Thoughts about mining and profitability

[Keyser Soze]

This post intends to help miners and potential miners make informed decisions about purchasing hardware to make a profit. I do not wish to discuss issues you may have with specific manufacturers.

There are essentially two types of miners:

1. "Hobbyist" - These miners are more concerned with the technical aspects of mining or perhaps the "greater good". While they obviously would like to make more bitcoin or fiat then they started with, it is not their primary goal.

2. "RoI" - RoI miners are primarily interested in turning their money into more money. They see purchasing a money printing machine (miner) as an opportunity to make a profit.

There are several factors to be consider if you are trying to make a profit mining, some may be obvious while others are not.

1. Buying a miner is essentially buying an unknown inflow of bitcoins. While you can make various estimates on how long your miner will operate profitably or how many bitcoins it will earn, you do not know what will happen over the life of the machine. The future of bitcoin mining is challenging to predict, but you will have to have some kind of estimate.

2. To avoid exchange rate fluctuations affecting your total profit or loss estimates, all income/expenses should be converted to a reasonable bitcoin/fiat price at the time they occur. This will calculate the most accurate profit or loss from mining activities. If you are solely interested in a fiat profit, you may be better off buying or selling bitcoins based on your future bitcoin/fiat outlook.

3. Discounting future cash flows is important. Obviously being given one bitcoin now is better then being given one bitcoin sometime in the future, but this is something I rarely see demonstrated when calculating mining profitability. When running your various estimates through a mining calculator, it would also be good to discount these cash flows to present value. If the present value of the cash flows is less then the current value, it is not a good investment. You can get more detailed results by running different likely scenarios (best case, worst case, somewhere in between) to help make your decision. These estimates should also be periodically adjusted as time passes.

4. Trust in the manufacturers is often the most important factor. If you base your potential profit off of their information and they are incorrect, then your estimates will need to be adjusted. Any manufacturer changing their timeline should affect your estimates, even if you ordered from another company. You may also want to consider why they are selling the machine instead of using it them self.

5. Your estimates may be wrong. There will be many winners and losers in bitcoin mining depending on their goals. What happens if you are wrong? Be sure to evaluate the risk vs. return to make sure you are properly rewarded for your risk.

I welcome any constructive discussion on these or other factors I neglected to list.

tl;dr, People should make more informed decisions about their mining purchases and the above information may help you achieve your desired RoI or avoid a loss.

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[Bicknellski]

The Genesis Block... must use tool for mining profitability. Updated frequently and a fair straight forward way to asses ROI in my personal opinion.

http://mining.thegenesisblock.com/

Further to that I think that education is only one part the equation you also need ethical companies that maintain standard practices for doing business here. It would good to also develop some sort of metric to help the consumer evaluate and compare performance particularly in delivery and refunds as well as other things like "mining protection plans" and other schemes that are trying to address the volatility in the market.

One should also follow the great analyses post from Death and Taxes... the "Break even difficulty by hardware efficiency (power cost = value of BTC) " is a great metric and is clear on different companies positions with regards to shipping reliability https://bitcointalk.org/index.php?topic=281279.0  as well as Guesstimate on Total Hash Power coming thread https://bitcointalk.org/index.php?topic=278384.0

[Keyser Soze]

The Genesis Block... must use tool for mining profitability. Updated frequently and a fair straight forward way to asses ROI in my personal opinion.

http://mining.thegenesisblock.com/

Further to that I think that education is only one part the equation you also need ethical companies that maintain standard practices for doing business here. It would good to also develop some sort of metric to help the consumer evaluate and compare performance particularly in delivery and refunds as well as other things like "mining protection plans" and other schemes that are trying to address the volatility in the market.

One should also follow the great analyses post from Death and Taxes... the "Break even difficulty by hardware efficiency (power cost = value of BTC) " is a great metric and is clear on different companies positions with regards to shipping reliability https://bitcointalk.org/index.php?topic=281279.0  as well as Guesstimate on Total Hash Power coming thread https://bitcointalk.org/index.php?topic=278384.0

Yes, I am familiar with various mining calculators and the posts referenced.

I agree that companies need to be held to a higher standard, but as a consumer all you can really do is vote with your wallet. If consumers demand a higher return due to the increased risk of uncertainty, then they will spend less on miners until the manufacturers change their ways.

[Bicknellski]

Well they can ask for a subform where the fabricators are held to a standard. If consumers here demand more services from this forum we will all be better off. That is part of the problem the collective mass of the forum users especially those following mining is under valued. Organizing a bit more would do a lot for all concerned and lower the levels of discord in this forum. I am all for a free market and the idea of caveat emptor but given the millions that have been squandered we need better more robust responses to these issues.

Your post goes a long way to that end I am glad to see it. I hope more people contribute to what you have so far. It is a good starting point.

[Korbman]

tl;dr, People should make more informed decisions about their mining purchases and the above information may help you achieve your desired RoI or avoid a loss.

It's a fairly good list, though my qualm lies with this last part...mainly since an 'informed' decision today isn't the same as an 'informed' decision next week/month/quarter/etc. That's the hardest part about purchasing mining equipment. You may be making the best purchase (in terms of $/GH, or kWh/GH) in this very moment, but what's to stop Company X from developing 22nm (or 14nm, 10nm, etc) ASIC technology that makes your purchase obsolete?

It all comes down to how quickly you receive your mining equipment and whether or not that company is working towards better tech. And if not, determining your next (and most cost effective) option becomes the goal.

[Serge]

to be sucessfull "ROI" miner one has to make sure to be ahead of a pack, this takes risk playing pre-order game early on with next generation chips/rigs.   everyone else is better off simply buying btc.

[Keyser Soze]

tl;dr, People should make more informed decisions about their mining purchases and the above information may help you achieve your desired RoI or avoid a loss.

It's a fairly good list, though my qualm lies with this last part...mainly since an 'informed' decision today isn't the same as an 'informed' decision next week/month/quarter/etc. That's the hardest part about purchasing mining equipment. You may be making the best purchase (in terms of $/GH, or kWh/GH) in this very moment, but what's to stop Company X from developing 22nm (or 14nm, 10nm, etc) ASIC technology that makes your purchase obsolete?

It all comes down to how quickly you receive your mining equipment and whether or not that company is working towards better tech. And if not, determining your next (and most cost effective) option becomes the goal.

I agree that making a profit can really be a crap shoot. New information comes quick and it can be very difficult to make decisions. People should factor uncertainty when calculating the present value of their estimated cash flow. I generally feel people are not weighing risk vs. reward properly.

to be sucessfull "ROI" miner one has to make sure to be ahead of a pack, this takes risk playing pre-order game early on with next generation chips/rigs.   everyone else is better off simply buying btc.

One could also argue that there are too many unknowns to make a smart decision (edit: With respect to buying a miner). Depending on your outlook it may be better just to hold onto your coins.

[DeathAndTaxes]

It's a fairly good list, though my qualm lies with this last part...mainly since an 'informed' decision today isn't the same as an 'informed' decision next week/month/quarter/etc. That's the hardest part about purchasing mining equipment. You may be making the best purchase (in terms of $/GH, or kWh/GH) in this very moment, but what's to stop Company X from developing 22nm (or 14nm, 10nm, etc) ASIC technology that makes your purchase obsolete?

You can make some fairly education assumptions.  Miners generally are going to earn the bulk of their lifetime revenue front loaded.  So the first 6 months is more important then the next 18 or even 36.  You don't even need to worry about 22/20nm tech.

Here is why.  22/20nm is insanely expensive.  Other than Intel (who doesn't use foundries they build their own fabs to their own specs), nobody is shipping any product in 22nm (or 20nm).  Not Apple, Samsung, AMD, Nvidia, nobody.  Lets think about this for a second.  These are companies with hundreds of ASIC engineers on the payroll, R&D budgets in the tens of millions of dollars who combined a couple billion cutting edge chips a year.  22/20nm is too expensive for them.  Long before any Bitcoin ASIC company can look at 22/20nm any miner you buy today is going to be end of life anyways.

22/20nm will come but it is further away.  The first (non-Intel) products moving into 22nm in late 2014 are .... smartphone chips.  Why?  Because the cost is sooo high right now it doesn't make sense.  Would you buy an AMD graphics card with twice the computing power for five times the cost?  I doubt it, just like you wouldn't buy a hyper efficient miner which costs 200% more than anyone else on the market.  Cellphones are a unique industry where the product price is high, the processor is cheap and battery life (which 22/20nm helps) is everything.  Even 2015 is dubious for 22/20nm.  Just because a process node is available doesn't mean it is economical.  It generally take 2-3 YEARS before the cost per transistor to fall below the prior node.  This is just the cost per transistor, remember new chips means new multi-million dollar NRE.  Unless a company can seriously undercut the competition that is huge risk to take.  As for 14nm and below start worrying in 2020 or later.

There are a lot of risks to mining but if it helps you can ignore cutting edge tech.