Three things you need to know about Bitmain’s IPO

According to industry sources, Bitmain – the giant behind an estimated 80% of all cryptocurrency mining equipment in existence – is mulling a Hong Kong-based Initial Public Offering (IPO).

For the uninitiated, an Initial Public Offering – the first sale of a stock issued by a company to the general public – marks the transition where a ‘private’ company becomes a ‘public’ one.

When a company goes ‘public’, it gains the potential of drawing in thousands of new investors (and subsequently, new capital), and can more easily facilitate acquisitions and mergers through issuing stock. However, this is weighted against regulations which ensure that public firms account to a strict set of legal procedures, form a visible board of directors, and are beholden to financial regulators.

Given Bitmain’s large footprint, the news that the company – under its CEO and co-founder Jihan Wu – could go public has set tongues wagging in numerous circles.

$3 billion USD: The IPO that could be

While no official figures have yet been published by Bitmain nor Wu, early reports indicate that Bitmain could seek to raise as much as $3 billion USD to $18 billion USD through its IPO, and the company might file a listing application with the Hong Kong stock exchange in September this year.

The company is reportedly valued at around $15 billion USD, though no official valuation has yet been given. The company is believed to have brought in $2.5 billion USD in revenue in 2017 through both sales of mining equipment and its involvement with several mining pools.

The company will be set to compete with Canaan Inc – which has similarly filed for a $1 billion USD IPO in Hong Kong – and further with Ebang International Holdings.

Bitmain reportedly unloaded its Bitcoin in favor of Bitcoin Cash

In a leaked dossier that apparently depicts pre-IPO information, Bitmain revealed that it had sold most of its Bitcoin in favor of Bitcoin Cash.

In a purported slide, Bitmain apparently disclosed that it owned some 22,082 BTC in January of 2018 (down from 71,560 BTC in December of 2017) and carried some 1,021,316 BCH (up from 841,866 BCH in the same time period).

Commentators on Twitter have noted that the company may be proceeding with an IPO in an attempt to offset its losses throughout 2018’s ongoing bear market.

Source: Bitcoin Magazine

In a popular thread by Vijay Boyapati, communities debated the allegation that Bitmain had sought to prop up Bitcoin Cash as a company-controlled alternative to Bitcoin, and, as a result, was now forced to obtain other means of funding as the deal soured.

Should Bitmain elect (or be forced to) dispense with its Bitcoin Cash holdings at any stage, the company could ultimately shake cryptocurrency markets by selling as much as 5% of the cryptocurrency – potentially pushing the digital currency into all-time lows.

Bitmain may branch out into other sectors

In more positive news, an IPO might propel Bitmain into new industries.

In an interview with Bloomberg in May, Wu quipped that the next phase of the company would involve “advancing our technology beyond what we’ve already achieved” – and it remains to be seen as to where Bitmain itself might head once public.

The company might square off more closely against Canaan Inc, which itself has committed to developing silicon chipsets applied to both artificial intelligence and cryptocurrency mining.

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How the biggest proof-of-work algorithms for cryptocurrencies compare

Not all coins are created equal.

Some cryptocurrencies require the equivalent of hours of computing time and energy to mine, while others are produced in a matter of minutes.

The term “mining” in cryptocurrencies refers to a collection of techniques to validate transactions known as proof of work (PoW). This is when a computer performs many calculations to try and solve a mathematical puzzle.

These puzzles use are typically based on cryptographic hash functions, which are designed to be one-way. The nature of these functions is exploited so that a miner must make many millions or even trillions of guesses per second to find a solution. It is then usually possible for any other computer to easily check that the solution is true.

In the case of distributed ledger systems like Bitcoin, other computers on the network can easily check someone else’s calculation, and must then build upon it to generate solutions for the next block of transactions.

Each block of transactions is its own mathematically difficult puzzle to solve, and becomes part of the puzzle for the next block of transactions, creating a chain. Hence the term “blockchain”.

By building the next block of transactions on one which came before, a network is able to come to a consensus of which transactions are valid. Proof-of-work algorithms are therefore also referred to as a consensus mechanism.

Other examples of consensus mechanisms is proof-of-stake and Istanbul Byzantine Fault Tolerance, but this article is only going to look only at proof-of-work algorithms, and how they compare.

Among the factors mentioned below will be resistance to mining hardware based on application specific integrated circuits (ASICs).

Application-specific integrated circuits, as the name implies, are chips designed for a specific use, as opposed to general-purpose computers. In the case of blockchains, they are chips designed to perform the calculations of a particular proof-of-work algorithm as efficiently as possible.

Criticism of ASICs is that they are expensive and make it difficult for people to participate in mining a blockchain without a significant capital investment. They also skew the ability mine a particular coin in favour of companies who can develop their own ASICs.

While some mining algorithms are designed with ASIC resistance in mind, it is worth keeping in mind the comments the lead developer of Sia made earlier this year: “At the end of the day, you will always be able to create custom hardware that can outperform general purpose hardware.”

SHA–256 — Bitcoin, Bitcoin Cash

What better place to start with a comparison of algorithms than where the cryptocurrency craze all began — Bitcoin.

The Secure Hash Algorithms are a family of cryptographic hashing functions published by the National Institute of Standards and Technology.

Short for Secure Hash Algorithm, the first variants of the SHA family, SHA–0, SHA–1 and SHA–2, were developed by the U.S. National Security Agency. SHA–256 and its bigger brother, SHA–512, are part of the SHA–2 family.

SHA–256 is not designed to be ASIC resistant, and ASICs to mine Bitcoin are readily available.

Scrypt — Litecoin, Dogecoin, Neo

Scrypt was designed to make it more difficult for specialised hardware like ASICs to be used to crack passwords that were hashed using the algorithm.

It did this by using a large amount of memory compared to similar functions, making it more expensive for an attacker to target.

However ASIC-based miners for cryptocurrencies which use Scrypt, like Litecoin, have been available since at least 2014.

Ethash — Ethereum, Ethereum Classic

Ethereum’s proof-of-work algorithm is a modified version of Dagger-Hashimoto, which was designed to be memory hard and ASIC resistant.

This means it tends to favour graphics cards with higher memory bandwidth, and has been the domain of people who want to mine a cryptocurrency with standard computer hardware (like high-end graphics cards) rather than specialised components.

Bitmain has produced a specialised Ethereum miner, but the creator of the platform, Vitalik Buterin, surmises that the “ASIC” is just an optimised regular computer with non-essential components stripped out.

Equihash — Zcash, ZenCash, Bitcoin Gold

Similar to Ethereum, the developers of Zcash created a memory-oriented proof-of-work algorithm for their cryptocurrency to make it ASIC resistant.

It uses Blake2b in the proof-of-work, and as a key-derivation function.

Bitmain has sold ASICs for Equihash, defeating its originally stated goal of democratising mining, rather than having it limited to only those who could afford specialised gear.

Blake, Blake2, and Blake2b — Siacoin, Decred

Blake was an entry into the competition by the U.S. National Institute of Standards and Technology for a new SHA algorithm to complement its older SHA-1 and SHA-2 standards.

It made it to the final round, but ultimately lost to Keccak.

The algorithm is fast, and was not designed specifically with resistance to ASIC mining in mind.

Bitmain has released as ASIC miner for Blake2b-based coins. The developers of Siacoin themselves also launched an ASIC project called Obelisk about a year ago, and reported in detail about their findings of the state of the mining space.

Keccak — SmartCash, MaxCoin

Keccak won a competition in 2012 to become SHA–3, the next variant of the Secure Hash Algorithms family.

It proved to be faster than all other entrants to the competition, and faster than SHA–2 and SHA–1.

While Keccak was not designed to resist ASIC mining, it was built to resist cryptanalysis and brute-force attacks with specialised hardware like ASICs.

Keccak is therefore currently considered ASIC resistant, and there are no ASICs on the open market which target the algorithm.

CryptoNight — Monero, Bytecoin

CryptoNight was designed to be ASIC-resistant, and accessible. The aim was to close the gap between miners who only have access to consumer CPUs and can’t afford hardware like graphics cards and ASICs.

This is to foster more egalitarian mining, and greater decentralisation.

However, Bitmain announced in March that it developed an ASIC for the algorithm and was going to sell a specialised miner called the Antminer X3.

In response, the developers of Monero announced an emergency fork to update its hashing algorithm. They also announced that they will be forking Monero twice a year to try and ensure that it remains ASIC resistant for as long as possible.

X11 — Dash

X11 is an algorithm originally built for Dash which uses multiple rounds of 11 different hashes: Blake, BMW, Groestl, JH, Keccak, Skein, Luffa, Cubehash, Shavite, SIMD, Echo.

It was not designed to be ASIC resistant, and ASICs for X11 are available from several manufacturers including Bitmain, Baikal, iBelink, Innosilicon, and Pinidea.

Variants of this idea—in the form of X13, X15 and X17—are used by several other cryptocurrencies.

Multi-algorithm coins — Verge, Myriad

Where X11 uses multiple rounds of a number of different hashing algorithms to mine a coin, there are also coins which allow many different algorithms to be used to mine them.

The aim is to allow CPU, GPU, and ASIC miners a fair opportunity to mine the coin, and enhance the security of the cryptocurrency.

Essentially, multi-algorthm cryptocurrencies adjust the difficulty of mining their tokens for each algorithm independently to prevent one algorithm from becoming dominant.

In theory, this should also make “51% attacks” more difficult. Such attacks are possible when one person or group control the majority of the hashing power for a coin, allowing them to rewrite the blockchain as they see fit.

Verge supports Scrypt, X17, Lyra2rev2, Myr-Groestl, and Blake2s.

Myriad supports SHA256-D, Scrypt, Myr-Groestl, Skein, and Yescrypt.

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Ethereum mining is changing. What is your action plan?

Between March and April last year a sudden rise in the price of Ethereum sparked the equivalent of a crypto gold rush. After Googling how to build a computer with six graphics cards and doing a quick return-on-investment calculation, people started buying up powerful GPUs en masse.

If you ran the numbers on sites like CryptoCompare and WhatToMine, the result was that you would make the money back you spent on your mining rig within a few months. From there on, everything you mined would be clean profit.

Those who jumped in and were able to secure hardware quickly managed to achieve good returns before reality set in. However, those who ran afoul of the graphics card stock shortages caused by the rush and only got hardware in May or June, soon found that their earliest return on investment would be in a year.

What many of these gold rush miners didn’t know that they didn’t know about Ethereum was that—like most proof-of-work distributed ledger systems—it has a built-in mechanism to increase the difficulty of mining depending on the amount of computational power on the network.

Referred to as your hash rate, or hash power when you’re talking about the whole network, your mining rig’s effectiveness is measured in the number of solutions it can produce to mathematical problem Ethereum requires that miners solve to validate transactions on the network.

Ethereum attempts to adjust its mining difficulty so that, on average, one block is produced by the network every 12 seconds. (In reality, the average block time is currently between 14 and 15 seconds.)

Another factor budding Ethereum miners didn’t take into account when they bought their hardware was the directed acyclic graph (DAG) file the network generates every 30,000 blocks.

The larger the DAG gets, the slower the hash rate of your graphics cards becomes. While the DAG affects all miners on the platform, it impacts some graphics cards more than others as it reaches certain size thresholds.

The Ethereum Ice Age

One thing any half-informed Ethereum miner knew was coming is the platform’s move away from using Ethash, the modified Dagger-Hashimoto proof-of-work consensus mechanism it has been using so far.

Ethereum’s developers are working on a proof-of-stake system called Casper which will not only be more energy-efficient, but, according to the project’s co-founder Vitalik Buterin, also hopefully make it easier to defend the integrity of the system than it would be to attack it.

To “encourage” the switch to proof-of-stake, Ethereum’s developers have built a difficulty bomb into the platform, which will be activated when Casper is ready.

ASICs for GPU-focused algorithms

Another concern for miners who may not have made back their returns, or who do not want to retire their mining rigs just yet, is that specialised hardware for algorithms which used to favour graphics cards is starting to appear.

These specialised miners use a technology called Application-specific integrated circuits (ASICs) which are chips designed for a specific use, as opposed to general-purpose computers.

Outside of the world of cryptocurrencies, examples of ASICs might be chips used in satellites and the transceivers used in cell phones for wireless connectivity.

Algorithms like Ethash, and those used by coins like Zcash (Equihash) and Monero (CryptoNight) were designed to be ASIC-resistant, but manufacturers appear to have found a way to build hardware that could make GPU miners obsolete.

The world’s biggest cryptocurrency ASIC manufacturer, Bitmain, has produced ASICs for Ethash, Equihash, and CryptoNight, causing concern among GPU miners.

While Buterin indicated that he is not too concerned about Bitmain’s Ethash miner, Monero’s developers responded with a plan to maintain the coin’s ASIC-resistance.

Monero forked its blockchain and updated the version of CryptoNight it uses to make Bitmain’s miner useless for mining its coin. It also announced a plan to update its algorithm twice a year to try and make it difficult for ASIC developers.

However, this may only be delaying the inevitable.

Sia’s lead developer, David Vorick, recently wrote in a post summarising the state of cryptocurrency mining and said that ASIC manufacturers will always be able to create custom hardware that can outperform general purpose hardware.

Vorick also predicted that ASIC makers will come up with ways to ensure that their miners can adapt to remain effective even if blockchains decide to fork to try and maintain their ASIC-resistance.

Monero’s lead developer, Riccardo Spagni, agreed with Vorick’s assessment, saying that maintaining Monero’s anti-ASIC stance is unworkable long-term.

Spagni said that they are basically just going to stall for time until the ASICs for some algorithm have been commoditized.

He clarified in a later tweet: “I consider ASICs sufficiently commoditized when they’re giving them out as swag at conferences.”

Where does this leave Ethereum miners?

Where does this leave Ethereum miners specifically, and GPU miners in general?

Effectively we have two choices:

  1. Dismantle your miners, build a sweet gaming PC or two and sell the card you won’t be using.
  2. Keep mining until ASICs take over.

If you choose to keep mining, you will need to select a new coin to mine when Ethereum makes the switch to proof-of-stake.

Depending on which graphics cards you have, Equihash-based cryptocurrencies like Zcash or coins using the updated CryptoNight algorithm like Monero may be a good place to start looking. You could also continue to mine Ethereum Classic after Ethereum switches to Casper.

Those who are willing to shoulder more risk can instead use their hash power on promising coins that are easier to mine. If you’re lucky, the coin might see a hundred-fold surge in price like Ethereum did and make you rich. However, it could also end up going nowhere and leave you in the red.

For those who don’t want to place bets on what the next big crypto will be, you can use multi-algorithm software like Nicehash to help you mine whatever is most profitable at any given time.

There are other options for multipool mining, such as MultiPoolMiner and Awesome Miner, but Nicehash has provided us with the best results, despite its hack last year. Nicehash has agreed to repay all money lost due to the hack in instalments, and five waves of reimbursements already made.

Unlike systems where you mine coins from a pool directly and automatically convert them to a coin of your choosing, Nicehash allows people to buy mining power from its distributed pool of miners, then pays those miners a share based on the work they contributed.

For now that is what I am using, as it is a great way to get relatively consistent returns.

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How to mine cryptocurrencies: What you need to know

So you want to try your hand at minting crypto tokens.

If you’re in this for the profits, stop right now. Unless you’re willing to risk a lot of money and swim with the big fish, you need to first resign yourself to the possibility that you might not even make back what you paid for your mining hardware.

Why would you want to mine then? That’s a question you’ll have to answer for yourself. Perhaps you want to gain a better understanding of how mining works—there is no better way than by doing. Or maybe you feel buying a GPU miner is a lower risk entry into cryptocurrencies than simply dropping the $4,000 to $7,000 on tokens—you can always sell the graphics cards if everything goes to zero.

Mining and hashes

“Mining” in the context of cryptocurrencies usually refers to offering your computer resources to help verify transactions in a distributed ledger.

In a system based on a proof-of-work algorithm like Bitcoin, Ethereum, and Zcash, computers solve difficult mathematical problems designed to require them to guess answers until they find the right one.

This is usually through a hashing function of some kind, with the algorithm specifying what solutions should look like to be valid. The speed with which your mining rig is able to calculate solutions is therefore often measured in hashes per second.

SI unit prefixes like kilo (k) and mega (M) are used for faster speeds, so kH/s is a thousand solutions per second, and MH/s is a million solutions per second.

Different distributed ledgers may use the same hashing algorithm. Ethereum and Ethereum classic use Ethash, while Zcash and Bitcoin Private use Equihash.

Choosing a coin

Before you can begin mining, you have to decide which coin, or coins you want to look into. This will help you decide what kind of hardware to buy and potentially eliminate certain components if you are electing to build a GPU mining machine.

The coins you select will generally determine whether you need to look at mining with graphics cards, or an application-specific integrated circuit (ASIC).

Bitmain is a major supplier of ASIC hardware. While it does have competitors in companies like Baikal, Taimine, Bitfury, Ebang, and Canaan, the Antminer hardware from Bitmain is always in high demand.

Antminers are typically released in batches, with the company taking a set number of orders at certain times on the day of release to give all timezones a chance to order units.

If you want to mine Bitcoin, Litecoin, or Dash, you have to buy an ASIC-based machine to stand any chance of making a profit.

Algorithms like Equihash and Ethash, as well as the CryptoNight used by Monero were designed to be ASIC resistant. However, Bitmain has released specialised hardware for these algorithms, causing an uproar in their respective communities.

It released the Antminer Z9 for Equihash-based coins, the Antminer E3 for Ethash, and the Antminer X3 for CryptoNight.

Monero’s community responded by voting for a change to CryptoNight that would ensure it remains resistant to Bitmain’s ASICs.

Before buying an ASIC, ensure you are up-to-date on all the technical, political, and principle discussions happening around the coin you plan on mining with it.

This advice applies to any kind of mining rig, but if a coin like Monero forks to maintain ASIC resistance and you’ve bought an Antminer X3, there is nothing you can do with it other than try and mine other CryptoNight coins which have not forked.

At least with a GPU rig, if everything goes wrong you can still build sweet gaming machines from the graphics cards.

Is the gold rush over? A look into cryptocurrency mining

Buying the hardware

If you have decided to get a GPU-based mining rig, the fun is only starting.

Are you going to get one with AMD or Nvidia graphics cards? Which graphics card models are you going to buy? Are you going to build it or get someone to build it for you?

Here, a website like WhatToMine can be handy to get a general idea of what a graphics card might be capable of, though you should not accept its results as gospel. The hashes per second values it has on file for graphics cards running particular algorithms are no longer current.

A general guideline you can work according to is that Nvidia graphics cards tend to offer better speed and greater energy efficiency, but are more expensive than AMD cards. As a result of their lower cost, AMD cards tend to offer faster return on investment and are popular among miners.

There are exceptions to this principle, especially with respect to the Nvidia GTX 1080 cards, which are not great for mining on the Ethereum network.

On paper this is not obvious, as the GTX 1080 has 10GHz of memory bandwidth. Ethash benefits from higher memory bandwidth, so one might expect the GTX 1080 to perform really well.

However, Nvidia used GDDR5X memory on the GTX 1080, and because of the way it is implemented mining software can only use half of the available bandwidth at a time. A tool released a few weeks ago called “OhGodAnETHlargementPill” appears to fix this problem. Its source code is not available, so use it at your own risk.

Running the software

Now that you’ve decided which graphics cards to buy, and whether to try and build the rig yourself or have someone else put it together for you, it’s time to choose your software stack.

Your miner can run on either Windows or Linux, and a host of different mining tools are available to choose from. I’ve found that running Windows tends to offer the greatest flexibility, as not all tools are available on Linux.

If you plan on mining ether, you should look at Claymore’s excellent dual miner. I’ve found that it delivers higher hashrates, though other miners say they achieve equivalent speeds using the standard ethminer tool.

With Claymore you also have the option of sacrificing a few megahashes of Ethereum mining power to mine another alt-coin like Decred, Siacoin, LBRY, and PascalCoin.

If you want to try mining Equihash-based tokens, you can use Claymore’s miner for AMD cards, or dstm’s miner for Nvidia cards.

For mining Monero there is information on xmr-stak.com regarding the kind of performance you can expect from certain graphics cards. Mining tools that have been updated to Monero’s new CryptoNightV7 algorithm include XMRigCast XMR, and xmr-stak.

Mining pools

Once you have selected your mining software, you should select a mining pool. Trying to mine solo unless you control significant hashing power will not be profitable.

Here I can only recommend what I’ve tried. Ethermine has been an excellent mining pool for Ethereum, while Suprnova has worked well for other coins I’ve wanted to try.

If you would like to cover your software and pool selection together, you can consider multi-algorithm pools. These pools allow you to automatically switch between algorithms depending on which is most profitable at any given time.

The simplest of these to set up is Nicehash.

Nicehash works differently from standard mining because you aren’t mining a particular coin and then selling it for profit. Instead you become part of Nicehash’s distributed pool of miners which people can buy access to. You are then paid in bitcoin to mine a particular algorithm on behalf of a buyer.

It offers its own software and collection of tools which allows you to benchmark many different algorithms and mining tools from several developers, and then automatically selects the best one.

While Nicehash was the victim of a hack at the end of last year which saw its security breached and the content of its wallet stolen, the company has promised its clients that it will repay all lost funds. To-date it has repaid 35% of the funds stolen.

If you would like to try Nicehash, it is possible to configure it to make payments to an external Bitcoin wallet so that any risk to your earnings is minimal.

Mining eyes-open

Before spending money on a mining rig, ensure that you know what you’re letting yourself in for.

Mining hardware uses a large amount of electricity and can significantly increase your utility bill, depending on how much you are charged per kilowatt-hour.

To break even you will therefore have to cover your running costs (electricity) and still make a decent profit to put towards paying off your new rig.

Certain power supplies can also be very noisy. In a small home this can be quite disruptive. As an alternative you may wish to consider is a dual power-supply unit configuration which tend to run quieter.

Running your own mining hardware gives you an understanding and appreciation for an aspect of distributed ledger technologies few people are exposed to. It is expensive to get started and there are no guarantees, but it is instructive.

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Nvidia predicts major decline for second quarter sales

Nvidia Corp has revealed how much income was generated from the company’s chip sales to the cryptocurrency market and expects that the amount will take a dip in the second quarter of the year.

According to reports from Bloomberg, the American graphics processing units (GPUs) producer declared that the demand from cryptocurrency miners in the first quarter was greater than anticipated and the revenue has translated into $289 million (when they had expected that it would be closer to $200 million USD) but the company expects that sales will fall by approximately two thirds in the current quarter.

Jensen Huang, Nvidia’s CEO, said that the company was able to succeed in owing to a higher demand for GPUs from the cryptocurrency miners which resulted in the higher prices and the boosted figures. He claimed that crypto miners “bought a lot of our GPUs in the quarter and it drove prices up” and also said that high the prices were an obstruction to the purchases of other consumers – for example, gamers – from investing in features such as the latest GeForce graphics card series – which might further skew the statistics.

The company’s report shows that Nvidia’s first-quarter sales for cryptocurrency are over 9% of total revenue which was an impressive $3.2 billion USD.

Other stats from the report from Bloomberg show that chips for cryptocurrency mining were a total of 76% of Original Equipment Manufacturer (components which are produced by one company and then marketed by another) income, which was an increase of 115% from the previous quarter. Although hash rates in cryptocurrency mining have continued to grow which signifies a continued increase in the global mining pool, there was a drop in revenue for everyone when cryptocurrency markets experienced a massive adjustment after December’s record highs.

Meanwhile, Nvidia’s largest competitor AMD published last month that they had also generated a high figure – 10% – of all sales from sales related to cryptocurrency and blockchain technology. Lisa Su, AMD’s CEO said that they think that they “have a very good idea of what people are using [their] products for. It’s a nice growth factor [blockchain or mining], but it’s certainly not the dominant growth factor in [their] story.”

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Is the gold rush over? A look into cryptocurrency mining

Interest in cryptocurrency mining seems to rise and fall with the market. Between March and April last year, when Ethereum’s token saw its sudden rise from around $10 to over $300, it triggered a gold rush. Ether miners were making unbelievable returns, paying off their hardware in a few months or less and pocketing huge profits.

What made Ether mining even more attractive to the tech-savvy was that it didn’t require specialised hardware. Trying to mine Bitcoin without an application-specific integrated circuit (ASIC) specifically designed for the purpose is a fool’s errand. ASIC-based miners are incredibly expensive, and have no use outside of mining.

Ethereum was a different animal, designed to resist ASIC mining and favour the use of graphics processors. A new wave of digital prospectors started buying up graphics cards, tweaking them in ways the usually gaming-focused hardware makers could not have anticipated—minimizing power draw, while maximizing memory bandwidth.

The rush caused a global shortage of high-end graphics cards, driving up the prices and angering gaming enthusiasts who had no interest in mining. Now a bit more than a year later, as the craze has started to subside, stock is more readily available and prices are returning to sane levels.

As with any gold rush, those who got in early enough made good money. Those who got in later—like me—either lost money or are still hoping that prices will rise enough as to pay off the original investment.

Ethereum’s proof-of-work algorithm

What many people rushing into ether mining did not realize was that Ethereum is transitioning from a proof-of-work system, to proof-of-stake.

Blockchains use proof-of-work and proof-of-stake algorithms to decentralize the processing and securing of transactions.

Proof-of-work is the more technical term for what is commonly called “mining” in the context of cryptos. In the simplest terms, that is when you get a computer to perform many millions of calculations, and are rewarded for being first to find the solution to a specific problem.

The basic idea is that finding solutions in a particular proof-of-work algorithm is difficult, requiring that you guess millions of combinations to discover one. Verification of the solutions, on the other hand, must be trivially easy and cheap.

In reality, unless you have massive amounts of computing power under your control, you shouldn’t be mining on your own. Individual miners group together in communities called pools, with each using an algorithm of its choosing to divide rewards amongst participants in the way it deems fair.

Proof-of-stake is a different form of verifying transactions that depends on a validator’s investment in the platform. In general, it requires that validators vote on the next block, with the weight of their vote linked to the amount of currency they lock into a deposit.

Both types of algorithm have benefits and drawbacks, including vulnerabilities that must be considered when developing a blockchain system.

Increasing difficulty

Proof-of-work algorithms typically have a mechanism built in to scale the difficulty of finding solutions based on how many miners are active on the network. Ethereum attempts to adjust its difficulty so that, on average, one block is produced by the network every 12 seconds. (In reality, the average block time is currently between 14 and 15 seconds.)

A feature of the Ethereum proof-of-work algorithm called the directed acyclic graph (DAG) is also constantly decreasing the effective speed with which your hardware finds solutions. The DAG is a file that is generated every 30,000 blocks, and the larger it gets, the slower graphics cards are able to generate solutions to the proof-of-work problem.

The DAG affects all miners on the platform, so it should not impact your relative earnings as much as the network-level difficulty adjustment. However, the DAG does slowly decrease your effective hash rate, and that is worth keeping in mind when consulting sites like WhatToMine.

For example, I operate a rig with six Radeon RX580 graphics cards (4GB variants), which WhatToMine claims can achieve 181.2 megahashes per second. Hashes are solutions to the proof-of-work problem, so that means 181.2 million solutions per second. Under that assumption, Ethereum is the most profitable coin to mine for my rig.

However, thanks to the difficulty adjustments on the Ethereum network my rig now gets below 100MH/s. Adjusting the values in WhatToMine yields an entirely different list of most profitable coins and algorithms to mine. For my rig it would be Monero, or coins based on the Neoscrypt or Equihash algorithms, like Zcash.

Profitability

When you just want to get paid and aren’t too concerned about which algorithm you are mining, so long as it is the most profitable, a multipool system can be useful.

As the mining difficulty on Ethereum increased, we switched our rig over to Nicehash. It switches between the most profitable algorithms automatically and pays you for the work in bitcoin.

There are other options for multipool mining, such as MultiPoolMiner and Awesome Miner, but Nicehash gave us the best result at the time. Unlike systems where you mine coins from a pool directly and automatically convert them to a coin of your choosing, Nicehash allows people to buy mining power from its distributed pool of miners, then pays those miners a share based on the work they contributed.

Just under a year ago I started mining with two rigs—one I put together on my own, and the other we bought from a local company that specializes in mining hardware. Both rigs run with six graphics cards: Radeon RX 580 in the one, GeForce GTX 1080 in the other.

We went in eyes-open with respect to Ethereum’s difficulty increases and potential move to proof-of-stake, deciding to run the rigs as an experiment. Most of us are gamers, so if the mining becomes unprofitable we would be able to use the graphics cards to build sweet gaming machines and write off whatever capital losses we couldn’t recover.

There have been some hiccups along the way, including Nicehash getting hacked. Nicehash has agreed to repay all money lost in installments, and four waves of repayments already made.

Even if both rigs had been mining optimally since July and we somehow sold all our tokens at the historical highs achieved in December, and taking into account the money lost during the Nicehash hack, neither of our rigs would have paid themselves off yet.

Based on current exchange rates, we are still earning more money than we are paying in electricity, but the return on investment period for a mining rig is not nearly as short as it was at the beginning of the Ethereum rush.

The longer it takes to make a return on investment, the riskier it gets. Mining wears hard on components like graphics cards, and if your hardware starts failing before you’ve made your money back the ROI calculation starts looking grim.

Small-time mining with the intent to make immediate obscene profits from cryptocurrencies is therefore not possible at the moment, and hasn’t been for some time.

There are still other reasons to buy a mining rig, but if you are looking for the most financially sound way to buy into cryptocurrencies, you would be better served taking the money you would spend on a mining rig, and buying a spread of the top coins directly instead.

Regardless of which route you choose, remember to thoroughly investigate the coins you are getting into, and make sure you understand all the security implications of how you choose to store your cryptocurrency.

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