Bitcoin mining and profit analysis

At present, there are many people who do not understand Bitcoin, let alone what Bitcoin mining is, and have joined the ranks of Bitcoin mining. The reason is that Bitcoin mining service personnel have become an industry. In fact, as long as you invest money and sign a series of agreements, you can obtain Bitcoin mining income.

As the old saying goes, "Don't invest if you don't understand". This article attempts to explore what Bitcoin mining is and the risks and benefits of mining investment from the aspects of the design of Bitcoin system architecture, what Bitcoin mining is, how to mine, and the cost structure and profit calculation of Bitcoin mining income, for the benefit of readers. If this article can help readers no longer misunderstand Bitcoin mining, or even generate the idea of ​​regulating the Bitcoin mining industry, it will be a great benefit.

1. Introduction to Bitcoin’s operating mechanism

If you want to fully explain the operating mechanism of Bitcoin, you need to use a certain foundation in computer and cryptography. Therefore, here we will only briefly introduce the operating mechanism of Bitcoin and try not to involve technology.

Simply put, the Bitcoin operating mechanism is mainly composed of three levels: nodes and transactions, blocks and blockchains, and networks. Nodes conduct transactions, transactions enter blocks, blocks form blockchains, and nodes are interconnected to form a network.

1. Node

On the website http://Bitcoin.org, you can download a node software called "Bitcoin core" (see the picture below). After registering, your personal computer will become a "full node". A miner is a full node. There is also a type of node called a light node (nightweight node). For example, your Bitcoin wallet is a light node.

2. Trading

Paying and receiving Bitcoin is a transaction. For details on how to implement transactions, please refer to Section 2 of the Bitcoin White Paper that I translated.

3. Block

In fact, the transaction process of Bitcoin is the process of continuously creating blocks. Because all transactions will be packaged into blocks. The block size is limited to 1MB, and each block can accommodate about 4,000 transactions.

4. Blockchain

A chain connecting all the blocks through hash pointers is called a blockchain.

5. Network

All nodes are linked together through some specific algorithms to form the Bitcoin network.

Simply put, the operating mechanism of Bitcoin is that first, a Bitcoin network is formed by nodes; second, these nodes trade Bitcoins with each other; third, the full node creates a block and puts the transaction into this block; the fourth step is to link the block full of transactions to the existing blockchain.

The system will reward a certain amount of bitcoins for the nodes that perform the third step above, currently 12.5, which is the creation or issuance of bitcoins. This step is mining, and we call this node a miner. I am an old accountant, and I think miners are actually accountants - they register entries (transactions) into account pages (blocks), and then bind the account pages into books (blockchain) in order.

2. The formation of the mining industry

The first generation of miners completed mining work on ordinary computers through CPU calculations.

In 2010, the birth of OpenCL made GPU mining possible. Soon, some people started using graphics cards or GPUs to mine, which was much faster than CPU mining. Then, the difficulty of mining increased, CPU mining became unprofitable, and all miners switched to GPU mining. This is the second generation of miners.

According to folklore, at some point in 2011, gamers suddenly found it very difficult to purchase a popular graphics card, which caused friction between the Bitcoin community and the gaming community. Interestingly, this actually promoted Bitcoin, and some gamers even became miners.

In 2011, someone used "Verilog, a hardware design language for field programmable gate arrays (FPGAs)" for mining, and GPU mining quickly became unprofitable. This is the third generation of miners.

The third generation of miners only existed for a few months, and then customized application-specific integrated circuit technology (ASIC) was born, and the fourth generation of miners appeared. This is what we currently call mining machines. They have no other uses and can only be used for mining. Moreover, a mining machine can basically only mine one kind of currency, such as Bitcoin mining machines.

You can buy a mining machine and put it on the balcony to mine. I saw someone do this online. However, due to the cost of mining machines, electricity costs and cooling costs, large professional mining farms have begun to appear in places with low temperatures, cheap electricity and fast network speeds. From a global perspective, mining farms are concentrated in Iceland, Georgia and China. From a Chinese perspective, mining farms are concentrated in western Sichuan and Inner Mongolia. Now, Chinese companies control more than 75% of the global computing power.

Mining pool. You can mine alone, but due to the randomness of Bitcoin mining, you may be very unlucky and not find anything for several months, and then you will be very envious of one of your friends who is lucky enough to mine a block within a month and get 12.5 Bitcoins, plus transaction fees, the income is more than this. At this time, someone said, join us, as long as you contribute the workload, we will distribute the mined Bitcoins to everyone who participates in proportion to the workload. This is the mining pool, which is similar to a mutual insurance organization for small businessmen or farmers. Its function is to reduce the probability fluctuation of finding blocks, that is, to reduce risks. Each mining pool has its own distribution method. Some miners will use this difference to find the right time to frequently jump to the pool to obtain greater benefits, but this operation is more difficult. From what I have observed in the mining farms in western Sichuan, it seems that no one does this.

Nowadays, most mining farms in China have joined a mining pool. For example, many mining farms in Aba Prefecture, Sichuan Province, have joined the BTCC mining pool, and many mining farms in Inner Mongolia have joined the F2Pool mining pool. The reason is that doing so can basically reduce volatility and lock in risks, which is the most important thing for investment. In addition, the mining pool fee is 0.

The above picture is the mining result chart of the last 24 hours (data from http://www.qukuai.com/pools ). AntPool, BTC.TOP, viaBTC, http://BTC.com , and http://BW.com are all mining pools controlled by Chinese companies. Generally speaking, the ratio of the number of blocks mined is the computing power ratio. The above five mining pools account for 74.57% in total. F2Pool (Fish Pool) and other mining pools are not shown above for unknown reasons.

3. Mining Revenue Analysis

According to traditional feasibility study reports, this benefit analysis must include parameter settings, revenue, cost, expense, profit and sensitivity analysis, and must dynamically consider factors such as the trend of revenue and cost changes. I will attach this type of analysis to the end of the article as an attachment, and you can read it carefully if you are interested. Here, in order to be more intuitive, I just statically calculate the rate of return at 11:00 on October 21, 2017 for your reference.

1. Income

Theoretical benefits:

According to the data provided by F2Pool, every 10,000 hashrates can generate approximately 2.1641 bitcoins every 24 hours (in fact, there is no such thing as “1 bitcoin”, I can talk about this when I have the chance).

Bitcoin Price:

40,187.53 yuan (RMB, all the following are in RMB).

Cash flow: (10,000 hashrate, 24 hours)

2.1641×40,187.53＝86,969.83 yuan

2. Cost

Mining machine cost:

At present, the price of 1 hashrate is 1071.43 yuan, so the cost of a 10,000 hashrate mining machine is 10,714,285.71 yuan. Assuming an annual depreciation rate of 80%, the daily depreciation cost is 23,483.37 yuan.

Electricity costs:

Every 1,000 hashrate consumes 1 kWh of electricity per hour, so 10,000 hashrate consumes 240 kWh of electricity in 24 hours. Based on the average electricity price of 0.35 yuan per kWh in western Sichuan, the electricity cost is 84 yuan.

Management Fees:

According to the relevant agreement, the management fee is approximately RMB 0.1 per kilowatt-hour of electricity, so the management cost is RMB 24.

Finance costs:

Assuming 80% financing and financing cost of 15% per year, the financial cost per 24 hours is RMB 3,522.50.

Other expenses:

Cooling and ventilation, factory depreciation or leasing, transformer transformation, etc. are one-time investments. Based on a computing power scale of 10,000, the investment is approximately 500,000 yuan. If it is used for three years and the residual value is not taken into account, it is approximately 456 yuan per 24 hours.

Total cost: 27,569.87 yuan

3. Benefits

The net cash inflow every 24 hours was 82,883.33 yuan, and the profit was 59,399.96 yuan.

In summary, it takes about 129 days to cash out, with an annual income of about 21,680,985.40 yuan and a rate of return of 202.36%. If rolling investment in mining machines is considered, the rate of return will increase significantly. According to more detailed calculations, the annual rate of return is conservatively estimated to be around 368% (mining and selling method).

IV. Risk Analysis

Risk of Bitcoin price fluctuations. Bitcoin prices have been cut in half many times in history.

The risk of increased mining difficulty mainly comes from the large-scale increase in mining computing power.

Policy risk. The possibility of relevant agencies using violence to physically destroy the mine is extremely low. Other restrictions have little effect.

The risk of rising electricity prices. If the power grid intervenes strongly and cracks down on direct supply from power plants, the electricity price will rise by about 0.1 yuan. Other increases due to market reasons are unlikely, because the surplus electricity situation in western Sichuan will not be alleviated in the next five years.

Tax risk. As far as I know, the Sichuan West Mine has not paid any taxes. If the tax authorities intervene, the income tax rate will be 15%, that is, 15% of the profit will be paid as tax.

5. Mining Industry Prospects

According to the current status of mining in western Sichuan, it can be seen that the entire industry is in the early stage of development and belongs to the grassroots state. Many factors such as industry self-discipline, government supervision, and management model are in a disorderly development state. How will it develop next? We can actually refer to the development history of the gold rush industry - from early individual operations to professional operations of large companies. Will this also be the next step for the mining industry? The answer is yes. Some people will ask, what happens after all the bitcoins are mined? After 2140, in fact, it should be before that, the business of these professional companies will gradually develop from mining to system maintenance service providers, similar to China's UnionPay, Alipay or international Paybay, etc. You can imagine their position in modern Internet finance.

6. What should we do?

If we want to enter the mining industry, we must adhere to the path of formalization and legalization, even if the profit is a little less. This is the key to investment - to do the industry well, to be practical, and to benefit the country and the people.

Then, the first step is to register a company, complete the industrial and commercial, tax, and banking procedures;

The second step is to seek support from the local government and try to obtain relevant approval documents;

Third, negotiate with the local power grid company to obtain formal electricity use procedures;

Fourth, improve corporate management institutions, establish formal accounting records, and manage employees strictly in accordance with laws and regulations.

If we can achieve the above four points, we can avoid corresponding policy risks, and the corresponding financing capabilities will be strengthened, so that we can make our company a century-old business.