Why there is no 161% profit in mining
Real numbers from a running mining operation show, that 161% profit in crypto-mining are not possible.
Over the last months a lot of mining ICOs came to the market, promising amazing returns of 100% — 200% and even more % per year.
Initially we didn’t care much about that fact, but over the last month investors have turned to us asking why HydroMiner is so unprofitable (current mining profit marge of 24%) while others make money like crazy.
The simple answer is there are no such returns. In the best case it’s a miscalculation, in the other cases fraud.
These are the reasons why:
1) The Legend of Paal Payasam
Let’s say a “disruptive” mining company promises you to pay 161% per year and you invest a firm $10,000 USD. That looks like this over the years:
year 1: 26,100 USD
year 2: 68,000 USD
year 3: 177,000 USD
year 4: 464,000 USD
year 5: 1,211,000 USD
year 6: 3,161,000 USD
year 7: 8,250,000 USD
year 8: 21,500,000 USD
year 9: 56,200,000 USD
year 10: 146,600,000 USD
After 10 years of regular payed dividends of 161 % on your $10,000 USD investment, you would have $146,600,000 USD — hard to believe any company can hold this promise. And this payout numbers are only covering ONE investor, let’s say you raised $100 Mio USD in investment, then after 10 years the company would have to payout $1.4 Trillion USD according to their dividend model. That is basically the cost of a war or the GDP of South Korea. Fact is, it’s not happening.
2) Real numbers and costs of a mining operation
Let’s make a short calculation of a mining operation. In our potential mining farm we start with 1000 S9 miners and make a calculation for 2 years; after that timespan this hardware is probably worthless.
Costs for miners, transport and installation
1000 miners on average of 2017 cost 2200 USD, plus about 300 USD for transport and installation, so it will be $2,500 USD per miner. Total costs: 1000 miners x $2,500 USD = $2.5 Mio USD
Costs for customizing the mining location
Next step is, building a cooling system, transformators and switches in a proper location. No power station is customized to connect mining hardware immediately and without costs. You either need to build completely new buildings (e.g. Giga Watt builds their own “Giga Pods”) or adjust the existing infrastructure to your needs, which means scaling up. In most cases, that costs about $300k USD.
Costs for running a company
Building a mining operation means running a company in a regulated economic environment. You’ll need at least about 6 people to run the operation, including maintenance, customer service, bookkeeping etc. This will be roughly $600k USD for the 2 years. In addition, things like insurance, tax advisors, lawyers need to be priced in, let’s say altogether $50k USD for the 2 years.
Costs for energy
Finally, you need energy. Energy costs are somewhere between 3 to 9 cents for the KwH. Realistically its about 6 cents. All other numbers sound nice, but they come with troubles like bad frequency, no energy for a day, or some other problems. At 6 cents you can get stable energy, which is absolutely required for a minimized downtime. Sure, there are claims of free energy and negative energy prices from spikes in e.g. solar, but only primary energy suppliers can handle negative energy. There is no chance to profit from this phenomenon that only occurs for seconds, which means no chance for miners to absorb these seconds of negative energy prices. A stable and reliable energy source is crucial for mining, solar energy only works during the day, wind energy is highly volatile, too.
So quick calc 1000 miners at say 1kw x 24hours x 730days x 6 cents = pretty much exactly another $1.05 Million USD for energy consumption over 2 years.
Tax situation
The tax situation with mining is a bit tricky. If you mine for the company to grow its value, you will most probably loose the VAT. If you offer hashing power for end customers, you’ll have to price in advertising costs that will be necessary to sell your services, as well as 15% per sale for affiliates.
The current total now is
2.5Mio costs for hardware, transport and set up
300K costs for customizing the mining location
600K costs for employees, maintenance etc. for 2 years
50K costs for tax advisors, bookkeeping, lawyers for 2 years
1.05 Mio costs for energy consumption over a 2-year period
= 4.5 Mio +15 % tax
— — — — — — — — — — — — — — — — — — — — —
$5.175 Mio USD in total costs would arise for setting up and running a mining operation (1000 Miners) over 2 years.
3) Mining profitability
Now let’s look at the profitability. In order to make profit you need to generate $5,175 USD revenue per miner during the 2 years.
If we look at the mining calculator now, we see that current profitability is $2,937 USD per year so basically $6,000 USD in 2 years. This translates to 16% mining profit at the moment.
And yes, there are ways to make it better. You may find a place with no taxes and mine for yourself, then you can add 15% profit to this number, or you may be super lucky and buy all miners at $1,200 USD then add another 20% on the revenue. Bitcoin price may jump and with it the profitability, so add another 20% on your profit. However, it’s highly unlikely that you unite all of these parameters to their best profitability, as most of them are pure luck, so there is nothing you can promise upfront. It is more likely that you are experiencing trouble with expensive hardware, problems with temperature, failing machines etc. so most likely right now profitability is around 16%.
Cost of capital
Another point to think of is the cost of accumulating capital to fund the operation. The calculation above is fine if capital does not cost anything, but in most cases the money has been raised through an ICO and the usual costs of an ICO are around 20%. You need to deduct this as well. On top of this fix, costs are ongoing costs like community management, etc.
4) Common sense and economics
Capital from investors is always allocated where the risk reward ratio is best. Of course, it’s not always completely clear what the risk is, but in the case of mining the capital investments are huge and if the profitability stays at its current 16% (or temporarily more), then more capital will be allocated because even 16% is a huge yield from an investment. Therefore, more capital will flow into mining and keep the profitability at a normal level that reflects the risk reward ratio.
HydroMiner’s H3O token introduces a model where mining profits go to the company, funds will be distributed for re-investment and growth, in a tax friendly environment. With cheap energy and an effective cooling solution we have an average profitability of 24%. HydroMiner’s aim is to offer investors the best possible way to participate in the mining process, in terms of technical expertise, lean management, tax and legal status. We believe that cryptocurrencies should be as open and inclusive as possible. That’s why the H3O-Token will be one of the first Tokens relying on a full capital market prospectus in accordance with Austrian capital markets law, making it as transparent safe and open as almost no other Token. Therefore, H3O will be Europe’s first security token under EU regulations.
