Episode 3: The Father/Daughter Guide to Crypto Mining Operations
In December of 2017 my 15-year-old daughter Alexa became interested in Bitcoin and we decided to start a mining operation. Since then we’ve built two mining systems and started mining in earnest. You can read about the start of our adventures here:
- A Father/Daughter Beginner’s Guide to Cryptocurrency Mining
- Episode 2: A Father/Daughter Guide to Open-Air Cryptocurrency Mining
Those adventures were mostly about screwdrivers and software. We built computers, installed operating systems and learned about the basics of blockchain and cryptocurrency. However, the intent was always to have Alexa also learn about how to manage a business. So, this article will focus on the business aspects of this endeavor.
We just completed our first, full month of mining operations. This article includes the basic financial statements for the operation and some key lessons we’ve learned to date. If you’re currently a crypto miner, we hope this might give you some ideas about how to evaluate your own business. Or, hopefully this will give you a good picture of the finances involved if you’re thinking of getting started.
Quick Review
Our first mining rig, a stand-alone Windows gaming PC, came on-line around December 15th, so the December financials are only for a half-month. Our second mining rig, the larger, open-air system, came on-line January 1st so we have a full month for January.
For miners who are interested in the technical details of our system, here are some specifics. Our two rigs are using five Nvidia GTX 1070 GPU video cards total. As configured, they produce about 150 Megahashes/second. Many more details about those builds can be found in the articles linked above.
Income
We are mining Ethereum cryptocurrency using Nanopool. Nanopool awards shares based on the amount of work your computers provide to the system. These shares are converted to Ether and deposited to your wallet periodically. On average, Alexa received a 0.05 Ether payment every three days or so. At the time of this writing, one Ether is worth about $1,000 USD. Here’s a summary table of Alexa’s payouts so far.
The column payout in dollars shows the amount that each payment was worth at the time the payment was issued (using the Ether to USD conversion rate at that moment). The price of Ether was pretty volatile over the month, so you will notice quite substantial variations there from day-to-day.
Expenses
There are two primary expenses associated with this business: Power and Equipment Depreciation.
To calculate our power expense, we used wi-fi enabled Smart Plugs to track the electricity usage by each of our systems. We were then able to get historical data on the power draw from an iPhone app. Here is an example chart that shows power usage of our larger rig over the month of January.
For depreciation, we choose to track straight-line depreciation of the assets over a 36-month period. Our first Rig has a cost of $928 so we charge $25.78 / month to that system. Our second, larger rig had a total cost of about $2,417 and we’re charging $67.14 / month to that asset. Note that we only charged half the expected depreciation for the month of December because we only started the operation mid way through the month.
December Financial Statements
December Lessons Learned
We only mined for a couple of weeks during December, and we only had one small rig. Income was inline with our predictions, but expenses were higher. We had measured power draw for our small system in our first article, so we knew what to expect. However, we’d estimated our power costs with a Google search for typical electricity cost. We’d estimated 10 cents per KWh based on that. As it turned out, when we actually downloaded our Pacific Gas and Electric bill, and deconstructed the costs, we are paying closer to 28 cents per KWh! Yikes. Almost three times our estimates. This definitely impacted our earnings. Do your research on electricity costs and tiers in your area before you start!
January Financial Statements
January Lessons Learned
As expected, the larger open-air rig was a much better earner than the stand-alone gaming PC. Margin Analysis is one of the most basic financial tools used to understand a business. In order to understand your profit margin you simply divide your gross income by your net income after expenses (for us this is power and depreciation). Doing this analysis resulted in a 32% profit margin for December. However, in January, with the newer, larger system in operation, Alexa increased her margins to 52%. Overall, the business was substantially more efficient in January.
Operational Challenges
Running a mining operation can be complicated and messy. Rarely has a week gone by where something hasn’t gone wrong and Alexa has had to reboot or otherwise kick one of these systems to make it behave.
Early in January, the new open-air system got into a state where it was running, but not able to connect to Nanopool. We didn’t discover and correct this for about two days. That’s two days of lost income! You can see how this showed up in the Nanopool control panel here:
That small dip on January 8th and the large dip that starts on January 9th are lost money for the business. Tighter monitoring will help ensure this doesn’t happen.
Looking Ahead
In creating the spreadsheets for this article, we noticed a trend. When you examine the payouts from Nanopool you’ll see the problem. They’re getting further and further apart, while they’re paying the same amount of Ether each time. Here’s an enhanced version of the payout table that shows the trend.
Note that you can discard the data point for Jan 10th as that includes the system downtime mentioned previously. When you look at the other data points, there’s a clear trend where we are earning less Ether each day.
It’s well known that the difficulty for mining increases over time to compensate for more miners with faster computers. However, I was pretty surprised to see this hitting so quickly. Alexa’s Ether earnings per day were about 25% lower at the end of the month than at the start. If we don’t see appreciation in the price of Ether this will start to cut into margins substantially in the coming months. We’ll have to keep an eye on it.
Conclusions
This project continues to be really fun and educational (for both of us!). It turned out to be almost as much fun building Balance Sheets and Income Statements with Alexa as it was wiring motherboards. OK, it wasn’t really as good as wiring, but it was fun. And, it’s entirely likely that the Excel and financial analytics skills she’s picking up will be more useful in the long run than power supply wiring.
We’re both looking forward to next month and to see what else we learn.
If you’ve enjoyed these articles, please think about dropping Alexa a tip to encourage her to keep working on these. Here’s her Ethereum Wallet address.
You can buy a complete starter kit CLICK HERE
Addendum: If you enjoyed this article then cruise on over and check out Episode 4!