Convert your cryptocurrency

The most obvious thing, of course, is to sell your mined cryptocurrency, most likely through an exchange, for your local fiat currency. After all, your business has expenses, most notably the cost of the equipment and electricity, and these bills have to be paid somehow. You may also want to recover the initial expense of setting up your cryptocurrency mining operation, and in most cases, you won’t be paying bills directly with cryptocurrency.

You can often buy mining equipment with cryptocurrency — most commonly Bitcoin — as we discuss later in this chapter, but few utilities accept cryptocurrency, and if you’ve just begun mining, you probably bought your equipment with dollars. We discuss how to pay bills with cryptocurrency in the upcoming section, “Buying equipment and paying bills.”

You should consider a number of things when converting your cryptocurrency:

• Would you be better off holding the cryptocurrency? That’s a subject we come back to in the section, “Hodling your cryptocurrency,” later in this chapter.
• Are you mining a very volatile cryptocurrency? If so, you may want to dump it as soon as you mine it, converting it into fiat currency or another cryptocurrency, one that you feel is more likely to increase in value, or at least hold value.
• What are the tax liabilities for converting your mined cryptocurrency into fiat currency? (In fact, you’ll encounter tax liabilities if you don’t, too!) We cover this subject later in this chapter in the section, “Tax and Your Mining Business.”

Buying equipment and paying bills

You may want to just pay bills and make purchases directly using your cryptocurrency. You can often buy mining equipment using cryptocurrency. Newegg, for example, one of North America’s largest electronics retailers, accepts Bitcoin, and companies that build mining equipment or otherwise cater to the mining or cryptocurrency markets typically also accept cryptocurrency.

However, they typically accept only a small range of cryptocurrencies — generally Bitcoin, though sometimes also a few other popular cryptocurrencies. While gateways exist, such as CoinGate (https://coingate.com), that help ecommerce stores integrate far more cryptocurrencies (CoinGate currently accepts around 70), in general, most stores accept only Bitcoin and one or two others.

Here’s a short list of places you can spend your Bitcoin (some also accept other cryptocurrencies), but many more are out there.

• AT&T: www.att.com
• DISH: https://my.dish.com
• Microsoft: www.microsoft.com
• Newegg: www.newegg.com
• Overstock: www.overstock.com
• Virgin Galactic: www.virgin.com

Coinmap (https://coinmap.org) can also help you locate many other local retailers where you can spend Bitcoin.

Paying with crypto when you can’t pay with crypto

Various services allow you to spend cryptocurrency with retailers and service providers that don’t accept cryptocurrency. For example, Amazon doesn’t accept cryptocurrency. However, services such as Moon (https://paywithmoon.com) and Purse (https://purse.io) let you buy at Amazon using cryptocurrency.

For example, Moon lets you use Bitcoin, Bitcoin Cash, ether, and Litecoin to make purchases on Amazon. But, of course, all you are doing is converting your cryptocurrency and making a purchase in the same process; Moon acts as an exchange and payment service, taking your cryptocurrency, exchanging it for dollars, and then paying Amazon for you.

Those two companies work specifically with Amazon, but various others have sprung up recently that offer a Bitcoin or cryptocurrency-based bill-pay service in easy-to-use applications. The concept is straightforward: you make a purchase; the company then pays the retailer using dollars or other local fiat currency; you then pay the company in cryptocurrency. Some of these companies even provide a credit card. Coinbase, for example, perhaps the largest U.S.-based cryptocurrency exchange, provides a Visa card (see Figure 13-1). Use it anywhere you can use a Visa card, and Coinbase pays the bill and deducts the equivalent value of cryptocurrency from your Coinbase account.

Here are a few other companies you can check out.

• Bitrefill (www.bitrefill.com): Gift cards and mobile-phone refills; 1,650 businesses in 170 countries.
• Gyft (www.gyft.com): Buy gift cards with Bitcoin.
• Living Room of Satoshi (www.livingroomofsatoshi.com): An Australian company that lets users pay credit cards and BPay online banking bills with Bitcoin.
• Piixpay (www.piixpay.com): An Estonian bill pay company, operating in 120 countries, including the United States.
• Paid by Coins (https://paidbycoins.com): Another Aussie company working with BPay, but that also allows users to purchase Australian gift cards.

Expand or upgrade your mining operation

Later in this chapter (see the section, “Scaling Up?”), we discuss the subject of expanding and upgrading your business. Cryptocurrency mining hardware is often sold directly from manufacturers in local fiat currency, but they may accept only Bitcoin or other cryptocurrencies. Some also accept wire transfers, and if you have ever gone through that painstaking process, you will understand why Bitcoin and cryptocurrencies are such an innovation. So, of course, you might also buy your expansion or upgrade equipment directly using cryptocurrency. Again, such purchases are business expenses; you won’t be paying tax on the mining income you use to buy more equipment.

But don’t forget the tax

Your mine is a business. You spend money with the intention of making money — that is, making more money than you spend. That’s what profit is, and it’s taxable!

Consider that your purchases are part of your taxation picture. If you use your cryptocurrency to make business purchases — to pay utility bills, buy new mining equipment, pay rent for a mining facility, and so on — those expenses are tax deductible. (Exactly how you deduct them is complicated, but we get to that later in this chapter — see the section, “Tax and Your Mining Business.”)

However, if you use your cryptocurrency to make personal purchases — groceries, your apartment rent or mortgage, nights on the town, and so on — then those expenses are not deductible. That is, they become taxable to you personally. They are regarded as payments to you personally, from your business.

Hodling your cryptocurrency

You can choose to do nothing but keep possession of your mined cryptocurrency rewards as an investment, with the expectation that eventually their value will increase. This is often known within the cryptocurrency community as hodling. Why? Because way back when, in the distant cryptocurrency past (that is, 2013), someone in a Bitcoin forum mistyped a message. Intending to say that he was planning to hold on to his Bitcoin, with the solid belief that its price would rise, he instead wrote, “I AM HODLING!” The message poster claimed he was drinking whisky at the time that he posted this message. (You can see it here if you’re interested. It is somewhat entertaining, and hey, you’re seeing a bit of Bitcoin history live: https://bitcointalk.org/index.php?topic=375643.0.)

Anyway, the terms hodl and hodling have now become part of the cryptocurrency culture. The principle is simple. If you are convinced the cryptocurrency will rise in value, why would you sell? If you’re so sure it will go up, then hodl!

In fact, this choice is very popular, and the long-term scarcity of many cryptocurrencies and the community’s expectation that the value will go up often makes this a self-fulfilling prophecy. (But not always. Many of the smaller cryptocurrencies have dropped to zero.)

We’re not going to tell you whether to hodl or sell. Both choices come with risk. Many people have lost huge sums of money investing in cryptocurrencies. But many multimillionaires have been made, too.

In fact, with the exception of a catastrophic one-year crash, from mid-December 2017 to late December 2018, Bitcoin has been an incredible investment. Had you purchased in August 2017, and held your Bitcoin for four years until the time of this writing (January 2022), your investment would have increased more than eightfold. Investors who have held since May or June of 2016 have seen the value increase around 85 times (see Figure 13-2.) Still, past performance is no guarantee of future results, as they say in the investment business! And Bitcoin is the world’s primary cryptocurrency; others are often much less successful in value appreciation. Always do your research on the viability and history of your cryptocurrency before you decide to hodl for any significant amount of time.

So, should you sell, or should you hodl? Keep an eye on the market and make your own decision!

Invest your cryptocurrency

Some ventures can be invested in via Bitcoin or other cryptocurrencies. Many early Bitcoin miners have invested in cryptocurrency-related businesses using their mining profits. For example, Kraken, a major cryptocurrency exchange, was mostly bootstrapped by early Bitcoin investors.

Does this make sense? Perhaps. But also consider that when you invest your cryptocurrency into a stock, real estate, or other business opportunity, you are betting that the return on the investment will be greater than the return on simply hodling that cryptocurrency. That hasn’t always been true.

On the other hand, you may consider investing mining profits into other businesses as a form of investment diversification, spreading your overall financial risk by holding different types of investments with different risks and benefits.

Donate your cryptocurrency to charity

Many organizations accept cryptocurrency donations to help support their charitable efforts. There may also be tax benefits associated with donating assets, such as cryptocurrency, to charity. Following are just a few noteworthy efforts you could donate to that accept cryptocurrency donations.

• American Red Cross: www.redcross.org/donations/ways-to-donate/corporate-supporters.html
• BitGive: www.bitgivefoundation.org/donate
• Electronic Frontier Foundation: https://supporters.eff.org/donate
• Free Software Foundation: https://my.fsf.org/donate
• Internet Archive: https://archive.org/donate
• Tor Project: https://donate.torproject.org
• United Way: www.unitedway.org/get-involved/ways-to-give/donate-bitcoin
• The Water Project: https://thewaterproject.org/donate-crypto
• WikiLeaks: https://shop.wikileaks.org/donate
• Wikipedia: https://donate.wikimedia.org/wiki/Ways_to_Give#Cryptocurrency

Gift your cryptocurrency

One use of your freshly mined cryptocurrency that is sure to get friends, family, and other individuals interested in finding out more about blockchains and cryptocurrencies is to have them try it out for themselves. Gifting them some of your cryptocurrency is a great educational tool as it requires them to set up a wallet and to witness a transaction. There is no direct tax benefit to you, the person giving away the cryptocurrency (except that you won’t pay tax on any gains you’ve made by hodling).

But, on the other hand, the person receiving the gift doesn’t have to declare it to the Internal Revenue Service or to pay tax on it, so many people use gifts to pass on wealth to their children. There is something known as the gift tax — above a certain (truly huge) level, the giver has to pay tax on the money given. But in the United States in 2019, that’s anything over $15,000. That is, no tax is due on the first $15,000 gifted during the year. And, in fact, there’s an $11.7 million lifetime exclusion in addition to the $15,000 a year.

Talk to your tax advisor if you’re making enough mining money to consider this. (But before you do, read The Millionaire Next Door [Taylor Trade Publishing]. Author William Danko will probably convince you not to give money to your kids; it really hurts them. Sorry, kids!)

Cryptocurrency market indicators

Market indicators may help you get a feel for where your cryptocurrency’s market is headed. No market metric is a 100 percent predictor, but they are still good resources to use when trying to figure out what’s going on in the market cycle. Here are a few examples of metrics related to Bitcoin.

• Mayer Multiple: The Mayer Multiple, created by Trace Mayer, tracks the current price of Bitcoin in U.S. dollars, divided by the 200-day moving average price (a moving average is one that filters out short-term fluctuations). For example, if the price today is $12,000, and the price over the previous 200 days has been on average $6,000, then the Mayer Multiple is 2. This indicator gives a good relative signal as to when the market has spiked up in price or, inversely, crashed. Higher multiples are warning signs; lower multiples are suggestions that it may be a good time to buy (https://stats.buybitcoinworldwide.com/mayermultiple/).
• NVT ratio: The network value to transactions ratio (NVTr) tracks the dollar value of on-chain cryptocurrency transactions to the relative total network value. It is calculated by dividing the daily average market capitalization (or total market value) in dollars by the amount of daily on-chain transactions in dollars. In other words, it’s a measure of how much transaction activity is going on with the cryptocurrency (see Figure 13-3).

  

• NVT signal: The NVT signal is very similar to the NVT ratio. However, instead of taking the market value and dividing it by the daily on-chain transaction total, it is the 90-day average market value divided by the daily on-chain transaction value (http://charts.woobull.com/bitcoin-nvt-signal).
• Realized market capitalization: A popular metric in the cryptocurrency space is the market capitalization, which is calculated by multiplying the current market price of a cryptocurrency by the total amount of the cryptocurrency in circulation. The realized market capitalization, however, is calculated by adding up the market value of each coin at the time it was last spent as a transaction on the blockchain. This page has a great explanation of how the RMT metric works; look for the link to the actual chart lower on the page: https://coinmetrics.io/realized-capitalization.
• MVRV ratio: The MVRV ratio, or Market Value Realized Value ratio, is calculated by taking the market value or capitalization and dividing it by the realized market value or capitalization. This indicator can help put the market value in perspective to detect over- and undervaluations (http://charts.woobull.com/bitcoin-mvrv-ratio).

Two of the sites we mention in the preceding list — Woodbull Charts (http://charts.woobull.com) and Coin Metrics (https://coinmetrics.io) — have really interesting and potentially useful metrics. Dig around a little and see what you find!

The charts we mention are all for Bitcoin. How about other cryptocurrencies, though? You may still be able to find such metrics for other cryptocurrencies. Coinmetrics, for example, provides them for literally dozens of cryptocurrencies. The chart shown in Figure 13-4 shows an NVT measurement for both BTC (Bitcoin) and VTC (vertcoin). Notice the option boxes at the bottom of the screen? You can add (or remove) cryptocurrencies to (or from) the chart by clicking these boxes, and you can find more choices in the More box at the top left of these three rows. (You can’t retrieve all metrics for all cryptocurrencies.)

Lots of cryptocurrency data and statistics websites can be very useful, helping you put each cryptocurrency in perspective. Here are a few.

• Bitcoin Visuals: https://bitcoinvisuals.com
• Bitcoinity: https://data.bitcoinity.org/markets/volume
• BitInfoCharts: https://bitinfocharts.com/cryptocurrency-charts.html
• Coin Dance: https://coin.dance
• Coin Metrics: https://charts.coinmetrics.io/network-data
• CoinDesk: www.coindesk.com/data
• Crypto51: www.crypto51.app
• How Many Confs: https://howmanyconfs.com

Unfortunately, many of the smaller cryptocurrencies are simply not popular enough for folks to do this type of in-depth study or real-time graphical analysis. Still, watching metrics for other cryptocurrencies can at least give you a feel for the overall market sentiment for cryptocurrencies in general, and often cryptocurrencies do move up or down together.

Where to sell: Cryptocurrency exchanges

If you intend to cash out and exchange your cryptocurrency earnings for local fiat, you should consider cryptocurrency marketplaces and exchanges. Some exchanges have a good track record, some exchanges are risky, and others are outright frauds. Some exchanges ban individuals from certain jurisdictions to avoid complying with laws associated with citizens of certain countries.

Exchanges collect trading fees, which depend on the exchange and the trade being performed, and different exchanges also have different market rates. In other words, selling your cryptocurrency on some exchanges will be more profitable (meaning you’ll get more dollars for your crypto) than on others. How do you tell which is best? Here are a few resources that can help:

• https://data.bitcoinity.org/markets/books/USD provides cool charts comparing ten different exchanges.
• https://en.bitcoin.it/wiki/Comparison_of_exchanges provides a comparison between a couple of dozen exchanges.

Dollar cost averaging your purchases

Assume that you intend to invest $1,200 dollars into an asset such as Bitcoin this year (or stocks, bonds, whatever). You could make that purchase all at once in an attempt to time the buy at a low price, for a relative discount on your trade. However, if you were to dollar cost average that purchase over the course of a year, you would buy periodically — say, once a month. Thus, instead of spending $1,200 right now, you’d spend $100 per month over the entire year.

In bear markets, with a downtrend in price, this strategy is effective as it does not expose your investment to all of the reductions in price. In fact, each time you buy, you’ll be getting the asset at a lower price. However, in bull markets, where the price is trending up, the DCA method would result in lower quantities of the asset being acquired, at overall higher prices.

The best thing to do, of course, is to invest everything at once into the asset at the point at which it’s at its lowest price; but how do you do that? That’s called market timing, and it’s essentially impossible. You may be lucky and pick the market just right, but you won’t be able to do that consistently.

So DCA is a way to spread risk. It’s also a way for you to avoid FOMO (Fear Of Missing Out) investing. Instead of jumping into a market and grabbing a big stake, because you’ve seen the price jump up recently — because you’re scared you’re going to miss a huge opportunity — DCA provides a more disciplined mode of investing, almost set and forget. (Well, you have to remember to make the purchase each month.) On the other hand, some exchanges — such as Coinbase — let you set up automatic periodic purchases.

In fact, it may be argued that what we are really discussing here is known as automatic investing, which is similar to DCA but subtly different. We use the term dollar cost averaging, because that’s the term people commonly use in the cryptocurrency arena (and, actually, in other areas of investing).

DCA works really well in markets that trend down for extended periods and then back up. DCA reduces your losses as the market declines (every time you buy an asset, the asset costs less than the previous time) and increases your profits when the market recovers (because you will have purchased much of the asset at a lower price than an original lump-sum purchase).

Here’s an example. Say that you purchased a single Bitcoin on December 9, 2017. You would have spent around $13,680 (depending on the time of day, of course). During the month of July 2019, your Bitcoin would be worth $10,011. You’ve lost. But say, instead, you dollar cost averaged. Instead of spending $13,680 all at once, you invested $684 on that date and each of the following 19 months. Your Bitcoin would be worth about $18,072.

Of course, the opposite is true during a long period of price appreciation. Each time you buy, you’ll get less Bitcoin than the time before. Had you just invested the lump sum, you’d be much better off. But again, how do you time the market? You pretty much can’t!

The Dollar Cost Averaging Bitcoin website (at https://dcabtc.com) can show you the effects of DCA in the Bitcoin market. You enter a periodic investment sum, an interval (daily, weekly, biweekly, or monthly), and how many years you want to go back in time for a starting point, and the system calculates how much you would have invested, how much your Bitcoin would now be worth, and the profit you would have made.

What does this have to do with cryptocurrency mining? This book is about mining cryptocurrency, not buying it! Well, in effect, cryptocurrency mining is a form of dollar cost averaging cryptocurrency assets (or, as co-author Tyler Bain likes to call it, electricity cost averaging). If you are mining toward a pool, the rewards are steady and predictable. You spend money — for equipment, maintenance, and electricity — and every day or week, you gain more cryptocurrency. Your investment grows slowly over time, just like a DCA strategy.

Cost averaging your exits

For miners and hodlers alike who want to sell their cryptocurrency gains, the DCA approach can also be used to methodically time your exits. The same theory applies: If you intend to sell $1,200 worth of Bitcoin or other cryptocurrencies over a one-year period, instead of making this sale all at once, you can plan to sell $100 dollars of cryptocurrency every month to reduce your exposure to volatility.

However, the inverse is true for DCA sales versus purchases: If the market is trending downward, your DCA strategy will result in less local fiat currency acquired, but if the cryptocurrency market is trending upwards, the DCA method will yield more fiat currency gains. This method of timing is very effective if costs from the mining venture need to be covered.

Custodial exchange risk

Over the history of Bitcoin and other cryptocurrencies, there are many examples of exchanges that have been hacked, lost funds, or closed down due to insolvency, theft by management, or other mismanagement issues. Because of this, it is best to exercise extreme caution and due diligence when selecting an exchange to use.

It is important to not leave funds on exchanges any longer than absolutely necessary, to avoid exchange risk. As cryptographer (and potential Satoshi Nakamoto) Nick Szabo once said, “Trusted third parties are security holes.” Remember, there is a rich history of exchange users losing access to their cryptocurrency funds on exchanges. The mantra in the cryptocurrency space is, “Not your keys, not your cryptocurrency.” Let someone else manage your private keys for you, and you are risking that the manager (the custodian) steals from you or does not protect the keys properly.

But you’re mining, not investing

Mining is very different from investing. Here’s how we see it (but remember, don’t trust us! You need to talk to a tax accountant who understands cryptocurrency and current tax legislation in that area!).

Your mining operation is a business. You put money into it, and out pops cryptocurrency (you hope). The profit you get out is immediately taxable. You’ll want to account for everything in dollars. (The IRS doesn’t have tax forms or tables that run calculations in cryptocurrency!)

Like any business, you have to track expenses: what you spend to buy your equipment, what you pay for electricity, the cost of rent (if your mining operation is in your home, you can deduct part of the cost of your home proportionate to the amount of space taken up by the equipment), and so on. Anything you spend to run your business is a deductible expense. Some of your expenses — sums spent on the mining equipment that has a multi-year life — may be depreciable. That is, instead of deducting the full price of the equipment in the year you spend the money, you may have to deduct a portion over several years. Again, a question for a tax accountant. (The rules are complicated.)

You also have to track your income — that is, the money, valued in dollars, you earn when you receive your cryptocurrency rewards. In other words, for reporting and tax calculation purposes, you have to convert the value of the cryptocurrency, at the time at which you receive it at your blockchain address, into dollars.

Even if you hodl this cryptocurrency, you’ll owe tax on it. Think of it this way. Gold is an asset, and if you buy it and hold it, as long as you hold it, you don’t owe tax on any appreciation in value. But do some work for someone and get paid with a gold coin, and you’ve just earned taxable income. It’s the same with cryptocurrency. If you earn cryptocurrency from a mining operation, you owe tax on the gain you make after deducting mining expenses. Indeed, the Internal Revenue Service has ruled that mining gains are regarded as “gross income” (see Q-8 in www.irs.gov/pub/irs-drop/n-14-21.pdf).

How do you figure out the gain? You take your total cryptocurrency income for the year, valued in dollars at the time you earned the income, and then you deduct all your business expenses. What’s left over is your profit, and your business owes tax on that profit.

What are you living on? Are you taking some of your cryptocurrency gains and converting them to dollars, so you can pay rent and buy groceries? Or even using the cryptocurrency to pay personal (nonbusiness) expenses directly?

Well, depending on your business form (a sole proprietorship, an LLC — limited liability corporation — a C Corporation, or whatever), the money you give yourself or spend on yourself will be regarded as payroll or distribution. It will be a deduction for your business, but taxable to you.

Okay, this can get complicated, and our goal is not to teach Taxation 101. Some forms of business structure — such as the sole proprietorship or LLC — treat you and your business as a single entity for taxation purposes. So if you give yourself money or spend money on yourself, it’s not a deduction to your business because your business is you. You simply don’t use those expenditures when calculating your deductions.

It gets complicated

Did we mention it gets complicated? Did we say that a lot of this is unclear right now? Perhaps we mentioned you should talk to a crypto-knowledgeable tax accountant?

What happens if you hodl? Say that you mine DummiesCoin, and it’s worth, say, $1,000 at the point it’s mined. But you don’t sell it, you hodl it — keep possession of your mined cryptocurrency rewards as an investment, with the expectation that eventually the value will increase, as we discuss earlier in this chapter. So, by the end of the year, the value is $2,000. Do you regard $1,000 as the taxable income, or $2,000?

Well, most likely (see what your accountant says!), you’ll file your taxes using $1,000 as the income from that block that you mined. But you’ll now have an asset on the books with a basis of $1,000. In effect, you have purchased that DummiesCoin for the $1,000 original price (that you paid tax on). Say that a year later, you sell the coin for $3,000; you’ll owe tax on the difference between the $1,000 you “paid” for it, and the $3,000 you sold it for. You’ll owe tax on $2,000.

You really need to track your cryptocurrency basis — that is, the original cost to you if you purchased it, or, if you mined it, the dollar value at the time it was mined. You also need to track the value when you disposed of the cryptocurrency; this is the amount you received in dollars when converting it to dollars, or the dollar value of the product or service you purchased when you made a purchase with cryptocurrency. All this can get, well, complicated. You need help, and we can provide a little for you with the following resources, a selection of systems for tracking the numbers and tax firms that specialize in cryptocurrency accounting.

• BitcoinTaxes: https://bitcoin.tax
• Crypto Tax Girl: https://cryptotaxgirl.com
• CryptoFolio: https://cryptfolio.com/tax
• CryptoTrader.Tax: https://cryptotrader.tax
• TokenTax: https://tokentax.co
• ZenLedger: www.zenledger.io

Do not overextend

It is important to not overextend if you plan on scaling up your mine. If you grow your mining operation too quickly, you can evaporate any savings you have in local fiat currency, which would force you to liquidate mining returns to cover mining costs.

In Chapter 6, we cover the cryptocurrency mining death spiral. We discuss how cryptocurrency systems themselves are immune to the mining death spiral because of regularly scheduled block difficulty adjustments that ensure block rate production is kept steady over the long term.

Individual miners, however, are still exposed to the mining death spiral. If the exchange market prices of cryptocurrencies fall significantly enough over the short term, your mine may very well lose profitability, forcing you to shut down if you cannot afford your mining expenses. Overextend your mining operation, and you won’t be able to continue to hodl your cryptocurrency rewards.

If you do intend to grow your mine, make sure you have plenty of funding to cover normal expenses in the case of a cryptocurrency market downturn. The best financial experts recommend that small businesses keep about three to six months of operating expenses on hand to cover expenditures in case of unforeseen market conditions.

However, in Bitcoin and cryptocurrency markets, the longest downturns have lasted up to 36 months! In extreme cases such as these, even the most profitable mining businesses are forced to rethink their operation and potentially make drastic changes.

Milestones to meet before you reinvest

Successful businesses, including cryptocurrency mining ventures, have set financial goals and long-range plans to make sure they will survive ongoing market conditions. Some miners measure their returns in the underlying cryptocurrency they are mining, while others measure it in their local fiat currency. There is some confusion in this area among many miners. Many don’t like to think in terms of fiat currency. This harks back to the crypto anarchist roots of cryptocurrency, the idea that fiat currency is bad because it comes from the state, and that it will ultimately be replaced by cryptocurrency created and managed by the masses. This is a big mistake!

Any asset only has value in comparison with something else! You might say, “I own ten DummyCoin,” and we can ask, “Well, what’s it worth?” What would you answer? “It’s worth ten DummyCoin”? That just doesn’t make any sense, any more than asking someone how much an orange is worth and being told it’s worth one orange!

“What’s it worth?” means “What can you get for it?” How many pizzas could you buy with it, how many oranges could you get, could you buy a car with it? Or, to make things much, much, simpler: How many dollars is it worth?

So nothing has a value in isolation. You can compare it to apples, or oranges, or gold, or fiat. But one way or the other, cryptocurrency has some kind of value, which can be measured in units of some other thing, not in terms of itself.

Sure, you could convert your mining rewards into the number of oranges it could buy, but what’s the point? Why not just use the most common medium of exchange in your country: your country’s fiat currency!

If you measure your results purely in how many coins you mine, you have no real idea whether your mining operation makes sense. Even if your goal is to accumulate a particular cryptocurrency that you just know is going to be worth, one day, ten times what it costs you to mine it, you still need to understand the numbers in terms of fiat currency. After all, if you don’t, you have no idea if you are spending more money to mine the cryptocurrency than you would spend to buy it.

So the most important metric you are watching should be profit or loss, based on fiat currency. Without knowing whether or not you are making money, it’s hard to make any rational decisions about expansion.

On the other hand, perhaps this is just a hobby or cool experiment for you, and your goal is to find out about, and become proficient at, cryptocurrency mining and the cryptocurrency space in general. Or maybe it’s an ideological statement; you are a crypto anarchist, or crypto libertarian, and want to see cryptocurrency succeed, and thus want to be involved. That’s fine. Your goals may be different in that case.

Or maybe you’re not so ideological, but you still believe in the future of the currency you mine, and cryptocurrency in general, and want to help support and secure the blockchain (if only because it holds some of your wealth!).

Some miners believe in what the cryptocurrency community is trying to accomplish, and thus are willing to mine at a fiat-loss for a short period, knowing they are supporting the blockchain and still accumulating cryptocurrency (which, they believe, will increase in value).

And, well, let’s be honest here. There are also miners who are mining so that the cryptocurrency they earn is anonymous. If you purchase cryptocurrency from an exchange in the United States, the exchange has a record of that transaction and who you are. If you solo mine a cryptocurrency, nobody but you has a record of who you are. (This isn’t true of pool mining.)

So there may be other reasons to continue mining, other metrics to consider. But from a business standpoint, you must know if you are making money or losing money, and how much either way. If you don’t, you can’t make a rational decision regarding expansion. (And even if you are mining for some other purpose, you can’t fully understand your operation until you look at the numbers in terms of fiat. Or oranges if you prefer, but fiat will be much easier.)

Decide your goals prior to setting out on your mining adventure, and check back on them periodically. How much profit is sufficient, in relation to the investment you are making in time and money, for example?

And what would the effect of expansion be? Consider, for example, that doubling a small cryptomine will cost money for the equipment, but won’t take much more of your time. You’ll have to spend time to set up all the equipment, of course (though that should be much faster the second time), but it won’t take much more of your time to watch over your additional equipment and keep it running. So, as far as your time input goes, there is a huge economy of scale in cryptomining. That is, as your mine gets larger, the amount of time contributed to earn each dollar declines dramatically.

Planning your expansion

Mining equipment has improved dramatically over the last decade. Hash rate output per rig has skyrocketed into the many trillions of hashes per second, and hashing efficiency has also increased, drastically reducing power consumption and doing more proof of work for less electrical cost.

This translates into easier deployment of staggering amounts of computational power. If you are planning to expand your cryptocurrency mining operation, you can do it with much less equipment and overhead compared to even a couple of years ago. Also, if your cryptocurrency mine is on the older side — say, two to five years (about the lifespan of an ASIC mining rig) — you may be able to simply replace your aging mining rigs with new state-of-the-art equipment and drastically increase your overall hashing capability.

But all this gear is expensive. “Is it worth expanding?” is a question that can only be answered by very careful calculations. Cryptocurrency mining is, after all, the consummate numbers game. It’s all about dollars to buy equipment, the cost of the electricity to run it, the number of hashes the equipment outputs, the number of hashes the entire network outputs, the block time, and on and on. Mining for a while will give you a baseline to work with, but spending hours with a spreadsheet (or online calculations discussed in Chapter 11) is the only way you can predict what an expansion may do for you, and even then, it is only a prediction.

But remember, if you’d like to grow your operation from its current hobbyist deployment, you can take various different routes (which we discuss in Chapter 9), such as colocation hosting facilities, hash-rate marketplaces (in which thousands of people with hashing power sell that power to thousands of people who want to mine without the hassle of setting up equipment), or even cloud-mining companies, in which individuals buy hash power from the company itself.

When expanding, be careful to not overextend, to plan thoughtful objectives and goals, and to maintain adequate cash reserves to cover multiple months of mining expenditures in case of market downturns or times of increased volatility.