MINING 101

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 Crypto Mining

Here is a short video that gives a good break down for you to watch before continuing with this
lesson.

Mining cryptocurrencies is something that not many people are

very familiar with. It takes quite a bit of education to be able to get started depending on which
direction you take. It is also an ever evolving space with many of the involved variables
changing regularly, sometimes daily.
There are two main reasons to mine crypto, some mine specifically to help individual coins’
networks’ grow and be stable. With each new miner that enters the space, that respective
network gets stronger. Without miners, there would be no network. Blockchain technology relies
on mining to be the backbone of the network.
Many people mine cryptocurrencies for the monetary reward it
provides for confirming transactions on the network. Depending
on the coin, the reward available varies. Since mining has gotten increasingly more difficult for
many coins, this reward is not always worth the cost. However, the main attraction to mining is
in regard to accumulating coins, typically the cost of mining coins is less than purchasing the
coins themselves.
 Crypto Mining

Here is an example of Bitcoins mining protocol;

For Bitcoin, there is an event that is called “halving,” that happens every four years. When this
occurs, the reward per block mined, is cut in half.
[25 BTC / block reward(Prior to halving)--- 12.5 BTC / block reward (After most recent
halving)]
What this means, is that for each “block (group of transactions)” that is mined, the payout would
be 25BTC before a halving event, but only 12.5BTC after a halving event. Then dropping to
6.25BTC after the next halving event, etc.
The amount of Bitcoins that are mined, are also at a controlled pace, with the final Bitcoin being
mined in the year 2140. Mining difficulty is what keeps this pace consistent. 1 block is to be
released every 10 minutes, regardless of how many people are mining on the network. The more
people that begin to mine, the higher the difficulty goes, this difficulty is what controls the
release of Bitcoin’s.
Many variables play a part in making the decision whether or not to start mining. Make sure you
address all of them prior to making any final decisions. The upfront capital, as well as electricity
costs in your area are two of the biggest factors.
Taking advantage of the opportunity to mine a coin early can be very profitable in the long run.
Many people will mine a coin, at a financial loss, in hopes that down the road the coin will be
traded at a high value.
 What is Mining?

With most currencies, governments decide when and how to print legal notes, how they are
distributed, as well as what they are worth because they are “centralized.”
Crypto, for the most part, is decentralized…it is governed by the users. There are however a few
coins that are centralized, an example of this is - Ripple(XRP).
With cryptocurrency, its users are given the ability to
solve special math problems, with specific software and equipment, and are rewarded with small
amounts of the currency attached to the math problem. (i.e. if a user is solving (mining) a math
problem for bitcoin, the user is rewarded with a small amount of bitcoin.)
This provides an incentive for more people to mine, and provide a larger, more stable network
for the currency as a whole.
These special math problems are actually transactions that are being sent over that currencies
network, also known as algorithms. When a transaction is sent into the network, a group of
miners all grab that transaction and start working on the algorithm to solve it. Once solved, the
transaction is completed and the mining reward is paid out.
 Mining Profitability

Many people get very excited when they start to learn about mining cryptocurrencies. One thing
that everyone needs to do before pulling the trigger on jumping into mining, is calculate the
profitability.
We want to touch on this so that you can see the magnitude of decisions that need to be made.
Cryptocurrency prices fluctuate, equipment is not built to last forever, electricity costs are
generally on the rise etc. Here is
an example; In the past, some people that joined mining had an expected ROI of less than 60
days. However, once their equipment was up and running, they had seen that their ROI had
extended out to 9 months, due the mining difficulty increasing for the coin they had planned on
mining.
This is why part of the calculation is finding out not only how much margin you have to play
within, but also why you should have an liquidity strategy in place from the beginning.
Depending on the mining rigs that you are planning on purchasing, they may be capable of
mining multiple coins. For instance, if you purchased a GPU mining setup and had planned on
mining; ETH, ETC, Z-Cash or Monero...then, once you began this operation, the one you chose
became less profitable, you can simply switch to mining one of the others since they are all
capable of being mined with a GPU rig.
 A SIDE NOTE

***Major data centers

all around the globe are purchasing as much mining equipment as possible, with a much larger
end goal in mind. These players want to have a large amount of processing power available, to
be used in the future. The blockchain is ever evolving, and
will always have a need for processing power.
As more and more industries convert their data processing from conventional methods to the
blockchain, there will be more options available for people to “mine.” This can be anything
from; processing real estate transactions, to managing all logistics processing for companies like
UPS and FEDEX, to complete management of all medical records all around the globe.
 The Mining Advantage

Depending on your personal situation, mining does have a slight advantage over trading. Many
people make significant amounts of money trading, but the crypto market operates under its own
set of rules. It is still in it’s early stages, and can be extremely volatile. Mining provides more
stability for someone that isn’t able to dedicate the majority of their time to crypto, but still wants
to be involved in the space. Regardless of the coin’s value itself fluctuating, you would still have
your equipment worst case scenario. The equipment has a value itself completely outside of
cryptocurrency, in an industry that has been around much longer than crypto.
 Processing Power ROI

The first number that would need to be calculated, is your “hashing” power. The goal is to get
your price per megahash as low as possible. Depending on which miner you go with, you can
search online for the hashrate of the combination of the parts (GPUs), or the description of the
miner would also include the hashing power of your equipment vs. what it costs.
There are multiple websites you can use to enter this data, and it will give you all the information
you need. We tend to use and suggest; cryptocompare.com & whattomine. com. Make sure the
information you are using is current, as this changes regularly. If you are looking at information
from even 1 month prior, your calculations can be drastically different.

Electricity Cost

Regardless of what equipment setup you decide to go with, you are going to need to power it.
These machines all using varying levels of electricity, but most of them share the characteristic
that they use quite a bit of power. Before purchasing any mining equipment, you also need to see
what type of outlet it will need to be plugged into, to be able to run.
As of late, manufacturers have come out with miners that were designed for residential usage,
and can be plugged into any standard wall outlet. Prior to that, most miners had to be plugged
into a 220V outlet, similar to a clothes dryer, air conditioning unit, or kitchen stove. Depending
on what outlet your equipment needs, you may need to calculate in the cost of an electrician
coming to your home, or place of business and running new electrical lines to support the load.
 A SIDE NOTE

***One cost that many forget to include, is the cost to

cool the equipment and the room where they are stored. Depending on the rig setup you choose,
a tremendous amount of heat can be generated while it is running. One of the most impressive
parts of the biggest mining operations we have seen is the cooling/heat distribution system.
These companies spend 10’s of thousands of dollars on research alone before building their
structures to house mining equipment. In your home, this could mean additional air conditioning
units to be ran year round, or depending on your climate, an engineered fan system to keep
internal warmer air cycling with the colder air outside. Some of the biggest commercial mines
are in Iceland, Canada and Northern United States to take advantage of the normally colder
climates. ***
Once you have this portion of the electricity figured out, you need to find out how much you will
be paying per KWh for the electricity they are going to use. This can add up to be a significant
daily cost.
 Profit, Loss & Return

Now that you would understand your hashrate / dollar spent, you can see what your actual return
on investment would be.
What you would calculate is the amount of coins your equipment will mine on a monthly basis,
and how much electricity it will take to mine them. Then subtract the electricity from the value
of the mined coins to find your monthly return. Once this is calculated, you take your monthly
return and find out how many months it will take to break even and then profit.
For example; If I am able to mine 1 Ether/month, with a value of $200/ETH, and my electric
costs are $100/month...that puts me at a $100/month return.
If I spent $3000 on the equipment needed to mine that 1 ETH, then it will take me 30 months to
break even, and 31 months to actually profit.
 How Does Mining Work?

1. The transaction is initiated from one user, to another

2. This transaction is referred to as a “block”
3. This transaction is sent to multiple “miners” who all begin working to solve the equation and
finish sending the currency
4. Once the miners involved finish the equation, this block is added to the chain, and is never to
be moved or edited
5. All miners who contributed to this equation being solved, are rewarded a small piece of the
transaction fee paid by the sender

What is a Miner?

A miner can be two things:

1. The individual who owns the equipment doing the mining 2. The equipment itself
We are going to be referring to the equipment itself
A miner is a high powered, yet simple, computer, that is specifically designed to process
algorithms for a specific cryptocurrency. This computer only needs a; keyboard, mouse and
monitor for setup. Once the machine is operating, you no longer need these, it runs on its own
24/7.
Bitcoin/Litecoin/Dash are three coins that all use the same hardware, but different software. The
hardware they are using is the ASIC chip, which we will expand on later in this lesson. Miners
are not universal in their ability, ASIC miners are designed to mine one coin, very efficiently.
There is a short list of equipment needed, however you need to make sure that all of these
components work well with each other. There are many places to source these parts, but not
many places that you will be able to find them in stock consistently.
 Mining Rig A

Motherboard
This is just as important and the name implies, it needs to be able to support all GPUs attached to
it. If you aren’t building a large mining rig, there are plenty of options to chose from. However if
you are using 6-8 GPUs, it is extremely important to get a compatible motherboard.

CPU (Central Processing Unit)

When it comes to the CPU, there are less specific requirements. This doesn’t mean to purchase
the least expensive one you can find, as there will still be compatibility requirements. The
motherboard would dictate which CPU would be needed.

RAM (Random Access Memory)

RAM is something else that doesn’t have very specific requirements. All you need is 4GB worth,
again, compatible with your motherboard. More RAM would just make syncing with the block
chain the first time faster, it is not something that would be useful long term.

GPU (Graphics Processing Unit)

This is largely considered the most important piece of hardware you will be using for your rig.
Your GPUs will determine your hashrate, which is one of the biggest pieces of information you
will need when determining profitability. -After all this is the most popular goal with mining,
profit.

***Most GPUs create 25mh/s out of the box, and can be

“overclocked” to achieve more hashing power. This software adjustment can provide an increase
in power of 10-20%, which can help achieve your ROI sooner. ***
 Mining Rig B

PSU (Power Supply Unit)

Every computer needs a power supply, just like any other electronic. The size of the power
supply for your rig will simply be the power requirements of all components added together,
with an additional 20% for safety measure. Your GPU rig will need 2 power supplies, one for the
GPUs, and one for the rest of the rig’s power needs.

Hard Drive
Mining rigs run best when using a SSD(Solid State Drive). These hard drives are much faster
than the standard disc drives, making the rig accessing the operating system much more efficient.
You only need a small SSD, 16GB should be suffice, which is also inexpensive.
In addition to these main components, you will need several more basic accessories to make
everything work together. These components will consist of; GPU risers, power cables, data
cables, fans, nuts & bolts, etc.
 Operating Systems

There are really 3 different options in this space; Windows, ethOS and Linux.

Windows

If you are using 6 or more GPUs, then Windows 10 is your best bet. Windows 10 has this
support built in, whereas Windows 7 & 8 will require adjusting. Windows also has the benefit of
more universal support, as well as better overclocking tools. The setup is slightly more
complicated, but not impossible and provides the upside of being able to access it remotely with
ease.

ethOS

This is simply a more basic version of Linux, where the task is simply to mine ETH. The setup is
easier than Windows, and so is the maintenance. The rig will be limited to mining, but that is the
purpose for almost every rig that is built.

Linux

This is the free option that mining enthusiasts tend to prefer. This is a very slim system to use,
with limited options by design. If you do not want to pay for Windows, this is a great solution.
 Stages of Equipment

Early on, the processor right inside of your home computer was able to solve these equations and
be rewarded with coins. Many people would set up their computers to mine all night and all day
from their basements. This worked well at the time, until they realised how much power was
used and heat was produced.
Soon after this became popular, it was discovered that graphics processors used for computer
gaming worked much faster, and the industry started to migrate towards using those. GPU’s
however use more electricity, and generate a larger amount of heat. GPUs are now commonly
used to mine; ETH, ETC, Monero and Z-Cash.
Chips were then reprogrammed specifically for mining, that were even faster than GPU’s…but
still used a tremendous amount of electricity. These miners were the first true commercially
available miners.
Then, something came out called ASIC, or Application- Specific Integrated Circuit. These chips
were designed from the beginning to mine certain currencies, extremely fast and used less power.
This update drastically reduced the physical size of mining operations around the globe. The
same space that was needed for the much larger GPU miner, could now be utilized much more
efficiently with several ASIC miners after this advancement.
Increasing Difficulty

Some Crypto networks automatically increase the difficulty of the equations needing to be
solved, depending on how quickly they are being solved.
Depending on the network, the difficulty can increase at different rates for different reasons.
ETH for example has something called “ice age” which has increased the difficulty dramatically.
Make sure you have an understanding of the network that you are looking to mine on. The rate at
which the difficulty increases can dramatically affect your ROI.
Earlier in this lesson, we referenced “bitcoin halving,” that is another form of difficulty
management.
Due to this increase in difficulty, many people who were mining on their own…looked for a
better way, which spawned the creation of mining pools.

Mining Pools

Groups of people all contributing processing power to mine the same coins
Since there is more power being used to mine, the mining process is accomplished much faster
Each miner that contributes to the solving of a block, is rewarded according to the amount of
work their equipment did
When it comes to mining, you can consider solo vs. pool mining with the same attributes as one
person working vs. a team of people working on the same task.
Mining Pools

Solo mining is when you are only working off of the hashing power coming from you rig. Pool
mining is when you contribute the hashing power from your rig, and combine that with the
hashing power of everyone else’s rig in the pool. Once this is combined, all miners in the pool
split the rewards from the collected effort.
The advantage of solo mining is that anything that you mine, is yours to keep and there are no
fee’s incurred. That being said, when solo mining, the amount of time it takes to mine a full coin
is much longer than pool mining. Most people in the mining space except the fee’s that come
from pool mining due to the speed in which coins are mined when hashing power is pooled.

Some popular mining pools are;

http://nanopool.org/
http://dwarfpool.com/
 Effects of Mining Outside of Crypto

Since the last wave of people coming into the industry of mining, the computer parts that are
needed to actually mine have been very difficult to find, and because of that have risen
significantly in value.
Commercial miners are typically sold out within minutes of them being announced as available.
The companies that are producing these miners, can guarantee regardless of how many units they
build, they will also sell.
As of late, GPU mining has become very popular. This is mining using high powered graphics
cards that are normally used for computer gaming. Since this rise in popularity, graphics cards
are virtually impossible to find. Many people are traveling around the world to try to get their
hands on any graphics cards they possibly can.
Two of the biggest names in the GPU space, AMD & Nvidia, have been able to capitalize on this
situation. Through simple supply and demand, their products are flying off the shelves, leaving
customers wanting more. -Many gamers and computer builders alike have found that they can
not replace damaged equipment, or purchase new for equipment without great challenge. Many
big box stores have actually placed a limit on how many GPU’s one person can buy, and for
most stores, that limit is 1.
These GPU suppliers can be seen in a similar light as the pick and shovel manufacturers during
the last gold rush. I say “last” gold rush, because cryptocurrency is absolutely the modern day
gold rush.
The other byproduct of this increase in supply and demand, is GPU manufacturers actually
creating entirely new GPU designs. These designs are specific to mining cryptocurrency, and are
lacking the bells and whistles that a computer gamer would be looking for. These GPUs are
highly anticipated and will most likely also be very hard to come by when they are finally
available for the public.
Further Reading

Just recently there was quite a bit of buzz surrounding Bitcoin, and something called a “hard
fork” or “chain split.” This event created a large amount of; fear, uncertainty and doubt (FUD).
In reality this was something that was not to be feared. There is currently a “block size” debate
going on in the Bitcoin community. There are going to be changes made in order to secure the
future of Bitcoin. We suggest learning about both sides of this event, to better educate yourself
for future discussions in this space. Here is an article that will help you to begin to understand
what happened, what is happening and what is to happen in the near future.

https://bitcoinmagazine.com/articles/beginners-guide- claiming-your-bitcoin-cash-and-selling-it/