Long story short, we believe that cryptocurrency mining has the possibility of becoming a major asset class. Somewhat paradoxically, we do not necessarily believe that Bitcoin, Ethereum or [insert cryptocurrency name] will necessarily skyrocket in nominal value. We believe that the mining process, in and by itself, can be a profitable endeavour, irrespective of how cryptocurrency prices and their respective market capitalization develop.
How? Well, imagine a scenario where there would be millions of different cryptocurrencies in circulation, each with its own purpose and use case. We are not saying that is the reality that we are predicting will happen. We are merely saying that is one of the ways this can play out. What we are saying is that in most of those alternate realities, mining and Proof of Work will play an important role.
What is Mining?
In all Proof of Work cryptocurrencies, the miners (or workers as they are also called) lend processing power to the system to facilitate transactions. As a reward, they get newly minted units of the cryptocurrency. Therefore, you could say that mining is a form of seigniorage. Seigniorage is basically a term for the profits made (normally by a government) by minting new currency.
The role of miners is critical to the concept of decentralized currency, or consensus money, as the system does not rely on a central figure, but rather on individual actors that lend their resources to the network in exchange for the profit of seigniorage.
Cloud Mining
Most ordinary people, we included, are not going to set up our own mining rigs and start negotiating with our electric utility company about favourable rates. Furthermore, if you want exposure to a particular asset class, you want to be able to get that exposure in a passive way. You don’t set up a business because you want exposure to equities, nor do you start underwriting loans to get exposure to the bond market.
Cloud mining or mining as a service (MaaS) is a great way (at least in theory) to get exposure to the economics of cryptocurrency mining. A mining operation basically rents you a fraction of its hash power and in exchange, you receive the corresponding mining rewards, less a maintenance fee.
Profitable Mining Contracts
We have tried out a few providers of cloud mining contracts. We have tried reputable providers, such as the Mining Pool of Bitcoin.com, Hashflare and Genesis Mining.
It is worth noting that the profitability of mining can be very volatile from time to time. Irrespective of that, you would expect that the market for these contracts would be relatively efficient. You would not expect extreme differences in the profitability of the mining contracts.
We find that if you are in the market to buy a mining contract for a modest amount (less than $1,000), you would be better off buying the cryptocurrencies on an exchange. But that defeats the purpose, remember. The aim is to earn a yield from mining.
Some providers, seem to be outright scams, selling contracts that produce crypto at a steep loss. Hashflare.io, in particular, comes to mind.
Genesis Mining
Note that we are not endorsed in any way by Genesis Mining. The company does offer a referral code that customers can use to get credits, but we have never used it, nor do we ever intend to do. That would make us less objective.
That being said, it is safe to say, that as these words are written, Genesis Mining has absolute superiority in the market. As far as we can tell, Genesis Mining is offering terms superior that all other providers we have tried out. This applies both in terms of the profitability of the contracts, as well as the fine print in their contracts
More Thoughts on Crypto
- Bitozi Crypto Compendium
- Will there ever be more than 21 million Bitcoin?
- The Economics of Cryptocurrency Mining
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