JOHANNESBURG — Cryptocurrencies have undergone a wild, rollercoaster ride in recent months. After Bitcoin touched the $5000 mark recently, the price on many global exchanges started crashing last week following an announcement by China that it intends to clamp down on so-called Initial Coin Offerings (ICOs) or token sales. News that China is also clamping down on exchanges has sent further panic into the market with the Bitcoin price subsequently spiralling down closer to the $4000 mark in a matter of days. There’s no doubt that Bitcoin is a massively risky investment that can either pay off in a huge way or leave you in tears. There is also another option though: Bitcoin mining. Undoubtedly, if you are willing to put in the significant upfront capital, you can create your own mining rig and potentially benefit with a nice passive investment tool. If you’re not into building your own rig, there are also cloud mining providers that allow you to pool with others and take on risk collectively. Of course, these cloud providers have their pros and cons as well as Dwaine van Vuuren points out – a risky endeavour, but if done correctly a potentially highly rewarding activity. – Gareth van Zyl
By Dwaine van Vuuren*
A question that is often asked by the public, our clients and members of the SA Crypto Club (which we run) is if Bitcoin mining is worth it. Very often the answer to that question that appears on forums or other pieces of online advice is that Bitcoin mining is too risky and doesn’t pay off, and you are better off just HODLING (holding) Bitcoin. This is probably true. But with just an incremental bit of knowledge, effort and patience, Bitcoin mining can absolutely kill the Bitcoin buy-and-hold strategy.
Over the last two years, we have established cloud mining operations at the Bitcoin Lab on six separate (non-random) occasions, for those not familiar with the term, cloud mining is where you purchase mining hardware (hashing power) that gets hosted in a service providers data centre and mining pool so you don’t have to worry about taking physical delivery of miners or having to worry about maintenance and electricity. All but one operation looked similar to the current operation the SA Crypto club members established on 16th July 2017 (almost two months ago) and shown below:
I know, unbelievable right? But the math is indisputable, based on real-world returns of real-world operations and real-world blockchain formulae.
But let us manage some expectations here:
- The right timing to open a cloud mining operation plays at least a 50% role in this.
- The right cloud mining operator plays the other 50%, since all but three of the majors are most likely scams/ponzies or downright opaque.
- The occasions to establish such operations are rare (six in two years so far) so you need patience to wait, have gunpowder in the barrel, and decisiveness when it’s time to act.
- The volatility of Bitcoin is high, but the volatility of the net asset value of these operations is even higher. Bitcoin falls hard; these NAVs on occasion fall even harder.
- Bitcoin risk needs no introduction. Cloud mining risk is undoubtedly higher.
- Running these portfolios requires a bit more effort and knowledge than just holding Bitcoin.
- You take on balance-sheet risk of the mining provider (you lose money if they go bust).
We have focused on the risk of Bitcoin in prior articles. What about the risks of cloud mining? They are not insignificant for the uniformed. Less than 20% of the cloud mining operations are legit or have solid balance sheets. And even half of those are quite opaque in how they calculate their daily returns. Only two provide comprehensive daily reporting and statistics required for you to check you are getting your dues as defined by the Bitcoin algorithms. Most are lifetime contracts (you never get your initial investment back). Only four of these do not have the terms completely skewed in the favour of the provider, and only two of these provide on-par or outsized returns due to favorable maintenance and electrical fees. Only two providers have liquid contracts you can dispose of at any time at a market related price. Only one of these has a liquid-enough market to swallow the disposal of a multi-million Rand operation within a few hours without a fire-sale.
But, if you acknowledge the risks, are armed with the knowledge of the small handful of legitimate, profitable providers, and are versed in a few techniques about the best time to buy and sell, you can see it can be very rewarding. Not just once, either – but five times out of six.
You should view this as a very interesting, entertaining, and yes, profitable hobby. But it’s quite technical. If having to understand and master a lexicon of about ten terms/phrases scares you off, then stick to HODL. You should allocate a percentage of your free trading/investing equity on par with what you would a single large cap share in your investment portfolio. No more. You do not want to be throwing kitchen sinks at this. If Bitcoin collapses, which is quite possible, then sure, you will be as mad as hell, but it won’t be a lifestyle-changing event.
Unfortunately, this is where most people come unstuck. They make crazy gains, for long periods I would add, get lulled into thinking this is the new paradigm, and throw unwarranted money at it. Not good. This is a very nascent technology, its daily prices swing from manic depression to wild unfettered enthusiasm and to be frank, more than 70% of the participants in this market are speculating and do not truly understand its mechanics and risks. They will never see the collapse coming.
If you are a self-directed market participant, then healthy diversification among a CFD equity trading account, an online equity investment account, and some well-picked unit trusts should accompany your Crypto activities. With Crypto, the old saying “caveat emptor” applies, but with cloud mining it applies more than ever.
- Dwaine van Vuuren has a BSc(Hons) degree majoring in Computer Science and is a full-time trader, global investor and stock-market researcher. His passion for numbers and keen research & analytic ability has helped grow RecessionALERT and PowerStocks Research into companies used by hundreds of hedge funds, brokerage firms, financial advisers and private investors around the world. He now also heads up retail-side research at Sharenet. An enthusiastic educator, he will have you trading and investing with confidence & discipline.