3 Costs Cryptocurrency Miners Need to know, and the 1 Wildcard that can change everything – The Motley Fool

In short, cryptocurrencies are doing things on Wall Street and investors have never seen before. Last year, the aggregate value of all combined virtual currencies rose nearly $ 600 billion to close the year at about $ 613 billion. The overall gain of over 3.300% is probably the best return per year for each resource – and there is a good chance we will not see anything like this, at least during our lifetime.

This higher increase in cryptocurrencies has generated numerous ways for moneymaking enthusiasts. Obviously, buying and holding virtual currencies (known as "hodling" in the crypto community) for long periods of time has done wonders for investors. Bitcoin, which was once trading below $ 1 per token, rose to about $ 20,000 per currency in December 2017. Meanwhile, Ethereum and Ripple, respectively, ranked second and third in the bitcoin market capitalization, are increased by 9.383% and 35.564% respectively, only last year.

Another potentially profitable company is buying publicly traded stocks that have exposure to the cryptocurrency market. For example, the Bitcoin Investment Trust it has a relatively fixed amount of bitcoins in its portfolio, allowing investors an approximate way to freely track the performance of the bitcoins. I say "freely" because the Bitcoin Investment Trust has often been valued with a premium of 25% to 100% on the net value of its held tokens.

The charm of cryptocurrency mining

But perhaps the most intriguing means to make money was through the extraction of cryptocurrencies. Cryptocurrency mining simply describes the process by which people or companies with high-powered computers and servers compete against each other to be the first to solve complex mathematical equations associated with a group of transactions (known as "block"). These complex mathematical equations derive from cryptography that protects data on a blockchain network from hackers and other unwanted parts. Once resolved, a block of transactions is considered true – that is, no two virtual money has been spent twice – and is added to the previously resolved blocks, forming a chain. Thus the term coined "blockchain".

So, what's in it for cryptocurrency miners to validate these transactions? Being the first to solve a block authorizes the miner to a "block premium". This reward is paid in the cryptocurrency tokens that are validated, with the amount of the reward and the difficulty in reaching the reward, ranging from one virtual currency to the next. For bitcoin, a reward for the block entitles the miner to 12.5 tokens, which with a bitcoin valued at around $ 9.400 per token, translate into a nice loot of $ 117,500! Not too shabby. However, the bitcoin awards halve every 210,000 blocks, which means that the reward for bitcoin mining (and many other digital currencies) decreases over time.

This is also an excellent time to stress that not all cryptocurrencies are miniscule. While bitcoin, Ethereum, Bitcoin Cash and Litecoin are extracted, Ripple, EOS, Cardano and Stellar are not. Validation of transactions takes place differently for undocumented cryptocurrencies, which means that new tokens are not created or rewarded.

The miners of cryptocurrencies at three costs must know this

Sitting down and relaxing while computers and servers do all the work might seem like a big money making plan, but I assure you there are some very big expenses too. Cryptocurrency miners need to be aware of three very important costs.

1. Electricity costs

One of the most significant costs with which the miners will compare is the cost of electricity needed to run graphics processing units (GPUs) or specialized ASIC circuits (application-specific integrated circuits), together with servers and computers. The proof-of-work model, also known as cryptocurrency mining, is electricity-intensive, meaning that the lowest kilowatt prices now (kWh) are favorable to miners' margins.

Which countries offer the lowest kWh costs? In a stroke of irony, some of the most attractive places for mine also have strict rules on cryptocurrencies. China, for example, has some of the lowest kWh costs in the world. However, China has also banned the first coin bids and exchanges of domestic cryptocurrencies, and has slowed electricity consumption for some of the country's largest mining companies.

Recently, mining companies like HIVE Blockchain Technologies (NASDAQOTH: HVBTF) they have turned to the Nordic region for cheaper electricity costs. HIVE is setting up mining centers in Sweden and Iceland, both of which have lower than average electric costs compared to the European average. In addition, Nordic countries such as Sweden are more dependent on renewable energy, such as solar, wind, and hydropower, to generate electricity, which helps keep overall kWh costs low.

In short, the position counts!

2. Cooling costs

Secondly, cryptocurrency miners must understand that the operation of some dozens or more GPUs, together with servers and computers, can produce a lot of heat. This heat can create a suboptimal operating temperature for mining hardware, causing it to fail if not properly treated. This means that it may be necessary to set up cooling systems to maintain overheating and breaking of the mining hardware. This is another cost of electricity that some people might overlook.

It is worth noting that the position can, once again, play a role in the amount of impact that cooling costs have on mining margins. Operating in the naturally colder temperatures of Iceland could help HIVE Blockchain Technologies reduce cooling costs. In fact, HIVE specifically lists the "cold climate" as one of the three main selling points of a mining data center in Iceland (along with a fast internet connection and low-cost green power).

3. Hardware costs

Finally, cryptocurrency miners have to deal with the costs of hardware, which in reality may prove to be their biggest budget dismay.

Miners can be hit with hardware costs in two specific ways. First of all, there are the initial costs of initial purchase of the hardware necessary to extract the cryptocurrencies. And secondly, miners are affected by the need to constantly update their equipment in order to remain competitive compared to other mining companies.

During the last year, NVIDIA (Nasdaq: NVDA) is Advanced micro devices (NASDAQ: AMD) I saw how cryptocurrency miners devoured GPU graphics cards at an incredible rate, drastically cutting supply and driving up the price of 100% to 200% graphics cards. Initially, great news for NVIDIA and Advanced Micro left these two giants in a bind situation. NVIDIA and Advanced Micro could choose to produce specific graphics cards for cryptographic miners, injuring the sudden increase in sales, or they could not do anything and risk alienating their main gaming customer who is suddenly annoyed by high prices graphic cards. It's really a win-win situation for both companies, and has been a major source of spending for cryptic miners.

Now for that predicted wildcard …

There is also a joker among all that could create or destroy cryptocurrency miners: the underlying movement in virtual currencies.

As you have probably guessed, the drop in cryptocurrency prices is not good news for mining margins. The higher the prices of coins, the more profitable it is often to extract virtual tokens. Understanding, however, that when it becomes more profitable for mine, the competition to solve a block becomes more fierce, which can eventually be dragged to the margins.

Likewise, the margins of cryptocurrency miners will depend on what they do with the tokens they receive as a reward. Miners could choose to convert them almost immediately into fiat currency, thus closing their predictable margins at that time. However, they could also choose to hang on their coins indefinitely and become investors. If the price of virtual coins held dramatically appreciates, the miners will have added glaze to their sweets. But if the encrypted prices fall, it could cut margins – or perhaps even make it unprofitable for having the tokens extracted in the first place.

For the time being, the cryptocurrency mining industry is thriving. But will it remain so even in three years? I'm not so sure