This third article in our “f2pool and the rise of crypto mining” series explores the future of mining and thoughts and insights from Chun Wang and Discus Fish, co-founders of f2pool.
Economies of Scale
Last time, we explored the rise of ASICs and the founding of China’s first mining pool, f2pool.
Notably, as covered in that article, f2pool launched international support in 2014, fueling the company’s growth and the pool’s popularity.
“Only 1 year into our operations we overtook GHash.IO and became the largest Bitcoin mining pool and also the largest Litecoin mining pool.”
Chun Wang, Co-Founder at f2pool
Soon after, in 2016, f2pool replicated this feat, becoming the largest Ethereum pool and Zcash pool by quickly rolling out support for ETH and ZEC mining.
Studying history can help to plan for the future. But very few of the early miners who started in the business in the early days of 2012 are still doing so as of today. And the average operation that is mining cryptocurrency looks very different today than it did 7 or 8 years ago. These days, most Bitcoin miners are companies and larger sized operations. Economies of scale have furthered the industrialization of mining, where big players accrue more resources to increase their return on their investment.
Back in the day, many solo miners who were attending college or university would use the electricity provided in their dorm rooms. A flat cost of this utility was included in their housing fees, so they were able to take advantage of low cost and in a sense “free” electricity. In a similar way, larger mining operations are taking advantage of cost savings.
But miners also face different risks now than they did in the past. As the industry has matured, the level of industrialization has increased over time, and not only just out of a necessity to decrease risk.
Planning for success
Even with the emergence of Proof of Stake network protocols, traditional Proof of Work mining is not going anywhere. There are many additional cryptocurrencies besides Bitcoin that are profitable to mine and are still accessible to smaller mining operations and individuals. It’s not all about Bitcoin anymore like it was in the early days when it comes to mining. Long term, some of these cryptocurrencies may prove viable or nonviable, but at least for now these different coins and networks provide options for people looking to get into profitable mining.
Discus Fish shared with us some tips for mining and becoming a successful member of this new generation of miners.
If you’re just starting to get into mining today, It’s important to understand mining farms. Mining farms are large scale mining operations with a conglomeration of hardware that allow customers to send them mining machines. They help miners maintain mining rigs professionally and offer a power rate the miner pays to the farm to host their hardware. So you can still own mining hardware and be “miner,” but you don’t have to operate the rigs by yourself.
Having so many machines on site translates into a lot of hash power, but often these operations can only exist because they have access to lower cost electricity. It often doesn’t make sense to operate where this access to low cost power is not available because the key to any kind of mining operation, big or small, is access to inexpensive and reliable electricity.
Even so, access to low cost electrical utilities does not mean this business model is without risks.
“You need to have a trusted team help you to do this. This is also another farm related factor concerning your revenue that you can use to make sure your revenue is above the average.”
Discus Fish, Co-Founder at f2pool
Discus Fish emphasizes that it’s important to purchase mining hardware at the right time. In a bull market, for example, when more people are looking to get into cryptocurrency mining, equipment and rigs are more scarce since demand is high. This can of course increase prices of mining hardware as well. On the other hand, if you buy in a bear market, you risk losing money if the next bull market comes later than you predict—you could be too early and not make any profit over and above the cost of the investment of your hardware. So miners have to understand the cryptocurrency market and weigh the risks, just like any other investment. Most people getting into mining probably believe cryptocurrency in general will have long term viability—but even so, it’s important to take all these ideas into consideration.
Discus Fish also says understanding your own mining equipment is critical. Even if you’re a solo miner, when you understand important information about your hardware, you can use a calculator to calculate your returns for different cryptocurrencies. You’ll have constant factors like the cost of your electricity, as well as variables like overall hashrate, which you could increase by adding more hashpower through additional mining machines. Some mining pools, like ours at f2pool.com, also have features that will automatically switch your miner to the most profitable coin to maximize your profits in addition to tools like mining profitability calculators. You can see an example of f2pool’s mining calculator here.
“I don’t feel like I am a miner of the current generation because I still have a fresh memory of very early mining pools like ‘deepbit,’ and as for myself I haven’t touched real mining hardware of my own for more than 7 years.”
Chun Wang, Co-Founder at f2pool
Some people choose third-party services like mining farms to host their machines, in this way taking advantage of the benefits of a larger scale operation. But you should always have a clear understanding of what is going on with your rigs so you can maintain your profits. Additionally, besides just having the knowledge of running the machines, trust and security are still vital in this model. After all, the old adage of “not your keys, not your coins” still holds true whenever you trust another party with your property.
The future of mining: Easier and easier with next gen tools
Discus Fish goes on to explain that the reason why mining will become easier and easier is because the industry is maturing across different segments. There are not only pools, farms, and manufacturers, but also repair companies, financial services for miners, information platforms, and more. Even now, you don’t have to build, start up, maintain, and monitor your machines by yourself. A miner will be able to focus on making decisions about who to collaborate with regarding these different areas of the business that make up mining itself.
“With the specialization of the mining industry and the development of mining software, mining will become easier and easier. Your primary task will be making investment decisions; everything else can be done by professional teams.”
Discus Fish, Co-Founder at f2pool
The professional teams that specialize in handling these specifics will take some of the complications out of the equation for you. Even so, you’ll always want to conduct due diligence on any company you partner with.
In another case, top mining pools can be a great source of information. Pools not only need to help their users understand the process of how to connect their mining equipment to the pool, but many also offer key updates on different cryptocurrencies and projects for their users to stay informed as part of a strategy to remain competitive and keep miners using their pool. Widely trusted top mining pools readily share reliable knowledge and insight with their users that helps them understand the industry better, which makes the pools themselves a great reference and resource for miners to make informed decisions.
Discus Fish explains that miners still need to understand the process of mining and how it works as much as possible. For example, if you are in a leadership position, like the CEO of a traditional company, perhaps a physical gold mining company for example, you probably aren’t going into the mines and digging for gold yourself, but you still need to have knowledge of your industry, on the ground operations, and accounting skills so you can strategize and make important decisions that will affect the whole company. He says it’s the same concept with cryptocurrency mining. The more informed and experienced you are, the better you will be able to make decisions that will impact your profitability. That can come from research, but nothing compares to diving in and gaining hands on experience as well. As the industry grows and moves away from solo miners hosting their own hardware, this emphasis on knowledgeability and informed decisions becomes even more important.
As a result, more and more new-gen miners are looking into new financial tools to diversify their investment portfolios. The first and most obvious reason is to hedge risk, as there are still two main risks for miners to pay attention to: mining network difficulty changes and market volatility. Though there are definitely opportunities for innovation to aid with the former risk, miners can also use some existing hedging tools to deal with the latter: market volatility. For example, electrical bills are the major cost of doing business for miners. But the price of any given cryptocurrency can fluctuate, and if it drops significantly, there are risks of not being able to pay these bills. That, of course, causes problems in regard to running the business consistently. Some companies, including mining farms, have developed services that can help miners protect against this volatility, like locking in prices of electricity so they can remain solvent in the case of a price swing.
The second reason to diversify is because of the thin margins involved in mining. Although mining in general is still profitable, it varies depending on the profitability and mining difficulty of different individual networks at any given time, and the competitive nature of the business keeps profit margins relatively low. In order to scale profits, some miners use leverage, such as attaining better cash flow by pledging cryptocurrency or even mining hardware as collateral, so that they can increase their production capacity by covering costs or investing in more hardware and, in turn, earn more.
These types of services have existed in traditional and legacy financial markets in some form or another for years, but new age DeFi financial services can help reduce risk for miners, depending on the structure of their operation.
Security will always be paramount
According to Discus Fish, “As the crypto market is growing constantly, the most important thing is to have the ability to ensure the security of your assets. There have been many hacks and phishing attacks happening every day.”
People should not only have knowledge and awareness around protecting cryptocurrency assets, but trustworthy and convenient tools also must exist in order for users to have the capability to reliably secure them. A “hack”—actually exploiting a bug in the code of a network or website—is distinct from a “phishing attack,” which tricks someone into giving over their authentication credentials. But both can affect crypto markets and entities holding assets.
This drove Discus Fish to start his entrepreneurial venture Cobo Wallet, which helps users easily secure their cryptocurrency holdings. Keeping full control of the security of your assets is extremely important, so finding trustworthy offerings like wallets or other storage options will continue to be fundamental to the crypto space, including mining.
Additionally, Chun Wang is a steadfast proponent of the idea that decentralization is another key factor in keeping cryptocurrency secure. Given Chun’s experience with crypto infrastructure and helping to decentralize the Bitcoin network along with other Proof of Work cryptocurrencies, and intending to contribute the same expertise and security through decentralization model he pioneered with f2pool in the Proof of Stake world, Chun founded stakefish in 2018.
“We’re doing our best to become a global company and work in a decentralized environment. At f2pool, you can meet people from everywhere—that includes Australia, Germany, Netherlands, Romania, Serbia—and stakefish is even more diversified. They currently come from 15 different nationalities. More importantly, blockchain itself does not have a border, Bitcoin doesn’t have a nationality. We have infrastructure and servers internationally.”
Chun Wang, Co-Founder at f2pool
Even earlier this year in 2020, Chun and Discus Fish continued to express their commitment to decentralization and the future of cryptocurrency by making preparations to record a message in the coinbase of the most recent bitcoin halvening block and executing on those plans. f2pool mined block 629,999 and therefore was able to include a custom message of The New York Times headline “With $2.3 Trillion Injection, Fed’s Plan Far Exceeds Its 2008 Rescue,” etching it in Bitcoin’s blockchain forever. Both a throwback to the Genesis block containing Satoshi’s message with his chosen The Times headline, as well as a public exhibition of their commitment to the future of sound money in the modern era, the efforts involved in recording this on such an important block is another way Chun and Discus Fish reiterate their commitment to the future of cryptocurrency.
Looking back, even though it’s common to see volatilities, drama, and even hacks, both Discus Fish and Chun Wang share a vision for the future of the industry. The development of compliance, DeFi, and other innovation has been accelerating in the crypto field, and both entrepreneurs expect many fascinating things to emerge, granting users and “HODLers” alike access to more unique, exciting, and secure experiences in the future.