By Alex Karasulu

Cryptocurrency mining has been through some ups and downs and recently video card manufacturers like Nvidia announced diminishing sales. Nvidia saw massive share price growth over the course of two years: over seven times. And now the share price dropped over 5% after reports of reduced demand for Nvidia GPUs for mining. Is this the sign of a turning point for mining?

Not all mining is the same

To understand what’s going on we must point out that NOT all blockchains are equal and miner population dynamics impact the returns of mining on each blockchain differently. Some blockchains have completely walked away from the Proof of Work (PoW) consensus mechanism (e.g. Proof of Stake in EOS) altogether but more on that later.

Mining the “king” of coins, Bitcoin, has been moot for individuals with do it yourself (DIY) GPU miners. GPU hashing power is simply overwhelmed by dedicated ASIC miners for the past few years now, due to the nature of Bitcoin’s mining algorithm. Ordinary home computing equipment can’t compete.

Ethereum is quite different because its hashing algorithm requires a lot of memory look-up and is inherently limited by memory bandwidth. GPUs have excellent memory systems, to meet the demand for high-end gaming, and Ethereum is served mostly by GPU rigs, set up by individuals or big farms.

Lastly altcoins are a mixed bag, but present perfect opportunities for DIY miners who purchase retail video cards due to a lack of congestion (low overall network mining rates).

Depressed cryptocurrency prices and power costs

The primary influencer is the diminishing returns on investment resulting from the recent drop and suppression of cryptocurrencies across the board along with power consumption costs. Essentially as the price of the mined currency drops the power consumption cost dominates to reduce the profit. Power guzzling GPUs with low hash rates put miners in the red. Doing the math is easy on a mining profit calculator like CryptoCompare.

DIY mining is dead until prices rise again

A decent four GPU mining configuration can cost about $3,000 to build, and draws 800-1000 watts. Big farms do mad optimizations to reduce these factors, but the DIY hobbyist is not endowed with the time, economies of scale, and an engineering team to tweak the factors in their favor. The best price to power vs. hash rate video card on the market in 2018 for Ether mining was the Nvidia GeForce GTX 1070. It costs about $600 USD and runs at 150w for 30MH/s. With four of them and a motherboard you’re in the 800w ballpark for 120MH/s and down $3,000 USD. When we plugged these figures into the calculator for today’s USD to Ether exchange rates ($263/Eth) and power costs (global average of $0.12/kWh) miners actually have net losses of $7.55 cents per month. The break-even point is at 712 watts or when the Ether price goes above $282 USD per Ether.

In addition to losing money, DIY miners don’t have a chance to get a return on their investment within a year until Ether prices go way up $400-500 with relatively the same total network hash metric. It makes sense that many individual DIY miners have tried and realized the costs outweigh the benefits at the current exchange rates. So many don’t bother mining anymore after being burned by the low or negative yield. Many of the purchased graphics cards are now flooding the second-hand market, and indirectly affecting NVidia’s sales of new cards.

ASIC Miners Bricked

Custom chips (ASICs) designed for mining have high hashrates and are power efficient. ASIC performance and efficiency is unparalleled, but the risk is high. ASIC miners can be “bricked” (made useless) by changing a single bit in the hashing algorithm.

This happened recently in summer of 2018 when Bitmain’s miners were bricked before purchasers could take delivery after a presale. Monero developers purposefully changed their hashing algorithm to make their blockchain resistant to Bitmain’s miner, making the ASIC miner essential worthless. BitMain even started a fire sale on useless miners at a fraction of their price. Consumers who spent billions on ASIC miners were burned overnight.

ASICs drew capital away from those that would have purchased custom GPU miners. Now, especially after Monero developers proposed changes to their blockchain hashing algorithm every six months to always ensure ASIC resistance, the mining community realizes ASICs are a risky bet. The cash pulled out by ASIC miners should start to flow back into GPU sales. There will always be a minimum delay of a few months before market fluctuations are felt and reported in quarterly reports.

Mining clouds and farms

Mining farms have special deals with hardware vendors to purchase cheap hardware in bulk and have designed their own low power configurations. They’re not going out and buying video cards at retail stores. They’ve got the know-how, economy of scale, and engineering teams to bring the costs down low enough to make the endeavor appealing. Combine this with cheap power from geothermal sources like in Iceland (i.e. Genesis Mining) or Canada’s hydroelectric dams (such as Bitfarms), then you have a the ability to profit at scale even with very low currency prices.

Both Genesis and Bitfarms seem to understand the evolution and are reducing the barrier of entry by using a cloud model for others to rent miners in their facilities, as a mean to raise capital and minimize risk.

Latest advance: FPGA miners

OptDyn is producing turnkey miners (it serves as your broadband router too) for memory hard hashing algorithms like the Ethereum hashing (Ethash) algorithm. The Subutai Blockchain Router takes another approach to enabling a turnkey solution that’s flexible like GPU’s, unlike ASICs, and has high performance (hash rates) with low power consumption. The “green” mining appliance uses low power consuming yet performant reprogrammable chips called Field Programmable Gate Arrays (FPGA).

In order to enable everyone to participate in the cryptocurrency economy, you need to provide end users an easy turnkey, and cost-effective means to earn cryptocurrency. The next generation of the  Residential Edition of the Subutai Blockchain Router (an advanced broadband router that also serves as a plug-and-play cryptocurrency wallet and mining device) will draw 50-75 watts at a hash rate of 232 MH/s. At today’s exchange rates ($263/Eth), users will earn about $115 USD worth of Ether per month. The Subutai Blockchain Router Residential Edition will be available early 2019, initially through ISP providers.

Impact of proof of stake alternatives

Unbeatable natural forces will keep Proof of Work (PoW) here for some time so don’t presume Proof of Stake (PoS) is reducing the demand for mining hardware. Blockchain networks are influenced by the same change-resistive inertial forces that have prevented the Internet from transitioning en masse to IPv6. It’s widely accepted that IPv6 is better than IPv4 but we’ve not made it through that barrier in over two decades. Don’t expect PoS to cause diminished sales for PoW hardware for the same reasons. PoW is trusted, proven, and provides the only reliable physically guaranteed protection against the Byzantine Generals’ Problem: everything else is a social experiment.

More importantly, no one wants to risk millions on an experiment. If anything we will see years of migration as value is transferred from old reliable PoW networks to new ones (if they work) on the same blockchain stack or using new approaches like EOS. PoS is not the reason for the decline in hardware demand.

Cryptocurrency mining is evolving, not dying

Expect the cryptocurrency market to come back with more fiat currency volatility hitting markets. Emerging markets have already destabilized with currency crises in Venezuela, Argentina and Turkey. With market corrections, more sanctions to come, responses to them and chain reactions in markets even the strong dollar will suffer unless there are major course corrections soon. The cryptocurrency markets that are dramatically suppressed right now will come back very strong which will make mining even for the DIY hobbyist reasonably profitable again.

The best option however is to consider the latest evolving solutions to mining where the investment is offset through your telecommunication provider for a mining broadband device or through a cloud subscription model for the hardware in a specialized farm. If you have the hardware lying around and want to tinker then go for it. However going forward the DIY miners will not be the optimal way for the future.

The diminishing demand for GPU miners is not that cryptocurrency mining is dead, it is just evolving and taking other forms. The drop in sales is also temporary and will go back up as soon as the cryptocurrency market starts to recover.

We see the PoW mining market evolving from advanced users with superb technology skills towards a mass market for everyday users. We’re excited about helping everyone benefit from the blockchain economy by providing accessible, efficient, and eco-friendly cryptocurrency mining solutions at scale. After all, what a better way to usher in the promise of the decentralization and democratization of cryptocurrency.

 

OptDyn Founder and Co-CEO Alex Karasulu is an entrepreneur with over 25 years of experience in the software industry and a recognized leader in the Open Source community. He is widely known as the original author of the Apache Directory Server, used by IBM both as the foundation of the Rational Directory Server and also integrated into the Websphere Application Server. Alex co-founded several Apache projects, including MINA, Felix and Karaf, among others, which, along with their communities, thrive independently past his day-to-day involvement in the projects. He is the founder of Safehaus, where he authored the first low-resource mobile OTP algorithms in Open Source with the OATH community that was later adopted by Google in their Authenticator product. In addition to IBM, Atlassian, Cisco, and Polycom are just a few of the many companies that sell commercial hardware and software solutions that bundle or embed software and products that Alex has created. Alex holds a BSc. in Computer Science and Physics from Columbia University.

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