Financial risks of coin mining
Mining is quite a complicated business. It relies greatly on equipment of various types, which is most often suited for mining of certain currencies. The equipment purchased by the potential miner has an estimated payback period. Most often, this period is calculated on the basis of the purchase price of the equipment, mistakenly made on the assumption of a constant and infinite increase in the exchange rate of currencies that are going to be mined. This is the main error of most new miners and it is necessary to take this parameter into account in calculations. We can say that mining, as a business, is correlated with the exchange rate of the currency mined. In addition, for the financial calculation of the payback of equipment, it is necessary to take into consideration the need to update part of the equipment because of the high rate of amortization and obsolescence of both hardware and software components. Given an average payback period of 8 months, the drop of cryptocurrency exchange rates by more than 25% of the initial price is expected to lead to an increase in the payback period to more than a year. We note that the main risk of mining is currency risk. It can also lead to the appearance of a turnaround risk — a capital deficit during the period of regular turnover. And, as a consequence, operational risks arise automatically.
There is also the risk of losing business. This is the risk of equipment loss due to fire or theft. In practice, insuring the equipment is a difficult task. Receiving payments on the insured machinery is also difficult, as mining is most often not formalized as a business with a legal entity.
Lest we forget, if one intends to mine Altcoins, there is also the risk of counterparties to consider. This factor can be manifested in the illiquidity of the coins mined. And if we take Bitcoin as an example of the most intensively mined currency, once every 4 years it halves the reward for the confirmation of a block by miners. This leads to a 50% reduction in income from 5 to 8 per year. This is a portfolio risk.
Risks should not only be identified, but also assessed adequately by choosing correct management methods. For currency, for example, the hedge is the instrument to apply. Counterparty risk is eliminated by selecting equipment that allows different currencies to be mined. Operational risks can be minimized by means of instruments that allow for removal of the cash gap.