Some of the beneficial and exciting aspects of participating in blockchain and cryptocurrency projects are the myriad of ways to participate from a time and effort standpoint. Whether you have expertise in hardware design, software development, network security, project management, economics, or technical analysis, these skills can be a key factor in the success of a decentralized project and provide the intellectual currency needed to bring about innovative ideas.
Outside of supporting a project with one’s time and effort however, many individuals and organizations have also found numerous financial avenues to participate in decentralized projects as well. Whether buying digital assets directly or organizing mining operations, the objective has been focused on participating in a project that will provide long lasting financial growth. From a blockchain mining perspective, we are constantly asked whether mining is a profitable venture and our objective in this article is to highlight some strategies that we have learned and applied across numerous profitable mining operations.
A number of questions that should be asked when considering which projects to support with mining resources include: 1) What are the long term prospects of a given project?, 2) What is the efficiency of mining systems relative to digital assets being mined?, and 3) What are the long term prospects for mining equipment over time?
To ensure that mining is not solely a speculative venture, there are many considerations when selecting a specific project to apply mining resources towards. To start, it is critical to understand the technical and operational underpinnings of any project you are thinking about supporting. With the massive volume of decentralized solutions constantly being introduced to the community, it can sometimes be difficult to determine which projects have the greatest chance for success. Instead of selecting a project that just has a “good story”, a more effective approach would be to identify projects with demonstrated success, a realistic technical roadmap, and a solid development community.
The next question deals with is the overall efficiency of mining relative to a digital asset. Although this seems like a basic question and answer, it is not. Our approach to efficiency does not focus only on dollar-cost-averaging of a specific digital asset, which is highly sensitive to price fluctuations, but more focused on aggregate dollar-cost-averaging of fiat, crypto, and hardware, which is much less sensitive to cost fluctuations over time. We can achieve a more effective dollar-cost-average since hardware has an underlying asset value and, in some cases, can be repurposed if digital asset mining proves inefficient and / or unprofitable.
Although it is possible to focus solely on digital asset mining and HODL’ing as a long-term growth strategy, our experience has shown that a hybrid approach that balances fiat-to-crypto, fiat-to-hardware, and crypto-to-hardware transactional strategies is a more robust and sustainable strategy. It is not necessary to employ each of these strategies in equal measure, because there may be certain market considerations that suggest re-balancing in different percentages.
For each of these strategies, there will be an initial return on investment (ROI) consideration that must be identified to determine how long it will take for each leg of the hybrid approach to work. For example, suppose that we allocate an equal amount on each leg of the hybrid approach. Once the ROI is realized with the fiat-to-hardware and crypto-to-hardware transactions, these will result in a built-in mechanism to reduce the unit cost of fiat-to-crypto transactions. Over time, the overall costs associated with obtaining and HODL’ing crypto will be significantly reduced due to the compounding nature of mining rewards.
Lastly, there is another strategy to consider when applying mining resources towards a specific digital asset that is less focused on ROI considerations and more focused on an altruistic desire to develop and secure a developing projects network. The idea being that as more nodes provide support to the network, the decentralization of the network increases which results in higher overall network security.
Over the next few weeks, we will introduce the key aspects of consensus algorithms from a hardware and mining perspective. We will show why different projects decide early in the project roadmap to use specific algorithms and identify the benefits and drawbacks of these decisions.
As one considers the entry of new decentralized projects in the crypto community we believe that the strategies discussed earlier can provide an efficient method that provides value to both project development and miner participation. We have shown that the question “Is mining profitable?” is incomplete, the more comprehensive question to ask is “What combination of fiat-crypto-hardware transactions over time makes mining the most profitable?” As we continue down the historical path of decentralization, I believe that question will provide opportunities that at one time could have never been imagined!