Newbie mining 101

[poby]

 You've seen the huge mining profits on whattomine.com and maybe you have friends who have made a mint out of mining and you desperately want to get on board.  Sadly, if you are waiting at the station to catch the gravy train, you should know that ship has sailed!  (sorry about the mixed metaphors).

However if you are determined to join in the fun and build your first rig, you really need to understand some fundamental basics that critically impact on mining revenue.  The single most important concept is:

MINING DIFFICULTY

You need to be 100% clear on what this is, what affects it and how it in turn affects profitability.  Fortunately it's a simple concept, though one which many newbies don't seem to understand.  Perhaps because a good understanding will raise disquieting doubts and nobody likes to have doubts.  The following is a simplified explanation that is true in every relevant aspect.

All the cryptocurrencies are based on varieties of a blockchain.  A blockchain is a linked chain of blocks.  Each block contains transactions.  Transactions are confirmed by running the block through an algorithm to come up with a correct answer.  Once a correct answer is found, the block is said to be confirmed and is appended to the blockchain.  How difficult or easy it is to find this answer is automatically and dynamically adjusted such that the average time to solve it is a period known as the "block time".  This period of time varies from one currency to another.  e.g. For bitcoin, it's 10 minutes, for Ether it's 15 seconds and so on.  Miners are rewarded for being the first to solve it by being given some shiny newly minted coins along with the transaction fees.  The amount received is determined by the particular cryptocurrency but typically is set to reduce over time.  e.g. Bitcoin mining reward was 50 a few years ago, then it went to 25 and now it's 12.5

GPUs work hard to try to find the answer as quickly as possible.  Mining difficulty is set automatically and periodically without human intervention so that the average block time hovers around what is should (e.g. 15 seconds for eth) If more GPUs are added to the network trying to find the answer, it will be found faster so mining difficulty will automatically increase.  Conversely, if fewer GPUs are at work, the block time will start to increase which will cause the mining difficulty to decrease.  It's all done automatically without human involvement to try to maintain a static average blocktime.

Stop and read the above again.  Do not proceed until the above is completely understood as more than anything else it determines how much money you can make.  It is at least if not more important than price.

MINING POOLS

The first miner to solve the block reaps the rewards.  It is extremely unlikely a handful of GPUs will solve it before anyone else.  If there are 60,000 GPUs all trying to solve it, the chances of your 6 card rig winning are remote indeed.  This is why we have mining pools.  Your 6 card rig joins forces with others such that the total number of GPUs in the pool might be 10,000.  So the chances of your pool winning is now 1 in 6 instead of 1 in 10,000.  When your pool wins, you get a portion of the coins won based on how much hashing power you contributed.

HASHRATE

Different GPUs differ on how good they are at solving the block and we measure this by the "hashrate"  The above example assumed all cards having identical hashrates but of course in the real world some cards are better than others so your 6 card rig of RX480's are going to have a much better aggregate hashrate than a 6 card rig of RX460's for example.

RUNNING COST

Once you've spent the money, built your rig and plugged it in, there aren't any more costs involved except the cost of the electricity used to power it.  Depending on where you live this will vary from less than 8 cents a kwh to more than 30 cents.  When revenue is high it doesn't look like it matters but when revenue falls, the electric cost starts to be a significant portion of that revenue, and can even exceed it.

Ok so now hopefully we are clear about these fundamental concepts.  Time to think and consider what it all means in terms of profitability.  Logically, if more GPUs are mining a particular coin, each individual GPU's chances of solving it reduce.  The reward for solving is the same but each GPUs share of the reward goes down, because there are more GPUs involved and the difficulty increases to maintain the same blocktime.

Read the above paragraph again.  Make sure you understand it.

This year cryptocurrencies have got a lot of press and public awareness has greatly increased.  Thousands of people are building rigs to make money from mining.   This of course means a massive influx of hashing power which has seen difficulty skyrocket.  But all this interest in cryptocurrencies has also lead to rampant speculation and frenzied buying causing the coins prices to spike even faster than the difficulty.  The result being soaring profits.  Your share of the mining reward has dropped a lot but it didn't matter because the coin's value was so much higher that the USD equivalent was much more than before.

The problem now is that coin prices have stopped rising.  Or at least they aren't soaring at the ridiculous rates they did for a month or so.  However more hashing power is added every day as more and more people are seeing the recent profits and want to join in.  The best cards are hard to find but even not so good cards are being pressed into service because nobody wants to be left behind.

Now remember, increasing difficulty, will directly cause the number of coins you get to reduce.  If you don't understand that, re-read the above until you do.  If the coin price is not rising or is rising less than the reduction in the number of coins you get, then your revenue must fall.

There is always a lagtime between people hearing about this stuff and getting online with their newly built rig so you can expect months of increasing difficulty before it starts to stabilise and eventually fall.  It will only fall when the number of miners giving up and turning off their rigs is greater than the new ones coming online.  I don't expect this to happen until the end of the year.  The ones to give up first will be the ones paying the most for their electricity.

As revenue falls, the electric cost becomes a greater proportion of that revenue, and eventually it may cost more to power your rig than you receive in revenue.

In the longer term (6 to 12 months) the mining boom will be over.  The miners who are still mining will be those paying the cheapest electricity and they will probably always be able to turn a profit, however the ROI by then will be around 1 to 2 years.

However, long before the mining boom is finished, ROI will stretch considerably.  Right now it is extremely unlikely you can pay for your rig inside 4 months.  Even 4 months is optimistic.  Ignore those profitability calculators - they don't take into account increasing difficulty so are pretty meaningless as a future predictor of revenue.

One more thing to note:

Price does not affect difficulty and difficulty does not affect price.  They are 2 entirely separate metrics.  Price is determined by buying and selling pressure.  Difficulty by how much hashing power is in the network.  An increase/decrease in one does not affect the other in any meaningful way.

The above is not in any way being pessimistic.  It is simply realistic to have a good understanding of how mining works and not simply look at the recent massive profits and imagine it is that easy.  It isn't.  Q.E.D.


TL;DR  You will almost certainly lose money especially if you go into this venture without a solid understanding of what drives the revenue.

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[Bothebu]

Price does not affect difficulty and difficulty does not affect price.  They are 2 entirely separate metrics.  Price is determined by buying and selling pressure.  Difficulty by how much hashing power is in the network.  An increase/decrease in one does not affect the other in any meaningful way.

Nice writeup!  Although I am not sure I agree with the quoted statement.  As the price of a coin rises the more miners come online to take advantage of the price and thus the difficulty will go up.  And I think the inverse is also true.  Today the price of ETH has gone down substantially.  I record the stats of ethermine.org every morning.  There are 1000 less workers mining ETH now then there was 14 hours ago, so it leads me to believe difficulty could go down...imho.

[poby]

Price does not affect difficulty and difficulty does not affect price.  They are 2 entirely separate metrics.  Price is determined by buying and selling pressure.  Difficulty by how much hashing power is in the network.  An increase/decrease in one does not affect the other in any meaningful way.

Nice writeup!  Although I am not sure I agree with the quoted statement.  As the price of a coin rises the more miners come online to take advantage of the price and thus the difficulty will go up.  And I think the inverse is also true.  Today the price of ETH has gone down substantially.  I record the stats of ethermine.org every morning.  There are 1000 less workers mining ETH now then there was 14 hours ago, so it leads me to believe difficulty could go down...imho.

Yeah you are spot on, there is an indirect affect on difficulty by changes in price.  If the price rises, more miners start to mine it, which leads to an increase in difficulty.  I was being a little glib but was mainly trying to emphasize that changes in difficulty do not in any way, directly or indirectly influence the price.  But you're right, price changes can indirectly affect difficulty.  Just not the other way round.

Some here think that if more miners mine a coin, it will somehow make it more popular for investors and cause the price to rise and I was trying to knock that myth on the head.

[Pennywis3]

Nice post Poby, that sum's up the basics in mining.

While i agree with the things you wrote, because they are actual facts, i must say, im very dissapointed in you as a person.
I've been reading your posts here for the last couple of days and im gonna explain something to you that you, clearly, don't understand.

First of all, by reading your posts its obvious that you think you're one of those rare persons that understands how mining works.

Well, you're wrong. Most people here know exactly how it works, even nubs, because its simple, you don't have to be a rocket scientist to understand the concept.
The second thing i see you can't accept is the fact that, even knowing all of the stuff above, people are still willing to take the risk, even if ROI is not around the corner.
People have money to burn and want to try new things, because maybe there are valuable life leasons to be learned here, or even some profit, besides testing how crypto world works.

To sum it up, i don't like the negative energy you are spreading around the forum, we have enough crypto ''i'm gonna save nubs from not making ROI'' knights around here as it is.

You realy should just be a happy miner / crypto user and stop the negative energy from spreading, along with stating obvious facts around the forum, which most people already know.
After all, its their money and everyone should do their own research and invest wisely.

Happy mining to everyone 

[poby]

I don't think I was being negative so much as informative and helpful.  I certainly don't claim to be an expert!  Far from it!  What I don't understand is vastly greater than what I do!

But the facts are simple and it is obvious some newbies don't know them so I took the time to write a simple straightforward explanation of the basics that every newbie should know.  Mining is a great hobby.  But I feel sorry for those who rush in too quickly thinking it's a gold mine business opportunity.  Unchecked blind optimism can hurt a lot more people than being told to be cautious.  Yes the facts are very obvious but it is also very obvious that some newbies don't know the facts.  This thread is not aimed at the already informed but at those beginners who don't know.

It's great if people want to take a punt on it, have some fun and see how it goes.  I'm certainly not trying to stop anyone. But when you get newbies posting their electric is 26 cents a kwh and they want to pour $10k into it and asking if it's a good idea... I mean it would be irresponsible if someone didn't point them towards some facts so they can make an informed decision.

I must admit, I am disappointed in you as a person for being critical of someone for posting factual educational information who's only motive is to help others.  You really should chillout and be a happy miner and not criticise others for trying to help.  I understand you have no desire to assist other people but don't criticise those of us who do!

[Pennywis3]

Most of us know, that it can end badly, but its a risk we are all willing to take. Or else no one would be mining.

I was once a nub also and still am today, and i was listening to the same stuff you are saying, how its not worth it, how i will never ROI, but im glad i didn't listen and did my own research.
Back then a 6 GPU rig made about 80-100$ per month after electricity, and even if it still did that today, it's not that bad + the knowledge gained in the process is priceless.

I just don't think that telling people they will loose money and never ROI is the way to go about it.

We learn on our own mistakes, not the mistakes others make.

Even though we agree to disagree, its certanly a nice piece on mining basics you wrote, kudos for that.

[Bothebu]

Some here think that if more miners mine a coin, it will somehow make it more popular for investors and cause the price to rise and I was trying to knock that myth on the head.

I definitely agree with this statement!

[Bothebu]

Nice post Poby, that sum's up the basics in mining.

While i agree with the things you wrote, because they are actual facts, i must say, im very dissapointed in you as a person.
I've been reading your posts here for the last couple of days and im gonna explain something to you that you, clearly, don't understand.

First of all, by reading your posts its obvious that you think you're one of those rare persons that understands how mining works.

Well, you're wrong. Most people here know exactly how it works, even nubs, because its simple, you don't have to be a rocket scientist to understand the concept.
The second thing i see you can't accept is the fact that, even knowing all of the stuff above, people are still willing to take the risk, even if ROI is not around the corner.
People have money to burn and want to try new things, because maybe there are valuable life leasons to be learned here, or even some profit, besides testing how crypto world works.

To sum it up, i don't like the negative energy you are spreading around the forum, we have enough crypto ''i'm gonna save nubs from not making ROI'' knights around here as it is.

You realy should just be a happy miner / crypto user and stop the negative energy from spreading, along with stating obvious facts around the forum, which most people already know.
After all, its their money and everyone should do their own research and invest wisely.

Happy mining to everyone 

Pennywis3, I think you are giving too much credit to humanity.  There are more ignorant people in the world than logical thinkers.  I have been around the block a few times...somewhere between a baby boomer and generation X.   People get scammed out of their money everyday because of ignorance and greed.  I read a lot of the questions and posts on this forum and chuckle to myself.  Whether poby is spreading "negative energy" or not, he is stating facts that every new miner should read.  It is kind of like checking the box on I understand the terms and agreement on crypto-mining.  Past performance is not indicative of future results!  I worry about ROI everyday since I started mining,  I am lucky, if I lose my investment it's no big deal to my financial well-being.  To many people on this forum it could be a major financial hit.  So, imho, poby did the right thing.

[frowsiter]

Amazing post I liked it reading a lot. I understood many things that I wasn't aware about before. You have made it pretty much cooler to understand about the mining technology. Thanks for sharing this. I completely understood what mining difficulty is and what factors affect it really. And before reading this post I use to think that bitcoin price keeps increasing so mining also gets cheaper as the time goes on. Hmm now I see there is no effect of it regardless of time and price of bitcoin. It's really good to know how stuff works with blockchain mining. Thanks for sharing. It's good piece of work.

[bkbirge]

Great post, thanks for sharing, nice to have it all spelled out so succinctly.

[duranmla]

Well, this is my first comment on the forum and I will say Thanks very much for taking the time to wrote those facts.