eye for financial detail helps, as does an instinct for when to load up on new machines and when to unload older ones.
There’s an X factor in this survival-of-the-fittest game, however, and that’s the ability to innovate within the narrow field of parameters that define mining. Those that discover new avenues for reducing costs, scaling up or down effectively, and boosting performance may achieve the edge needed to get ahead.
One example of innovation making a difference is the introduction of immersion mining, where the electricity-hogging ASIC fans and facility fans of a large-scale mining operation can be taken out of the equation. These traditional air-cooled systems are replaced by immersion systems, where the rigs are immersed in a circulating dielectric fluid that is vastly more efficient as a heat exchange medium than air.
With immersion, mining operations can drastically lower their Opex electricity cost, while extending the life of their machines, reducing their maintenance requirements, and even increasing their hash rates. The tradeoff, of course, is the higher Capex cost that comes with initially investing in immersion cooling.
Likewise, the choice of power provider can make a major difference in outcomes. Miners who are on the lookout for competitive new entrants in electricity supply, may very well find a specialized source that’s attuned to the particular needs of crypto mining. The right power provider–optimally in the form of renewable energy–can contribute to a more stable and affordable operating environment.
Interestingly, the energy providers themselves today are getting into the innovation game. Savvy power suppliers are incorporating bitcoin mining into their base business plan, integrating mining farms directly into the design of their grid to ensure that renewable energy and PoW electricity demands are well-balanced.
As an industry where any small adjustment can lead to a major breakaway, bitcoin mining presents a tantalizing challenge for those with an eye for detail. The miners with the brightest future survey the landscape closely at all times, innovate, and stay a step ahead.
— EcoChain Mining