Graphics card mining investment analysis report

With the flourishing of Defi (Decentralized Finance) projects and the development progress of ETH2.0, Ethereum (ETH) has recently received more and more attention. As the price of the currency gradually rises, graphics card mining has become more and more popular.

After comprehensive analysis, we believe that now is a good time window to deploy graphics card mining, so we will give you a complete introduction to some information about graphics card mining machines mining ETH.

Introduction to Ethereum

The above is the definition of Ethereum from Wikipedia. Ethereum’s token is ETH. Unlike BTC’s vision of becoming a decentralized financial system, Ethereum’s vision is to become a blockchain platform for smart contracts.

A smart contract is a program that can run automatically according to pre-set rules. This program can be used to achieve various functions, such as running games, issuing other tokens, online insurance, lottery, etc. Running these smart contracts requires ETH, which is the relationship between the Ethereum system and ETH. Compared with the traditional centralized program operation method, Ethereum smart contracts have the advantages of open source, automation, fairness and justice. It is precisely because of the existence of smart contracts that Ethereum has unlimited possibilities.

Introduction to ETH Mining

Currently, ETH mining is mainly done through graphics card mining machines. The so-called graphics card mining machines are actually similar to home desktop computers, except that each machine has 6-10 graphics cards and no monitor (as shown in the picture).

Figure: Graphics card mining machine

The reason why Ethereum has not developed an ASIC mining machine similar to BTC is mainly due to ETH's special mining mechanism.

During the ETH mining process, a DAG file is generated, which needs to be called all the time, so a dedicated storage space must be placed. This rigid demand for storage space means that even if ASIC chips are produced, the cost per unit of computing power cannot be significantly reduced. In short, the cost-performance ratio is very poor.

The size of Ethereum's DAG has increased from 1GB when the Dagger-Hashimoto algorithm was introduced in June 2016 to the current 3.7G at a rate of about 520MB per year. It is expected that the size of Ethereum's DAG will increase to 4G by the end of 2020. By then, graphics cards with less than 4G of video memory will be gradually eliminated.

Another point worth mentioning is that since the size of a graphics card mining machine is usually 2-4 times that of a Bitcoin mining machine, but the power consumed is only 1/2 of that of a Bitcoin mining machine or even less, this leads to the general public being reluctant to build a dedicated graphics card mining farm (because the mining farm mainly makes money from the difference in electricity costs, and the same area of ​​the site can accommodate fewer graphics cards and consume less electricity). Even if there are a small number of graphics card mining farms, the electricity costs charged are usually higher than those of Bitcoin mining farms.

In addition, the assembly, debugging, and operation and maintenance of graphics card mining machines are more complicated than those of Bitcoin mining machines, and the requirements for operation and maintenance personnel are relatively high.

The current logic of investing in graphics card mining

( 1 ) Rapid development of DeFi

The figure below shows the changing trend of the value of tokens locked in DeFi projects over the past year. It can be seen that since June this year, the amount of funds locked in DeFi projects has increased.

Data source: defipulse.com

The prosperity of DeFi projects has brought two results.

First of all, the value of Ethereum itself has once again been recognized by everyone. Decentralized finance allows everyone to see solutions that are different from traditional finance. The value of ETH, as an Ethereum token, will naturally rise, and the possibility of the currency price rising will greatly increase.

Secondly, due to the prosperity of DeFi, frequent on-chain operations have led to the consumption of more and more ETH, and the consumed ETH will be paid to miners as mining fees, and the miners' income is also increasing. Under normal circumstances, miners can get 2 ETH rewards for each block they mine, which is about 2.2 ETH including mining fees. Now this reward has increased to more than 3, which means that the prosperity of DeFi has brought miners an additional 50% of income.

Data source: etherscan.io

(2) High residual value of graphics cards

Since the nature of the graphics card mining machine is the same as that of an ordinary home computer, when the project is over and the graphics card mining machine is disposed of, most of the accessories can be sold on the second-hand computer market, and miners can get

Relatively high residual value of mining machines.

Taking an AMD580 graphics card with 8GB of video memory as an example, the market value of a new card is about 1,300 yuan, and the current value of a second-hand graphics card on Xianyu is about 400-700 yuan. Therefore, it can be predicted that the residual value of the graphics card will be about 30% after 1-2 years (the residual value of different cards is different, and the residual value ratio of Nvidia graphics cards is usually higher than that of AMD graphics cards). Therefore, for miners, only about 70% of the investment is needed to recover the investment, and the risk of this investment will become very low.

Image source: Xianyu

(3) Appropriate static payback period

The static payback period refers to the payback period of the mining machine based on the current income level, assuming that all conditions remain unchanged. Taking the AMD 580 8G graphics card as an example, according to the price on the website, the cost of each unit is 13,500 yuan. According to the current currency price difficulty and electricity costs, the daily income of each unit is about 41.5 yuan, so the static payback period is 13,500/41.5=325 days. This is the case where the residual value is 0. If the residual value is considered at 20%, the static payback period will become 260 days. Even in the currency circle known for its high returns, this is a very good income project.

In comparison, the payback period of the Bitcoin Miner is almost the same as that of the most advanced S19Pro. Assuming that the difficulty remains unchanged, the static payback period is 788 days.

Data source: www.f2pool.com (September 9)

(4) Exit of 4G video memory graphics card

As mentioned above, it is expected that by the end of 2020, graphics card mining machines with 4G video memory will have to withdraw from the mining market due to the size of DAG files.

It is estimated that 4G memory mining machines account for about 40% of the total computing power of current graphics cards. These mining machines have two options: one is to shut down and liquidate directly , and sell the mining machines to obtain the residual value. The other is to upgrade and upgrade the 4G memory to 8G memory. This technology is relatively mature at present, and the cost is about RMB 350 per card.

However, since these graphics card mining machines have been running for a long time and their quality varies, coupled with the bumps during loading and unloading and transportation, it is impossible for all of them to be upgraded intact. It is estimated that this will cause about 10-20% of the computing power loss. For miners who directly invest in 6G video memory or 8G video memory, the shutdown of other mining machines means an increase in the income of the mining machines in our hands.

(5) Expectations for Ethereum 2.0

Ethereum 2.0 is a relatively large topic, which I will not elaborate on here. This article will simply give an introduction and provide a conclusion.

Ethereum 2.0 is a project that was proposed a long time ago. Its purpose is to make Ethereum more powerful and support the entire system to run more efficiently, quickly and at a low cost. Especially in the context of recent block congestion and high transaction fees caused by Defi, more and more people are looking forward to the arrival of Ethereum 2.0, and the development team is also working hard on it.

The entire Ethereum 2.0 will be implemented in 7 phases (Phase 0-Phase 6, see the figure below). The current progress is that Phase 0 is still under development and is expected to be completed by the end of 2020. The latest news is that the development team has issued a statement postponed to 2021.

After a certain stage of Ethereum 2.0 is implemented (currently generally estimated to be after the third or fourth stage), the current form of mining ETH by mining machines will gradually be eliminated, and POS will be used to obtain ETH. This cycle is estimated to be in 2-5 years. In other words, the life cycle of the graphics card mining ETH industry is about 2-5 years, which will depend on the progress of the development team. Under this estimate, it is a very appropriate time to invest in graphics card mining.

In addition to the certainty of the development progress, Ethereum 2.0 will also bring an additional benefit. After the first phase of 2.0 is launched, verification nodes will be opened. Ordinary users can become a verification node by staking 32 ETH, thereby obtaining Staking benefits. However, this staking is one-way in the first phase of 2.0. Once the staking is made, it can only be withdrawn after a certain phase is completed. It cannot be withdrawn in the first phase. This rule will lock up a large amount of ETH, resulting in a shortage of liquidity, and therefore will also bring certain expectations for the rise in the price of the currency.

The risks of investing in graphics card mining

Any investment has risks. After analysis, graphics card mining may have the following risks:

(1) Ethereum 2.0 is progressing rapidly

The general expectations for the progress of 2.0 have been introduced above. If the progress is far beyond everyone's expectations, there may not be much time left for graphics card mining. However, even according to the most optimistic forecast, it will take at least one year. According to the above forecast of the payback period, the investment in mining machines has basically paid back within one year, so there is no need to worry too much about this risk.

In addition, there is another topic related to Ethereum 2.0 called the " difficulty bomb ". In the final analysis, this is still closely related to the progress of Ethereum 2.0. If the development of 2.0 does not meet expectations, it will bring a great blow to Ethereum if the difficulty bomb is detonated rashly. Therefore, it is very likely that the difficulty bomb will be postponed again.

By the same token, even if there is no delay, there is still a year to mine at leisure.

(2).EIP1559

EIP is the abbreviation of Ethereum Improvement Proposal. EIP is usually proposed by the community. After sufficient discussion, the development team confirms and accepts the proposal and updates the content of the proposal to the code, and then pushes it to everyone for upgrading.

This proposal is quite complicated to describe. If you are interested, you can search it. In short, if this proposal is passed, the mining fee part of the current mining income will be greatly reduced to almost 0, leaving only the block reward itself. This will bring a relatively large loss to miners. Before the popularity of Defi, this loss was about 10%-15%, and with the current high mining fee, this loss will be 40%.

We don’t evaluate this proposal, we only care about its impact on miners. It is undeniable that once this proposal is passed, it will be a big negative for miners. But first of all, this proposal itself is still under discussion and there is no final conclusion. And according to convention, Ethereum will generally have only one, at most two major upgrades a year, at the beginning and middle of the year. In other words, even if this proposal is passed immediately, the fastest implementation time is January 2021, leaving miners at least 4 months. The development team is currently focusing on 2.0. We judge that the probability of the proposal being passed this year and implemented at the beginning of next year is not high.

(3) Coin price plummets

This is what many people are most worried about, especially those who have entered the mining market at high prices. Therefore, we usually recommend that if you are considering starting graphics card mining, you should perform hedging operations to lock in profits while avoiding risks.

Hedging, or hedging for short, means that when you buy a mining machine, you predict how much ETH the mining machine can produce in the next period of time (3-6 months), then borrow an equal amount of ETH, sell it directly at the current market price, and lock in the profit. Then, you use the ETH mined by the mining machine after it goes online to gradually repay the borrowed coins.

This can avoid the risk of a sharp drop in the price of the currency to the greatest extent. Of course, if the price of the currency rises sharply, you will not be able to obtain the profit of the sharp rise. However, for mining, the most important thing is the certain profit. And even if the price of the currency rises sharply, you will only lose the extra profit of the hedging for a few months. After the hedging period ends, you can still enjoy the extra profit of the high price of the currency. What's more, after the price of the currency rises sharply, the residual value of the mining machine will also rise.

Therefore, a sharp rise in coin prices is not the biggest fear of hedging. The biggest fear of hedging is a sudden increase in difficulty, which results in you not actually mining as many coins as you expected. Then the coins borrowed from other places cannot be returned. Therefore, I will talk about the risk of difficulty separately below.

(4) Difficulty skyrocketed

After the difficulty skyrocketed, not only would miners who hedged be in great pain, but miners who did not hedge would also face a decline in income. So is there a possibility of a skyrocketing difficulty in the next year? Let’s analyze it from several aspects:

a) Let's first look at the historical data. The figure below shows the historical trend of Ethereum's total network computing power. It can be seen that except for the crazy bull market in 2017, the total network computing power of graphics cards has remained at a relatively stable level. Even in June 2019, when the price of ETH rose to the highest point of the year at around $360, the total network computing power only slowly increased to 199T, which is about the same level as the current level. In other words, even if the current coin price rises by another 20%-30%, the total network computing power will probably increase by 10-20%, which is relatively slow.

Data source: etherscan.io

b) Graphics card mining machines are different from ASIC mining machines. For ASIC mining machines, as long as there are people who buy them, the manufacturers can produce them at full capacity, and the production capacity can be considered unlimited.

As for graphics card mining machines, there are only two core suppliers: AMD and Nvidia. Their core business is for ordinary consumers, and they will not easily increase production capacity due to the popularity of mining (this has actually happened, but both manufacturers have been affected to a certain extent, so they are more cautious now). Therefore, the supply of mining machines is not unlimited, and they will not emerge in large numbers in the short term.

c) The withdrawal of 4G video memory graphics cards mentioned above also has a certain offsetting effect on the increase in difficulty.

Combining the above factors, it can be concluded that the difficulty of Ethereum mining may rise slowly or fluctuate in the next few months, but it is unlikely to skyrocket.

(5) Risks of GPU Mining Machines

The graphics card mining machine itself is also very complicated. There are more than a dozen brands of graphics cards on the market, and the models are also varied. There are even unbranded so-called white cards. There is a big gap in the quality of graphics cards from different manufacturers, including materials, heat dissipation, workmanship, size and other factors that need to be considered.

Ordinary users are completely unable to distinguish the various traps here, and this cannot be explained in a short time. Therefore, it is recommended that ordinary users should not easily go to unfamiliar merchants to buy graphics card mining machines, and try to purchase products through more professional teams. There are specialized technicians who will comprehensively check the entire procurement, assembly and operation and maintenance process to help customers avoid pitfalls in this regard.

ETH mining revenue forecast

According to the data provided by the blockchain browser, the computing power of the ETH network has reached 215,010.36 GH/s, and the network difficulty is 2,733.64 TH. The block reward mechanism of Ethereum mainly consists of three parts: basic reward + transaction fee + reward for packaging uncle blocks. The basic reward was 5 ETH at the beginning, and it was reduced to 3 ETH after the Byzantium hard fork at block height 4370000, and it has now been reduced to 2 ETH; and the calculation method of uncle block reward is: 8-(block height-target block height)/8*basic reward.

The block time of Ethereum is about 15 seconds to produce a block, and there is no limit on the total amount of Ethereum, that is, the halving period.

According to the current currency price and relatively conservative unit computing power income, the static payback period of mainstream graphics cards on the market is within 300 days.

Under this year's graphics card mining market, the new cards suitable for mining are mainly AMD graphics cards, including 588, 598, 5500XT, 5600XT, 5700, and 5700XT.

Taking the two graphics card mining products currently on sale as an example, a prediction of the mining income of the two products is made for your reference.

(Statistical time: September 8, 2020)