Cryptocurrency is both new and complex. It’s the meeting point of finance, technology, game theory, networks, economics, cryptography, contracting and other technical fields. Understandably, cryptocurrency is riddled with misconceptions. Add the fact that it was birthed in an era of fake news and outrage, where the truth is often sidelined in favor of a catchy title or a clickbait headline.
Cryptocurrency mining is our area of expertise. To narrow the scope of this article and only talk about what we know, we are going to debunk 6 common cryptocurrency mining misconceptions.
1. Mining Block Rewards Will Last Forever
Block rewards are the crypto-economic incentive for miners to contribute their hashing power to the network. Miners add transactions to blocks because they are paid a block reward, and this justifies investing in mining rigs and ASICs.
Because of how central the block reward is to the economic structure of cryptocurrency, a common mistake is thinking that the block reward will be around for as long as the network. This isn’t true of Bitcoin and other Proof of Work cryptocurrencies. The block reward is used to bootstrap the network.
Think of bootstrapping as pulling yourself up by your own shoelaces. Cryptocurrency networks need something to get them off the ground, and this is the function of the block reward. They incentivize miners to invest in and join the network, so they will process transactions, and the block reward is the mechanism by which new coins are created.
Once the total coin supply has been met, the block reward will be no more. Once this happens, the network will have to get by on transaction and/or miner fees. Some cryptocurrencies like Dogecoin don’t have a total supply, but the vast majority of POW currencies are gradually phasing out their block rewards.
2. After All 21 Million Coins Are Generated, There Won’t Be Any More Blocks
The second misconception is a continuation of the previous one. There are a lot of misconceptions about what will happen once the total supply is reached, and one of the more common ones is that miners will stop forging blocks. As we mentioned before, this won’t happen.
The miner’s sole source of income will be from transaction fees on the network. Will this be enough to support Bitcoin and other networks? Considering that this will happen in over 100 years, give or take, it is all but impossible to predict how it will play out.
We might have incredibly efficient ASICs chips that can forge blocks in the background, without slowing down your average consumer grade laptop. Businesses that take cryptocurrencies as a payment method might equate background mining crypto with running a full node, another activity performed that secures blockchain network and there is no economic incentive. Or Proof of Work might be replaced completely by Proof of Stake, and mining will become nothing but a distant memory. Something that IT and economic students read about in books.
3. A Cryptocurrency’s Value Is Derived From The Cost Of Electricity
This misconception is an attempt to apply to Bitcoin the labor theory of value. The labor theory of value makes very little sense when applied to a speculative asset like a cryptocurrency. That isn’t to say that cryptocurrency is always worth more than the electricity used to mine it.
Inefficient mining rigs can’t solve cryptographic puzzles at the current difficulty of the Bitcoin network for less than it costs to keep the lights on. This is a reflection of the difficulty increasing to meet the 10 minute block time.
This misconception stems from original valuations of Bitcoin, which were solely based on the cost of mining a block / the amount of coins rewarded in the block. The misconception has had new life breathed into it: the massive electricity usage of POW mining corresponding with a bull-run up to just under $20,000.
4. There Are No Ethereum ASICs Miners
There was a time when Ethereum was exclusively mined on GPUs and CPUs, but it has long since passed. The ASICs resistance Ethash algorithm was cracked by Bitmain in early 2018 when an Antminer ASICs was announced via tweet.
This didn’t come as a shock to anyone. Vitalik Buterin himself has said on numerous occasions that it is only a matter of time before ASICs are made for any algorithm. If it is any constellation for hobby and GPU miners: at the time of writing, the ASICs chips made for Ethereum aren’t very effective. Coindesk developer Nick Johnson said the ASIC doesn’t seem to have achieved any improvements that would qualify it as having achieved a performance boost much higher than the GPU cards used today.
ASICs miners for Bitcoin are 100xs more efficient than their GPU counterparts. Jihan Wu, co-founder of Bitmain, has even managed to squeeze an additional 20% – 30% efficiency out of his ASICs with the controversial ASICs Boost technology. It’s probably still a good couple years away before similar advancements in technology bring about the centralization of Ethereum mining. By which time, Casper or Casper FFG will have made Ethereum a POW/POS hybrid or completely POS network.
5. Mining Cryptocurrency Is Illegal
There are many variants of the “cryptocurrency mining is illegal” misconception. Not only is there no such law, it would be very difficult to enforce since Bitcoin and other cryptocurrencies don’t fall within the confines of a single state or border.
True, there are countries where governments have taken a hostile stance to cryptocurrency and have banned them outright: examples include Algeria, Bolivia, Ecuador, Bangladesh, Nepal and Macedonia. The laws tend to be vague, or they ban cryptocurrency mining or trading by bringing these activities under anti-money laundering legislation.
Even where cryptocurrency mining and trading is permitted, rules vary from country to country. Korea and China have laws that restrict ICOs. Indonesia allows crypto trading as an asset, but prohibits using cryptocurrencies to make purchases. In the United States, the SEC is debating whether or not cryptocurrencies are securities or commodities.
It’s complicated, but the overall trend is one of legislation, not prohibition. Most countries are implementing laws along the lines of mandatory KYC (know you customer) and reporting to tax agencies.
6. Mining Is Bad For Your Computer
It’s true that running a GPU at 100% or close to it for a prolonged period of time can affect the longevity of your hardware, but this is no worse for a computer than intensive gaming or rendering graphics intensive processes. A case could even be made that running fans at a constant speed isn’t as bad for them as spinning them up and down like you do when gaming.
Providing you apply heat sink regularly and get a little bag of spare fans, your GPU will last for years. The most important thing to remember is to not let them run hot. Nothing kills a GPU faster than heat. Keep your rig in a well ventilated area and dust regularly.
Another factor to take into consideration is the speed you are running your GPU at. You need to find what is colloquially referred to as the sweet spot. Running a GPU as fast as it will go, especially in countries where electricity is expensive, won’t equate to much more profit.
Hashing speed does not scale linearly with TDP (Thermal Design Power). Factor in the additional years of life you will get out of your card, and it could well be worth your while to slow the card down.
Do you have any cryptocurrency mining misconceptions you would like to share with us? Feel free to leave a comment!