To Buy or Mine? Thoughts on Ethereum Mining.

One of the questions that has been posed to us is: given the meteoric rise in the prices of cryptocurrencies, why aren’t we just buying them? Or in other words, why invest hundreds of thousands in equipment, assembly, programming and then hundreds of more thousands in maintenance, power, rent, heating/cooling, when you could just avoid it all and buy into currencies that are rising 25%, 50%, 100%+ per month? It’s a really good question. Here is our best answer:

First, the current astronomical gains in cryptocurrencies are not going to last forever. Granted, we appear to be in a golden era where most mid to large-cap cryptocurrencies are sprinkled with profit-laced fairy dust. But if it’s too good to be true, it probably is, at least in the longer term. While we are Hodlers at heart, we are also realists that understand that potentially massive corrections could sweep various cryptos or the entire market. Second, we do believe that crypto is here to stay. I am not going to pontificate here when you can Google “how blockchain is disrupting industry” and get a million legitimate articles.

Blockchain is here to stay and its impacts will be wide-ranging. Being a miner means being part of the blockchain, supporting it and strengthening it. Third, miners have great flexibility in that they can diversify and switch based on profitability. So as a miner we have a lot more choices outside of what Coinbase is offering. Lastly, and despite that proof of stake (PoS) may be much more desirable from an energy-consumption and environmental standpoint, truthfully proof of work (PoW) is the only practical way to presently validate transactions in a large and decentralized way. We believe that PoW is here for the long-term.

As the decentralized Ethereum app cryptokitties displayed, ethereum needs more miners. Why? While the dapp was a stepping stone for Ethereum in that it proved that kids and developers alike could interact securely worldwide with the blockchain, once viral, the dapp accounted for 10% of all ethereum activity and significantly slowed the network. So the need for more miners, more processing power and validation is clear. What will entice miners?

Miners will only enter the market if a) they believe in the future/developers; and (most importantly) b) if it is profitable to mine. Given that no one except core ETH developers or Alliance members quite understands what Casper/PoS actually means for Ethereum yet in terms of how to entice people to stake, and Vitalik Buterin has even stated that PoS may be years away, we can assume that PoW will be around for awhile. Because Vitalik cannot control the market demand or price for ETH, and because he wants to entice more miners to join, his two biggest tools are: implementation of development to keep the network scalable, fast, inexpensive and secure; and by leaving open potential continued modifications to difficulty adjustment. Now, we believe that the Ethereum will continue to be the leader in developer activity and usability, so we will address difficulty adjustment. Presently, difficulty adjustment is coded into Ethereum so that it happens automatically to keep mining time of the blocks between 10 to 19 sec.

But according to #10 in this article discussing how the Ethereum difficulty algorithm works: “In order to increase the difficulty exponentially, new block number is calculated by adding one to the parent block number.” So basically, while Ethereum difficulty is hardcoded, core developers may decide to change it. How do we know? Well, they already have. Earlier this year, the Byzantium hard fork went live on the Ethereum mainnet. According to ETHNews, the block reward adjusted down from 5 to 3 Ether and the average block time fell substantially — due to an adjustment to the difficulty formula. In the early part of October, the average block time was approximately 29 seconds. Post-Byzantium, as of October 17, 2017, the average block time was approximately 14 seconds. Similarly and earlier in the year, Casper, or Ethereum’s switch from PoW to PoS, had been hardcoded, but roll out was not on schedule. Therefore, the implementation of Casper and the associated “difficulty bomb” that will commence (to coerce miners/hodlers to switch to PoS) was delayed again. The point is that Ethereum developers can manipulate difficulty based on circumstances and projections.

Given that more miners are needed and Casper is not yet on the visible horizon, we believe that difficulty is unlikely to increase much in the near term. Or perhaps better stated, we do not believe that difficulty will increase at the same pace as price. We also believe that if the price of ETH dropped significantly — threatening its profitability to mine — then difficulty would drop as well because otherwise miners would defect to other coins. So if price and difficulty drop, miners will just accumulate more coin. Crypto cost averaging. It is hard to lose in this situation if your mining operation is significantly scaled and equipment and energy costs are at advantageous economies of scale.

Circling back to the beginning, we believe that mining is more flexible and safer than buying retail. Not only is there built-in flexibility, but there is a strong argument that mining has to be profitable, perhaps not with one rig in mom’s basement, but certainly at a moderate commercial scale.

Legal Disclaimer: Ensource Capital, LLC does not endorse any content or product on this page. While we aim at providing you all important information that we could obtain, readers should do their own research before taking any actions related to the company and carry full responsibility for their decisions. This article should not be considered as an investment advice. Investing in cryptocurrencies and other Initial Coin Offerings(“ICOs”) is highly risky and speculative, and this article is not a recommendation by Ensource Capital, LLC or the writer to invest in cryptocurrencies or other ICOs. Since each individual’s situation is unique, a qualified professional should always be consulted before making any financial decisions. Ensource Capital, LLC makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, Ensource Capital, LLC owns relatively small amounts of cryptocurrency.