Behind every popular cryptocurrency in 2021 is an army of crypto miners powering the whole ecosystem. Miners range from large companies running huge data centres to individuals using a PC or laptop in a spare room of their house. As cryptocurrencies have risen in popularity with retail and institutional investors, miners have also proliferated around the world. Parts of China such as Inner Mongolia, for instance, now power about 8% of all mining operations due to the lower power costs. How does crypto mining work, where is the market heading and how can investors benefit? We’ll address these questions in our latest Industry Report, below.
How crypto mining works
Suppose you visit a website like Amazon, add an item to your cart and click “Buy” using your credit card. How does everyone involved – you, your bank and the merchant – know that this is a legitimate transaction? In short, a whole ecosystem of checks and verifications are in place to ensure all parties communicate properly and the matter is “solved”.
Yet with a cryptocurrency, there is no bank (typically) involved which holds your financial details on their private ledger; i.e. their own computer system. Indeed, there is no credit card or even physical cash/coins present in the whole process. So how does it all work?
The key thing to grasp is that, with a cryptocurrency (like Bitcoin), the “ledger” – which would normally be in a bank’s sole possession for its customers – is public, and is known as the blockchain. Therefore, all transactions using the cryptocurrency can be seen (although identities of buyers and sellers are anonymous). Computers can then compete with each other on the ledger to “verify” the transaction (data block) that just took place – a process called mining. For this work, miners are offered a reward payment in the cryptocurrency.
Since crypto mining is powered by computers, a market overview necessarily entails looking at the cryptocurrency mining hardware market. Here, investors have witnessed huge global growth in recent years – even amidst the COVID-19 pandemic. Over the coming years, the market is expected to grow by $2.80bn with a compound annual growth rate (CAGR) of 7% over 2020-24. The pandemic has led to big fluctuations in cryptocurrency prices, which has had knock-on effects for miners. Due to quarantine measures, mining farms across the world have needed to be put on hold. On the other hand, more people working from home has likely driven up interest amongst ordinary people to find other sources of income – such as crypto mining.
Broadly speaking, cryptocurrency mining hardware can be divided into two main types: ASIC (application-specific integrated circuit) and GPU (graphics processing unit). The former are very expensive, high-powered machines which limit their availability to individual miners and thus feature more in large mining farms. The Antminer S19 Pro, for example, retails at $8k-10k at the time of writing. GPUs, however, are present in all personal computers, allowing those with more high-powered machines (e.g. gamers) to mine cryptocurrencies in their “off time”.
The most direct way to invest in crypto mining, of course, is to set up your own mining rig and use it to solve “hashes” in one or more chosen cryptocurrencies. When this results in a crypto reward, you could then immediately sell this for cash (fiat), or hold it – perhaps to sell later when the cryptocurrency rises in value. Doing this, however, requires a lot of space for the hardware, significant technical know-how to construct and a big time commitment to monitor, maintain and improve everything. This might attract some investors, but others may understandably wish to get involved with investing in crypto mining in other ways.
Another option would be to invest in companies which operate a crypto mining business model – or to invest in funds with specific exposure to such companies. Large, publicly listed mining companies include Riot Blockchain, Hive Blockchain and Marathon Patent Group. These also suggest another way investors could get involved with crypto mining – investing in companies pioneering the blockchain technologies which underpin these ecosystems. These might include cryptocurrency-related services such as crypto-exchanges, where users can trade currencies. They might also comprise businesses which are constructing their own blockchains for certain industrial/business purposes. Here at Bure Valley Group, one example we are currently working with is Filecoin – “an open-source, public cryptocurrency and digital payment system”. Here, miners can participate from all walks of life; from those with a PC to large racks.
It is important for investors to be aware of the key trends emerging throughout 2021, and which are likely to develop in the years ahead. First of all, mining is likely to continue its expansion – especially as more institutions accept and invest in the likes of Bitcoin. Secondly, constraints on the supply of crypto mining hardware will probably persist for some time – driving up prices that can eat into miners’ profits. Thirdly, crypto mining has been geographically concentrated (e.g. in China) for some time. Yet this appears to be slowly changing, particularly as coal-rich regions push out bitcoin miners in an attempt to curb their greenhouse emissions.
If you are interested in expanding your portfolio into these kinds of exciting spheres of investing, then we invite you to get in touch with us here at Bure Valley and to consider joining our exclusive investor network:
+44 160 334 0827