Mining, choosing the right mining machine is half the battle, a guide to scientifically purchasing mining machines

In the two articles "Is Bitcoin Mining a Good Business?" and "What Are the Ways for Ordinary Users to Participate in Mining?", we introduce the importance of mining timing and the paths for ordinary users to participate in mining. Bitcoin mining is a model of the "tragedy of the commons". The more computing power there is in the entire network, the less profit miners will receive. As Coase's law says, resources will always end up in the hands of those who are better at using them. The same is true for Bitcoin mining. The computing power will eventually be concentrated in the hands of miners with technical and cost advantages. Choosing a mining machine is a reflection of better use of resources. A good mining machine can reduce costs, increase revenue, and shorten the payback period. Today we will introduce how to choose a mining machine.

01

Income approach vs. cost approach

There are two main methods for purchasing mining machines: income method and cost method.

The income method mainly looks at the static payback period of the mining machine. Static payback period = mining machine price divided by the daily net income of the mining machine. The advantage of the static payback period is that it is intuitive and it is clear at a glance how many days it will take to pay back. It is one of the important indicators for purchasing mining machines.

The cost method is to use the cost of manufacturing a mining machine and compare it with the current selling price of the mining machine. If the difference between the two is several times, it means that there is a large bubble in the price of the mining machine, and buying it at this time will involve a greater risk; if the selling price of the mining machine is close to or even lower than the manufacturing cost of the mining machine, it means that the bubble in the selling price of the mining machine is very small, and the buying risk is lower at this time.

The cost method requires disassembling the mining machine and calculating the costs of its components, processes, materials, etc. This has a high threshold and only professional teams have the ability to do cost analysis.

In what cases should the income approach be used and in what cases should the cost approach be used?

When the market is good and the price of currency continues to rise, using the income method is safe and secure, and can obtain good returns. Share a real case:

At the end of 2018, the price of Bitcoin plummeted, breaking through the shutdown price of some mining machines. Miners sold their mining machines in panic, and the price of S9 in the second-hand market fell to around 700 yuan. After that, the market experienced a one-sided bull market, and miners who bought the S9 at the bottom quickly recovered their investment and achieved nearly ten times the profit in one year.

The income method has great limitations, and limitations mean risks. When the price of coins rises rapidly, the static payback period of mining machines becomes very short, and the selling price of mining machines also soars. If you buy mining machines at this time, and then the price of coins falls and the computing power rises, you may not be able to get your money back. This situation has also happened in reality:

From the end of 2017 to the beginning of 2018, the second-hand market price of S9 was 28,000 yuan. According to the price of the currency and the difficulty of mining at that time, the static payback period was less than 150 days. After that, the market went bearish, the price of the currency fell all the way, but the computing power continued to rise. So far, that batch of S9 mining machines has only paid back about 70%. With the launch of new mining machines with better performance, the S9 will most likely be shut down before or after the next halving. According to the current income calculation, it is very likely that it will not be able to pay back.

In the above situation, using the income method to buy mining machines may result in the risk of not being able to recover the investment. In this case, the advantage of the cost method is reflected, avoiding buying mining machines at the peak of the bubble. The disadvantage of the cost method is that the threshold is high, and only professional teams have such analysis capabilities. The Litecoin Mining Pool is very proficient in the cost analysis method and has helped customers avoid buying mining machines at the peak of the mining machine bubble many times:

From June to August this year, many old users of joint mining wanted to buy Antminer S17 series mining machines. Based on our analysis of the cost method, we felt that there was a big bubble, so we did not launch this batch of joint mining at that time. In October, the price of S17 mining machines really fell sharply, and the decline was much higher than the output of buying a few months earlier, which successfully helped users avoid risks. This is the power of the cost method.

The cost analysis method can show how big the bubble is in the price of mining machines. Assuming that the computing power cost of a mining machine is 150 yuan/T, and the selling price is around 200 yuan/T, before the halving, the net profit per T of computing power can reduce the cost of the mining machine to below 150T/yuan. In this case, the risk of buying a mining machine is relatively small.

To sum up, when it is predicted that the market will rise rapidly and continuously, the income method can be used to select mining machines, but the income method cannot determine whether there is a bubble in the price of mining machines. If the market reverses and turns bearish, the limitations of decision-making based solely on the income method will be exposed. The cost method can make up for the shortcomings of the income method and avoid buying mining machines at the peak of the bubble.

Both the income method and the cost method make decisions based on the current situation and are the results of static game deduction. Mining is a dynamic game between mining machine manufacturers and miners. The fluctuation of currency prices, the rise and fall of computing power, and the continuous iteration of new mining machines all reflect that mining is a dynamic game. Therefore, the work of purchasing mining machines is only half done here. On the basis of the income method and the cost method, you also need to consider whether to buy new machines or old machines, and whether to buy futures or spot.

02

Buy a new machine or an old one?

First of all, we should clarify that the new and old machines we are talking about here are based on the performance of the machine. The new machine has good performance, and the old machine has poor performance. In this context, the S17 in the second-hand market is a new machine, and the S9 that just came off the production line is an old machine.

Energy efficiency ratio is the most important indicator for evaluating performance. Energy efficiency ratio means how much electricity is needed for a mining machine to output 1T computing power. The lower the energy efficiency ratio, the better the mining machine performance. The shutdown price of a mining machine depends largely on the energy efficiency ratio of the mining machine. The operating cost of a mining machine is mainly electricity. The price of the currency when the value of the mining machine's currency output just covers the electricity cost is the shutdown price of the mining machine. The better the performance of the mining machine, the lower its energy efficiency ratio, the lower the shutdown price, and the higher the safety margin.

In other words, the performance of the mining machine is related to the shutdown price of the mining machine and the safety margin of the mining machine. If the mining machine is purchased and the price falls below the shutdown price, the mining machine is no different from scrap metal, so when buying a mining machine, you should consider whether to buy a new or old one. We use S17Pro-56T and S9 as representatives of new and old mining machines, respectively, as examples:

▲Comparison of safety margins between new and old mining machines

From the above data, it can be seen that the safety margin of the S9, a representative of the old mining machine, is very low, and a 5% drop in the coin price will trigger a shutdown; while the S17pro-56T, a representative of the new generation of mining machines, can withstand a drop in the coin price of more than 50%, and has a very high safety margin.

There is a hidden layer of information behind the safety margin. Low-performance mining machines are the safety cushion of high-performance mining machines. Take S9 and S17 as an example. If the price of the currency drops, it triggers the shutdown of S9, and the computing power of the entire network decreases. The unit computing power of S17 with better performance increases the output of coins. This is the safety cushion that low-performance mining machines provide to high-performance mining machines. The lower the energy efficiency ratio of the mining machine, the thicker the safety cushion. Therefore, the safety margin depends not only on the "shutdown currency price", but also on whether the mining machine has a safety cushion and how thick the safety cushion is.

Everything has two sides. Old mining machines with low safety margins are priced low precisely because of the risk of shutdown. If the price of the currency rises rapidly after buying a mining machine at a low price, the net profit increase, payback period, and price increase of the old mining machine will far exceed those of the new machine. It is not difficult to understand with an example:

Assume the current situation:

The output value of the new machine currency is 80 yuan/day, of which the electricity fee accounts for 50% of 40 yuan/day, and the net income is 40 yuan/day;

The output value of the old mining machine is 10 yuan/day, the electricity fee accounts for 90% of the total, which is 9 yuan/day, and the net profit is 1 yuan/day;

Assume again that the price of the coin doubles and the computing power of the entire network remains unchanged:

The output value of the new mining machine coins will double: 160 yuan/day, the electricity cost remains unchanged, 40 yuan/day, and the net income will triple to 120 yuan/day;

The output value of the old mining machine coins has become 20 yuan/day, the electricity cost is 9 yuan/day, and the net profit is 11 yuan/day, which is 11 times the previous value.

▲The price of coins has risen, and the revenue growth of new and old mining machines is compared.

When the price of coins rises rapidly, old mining machines perform better than new mining machines in terms of daily net income, payback period, and price increase.

The old mining machines well reflect the property of investment that high risks are accompanied by high returns: on one side is the warning of zero risk, and on the other side is the temptation of high returns. Should you choose an old mining machine to take a gamble or choose a new mining machine to mine steadily?

The editor chooses new mining machines to be safe and stable miners. Once the old mining machines with low safety margins are turned off, the mining machines will lose their output and liquidity, and can only be passively shut down and wait. The shutdown and storage of mining machines will incur additional expenses. The longer the time, the more new mining machines on the market, and the greater the risk that the old mining machines will never be turned on. This situation is unbearable for ordinary users. The old mining machines have a small fault tolerance space and are not anti-fragile. You cannot risk going to zero to bet on the rise to bring high returns. Safe "survival" is more important than anything else.

You can choose a cost-effective machine from high-performance machines. The specific steps are as follows:

For machines with the same performance, you can compare the price per unit of computing power and choose the one with the better cost performance;
If there is a difference in performance, the number of days required to dig back the performance premium can be calculated.

Let’s illustrate this with a specific case:

Assume that we have the following three mining machines for us to choose from: T17-40T/T17-42T/S17Pro-56T. Their related information is shown in the following table (assuming that the failure rates of the three machines are the same):

▲The price of the mining machine comes from a mining machine dealer

1. The energy efficiency ratio of T17-40T and T17-42T is the same, 55W/T. The price per unit computing power of T17-40T is lower, and the cost performance is higher;

2. The energy efficiency of S17Pro-56T is lower than that of T17-42T, so the price per unit computing power is 75 yuan/T higher. The mining machine needs to run effectively for 1550 days (about 4.25 years) to dig out the performance premium of 75 yuan. Few mining machines have such a long economic life and the safety margin brought by the slight performance advantage is also limited.

To sum up, among the above three mining machines, T17-40T is the best choice that takes into account both safety margin and cost performance.

03

Buy spot or futures?

In terms of time, mining machines are divided into spot and futures. Buying spot or futures is a matter of economics. Spot mining machines get mining machines earlier, get benefits earlier, and enjoy time premium, so the price is higher. Compare the net income and time premium of the mining machine within the time difference. If the income is greater than the price difference of the mining machine, then it is more cost-effective to buy spot, otherwise it is more cost-effective to buy futures. This judgment is also based on the trend of future currency prices. It is difficult for ordinary users to make a correct judgment on the short-term currency price trend. It is recommended to compare static income with the premium of spot mining machines.

Mining income is affected by many factors such as currency price, computing power, electricity cost (flood season/dry season), halving cycle, etc. The longer the time span, the greater the variables, and it is difficult to calculate accurately. If a certain model of mining machine has been tested by the income method, cost method, safety margin, and cost performance, there is actually no obvious difference between buying a spot mining machine or a futures mining machine. It is just not recommended to buy a mining machine with a term of more than two months, especially when the halving is approaching.

04

Summarize

Whether to participate in mining is a systematic decision, and you need to consider many aspects such as the timing of participation, the method of participation, and the selection of mining machines. If you finally decide to participate in mining, you need to consider how to choose a mining machine. Mining is a complex game between mining machine manufacturers and miners. Choosing a mining machine is a process of selection:

1. First, analyze the mining machines from the perspective of revenue method and cost method, and select the mining machines with short payback period and small price bubble; the cost analysis method is very professional and critical, and only professional mining institutions have such capabilities. Litecoin United Mining applies this method and has helped users avoid losses many times;

2. After passing the first level, you need to select from the perspective of energy efficiency and cost performance to find a mining machine with low shutdown coin price and low unit computing power price;

3. After successfully passing the above two levels, whether to buy spot or futures is mainly a matter of economics. Unless encountering extreme circumstances, the difference will generally not be too big. Considering that the halving time is approaching, it is not recommended to buy futures mining machines with a time of more than two months.