Upgrading aging equipment

As block difficulty and total cryptocurrency network hash rate increase steadily over time, your proportion of the mining rewards will diminish, which (depending on the value of the cryptocurrency in your fiat currency) may also mean your overall profitability will drop. In other words, your mining equipment will eventually become unprofitable.

You can help mitigate aging equipment by upgrading your mining gear as it nears its end of life. The average useful life span of modern cryptocurrency-specific ASIC mining hardware is generally between four and five years. By upgrading to newer, more efficient mining hardware, you can maintain your cryptocurrency mining competitive advantage.

Mining different cryptocurrencies

Upgrading equipment often can be expensive and wasteful, however, so another route is to find alternative cryptocurrencies for your ASIC or GPU mining hardware to mine.

We cover the various types of cryptocurrency hashing algorithms and the different cryptocurrencies that use them in Chapter 8. Even if you’re mining using an ASIC, the ASIC will work with other cryptocurrencies that use the same algorithm.

If your mining hardware becomes unprofitable mining the cryptocurrency you originally set out to mine, you may find that you can still generate rewards on other proof-of-work blockchains that use the same algorithm. Perhaps a new cryptocurrency has come on the scene since you began, or perhaps a cryptocurrency that you looked at and disregarded earlier has become more profitable. So keep your eyes and ears open and don’t think you’re stuck with your cryptocurrency mining choice forever.

Using exhaust heat

The intense computational processes involved in mining proof-of-work cryptocurrencies produce quite a bit of typically wasted heat exhaust. This is especially the case for application specific integrated circuits (ASICs) and for large-scale GPU mining rigs, as they are essentially electric space heaters converting electricity into heat while they steadily mine cryptocurrency.

A way to stack value and increase margins when mining cryptocurrency is to not waste this heat exhaust and instead utilize it for your own benefit. According to the U.S. Energy Information Association (EIA), the estimated winter heating bills of the average American household range from around $600 to $1,600, depending on home size, fuel source, and local climate. Figure 12-1 shows the past few winters of EIA data by fuel type as well as an average value from all sources. (The data is from www.eia.gov/todayinenergy/detail.php?id=37232.)

If you live in a colder climate and are running a mining operation at home, the equipment is going to pump heat out, reducing the level of heating you need for your home, and thus in effect reducing the cost of your mining operation. (Take this into consideration when running your calculations; see Chapter 10.)

Reducing electricity bills

As discussed in Chapter 10, electrical expenses for proof-of-work mining equipment make up the largest portion of operational expenditures for cryptocurrency mines. So reducing your electrical bills is obviously a good thing! It may be enough to push you into — or keep you in — profitability. The following sections discuss a few ways to save.

Utility rate structures

One way to reduce your electrical bill that may be available to you is to sign up for a special rate structure from your electric utility. Many electric utilities offer Time of Day rates, peak demand rates, or other such rates (rates that sometimes provide pretty decent discounts on energy prices). For example, if you sign up for Time of Day rates, you may find that even if you run your equipment 24 hours a day, you still end up paying less. You may pay 50 percent lower rates during the nonpeak hours, which may be most of the day, so even if you’re paying twice that rate during peak hours, you’re still saving.

Research your local utility provider’s rates (or tariffs) to see whether any rate structures would help reduce your energy cost. (You can probably find the information you need on their website.) Commercial electrical rate structures normally provide cheaper bulk electric rates, but are not available for homes, a factor to take into consideration when trying to decide whether you need a home-based or industrial mining facility.

You should also shop around, if possible. Some states, such as Texas, have deregulated electrical markets that allow the consumer to choose from a variety of retail electrical providers (REPs). If you’re in such an area, you really need to check around and find the best deal; you’ll want to know how much electricity you’re going to be using before you start shopping, of course.

Another option is to relocate your mining equipment to the service territory of an electrical utility that has more affordable electricity or a variety of rate structures that can benefit you. You may be surprised at how much electricity costs vary around the country. Figure 12-2 shows average electricity prices per kWh throughout the United States (www.eia.gov/electricity/monthly). As you can see, mining profitably in Hawaii is likely to be pretty tough (it’s hot, too, so you have additional cooling costs). A state like Wyoming may be good, though. Not only does it have electricity costs near the bottom of the rankings, but it’s one of the coolest states, too; one of the coldest states in the summer and in the top ten coldest states in the winter.

Why current events are important

Cryptocurrencies and blockchains act as an immutable record of data, indisputable information that is accessible to anyone with the tools and knowledge to look for it. This isn’t the case with off-chain data, such as current events and news in the space, which is why it is very important to stay up to date on accurate information from reliable sources if you intend to mine cryptocurrency.

Current events affect what’s going on in the mining space. They can affect the value of the cryptocurrency, and thus, in response to fluctuation in the value, the network hash rate, your percentage of the network hash rate, the amount of blocks you’ll mine, and ultimately your loss or profit.

There is plethora of news sources in the cryptocurrency mining space, but not all can be trusted. Some peddle misinformation with the intent of misleading you. Staying up to date on the latest and greatest in the mining industry is crucial to your continued success in the space. Reliable content from sources such as those listed in the preceding section is the best defense against spin and distortion from those that would lead you astray. Without information, you may find yourself mining a cryptocurrency without much future value, or on the uneconomical side of a blockchain fork.

The “fork wars”

You may have heard of the concept of forking a cryptocurrency. Understanding blockchain forks is critically important to maintaining your mining competitive advantage. Forks can provide a great little bonus — free money! But make the wrong decisions when a fork occurs, and you could end up losing money. If you’re not paying attention and pick the wrong side of the cryptocurrency fork, you may find yourself mining the side of a fork that is not economical.

Also, some forks are pitched as upgrades by their participants, but tread lightly: You may find yourself being duped by bad actors and cheap imitations that simply copied the code and branding of the original cryptocurrency blockchain. This is another reason why being up to date on information and news in the cryptocurrency mining space is so vital to the long-term viability of your venture.

The term fork is used in the software-development business to describe a situation in which a line of development splits into two lines, and the two different lines proceed independently of each other. Think of it as a fork in a road. You’re driving along a road and arrive at a fork; you can take the left fork or the right fork, but whichever you take, you’re now on a different road.

Software forks are especially common in the open-source community. Here’s an example of a successful open-source fork (most are not successful, by the way): OpenBSD, an open-source operating system, is a fork of NetBSD that forked off from the original NetBSD development in 1995. NetBSD had already been in development for several years before that. After the fork, OpenBSD and NetBSD were two separate software systems, with different features, different software developers working on each one, and so on.

Now, in the cryptocurrency world, the term fork has an additional meaning. Certainly the software itself can be forked; a developer takes a copy of existing cryptocurrency software and begins modifying it and running a new cryptocurrency. For example, Ixcoin was an exact copy of the Bitcoin code that was launched in the early days of Bitcoin (in 2011). The founder took a copy of the Bitcoin code, set it up, and created a brand-new blockchain (that ran in exactly the same way as Bitcoin). It’s still running, though not much activity occurs in the Ixcoin markets. In other cases, copies of Bitcoin have been downloaded, modified, and then set up as new cryptocurrency networks with new features, even using different algorithms. In fact, this has happened dozens of times.

However, forking can mean something else, something, from our perspective, far more important. Forking in the cryptocurrency space is what occurs when a node or group of nodes in a cryptocurrency system break away from consensus of the original blockchain. Consensus is the rule set that the nodes on the network comply with, so they ensure that all copies of the blockchain remain in sync and all agree on the transactions added to the blockchain. When nodes fork and fall out of consensus on the blockchain, an entire new chain of blocks is created; thus two different blockchains, two different networks, move forward from the fork point. They both have the same transaction history — the same blocks up until the fork point. But after the fork, there is no longer only one blockchain, one cryptocurrency, and one network; now, two blockchains, two cryptocurrencies, and two separate networks exist.

Some people in the cryptocurrency field refer to this situation — the hard forking of both the code and the blockchain — as forking, and the other kind of fork — taking the code and starting a brand-new blockchain — as cloning. Many of the blockchains in existence today are clones of the Bitcoin code, some with only slight modifications. In the case of Ixcoin, it began as a clone of the Bitcoin blockchain, but later the Ixcoin code and blockchain forked, producing another cryptocurrency named IOCoin. (At one point, an IOCoin was worth as much as $7.26; today, it’s worth around 11 cents. It’s sometimes suggested that IOCoin’s lack of success is partly due to the fact that nobody knows how to spell or pronounce it!) By the way, here’s a link to a great chart showing how many different cryptocurrencies have evolved — through forks and clones — from Bitcoin: https://mapofcoins.com/bitcoin.

Anyway, when we use the term fork or forking from now on in this discussion, we’re referring to the forking of the blockchain, typically in conjunction with modifications to the software. That’s the issue you need to understand if you’re going to mine.

Here’s what happens. A schism occurs in the developer community for a particular blockchain. One group wants to do something to the code that another group doesn’t approve of. At some point, the disagreement reaches a point at which some of the developers are so dissatisfied that they break away. (The term civil war is sometimes used to describe the level of conflict in the community that leads up to a fork!)

For example, the cryptocurrency’s code may be modified in some way, and some of the developers say, in essence, “No, we want the code to remain the way it was!” That’s the situation with Ethereum Classic, by the way. Ethereum was forked in July 2016 (in response to the theft of around $50 million worth of ether, the blockchain was forked to restore the lost money). Some in the community felt this fork should not have been created, and thus continued using the original Ethereum code and blockchain. So then there were two networks, two blockchains, and thus two different cryptocurrencies.

In most cryptocurrency forks, the forked network is given a new name and ticker symbol. The Ethereum fork was a very unusual situation, though; the network that had forked away from the original network kept the original name and the ticker symbol (ETH)! The people who wanted to continue with the original blockchain and software, in a minority, were forced to come up with a new name (Ethereum Classic) and ticker symbol (ETC).

Thus Ethereum is a fork of what used to be known as Ethereum, but is now known as Ethereum Classic. The Ethereum fork is also unusual in that it’s generally a minority that breaks away — that forks — from the original cryptocurrency. In Ethereum’s case, the majority forked from the original code and blockchain, while a minority continued running the original software, network, and cryptocurrency.

Here’s another example, but of the opposite situation: Bitcoin and Bitcoin Cash. In August 2017, a small group of Bitcoin developers forked the code in order to increase the blockchain’s block-size limit. The majority continued developing on, and operating nodes with, the original code, and the minority developed the new, forked code and managed the new network and blockchain. The forked code was also renamed Bitcoin Cash (BCH).

Technically, forking is really cheap and easy; remember, most cryptocurrencies are open source, which means anyone can go to the code repository (usually on GitHub; here’s the Bitcoin repository, for example: https://github.com/bitcoin/bitcoin), download the code, tweak it (change the consensus rules, for example), and relaunch as a new cryptocurrency. Because it’s so cheap and easy to do this, hundreds, maybe thousands, of new cryptocurrencies have been created from forks of existing cryptocurrencies, and forks created from forks.

Many of the most popular cryptocurrency networks over the years have had small groups of their users change the rules of consensus and fork off, taking minority portions of their networks (the nodes and miners) with them. At the time of this writing, around 74-plus Bitcoin network forks — including Bitcoin Cash (BCH) and Bitcoin SV (BSV) — now exist as their own coins on separate, active, albeit less secure, cryptocurrency systems.

Other popular blockchains that have been forked many times include Ethereum (Ethereum Classic, Ether Gold, Ethereum Zero), Litecoin (Litecoin Cash, Super Litecoin), and Monero (Monero Original, Monero Classic, MoneroV). It is relatively inexpensive for developers to fork a cryptocurrency system and easy to mimic a blockchain with slight changes in the codebase and branding, so it’s likely we’ll continue to see forking into the future, and you need to be aware of that. (Litecoin, by the way, was itself a clone of the Bitcoin code — with significant modifications — though not a fork of the Bitcoin blockchain.)

Each of the newly created minority-forked blockchains have a few things in common: a reduced node count, fewer developers, lower hash rate, and reduced blockchain security. We recommend treading lightly when dealing with forked blockchains and, in most cases, avoiding them completely. Some forks may not have replay protection enabled, which could lead to a loss of funds, and other forks drastically lose exchange rate value over time as measured in both local fiat currency and the original blockchain’s cryptocurrency.

Your forking decisions

If you are mining a cryptocurrency and it forks, you have two primary decisions to make:

• Which fork do you continue mining?
• What do you do with your new currency?

Imagine you’re mining a coin called DummyCoin. And assume that instead of selling your mined DummyCoin as soon as you receive it, you have been keeping DummyCoin, so you have an address (maybe a few addresses) in the DummyCoin blockchain that are storing your mining revenues.

You realize that a fork war is going on in the developer community (because you have been paying attention to the community news and conversations), and one day, in fact, the cryptocurrency splits. Now there are two networks, two blockchains, and two cryptocurrencies (DummyCoin and DummerCoin).

The nice thing is that you now not only have coins in the DummyCoin blockchain, but you have the same number of DummerCoins in the DummerCoin blockchain. Remember, both cryptocurrencies use the same blockchain up until the split point. Thus, the founders of DummerCoin took a copy of the DummyCoin blockchain and began building on that, so all the original transactions from DummyCoin are now in the DummerCoin blockchain, too. The transactions — and your coins — are in both blockchains!

Now, this sounds great. You’ve just doubled your money, right? Well, not quite. First, there are situations in which the forked cryptocurrency fails quickly and badly, and you may not even be able to get to the new coins in DummerCoin. But say that in this case, DummerCoin does enjoy a modicum of success, and you are able to safely manage your DummerCoins in the new blockchain.

What do you mine?

Let’s get back to those two decisions you have to make. The first decision is, what are you going to mine?: DummyCoin or DummerCoin? The original cryptocurrency or the forked cryptocurrency? In most cases, forked cryptocurrencies don’t fare as well as the original cryptocurrency, from the perspective of the coin’s market value. But deciding which to mine is a more complicated subject than that.

You may find that the new cryptocurrency has a lower value, but is still worth mining because your equipment’s hash rate is a larger percentage of the new network’s hash rate than the previous network’s hash rate. In other words, you’ll be able to win more blocks on the new network than the old. On the other hand, what if the value of the new cryptocurrency declines precipitously? Perhaps, you may decide to mine the new cryptocurrency and sell the coins as soon as you receive them. But whatever you decide — to stick with the original network or move to the new one — it’s a tricky decision, and it greatly depends on your values and your assessment of what is likely to happen to the forked cryptocurrency. Which is why you need to be plugged into the cryptocurrency’s community, to get a feel for the community sentiment.

Here’s a general rule: The side of the fork that has the most community support, that the most nodes are supporting, and that most of the hashing power is supporting, is the side that is most likely to survive, most likely to remain stable, and most likely to thrive. But these factors can also switch back and forth. As miners see an opportunity — a lower overall network hash rate on one side of the fork — they may switch their hashing power (many, perhaps most, miners are mainly motivated by profit, after all); as miners switch, network hash rate goes up, returns decrease, and some miners may leave, and so on. We generated a chart at the wonderful BitInfoCharts site that shows this phenomenon (see https://bitinfocharts.com/comparison/hashrate-btc-bch.html). In Figure 12-3, you can see the Bitcoin network hash rate (top line) in comparison with the Bitcoin Cash network hash rate when it first forked. As the Bitcoin Cash hash rate went up, the Bitcoin hash rate went down. Miners switched back and forth, and on a couple of occasions, the fork’s network hash rate was actually higher than the original network’s hash rate.

Cryptocurrency miners are opportunistic and motivated by profits (of course!). Thus, during times when Bitcoin Cash was slightly more profitable to mine than Bitcoin, portions of the SHA-256 hash rate moved to the Bitcoin Cash network, and vice versa. Bitcoin Cash profitability didn’t last, however, and today Bitcoin Cash has around 1 percent of the hash rate that Bitcoin does. See https://fork.lol for real-time comparisons on hash rate, value, and miner rewards between these two forks.

There’s another twist in the Bitcoin Cash story. Originally, Bitcoin Cash had more pledged support, as far as hash rate goes, than Bitcoin. Large companies that were providing a very significant portion of the network hash rate supported the idea of a fork, but many people did not. The majority of network nodes did not switch to the forked network, and most of the miners’ hashing did not ultimately switch either, as you can see from Figure 12-3.

Increasing mining competition

As blockchains become more popular and mining equipment more capable, cryptocurrency mining trends toward a tougher, more competitive environment. As more miners spin up equipment pointed to your chosen cryptocurrency’s proof-of-work algorithm, this leads to the same scheduled amount of predetermined coin issuance being split between more miners and hash rate.

Increasing block difficulty

Over time, as more miners and more effective mining equipment connect to a blockchain, the block difficulty will automatically increase to ensure block issuance time interval stability — that is, that the same amount of cryptocurrency is issued, on the correct schedule, regardless of how much computing power is being used to mine it.

Over the Bitcoin network’s history, block difficulty has trended upward. There have only been nine months in the Bitcoin network’s decade-long life where the block difficulty finished at a value lower than it started with; in other words, block difficulty reduction is a fairly rare occurrence on the Bitcoin network, and on other successful cryptocurrency networks. The increase in competition will lead to blocks being harder to find. Thus, your mining equipment, with a constant hash rate, will be less effective at finding blocks or contributing to a pool.

Diminishing returns due to halving events

With the increase of competition, hash rate, and block difficulty, your mined cryptocurrency rewards, as measured in the cryptocurrency you are mining, will be reduced.

There is also the block subsidy halving cycle to be aware of. On the Bitcoin network, every 210,000 blocks (or roughly every four years), the amount of Bitcoin issued to miners is cut in half. On May 11, 2020, the Bitcoin block subsidy halved, from 12.5 Bitcoin per block awarded to the winning miner, to 6.25. Sometime in the middle of 2024, the Bitcoin block subsidy will be halved, from the current 6.25 Bitcoin per block awarded to the winning miner, to 3.125. (The miner’s reward comprises the block subsidy — the new coins issued — and the transaction fees.)

These issuance halving events will further affect the amount of cryptocurrency your equipment will earn. This trend of diminishing mined cryptocurrency returns is something to be very wary of when considering if mining is right for you. Of course, if the value of the cryptocurrency goes up (when measured in terms of dollars or whatever local fiat currency you are working with), there’s still potential for profit. If, for example, the value of Bitcoin triples before the halving event, well, you’re still ahead of the game. However, if the value of the cryptocurrency drops and the block subsidy halves, well, you really are in trouble.

These halving events are not unique to the Bitcoin network. Many other cryptocurrencies reduce the block subsidies periodically, so this concept affects a wide range of cryptocurrencies.

The BitInfoCharts.com website offers a historical perspective on how much reward a miner would have earned with a tera hash per second (TH/s) of SHA-256 mining capability per day as measured in present-day U.S. dollars, using the present-day exchange rate. This graph from https://bitinfocharts.com/comparison/bitcoin-mining_profitability.html provides a good perspective on diminishing mining rewards over time (see Figure 12-5). It takes into account the block subsidies and the halving episodes (the BTC icons on the chart show a description of important events when you let the mouse pointer sit on them for a moment, including halving events).

The chart still gives a good estimation of how computing power has in effect been devalued over time. That is, it takes far more computing power to get the same result. Back at the beginning of 2019, an S9 mining on the Bitcoin network would have earned you over $60 a day. Now, you’d earn less than $5 a day.

These earnings tell a different story when measured in Bitcoin, however. Note, by the way, that the chart in Figure 12-6 is a logarithmic chart; the dramatic reduction would appear even more so in a linear chart.