CRYPTO CURRENCY Should you invest?
The ethics, the risks and how to take your first steps
“Buy them only if you’re prepared to lose all your money,” said Bank of England governor Andrew Bailey in May 2021. He was talking about cryptocurrencies, one problem of which is that they “don’t have intrinsic value”.
Does that make them a bad investment? And are traditional currencies any better? Sterling was underpinned by gold until Britain sold off half of its reserves between 1999 and 2002, when gold was at its lowest value in 20 years. When governments can make fundamental decisions like that, whether or not the electorate approves, decentralised cryptocurrencies over which no single party has absolute influence start to look appealing. Particularly if they’re set up to mimic a traditional gold-backed means of exchange.
Indeed, Bitcoin’s pseudonymous creator Satoshi Nakamoto mimicked gold in two key ways: first by making it rare, and thus giving it more intrinsic value, and second by making it incredibly difficult to mine.
“It is its very cost of production that gives it value (among other factors),” wrote Dominic Frisby in
MoneyWeek last October. “You can’t just conjure up Bitcoins. You have to do some hard computer work first and thereby make your contribution to the [Bitcoin] network. And even if you do this, there is no guarantee you’ll get bitcoins at the end of it. There is risk.”
So, there’s a chance you could burn a considerable amount of electricity for no financial gain. That’s just one of the risks involved in mining cryptocurrency, and it needs exploring if we’re to discover whether it’s possible to turn a profit.
The biggest cost of mining: energy
“Any [crypto] coin with a limited issue over time becomes significantly more complicated [to mine],” said Laura Shin of Coin Trade & Mine
( coin-tradeandmine.com), a site dedicated to mining and trading. That means mature cryptocurrencies such as the 12-year-old Bitcoin will be significantly more difficult to mine than younger alternatives. To make money through mining, you’re going to need to make an investment in hardware and sufficient power to run it. Minimising both costs is essential to turning a profit.
Evidence presented to the United States Senate Committee on Energy and Natural Resources by Princeton
To make money through mining, you’re going to need to make an investment in hardware and sufficient power to run it
University’s Arvind Narayanan, outlined how Bitcoin miners were computing “about 50 billion billion hashes… every second. Most mining is carried out in large-scale commercial operations using purpose-built computing devices specialised to the task of repeatedly computing these hashes – and nothing else.”
Combined, Narayanan estimated, those operations were consuming just under 1% of the global electricity supply “or slightly more than the electricity consumption of the state of Ohio or that of the state of New York”.
Narayanan’s written testimony ( pcpro.link/324arvind) was presented in 2018 – the same year in which Elite Fixtures calculated the cost of energy burned to mine a single Bitcoin in 115 different countries. These ranged from $1,190 in Trinidad and Tobago to $26,170 in South Korea. In the UK, the cost was $8,402. So, to maximise your profit, it would have been best to set up in Trinidad and Tobago.
Even then, though, mining isn’t a get-rich-quick scheme. As we’ve noted, mining cryptocurrencies gets more difficult over time and, by 2020, digital assets exchange Zipmex stated that “it takes a large setup nearly 30 days to mine one bitcoin. This setup is not as economical as we think it is, after deducting the electricity cost and the overall hardware and software cost you will be left with 0.1 bitcoin of profit every month at best. With the majority of setups and the electricity cost and some manpower, it would cost you a total of $73,000 to process one bitcoin every month.”
At the time of writing, a single bitcoin is worth $34,471, which is below Zipmex’s calculated costs – but that doesn’t mean it’s not worth doing, as there’s no way to know that a single coin won’t be worth $100,000 by the end of the year. Furthermore, Zipmex itself says that “with economic and reliable mining pools and hardware, you can easily earn enough to break even while collecting some revenue on the side”.
Logically, if the cost of electricity got significantly more expensive in one location, you could just move your mining operation somewhere else to maximise your profit. Except it’s not that simple.
Moving a mining operation
The Cambridge Centre for Alternative Finance has been tracking where most Bitcoin mining takes place. In April 2020, the most recent period for which figures are available, China accounted for 65% of all work completed, with the US a distant second at 7.2%.
Expect that to change. In May 2021, China announced a crackdown on Bitcoin mining and trading activities and restrictions were placed on banks and payment companies providing crypto-related services. Bitcoin and some other cryptocurrencies immediately lost 15% in value, and further losses were on their way. Later in the month, the Inner Mongolia Development and Reform Commission said that “telecommunications companies and internet firms which are engaged in cryptomining will see their business licences revoked by regulators,” according to Reuters, and explained the move as part of a drive to meet energy efficiency targets in a region heavily dependent on coal. Sichuan followed suit in June, despite mining activities there being largely driven by cleaner hydroelectric sources.
By the end of the month, the value of Bitcoin was down 50% and mining machines were “selling like scrap metal” according to Reuters ( pcpro.link/324reuters). This isn’t surprising: although you can mine cryptocurrency on a desktop PC, commercial mining operations use specially designed hardware, and finding a buyer isn’t as easy as selling a job lot of laptops.
Any mining operation that wants to continue being profitable really needs to keep up with the latest hardware
This wasn’t the first time the value of mining hardware had dropped through the floor, either. In November 2018, the International
Business Times reported that, with Bitcoin hitting a then 13-month low of $4,300: “Some small and mediumsized miners in China’s Xinjiang and Inner Mongolia have been selling their mining machines in the secondhand market. The miners were not able to cover the electricity cost by mining currencies with their older machines… A mining machine bought at a price of about 20,000 yuan ($2,885) a year ago is being sold for a price between 100 yuan to 1,600 yuan. Discussions on Reddit echoed it was difficult to sell these machines even at the quoted low price.”
The alternative, then, would be to transport the operation to a more favourable jurisdiction. The time taken could be minimised by flying the hardware between the two locations but, warns mining hardware company Compass, “air freight can be up to five times as expensive” as surface transport. So, you put them on a boat, despite the fact that “sea freight isn’t cheap, either”. Compass continues: “moving goods by freight is measured by shipping containers, called twentyfoot equivalent units (TEU). Some measure in forty-foot equivalent units (FEU). The largest of vessels, like the Ever Given of Suez Canal fame, can hold some 20,000 TEU.”
Over the past six months, the price of ferrying an FEU across the Pacific has risen almost 200% to more than $6,000 per unit. But, more seriously, the estimated time required to ship a single 20ft container from Shanghai to San Francisco is up to 32 days. From Guangdong to Trinidad and Tobago, for anyone who wants to benefit from cheap electricity, the transit time increases to a possible 41 days. And, while at sea, the hardware isn’t earning, so the lost revenue could dwarf the cost of shipping.
Ideally, if you want to generate a profit from a mining operation, you need to set up in a territory where you can remain for the longer term.
Generating money through mining
Turning a profit through mining, therefore, relies on low energy prices, political stability and, as your PC is unlikely to be up to the job, dedicated mining hardware. Assuming you had everything you needed to host it, you could buy an Antminer S19 Pro for £6,500. Its power consumption is around 3.25kW and its hashrate is 110TH/sec. With the UK average cost of electricity standing at 17.2p per kWh at the time of writing, and that
converting to 24 cents, it would cost around $18.72 per day to mine around the clock ($6,833 annually), and generate 0.0007 BTC per day (0.2563 BTC annually). That would deliver a profit of $4.25 (£3.05) per day, or $1,551 (£1,116) annually. However, you would still need to pay down the cost of your hardware, which, at that rate, would take around six years. After that, you’d start making money, but only without other costs, such as maintenance or upgrades.
But there’s a further complication. In December 2020, CryptoAge reported that “it has become 20 times more difficult to mine Bitcoin in the past three years”. So, “cryptocurrency miners are now getting 20 times less for the same work they did in 2017”. That’s because every time 2016 blocks have been calculated, each of which takes the global mining network around ten minutes to resolve, the complexity of the algorithm is tweaked to compensate for technological advances in the mining hardware and avoid the network running away with itself. Any mining operation that wants to continue being profitable really needs to keep up with the latest hardware.
That’s why regular CPUs, which were where mining originally took place, were unseated by GPUs, which were better suited to the complex maths involved. Today, many large-scale mining
We can’t emphasise enough that using your CPU to mine for crypto is an incredibly bad idea as it’s so slow and inefficient
operations have switched again to field-programmable gate array (FGPA) and application-specific integrated circuit (ASIC) chips, as found in the Antminer S19 Pro.
If you’d rather not handle ongoing upgrades and maintenance, you can mine in the cloud using services such as Shamining ( shamining.com),
Hashing24 ( hashing24.com), Genesis Mining ( genesis-mining.com) and others. Not only do you benefit from the expertise of teams whose job it is to operate and refine a mining operation full time: in many cases, you can also make responsible choices regarding energy consumption. Shamining has a focus on solar and wind energy, for example, while Genesis Mining is based in Iceland, a country where 80% of power comes from renewable sources.
Most cloud mining services require an upfront payment, and many give you the option to withdraw profits on an ongoing basis. When choosing one, check the minimum required investment, minimum contract length, expected profit and the terms on which you can withdraw your share of the operation’s earnings.
Can you still use a PC?
Despite all the problems we’ve described around mining, you may still be wondering if you can use your own computer or do you need a specialised rig? The answer is yes, but with many caveats.
One approach is to join forces with others, and NiceHash ( nicehash.com) is an obvious choice. However, just to show the risks involved with crypto, it was hit by an attack that stole $64 million worth of its coins back in
2017. Still, its profit-sharing approach is an interesting one, and was (a little bizarrely) copied by Norton with the latest release of its Norton 360 antivirus software.
The idea (as with NiceHash) is that it will use the “idle” computational power of your system to mine for cryptocurrency. In Norton’s case, Ether. Your earnings, such as they are, will then be transferred into Norton’s own Crypto Wallet.
However, we can’t emphasise enough that using your CPU to mine for crypto is an incredibly bad idea as it’s so slow and power-inefficient. You’ll burn up far more money paying for your electricity than you’ll make.
This is why we mention GPUbased rigs above. Graphics cards, with their abundant cores and parallel processing, are far better tuned to mining, so if you have a discrete, powerful graphics card then it may just net you some cryptocurrency.
Official use of digital currencies
China and the UK are investigating establishing their own digital currencies. In April 2021, the Bank of England announced the creation of a Central Bank Digital Currency (CBDC) Taskforce “to coordinate the exploration of a potential CBDC [which] would be a new form of digital money issued by the Bank of England and for use by households and businesses. It would exist alongside cash and bank deposits, rather than replacing them.”
However, the Bank of England is keen to point out that “a CBDC would be fundamentally different to cryptocurrencies and cryptoassets” and that “cryptoassets… do not currently pose a risk to monetary or financial stability in the UK”.
Introducing a CBDC would be a logical move, as the Bank’s own figures show that traditional cash is now used for less than a third of all transactions, with the remainder being electronic transfers driven by debit and credit cards, automated credits and direct debits. However, if it was hoping to come up with a snappy name for its mooted digital currency, it may have missed a “golden” opportunity, with the aptly titled Britcoin emerging elsewhere in summer 2021 (see britcoin. finance).
While the Bank of England is cautious about traditional cryptocurrency and related assets, other jurisdictions are more welcoming. The Swiss canton of Zug, which is home to several fintech and crypto operations, announced in February 2021 that residents could pay their taxes using Bitcoin or
Ether. But, said the canton’s finance director, Heinz Tännler, “this is of course also an image campaign. A large part of the fintech industry is at home in Zug, so it is important that we lend a hand and not ignore new technologies.”
Zug issues residents with a QR code that, when scanned, initiates a transfer. Zug receives Swiss francs and the cost of the conversion from cryptocurrency is borne by the taxpayer, rather than the canton. This presents residents the opportunity to earn a small amount using crypto, since by initiating the transaction at a time when the currency is strong, they will pay fewer crypto coins to transfer an equivalent number of francs, allowing them to benefit from fluctuating exchange rates.
In June 2021, El Salvador went further and voted to make Bitcoin legal tender. It was “a move that analysts say risks putting its economy at the mercy of the digital currency’s sharp swings,” reported The Wall
Street Journal, but, “the designation allows Bitcoin… to be used to buy goods and pay taxes and bank loans. Businesses would be required to accept Bitcoin for payment, with the Bitcoin-dollar exchange rate set by the market.”
Alternative ways to turn a profit
In June 2021, BBC News reported on Philip Hughes’ Denbighshire cattle farm, which is mining Ether on-site as a by-product of its agricultural
activities. Hughes has installed an anaerobic digester to generate electricity from hi s cows’ manure that powers anon-site mining operation. “If the [cryptocurrency] market collapses,” he told the BBC, he “will put the computing power of the rigs to other uses.” Having found a way to take power costs out of the equation – and another use for his hardware should crypto stop turning a profit – Hughes has greatly reduced the risk of setting up on his own.
Not all of us have our own herd, digester and a barn full of computers, but we can invest in cryptocurrency the way we would any other currency and turn a profit by riding the exchange rate. This is akin to currency speculation and, according to CryptoCoin News, a 2021 study by investment firm AJ Bell found that “more Brits have bought into cryptocurrency than into equity, noting that 7% of young adults have invested into crypto over the course of the last year. The FCA estimates that 2.3 million Brits now own cryptocurrency, which amounts to 3.4% of the UK’s population.”
If you’re not among them, you might be wondering whether you’ve left it too late. Nobody can say what will happen to the market day to day, let alone over the longer term, so those of us who didn’t invest in 2010 can only look back and rue what we missed. However, with AJ Bell’s calculations indicating that fewer than one in 25 of us has yet invested in a digital currency (in the UK, at least), it’s possible the market could still see gains as interest increases – particularly if other countries follow the lead of El Salvador and Zug.
We can’t advise on whether you should buy into cryptocurrency. There are many factors to consider, such as the environmental impact ( see p31). But, if you want to do so, there are several points you should keep in mind.
First, make sure you trust the institution you use to buy your currency. Some well-known appbased banks offer crypto investment tools. Second, consider buying when the market is down to maximise your chances of selling at a profit later.
And third, heed the advice of the Bank of England: although you’re by no means guaranteed to end up out of pocket with cryptocurrencies, “buy them only if you’re prepared to lose all your money”.
Consider buying cryptocurrency when the market is down to maximise your chances of selling at a profit later