I started off 2017 by embarking on a project to mine cryptocurrency. Specifically, I had my sights set on Ethereum. It was mid June by the time I had a functioning miner. There ended up being a lot more to it than just plugging in a computer. There were electricity costs, taxes, maintenance, and ultimately the decision of what to do with the ETH it produced.
I eventually ended up running 3 miners before winding down the operation when the market crashed in January of 2018. It was ultimately a profitable endeavour, but only barely, and probably because of a bit of luck.
Lastly, I learned much about the “Proof of Work” algorithm that requires mining to be done in the first place. This experience lead me to have a greater understanding of game theory and market dynamics driving both Bitcoin and Ethereum.
Let’s Mine Ethereum
Passive income was on my mind in 2017. This was around the time that I was thinking about the following quote.
If you don't find a way to make money while you sleep, you will work until you die. — Warren Buffett
This quote was the entire motivation behind setting up a computer that makes money while you sleep. I started by finding a model/blueprint of a miner on the internet that I wanted to replicate. Despite having a computer science degree, computer hardware was actually one aspect of computers that I had not yet explored. I eventually found out that I needed the following to get up and running.
The Hardware
6 Graphics Processing Units = ($250 / Unit) = $1,500
6 PCIe Risers = ($6/Unit) = $36
Metal Frame & Assembly = ($50 + 2hours)
Central Processing Unit (CPU) = $80
Motherboard (MOBO) = $150
8GB RAM - $80
Power Supply Unit (PCU) = $300
Mining Operating System (ethOS) = $50
Assembly and Configuration = 32 Hours
Total Cost = $2,246 + 34 Hours
The Profits
The picture above is of the rig I built. In the end, there was a lot of configuration that needed to be done in order to have the rig operate at maximum efficiency. The rig ended up pulling in 0.2 ETH every 5 days. In 2017 terms, that was $50 every 5 days, or $300 per month.
Reinvestment in ICO’s
At this point in the year, the Ethereum network and its token (ETH) was experiencing rapid growth. The main driver of this growth was the fact that Ethereum was the first platform to be able to host “Initial Coin Offerings” at scale. It became extremely simple for anyone with a crypto or blockchain idea to create their own token and sell it on Ethereum. If you wanted to invest in a project you found on the internet, you needed ETH to do it. This drastically increase the demand for ETH, driving up the price. Holding ETH was going to give decent gains alone, but I decided to invest in about a dozen projects on the prospect that I would get a 10x or more return on my investment.
Which ICOs Didn’t Work out For Me?
Most of the ICOs I invested in didn’t work out. I lost between 75% - 100% of my initial investment on most of the investments. I learned later that this was the methodology employed by venture capitalists. They make 10 investments, knowing that only 1 will actually pay off and cover the losses of the others. I believe this is called the “Shotgun Approach”.
Out of the many ICOs I invested in, Envion and ChangeBank were two of them. I have included screenshots of the actual transaction as it is presented on etherscan. I just chose a couple of the more notable ones to highlight here. In total, I estimate to have lost about $10k on ICOs, whereas my investment in MCO (Now Crypto.com has covered these losses).
ChangeBank
This company positioned themselves as a “NeoBank” or “CryptoBank” of the future. A bank that handles FIAT, and makes interacting with the world of cryptocurrencies seamless. My investment thesis was correct, there is a need for crypto banks. Kraken, Crypto.com and Binance are all examples of companies that are trending in this direction. I was simply just wrong that ChangeBank was the entity to manifest this reality. I was right on the money with MCO and Crypto.com though!
Envion
The idea of Envion is that they would stuff shipping containers full of GPU miners and place them beside solar and wind farms. They would use the excess energy from these green energy farms to power the mining units. The ICO funds would be use to acquire these units and the profits would be shared amongst the investors. This was a German project and the European Securities and Markets Authority (ESMA) got wind of the project and declared the tokens to be unregistered securities. This is essentially a bomb for any project. Envion had to fold their operations and return investor funds. I got my ETH back 2 years after the initial investment. My investment thesis for Envion still stands, there is nothing inherently flawed about their idea to hardness unused electricity from fields of green energy. This is still a great idea. The company behind Envion simply did not go through the proper channels to register the sale of their token with the public.
[ Some of the projects I got rekt on in 2017 in my previous letter ]
Which ICO Worked Out for Me?
Basically only 1 of the dozen projects I invested in actually ended up working out for me. I got my money back on some, and lost 99% on others. The point is, I only needed 1 project to do really well in order to cover the losses from my other investments. That project was MCO, which then turned into my favourite platform Crypto.com.
The Cost
With any mining operation, your profitability is entirely reliant on the amount of energy it takes to run the rig. In other words, if ETH is not worth more than the electricity I spent to run the miner, then I should stop mining. The only exception to this rule is if I am making a strategic decision to acquire the ETH and wait until it rises above the cost of electricity. This is oftentimes what miners do during bear markets1. This is because they’ve made an investment in hardware, and the cost of not running it is a lost-opportunity. Understanding the connection between Proof of Work mining and the cost of energy is actually vital to understanding the market dynamics of Bitcoin (and Ethereum).
I was running the miners out of my parents basement. This means they were paying the electricity. They paid electricity to the power company according to something called “budget billing”. They average out your electricity usage over 12 months, and have you pay the same amount of money each month. This helps people living in cold, and hot regions of the country predict what amount of money they’re going to need to allocate towards paying their power bill. When I started mining in the basement, their electricity bill spiked. Big.
My parents went from paying $150 per month to over $600 per month. So as the value of ETH and the investments were rising by impressive factors, so was the cost of my electricity. I discovered that running a mining rig while paying upwards of $.13 per KwH is simply not a profitable operation. Although, my Mom did mention that the miners gave off enough heat to dry our clothes in the indoor clothes line. This lead me to investigate companies around the world building space heaters2, and industrial heating units3 that mined cryptocurrency. In effect, getting paid to heat your house, rather than the other way around. I digress, this is a topic for another letter.
The Taxes
This is where I gained foundational knowledge on how to account for mining and investing cryptocurrencies. I had a “Do now, ask questions later” approach, which in hindsight, caused me more problems down the road. I realized I needed to better account for my transactions ahead of tax season. Fortunately, all of my payouts from mining ETH were recorded on the blockchain. This means that I could see each and every one of my transactions, the amount that I was sent, the time it occurred, and the value of transactions at that date and time. Everything I needed when filling my taxes. Etherscan.io is the website I used to glean this information.
What I Learned
Proceeds from mining is income
The cost of electricity is an expense
Transaction fees paid to the network for transferring ETH or investing in an ICO are capital losses or expenses (depending on how you look at it)
Proceeds from the ICO are subject to capital gains
Most ICOs were scams, and thus total losses. I was able to claim them as losses on my taxes to reduce my tax liability
It’s better to set up systems for tax season ahead of time
My Thoughts on Proof of Work
To this today, proof of work is one of the most debated topics of Bitcoin. It is the algorithm that is behind peoples’ observations of Bitcoin’s excessive electricity usage. To be clear, mining does take incredibly large amounts of energy. I became conflicted with this realization because I have a high affinity to act in accordance with environmentally friendly systems and technologies. I am staunchly against things that perpetuate the desecrated state of our environment. This lead me to be a hypocrite, because for the time I was mining Ethereum, I was profiting from a practice that I saw to be mildly un-environmental. I eventually came to dislike both Ethereum and Bitcoin for their complete lack of efficiency when it came to transaction throughput.
Bitcoin - 7tx/s
Ethereum - 25tx/s
Transaction Throughput is Not the Point
I became hypercritical of Bitcoin to the point of divestment. I invested in coins like EOS with 0 transaction fees and a claim to being able to process 1 million transactions per second. I tried out cryptocurrencies that are not built on blockchain such as IOTA. Everywhere I turned, I discovered that these systems all had one thing in common, they had institutional, invested interests guiding them. They were projects that were owned by someone, or something. One of the points of cryptocurrency is to have networks of money that do not have controlling entities with the ability to influence aspects of the network.
It doesn’t matter what the transaction throughput of a network is if your transaction can be censored. For the group or individual that is censored, the transaction throughput of that network is ZERO.
I am aware of blockchain networks with high scalability and decentralization in mind. The one that I am most closely paying attention to, is Cardano. I do not think that we know yet whether or not it will work at scale, but I am paying close attention to see how it all plays out.
A New Understanding of Money
My search for more efficient systems eventually caused me to examine money, time, and energy more closely. This more nuanced perspective on economics, physics, and game theory lead me to discover that Proof of Work might just be the most efficient means for supporting fair, hard money (Bitcoin). So while I now have a belief that Bitcoin is the best money in the world, it falls short on other dimensions such as transaction throughput (potentially solved by lightning) and privacy (again, potentially solved by lightning). If you’re interested in reading more of my thoughts on Bitcoin mining and energy efficiency in the crypto space, I recommend these two articles.
I will definitely do an in depth article on just how Bitcoin, with all of its energy requirements, is the best, and most efficient money we’ve ever had.
Summary of Mining Ethereum
After everything was all said and done, I profited only about several thousand dollars in CAD terms. Is it worth it for you to get some GPUs and start mining Ethereum? I’d say probably not. If it is passive income that you’re interested in, then mining is a bit more complex than what is required. There are a plethora of cryptocurrencies you can buy that will generate you an income stream. You’re probably better off strategically investing your money in a cryptocurrency that will itself rise in value, and pump out additional income which is immediately reinvest-able. The mining rig is currently sitting in my closet collecting dust and depreciating in value. In other words, the hardware required to mine, is not a very liquid asset. Regardless, I am grateful for the experience. For now, I’m happy to leave mining to the professionals.
All The Best,
Keegan Francis
Home Heater - https://qarnot.com/en/home/