This series of articles chronicles my experiment to answer these two questions:
- Can home mining make money?
- Would it be better to just buy and hold some coins?
I will outline all of my findings as they happen - follow here to save on research and decision making effort, or just watch me probably lose money. The principals discussed will apply to all networks and mining projects, despite focussing on the Z9 Mini and ZCash. I give a lot of context and detail in this first post for those that want it, so feel free to scan through to the pertinent parts for you, everything is titled either by date or topic.
My basic plan:
- Network: ZCash
- Device: Bitmain Z9 Mini 300watts, 10,000 sols/s
- Scale:
1x Z93x Z9s - Location: UK, residential
- Electricity: £0.1538 per kWh ($0.204) from a solar and wind energy supplier
3-May-18:
Bitmain announce the Z9 Mini, Equihash miner capable of far outperforming GPU miners on a hashes per watt basis.
Why ZCash, why mining, why now?
I've been following ZCash since they published their plans in late 2015 or early 2016, I think it was. Their ZK-SNARK transaction encryption methodology represents the most complete way so far to make blockchain coins fungible. A significant achievement given that many consider Bitcoin's use of a transparent shared ledger as both its strength and weakness due to the linked and public history of transactions. The ZCash mainnet successfully launched on 28-Oct-2016 https://bitcoinmagazine.com/articles/zcash-has-launched-here-s-how-to-get-some-1477670989/ and stabilised to around $50 after a couple of months and some initial, but high, low volume price spikes (which still represent the all time high). At the time of the launch I had recently quit my job to start a new career and so was short on cash to invest, and so far have never owned any ZCash.
Back in the present day, cryptocurrency is in the midst of a fearsome bear market following the bubble burst of Christmas 2017, we don't seem to have found a market bottom yet. In this context, Bitmain made their Z9 Mini ('Z9' for short) announcement and despite having a reasonably long history of new product launches, this one was special. The Z9s represent a way to get in early on a new version of an existing and well understood game, and at a good price thanks to the bears. The existing miners on far less efficient hardware will inevitably have to upgrade or leave as the Z9s roll out. Due to the ZCash team’s diligent work building a prelaunch mining community, even the start of ZCash came with a pre-loaded distributed and competitive mining ecosystem. This will not be the case with the Z9s which are launched and sold on a first come first served basis, the first in the queue will find a lot more coins per unit of investment than those later in the queue.
Some mining context for those less familiar with the concept:
As a leaderless peer-to-peer network, ZCash users (peers) need a way to reliably and automatically agree on the ordering and validity of all transactions, which come at any time, all the time and from all over the world. This is achieved by means of a shared set of consensus rules, and in ZCash's case these rules are enforced by a ‘proof-of-work’ algorithm called Equihash. The role of Equihash is to inject game theory into the leaderless group of peers to align behaviour in favour of enforcing the rules rather than deviating from them. Equihash is run by all miners (a form of peer) competitively in order to be the first to correctly add new transactions to the ledger, in return for currency rewards. Imagine a maths class full of teachers' pets, desperate to out perform each other to solve the formula on the blackboard and win the apples. It would take some serious effort for any other kid to beat them to the solutions. Launching a cryptocurrency in 2016, 7 years after Bitcoin, represented a challenge in achieving the crucial decentralisation of a group of miners. Failing to do so would result in a leader based system and that would be no different from the centralised and vulnerable systems we have already. If the PoW algorithm is copied from another cryptocurrency the miners are not bound to the perpetual ZCash game and can easily shift allegiance to other networks if more profitable, causing great instability to the network and its ability to process transactions. Choosing a unique algo is therefore important and difficult as the candidates available are rare and already in use on other networks. Once in place in a cryptocurrency, PoW algos incentivise the development of more and more efficient and specialist hardware for solving the formula as miners compete to outperform each other. CPUs are generally least optimal; the highly parallelised GPUs more optimal; and then the bespoke, algorithm specific chips known as ASICs are the most optimised class. Each technology achieves at least an order of magnitude greater profitability than its former. Inventing a crude or naive algo would invite the wealthy and well equipped ASIC manufactures to secretly dominate the chain, winning all the rewards, and centralising control. Equihash therefore was designed to make an ASIC very difficult, or rather uneconomical, to produce. It targeted GPUs instead since these are widely available. A year and a half later we wake up to Bitmain's surprise announcement that a competitive Equihash ASIC is born, buy now!
ZCash GPU mining community are up in arms. Their investment in mining rigs is about to become obsolete, or more specifically, obsolete for ZCash and its currently profitable profile compared to many other GPU coins. What of the ASIC resistance promise of Equihash and the foundation that created it and vows to support the ecosystem into the future in return for 10% share of all coins ever mined? I'll not discuss that in detail here as the debates are ongoing. My outlook though, is that the job of Equihash was successfully completed in that mining peer decentralisation was achieved making ZCash robust enough to handle any subsequent emergence of ASICs. Furthermore I think PoW based consensus systems are strengthened and stabilised by ASICs as those miners are economically compelled to remain loyal at least until they breakeven.
In the eye of 2018's bear market storm, arrives a cold capitalist opportunity that rarely arises: A valuable coin, an existing ecosystem of community and marketplaces, tacit acceptance by most [insert japan news link] governments, and the chance to be on the first wave of an irreversible change in the mining paradigm from low to high efficiency. If mining is ever going to be a profitable activity this is it. Mining is an early adopters game and opportunities are few and far between.
The starting pistol had been fired on a first come first served hot cakes fire sale. I was now in a race against all other potential buyers, but I had some considerable risks to asses first. Will the ZCash miners convince the wider community to modify Equihash to render the Z9s useless (no Bitmain refund, of course)? What volume of Z9s will ship how quickly? Bitmain have a history of swamping mining markets making it impossible for buyers to recoup their costs. Here are the figures from the time:
Mining profitability calculator results: 03-May-2018:
- ZECUSD: $294.51
- ZECBTC: ฿0.03193130
- BTCUSD: $9,241.69
- Difficulty: 8,310,601.04564249
- Electricity: £0.1538 kWh = $0.204 kWh
- Daily income: ZEC 0.12690869 (USD 37.45)
- Days to generate one block mining solo: 78.80 Day(s)
- Breakeven horizon: 75.89 days
| Time Frame | ZEC Coins | BTC (ZEC/BTC at 0.03193130) | USD (BTC at $9,241.69) | Power Cost (in USD) | Pool Fees (in USD) | Profit (in USD) |
|---|---|---|---|---|---|---|
| Hourly | 0.00528786 | 0.00016885 | $1.56 | $0.06 | $0.02 | $1.48 |
| Daily | 0.12690869 | 0.00405236 | $37.45 | $1.47 | $0.37 | $35.61 |
| Weekly | 0.88836084 | 0.02836652 | $262.15 | $10.28 | $2.62 | $249.25 |
| Monthly | 3.80726073 | 0.12157078 | $1,123.52 | $44.06 | $11.24 | $1,068.22 |
| Annually | 46.32167221 | 1.47911121 | $13,669.49 | $536.11 | $136.69 | $12,996.68 |
On paper and assuming no change in the difficulty, this is a great investment. Nearly $40 per day from a $2700 investment, means a breakeven in 76 days and an annualised return of 406%. I'm not the only one buying a Z9 though, that difficulty is going to rise just as fast as those Z9s come on-line. The more Z9s that are bought, the further away that breakeven date will move. It has, however, always been the case with mining that manufactures will be selling machines every day and profitability for everyone else will be going down. As I said before, The key is to be early, and with the Z9s there is a chance of being early if I move fast. Here is the research required before clicking buy:
Risks:
Will the network fork from the PoW algo?
Thanks mainly to Zooko reacting quickly and publishing his opinions online, but also reading all the community forums, blogs and tweet, a hard fork seemed very unlikely, at least in the near future. Ideally, by the way, there shouldn't be such focus on a single person or even company for a decentralised coin, but that's just the way most non-bitcoin coins are for now - these are early stage decentralised projects.
See Crypto51.app, and AreWeDecentralizedYet.com, for some sobering numbers.
How many Z9s will be sold?
Bitmain swamped the Dash market with their D3 and Siacoin with the A3 making it difficult for anyone to be profitable, especially if they wanted to sell their coin income straight away for fiat to pay their electricity bills.
Bitmain will likely apply the same strategy to the Z9 Mini, and the 'Mini' insignia implies there is a ‘Maxi’ on the roadmap which could be just bigger which would not be a big problem but if it is more efficient that will be far more of an issue. This is a huge risk for mining ventures and it is impossible to get accurate data on historical distribution volumes from Bitmain and other manufacturers. Bitmain have taken the decision to publish their Z9 Mini distribution tables so, assuming they are honest, I will be collating the data and drawing up graphs to plot and correlate the effects.
Will other manufactures sell Equihash ASICs?
I didn't even think of this risk before buying! Mainly because Bitmain are the ASIC giants and I assumed would lead the industry by a good time margin, also because of this excellent blog from Siacoin: https://blog.sia.tech/the-state-of-cryptocurrency-mining-538004a37f9b
Innosilicon however, brought out their A9 Master model on the 7th Jun which is about 200% more efficient(!) than the Z9 Mini but at least it is 5 times the cost - more about this later.
Mining pool operator honesty
As a small miner I will need to join a mining pool to stand any chance of making a return, which means leasing my hardware to the mining pool operator and hoping they pay me honestly according to the work my ASICs provide. Pools can go offline, be hacked, etc, all of which can disrupt your plans. Mitigate this risk by collecting payments often and setting up your devices with accounts on multiple pool providers.
Avoid joining any pool which is getting anywhere near a majority hash rate (>30% is the danger zone, >50% is critical). The value of the network will be undermined (pun intended) if there is a single source with a majority of the total hashing power. Monitor this over time and switch pools if necessary.
Will the coin crash and burn?
What, ZCash? Noooo.
I'll assume that since you're considering mining you believe in the future prospects of your particular cryptocurrency, but if not - think hard about proceeding.
Strategies
Mine or buy and hold?
This is the primary decision every prospective miner has to hurdle: Would it be more profitable to just buy coins rather than mine them? It would always be A LOT less work. The only way to definitively answer this question is to try it, and that's what I'm doing here, so you don't have to. A key factor in the outcome will be your selling strategy...
Mine+sell or mine+hold?
Every miner has to consider which of these two selling strategies to adopt, (or which ratio of them):
- To mine+sell is to convert all crypto income into fiat to cover overheads and make fiat profits.
- To mine+hold is to retain all crypto income, paying the energy bills with other fiat based income, speculating that the crypto will be worth more in the future.
If markets are up, maybe mine and sell, and if they are down mine and hold. My plan is to mine+hold which I can get away with as the overheads are quite low (around $500 per year for energy), and hope that ZECUSD will rise in the future which I deem likely given the bear market we are in and my belief in the value of the ZCash network.
Thermodynamic entropy
Is your house/flat/appartment cold? Is there some room which doesn't get heated well? Stick a miner in there, it's just as effective at space heating as... a space heater. It is literally 100% as efficient as a space heater - all the electricity turns to heat, and the mining comes for free (okay, I know, an ASIC has a slightly higher price tag than a three bar heater). Anyway, talk about risk mitigation - I can run this thing forever as a heater once the cost is sunk. Bitcoin miners are noisy beasts but the Z9 Mini looks to be pretty quiet at 55dB which is equivalent to a "Quiet suburb or conversation at home", apparently. In my case, the bathroom is the ideal place, it's always been cold and I'd love to have a 24x7 heater in there, bring on the ZCash towel warmer!
Questions:
Mining pools:
Which pools are available, what are their reputations and what are the fees?
- Smallest: Slush pool = 2.0%
- Medium: Nano pool = 1.0%
- Largest: Fly pool = 1.0%
- ...There are more I discovered later.
There were some early reports of difficulties and successes joining these pools. My plan was to set up a CPU miner to test the pool connections in advance of receiving the ASICs but didn't get time to as I couldn't get zcashd v1.1.1 to compile on Ubuntu and ran out of debugging time.
UK Import duty:
In the UK, global import of most electronics are not charged duty, this will vary from country to country so do your research first. See here for UK specific information. The .gov website unsurprisingly does not have a specific category for cryptocurrency mining equipment so I checked various similar categories such as CPUs, memory modules, PSUs, and so on, all of them are rated at 0.0% so I considered it safe to go with that. Here are the commodity codes I checked:
8473 30 20 00
8471 49 00 00
8471 80 00 00
8471 30 00 00
8517 62 00 00
8473 30 20 00
8504 40 30 90
I can confirm that no duty was applied, although UPS snuck in a £22 admin charge for handling the VAT collection I think.
UK CGT (Capital Gains Tax), Income Tax (IT) and Corporation Tax (CT):
Read this site for details on the UK treatment of cryptocurrency for tax purposes: https://blocktax.uk
As my operation is small I'm not going to set up a company structure to run it. Also, as the income from it will not be my primary income, I shouldn't be deemed a professional. Tax varies greatly from person to person depending on circumstances so perform some careful analysis first and/or employ an advisor. If you expect to make more than the stated zero rate thresholds during the tax year then apply for self assessment.
UK VAT (Value Added Tax):
UK V.A.T. applies to electronics imports at a rate of 20% - Ouch! This will be levied by the courier company, probably at point of delivery (that was the case with UPS for me). You can claim a refund if the mining operation is part of a business.
Cost of power:
My power is expensive at £0.1538 per kWh ($0.204). Professional miners generally aren't paying more than $0.05 and often $0.00 where they have access to excess, unused power production. Onsite renewable generation is the way to go as that will ultimately be the cheapest energy. I'm investigating whether it makes sense for me to to buy some solar cells and battery for this small project. Essentially, the cheaper your energy is, the longer the miners will be profitable.
Next post: Will I buy or won't I? Of course I will. See you in part 2.
Coins mentioned in post:
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