Should You Set Up Your Own Mining Operation?

Corey Baldwin | CEO

The recent boom of the cryptocurrency market, especially Bitcoin, has many people wondering how they can get involved and make some money. There are generally two ways to see gains from cryptocurrencies, each appealing to a generally different subset of people: mining or buying. Every potential investor should have an honest consideration for what level of effort and risk they are willing to accept with the potential benefit of profit down the road. Depending on the risk profile you are comfortable will will greatly influence whether a mining operation will be right for you.

Mining

Mining has a certain hobbyist appeal to those who want to setup an operation in their own space, and are decently savvy with hardware and software. The fixed capital invest to setup a mining rig means that you have a very clear break-even point, and allows you to calculate when you will start profiting based on the current exchange rate of a currency and your kWh rate.

Pros

  • Easy to scale up the operation by adding more units to the mining rig in the future. This allows you to expand at a comfortable rate and increase the rate of return over time. 
  • Flexibility for which currency you are mining for. If a more profitable currency comes along, you can switch to an associated pool. Some pools will even switch which currency you are mining for you, ensuring you are always mining for what is most profitable. 
  • As an additional benefit to the ability to switch mining currencies, your investment will not lose value if a particular currency folds. As long as the algorithm that your units can perform remains relevant with the currencies in the market, your money will not be lost. 
  • Mining rigs can be filed as a depreciating asset if you set up an LLC, helping your ta situation and easing some of the burden of the cost. 
  • Most hardware for the rig will have some degree of resale value if you decide you want to stop.

Cons

  • The architecture of your units will limit which currencies that you can mine for.
  • Hardware is quickly replaced with more efficient models.
  • Initial startup can be very costly and there is a period of time in which you will not be profitable until the rig is paid off. The rate of breaking even is completely dependent upon the exchange rate of a particular currency
  • Units can be very hard to source unless you are willing to pay the mark-up to a secondary vendor. Units purchased from the manufacturers have long lead times.
  • Setting up a mining rig can be complex especially for those that don't naturally have a tendency for tinkering.

Trading

Trading is a much easier way to enter the cryptocurrency market as it only requires an account on an exchange. The amount of verification varies depending on the exchange and some don't even require verification as long as transactions are less than 2 BTC. Other exchanges may require a vetting process that verifies a physical ID and proof of residency document before you will be allowed to trade. This method will be enticing for those that have a lack of space, necessary energy requirements, or a desire to manage physical equipment

Pros

  • Easy to enter the market. Only requires an exchange account and adding a balance to that exchange account. Some exchanges only operate by trading one currency for another so you may need to have an account with a separate exchange that takes USD in order to get the initial amount of BTC or other currency you will be trading. You will then need a wallet in order to transfer currency between these two exchanges.
  • You can notice immediate profits if the exchange rate of your choice currency increases after buying.
  • Flexibility to adapt to the market. Exchanges give you a quick way to adjust to a currency on the rise or one that is falling. If you see a signal to invest you can easily buy into a variety of different currencies depending on the exchange you are using. You can also dump any currency you may have stored on the exchange, although it is not advised to keep very much stored on an exchange unless you are day trading.

Cons

  • Your profits are completely beholden to the exchange rate of a given currency. If a currency loses value and you dip below your buy-in price your only two options are to sell at a loss or hold onto this currency and hope it rebounds. If the currency never rebounds then you are out of any money that you invested without any recourse.
  • Transaction fees. Exchanges operate primarily off of fees that they charge for transactions by users. If you are frequently trading currencies this cost will add up quickly. Some exchanges are friendlier than others and may offer users something like 30 transactions a month free without any fees.
  • Transaction times. Exchanges can be very slow in verifying and performing transactions. If you are trying to be an agile trader this can be a massive pain and it is suggested that you find an exchange that meets your needs as a trader. These times also vary a great deal depending on the currency that is involved in the transaction.
  • Exchanges can be abusive. There is an unfortunate history of exchanges acting against the best interest of the users. These exchanges can be hacked, losing all of the currency that the users are storing on the exchange. They may slow down their transaction speeds in times of flux in the market in order to make sure they are maximizing their own profits. Insider trading within the exchanges has been a problem over time as well. It is best to find a reputable exchange and hope that the management always keeps the users in mind with the decisions they make. Ultimately these exchanges go against the core de-centralized original nature of cryptocurrencies, but until there is a better option for realizing real-world USD profits from your efforts they are a necessity.
Caroline Baldwin