Is Ethereum Mining a Good Business?

Proof of Work (PoW) is essentially a fair way to issue tokens. It is not only Bitcoin mining, but also many other currencies, such as ETH, BCH, DASH, etc., which are all issued through PoW. Zhikuang University will gradually produce mining content for other currencies in the future.

In recent months, the price of Ethereum has risen sharply, and the corresponding mining income has increased, and the payback period has shortened. Is Ethereum mining a good business? Is now a good time to enter Ethereum mining? As the price of Ethereum rises, the output of unit computing power coins increases every day. Many friends have begun to pay attention to Ethereum mining. Let's talk about Ethereum mining today.

01Ethereum mining algorithm and computing power scale

The Ethereum mining algorithm has higher requirements for memory, and the purpose of this design is to limit the use of ASIC chips in Ethereum mining to a certain extent. From the results, the vast majority of Ethereum mining machines are graphics card machines, which reflects the success of the Ethereum mining algorithm in resisting ASIC . From the absolute value of the computing power scale, the computing power of the entire Ethereum network is about 200TH/s, and the computing power of the entire Bitcoin network is about 120EH/s, the latter is nearly 600,000 times the former.

Ethereum network computing power, source: miningcoin.com

The above comparison is not very meaningful. Let's compare from another angle. Assuming that we spend ¥10 million each to buy a mainstream Bitcoin mining machine and an Ethereum mining machine, and compare the computing power increase of the two:

Impact of investing ¥10 million on the overall network computing power

In the table above, the unit of Bitcoin computing power is TH/s, and the unit of Ethereum computing power is MH/s. The Bitcoin mining machine is Shenma M31S, and the Ethereum mining machine is 5700XT. They are both machines with the highest shipments this year and are quite representative. Investing ¥10 million worth of computing power on both sides, the increase in the total network computing power is at the same level, with little difference. From this perspective, the "immunity" of Ethereum's total network computing power to capital is comparable to that of Bitcoin, and the Ethereum network is very robust.

02Current revenue and payback period of Ethereum mining

The mainstream graphics card manufacturers on the market are AMD and Nvidia. In the Ethereum mining market, the more popular graphics cards are Nvidia's 1660S, AMD's 5600XT and 5700XT.

We will explain the current revenue and payback period of graphics card mining based on the graphics cards that can be quoted on the market.

Graphics card mining income and payback period

At the current price of the currency, the net income of a 5700XT 8-card machine is 115.6 yuan per day. According to the current market price, the static payback period of Ethereum mining is about 240 days , and the static payback period of Nvidia's 1660S is only 210 days. From the perspective of the static payback period, this investment is extremely attractive.

It should be noted that currently, both the price of Ethereum and the daily output of coins per unit of computing power are fluctuating greatly. For example, today's mining website shows that 1MH/s can mine 0.00013576ETH a day. The above table is the payback period calculated based on the average daily output of 1MH/s in the past 7 days. Of course, the recent surge in miners' income is mainly due to the popularity of the DeFi concept. We conservatively estimate that the static payback period is about 10 months .

03 Factors affecting Ethereum mining revenue and potential risks

The static payback period for Ethereum mining is only 10 months or even shorter. Some people are definitely worried about the risks of Ethereum mining. Let's take a look at the factors that affect the benefits of Ethereum mining and the potential risks of Ethereum mining.

1. Network computing power

The total network computing power is one of the important factors affecting the mining revenue of Ethereum.

Currently, the actual average block time of Ethereum is about 13 seconds, the system reward is 2ETH , and about 5% of the blocks are uncle blocks. The higher the total network computing power, the less system rewards are allocated to each unit of computing power.

Ethereum block time in 2020

In addition to block rewards, Ethereum miners' income also includes mining fees . Recently, liquidity mining on Dex such as Uniswap has been hot, and mining fees on Ethereum have skyrocketed, and even the mining fee for a single block has exceeded 4ETH. Of course, such super-high fees are unlikely to continue for a long time, but the rise of the DeFi concept is very beneficial to increasing miners' fee income .

When the system rewards and handling fees are basically guaranteed, the reward per unit of computing power depends on the computing power of the entire network . The computing power of the Ethereum network is relatively stable. From 2019 to now, the computing power of the entire network has fluctuated around 200TH/s.

Ethereum computing power trend chart from 2019 to 2020

Currently, graphics cards are in short supply on the market, and new graphics cards entering the mining circle are even harder to come by. This is mainly due to graphics card manufacturers and the epidemic stimulating the consumer market for graphics cards, resulting in a very short supply of graphics cards in the short term. Zhikuang University has learned through multiple channels that if the price of Ethereum and miners' handling fees continue to rise, the Ethereum computing power may increase to a certain extent this year, which is a potential risk for miners .

For new miners, there is a definite benefit. Ethereum mining requires the storage of DAG files, which will continue to grow as the block height increases. Around December this year, the file DAG will exceed 4G, which will cause mining machines with 4G video memory to no longer be able to mine Ethereum. This batch of graphics cards may be used for modification or flow out of the mining circle. It is conservatively estimated that the computing power provided by such graphics cards accounts for about 30% of the computing power of the entire Ethereum network . That is to say, when the Ethereum DAG file exceeds 4G, about 30% of the computing power will be withdrawn from the Ethereum network for a period of time, which means that mining machines with 6G or 8G video memory can mine more coins in the corresponding period of time.

Countdown to mining Ethereum with 4G graphics cards Source: www.sparkpool.com/token/ETH#sparkpool

2. Currency price fluctuations

Buying a mining machine is a one-time investment, while mining income is generated gradually. The fluctuation of the currency price will have a great impact on the payback period . The current price of Ethereum is $420. If there is a significant drop, the payback period will be greatly extended. Hedging can avoid such risks . For example, if you have a batch of Ethereum mining machines, according to the current currency price, the payback period is conservatively estimated to be about 10 months, and 10 ETH can be mined every month. You can find a financial service provider in the circle and choose to hedge the mining currency output for three months, half a year or even 10 months. We have learned about it. At present, the financial service providers in the circle either have relatively simple and crude hedging plans or are not very friendly to retail investors.

If miners have some Ethereum in their hands, they can sell the coins for hedging based on the mining output and hedging period .

3. Safety margin and residual value of mining machines

The safety margin can be simply understood as the shutdown coin price . When the mining income is not enough to cover the mining machine operation and maintenance costs, the coin price is called the shutdown coin price. According to the current output, the annual electricity price of 0.36 yuan/kWh, and the 4J/MH energy efficiency ratio, the current shutdown coin price of the mining machine is about 380 yuan . Ethereum mining electricity costs account for a relatively low proportion, and there is a high safety margin. Ethereum graphics card mining machines have a higher residual value. The residual value rate of a graphics card that has been mined for two years is about 30% of the market price of the graphics card . For Ethereum miners, the residual value of the graphics card is an important part of the income.

The price of graphics cards has also seen a significant increase this year. This year, graphics cards such as 1660S, 5600XT, and 5700XT have all increased by about 30% or even higher, which is also a potential risk.

4. Ethereum 2.0

Some people are also worried that the arrival of Ethereum 2.0 will have an impact on Ethereum miners. Ethereum 2.0 is mainly divided into three phases, Phase 0, Phase 1 and Phase 2. Currently, Phase 0 has not yet been launched, and it is conservatively estimated that Ethereum graphics card mining machines can still mine for more than a year. According to the 10-month payback period, and hedging the output of coins for half a year or even the entire payback period, now is a good time window for Ethereum mining .

04
Summarize

According to the current market situation, the static payback period of Ethereum mining is conservatively estimated to be 300 days or even shorter, and the shutdown coin price is less than ¥400, which has a high safety margin .

Affected by graphics card manufacturers and the market, the supply of new graphics cards to the mining circle is very limited. In addition, the Ethereum DAG file will exceed 4G by the end of the year, which will cause a callback period in the computing power of the entire network. This will help increase the coin output of new machines (with graphics memory exceeding 4G) and shorten the payback period of new machines .

Ethereum 2.0 has not yet been launched. According to the current progress, it is conservatively estimated that Ethereum graphics card mining machines can still mine for more than one year or nearly two years. After Ethereum completely switches to PoS mining, graphics card mining machines can no longer mine Ethereum. The residual value of graphics cards is also a part of mining income that cannot be ignored .

To sum up, at present, Ethereum mining is a very good investment option. Considering the market volatility, it is best to hedge the coin output within half a year or even the entire static payback period to avoid the risk of coin price fluctuations .

Risk warning : The content of this article is only the author’s personal opinion, does not represent the views or position of Zhikuang University, and does not constitute any investment opinion or recommendation.