Calculating Bitcoin Mining Profitability

Hi and welcome to Stephan Livera podcast, show about Bitcoin and Austrian economics. Today for episode three hundred and sixty nine my guest is Daniel Frumkin from Brains, and we're talking about calculating Bitcoin mining profitability. So we talk about a range of things, Brains Insight Dashboard, which you should be using and checking out to understand the mining space, and we talk- Talk about the profitability calculator, the cost to mine calculator, CapEx or OpEx costs for mining, and how to think about mining ROI, as well as updates coming, and I'm sure you will enjoy and learn from this episode. This show is brought to you by Swan Bitcoin, and I'm working as part of the team with Swan Private. Swan Private is specifically for high net worth investors and companies, entities who are looking to buy Bitcoin, and these are people and entities who want some additional guidance, they wanna be able to pick up the phone and call somebody and get some help. And in fact, earlier today, I was teaching a Swann Private customer how to withdraw to their hardware wallet, so this is all part of the guidance that Swann Private customers will receive. So, so if this sounds like something interesting for yourself, go to swannprivate dot com and fill out the form, and we'll get in touch with you. This podcast is also brought to you by Brains. They are a Bitcoin mining company through and through. They are working on various projects, and you will be interested in Brains OS Plus. This is firmware that you can install on your ASIC mining machine, More Sats for your electricity. So make sure you are looking into the website to see which models are supported. They've got some Bitmain models available there, and Whatsminer models will be up soon. With BrainOS Plus, you can install this firmware and you are optimizing your performance. So make sure you check it out. And if you use BrainOS Plus and point your hash rate towards Slushpool, you also receive zero percent pool fee. So that's another added benefit that you can get out of that. So that website is It is brains dot com, that's brains with two eyes. Lend at HodlHodl is a peer-to-peer Bitcoin-backed lending platform where you can anonymously borrow stablecoins against your Bitcoin. With Lend at HodlHodl, you don't have to sell your Bitcoin if you need to get some liquidity, you can borrow some stablecoins instead. So by doing this, you're putting up Bitcoin in an overcollateralized loan, and you still hold one key out of three in this deal. At Lend at HodlHodl, all deals happen directly between users, so you The offer, you can set the terms or accept the terms based on the offers that are up there, depending on how long you want to borrow and the interest rate you're looking to pay. So go and check it out at lend dot hoddlehoddle dot com. On to the show with Daniel. Daniel, welcome to the show. Thanks Stefan, thanks for having me. So Daniel, you're over at Brains, and, I wanted to chat with you about obviously mining and some of the insights that, Brains are sharing, and there's, obviously this really cool Insights dashboard that I wanna chat about with you. But do you wanna just give us a bit of a background on yourself, how you got into the world of Bitcoin mining?

Sure. So, I got into Bitcoin originally in 2016, and I was finishing up my university studies at that time, and I realized I was much more passionate about Bitcoin than what I was studying and pretty much anything else I was doing with my life. So I ended up pretty much getting my degree and then shortly after deciding not to use it and to go travel the world and just like try to figure out a way to make money, location independently, so make money online. And the way that I figured out how to do that was to start doing copywriting and technical writing. so I was a, a freelance copywriter and technical writer in 2017, thanks to the bull market, there was a ton of work in the crypto industry, so I got to start writing about Bitcoin, but also unfortunately, quite a lot of shit coins. It was a really cool way to make a living, I was traveling the world and working online. By 2018, especially late 2018, it was starting to wear on me that, like, I'm working on things that I don't believe in, and I wanted to be working on Bitcoin.

Aetherium and, and a bunch of other stuff, and like two thousand eighteen showed me the, the light so to speak. So in two thousand nineteen, I was kind of in that place, early two thousand nineteen, and I just happened to move to Prague because I had a friend moving there, and I was like hopping around. And thought, why not? And I was on the Prague subreddit, somebody posted about like cryptocurrency meetups, I responded to it, hey, I work in the cryptocurrency industry full time, I just moved to Prague, don't know anything, but I'm down to go grab beers with anybody. Somebody else responded to that, what do you do for work full time in the crypto industry? I posted a couple author profiles, and then somebody from Brains DM'd me on Reddit. And said like, "Hey, we're looking for a technical writer. We, we're a Bitcoin mining company." And then I looked up Brains and I was like, "Oh, Slushpool, I've seen them on the hash rate distribution charts for forever." And then I like looked into it more, and I thought, "Oh, this is, this is really, really cool. Like, yeah, I'm gonna go in and interview with these guys." so I went to the office, and yeah, the rest is history, I guess. It's been a little over three years

Fantastic, and, definitely I keep up to date on what's happening with the Brains blog and the Insights dashboard, and so, that was partly why I wanted to get in touch with you and chat about it, because I think it'll be interesting for listeners to just hear some analysis and insights around that. And so, do you wanna tell us a little bit about this Insights dashboard and how it came about?

Yeah, for sure. So, two thousand and nineteen, when I started with Brains, I was just doing technical documentation. But, it only took a couple of months for me to end up like diverting most of my time to marketing, and so I, I quickly became kind of the director of content. And so around the halving in twenty twenty, I was producing a bunch of content for the brains blog and Twitter and whatnot, and I was using like BTC dot com and just a, a whole bunch of sites that I didn't wanna put our competitors in, in my content. mining pool stats dot stream, Clark Moody dashboard, which I don't mind actually using, but it was just like I'm, I'm using all kinds of external resources for content, and I love the brains design language, I love all the, like, our websites and user interfaces and everything, so I, I started thinking like, why don't we do this ourselves? It couldn't be that hard. And we were pretty lean at the time, halving is a tough time for mining companies, so, we weren't Like eagerly hiring a bunch of developers that I could just say, "Hey, guys, give me a developer and let's do this thing." But I did get approval to at least like build a proof of concept and see if, if it caught on. so I had a profitability calculator idea that was basically, I had Excel spreadsheets and I thought it would be cool to have visualizations for this because I change one number in one cell and, and the Bitcoin mind changes, the profit changes, everything changes. And And it's, it's really cool to see that in a spreadsheet, but numbers changing is a lot different from having a chart where you can kind of see the real, real-time impact of different decisions you might make. So the, the first part of it was just like, let me put this Excel sheet into a chart where people can visualize it and they don't need to necessarily understand all the formulas going on behind it. And then there was also around that time we were launching the first version of Brainz OS Plus to do auto- Running on Antminer S9s, and we were saying that, oh, we can actually bring the efficiency of these S9s from like eighty-eight joules per tera hash down to seventy, seventy-five, which completely changes the economics of whether or not you can run them at different electricity prices. so Jan and Tomasz, Jan being the, the lead developer on Brainzo S+ and Tomasz is our head of product, they built this cool little cost to mine one BTC chart in Tableau, and, you could just like change the efficiency of the miner and see your break-even electricity price change, see, how much Bitcoin you mined changed and all that stuff. So then I thought, okay, this one is really cool too, let's just put these two tools online as a proof of concept. And, and let's see if anybody uses it. so that was the, the first iteration, and due to the, the difficulties of the halving and whatnot, I ended up being the back end developer on that myself, and I don't know how to code, so that was a very time consuming, slow, and difficult process. and then we hired a freelancer to do the front end, and that turned into a mess, and basically like the first year or so of the project was just a slow, difficult- Learning process for me on working with developers and doing development work. Gotcha. But then we got a couple of part-time backend devs who I'd known from previous projects and, switched the frontend to internal developers, and since then it's been awesome and like most of the stuff that we have online now is, is from that. So yeah, it's been, it's been really cool the last few months in particular working with those guys 'cause we're building stuff at a better rate.

Yeah, for sure. I, I find I find it interesting just in terms of keeping an obviously just keeping an eye on the industry, right? Just to see, okay, this is kind of where things are at, this is the hash rate, here are some of the interesting statistics. And I think probably what will be most educational for listeners is actually to talk through some of those statistics. What is it? How is it estimated? What does it mean for the network? So maybe you wanna just tell us about some of the key stats, or maybe if you could just tell us, obviously the headline, if there's one statistic you wanna know about the Bitcoin network, it's, it's the hash rate. So could you tell us a little bit about that in terms of how is that estimated, and where is that sitting today?

Yeah, for sure. So we have two, two stats for hash rate on the top of the dashboard on Mining Insights. One is the current hash rate, and then the other one is a thirty-day average, moving average. So both of those are estimated based on the block times and the network difficulty during the given time period. The current one right now, we estimate It based on one day block time, so it actually has huge variations, and that's, that can be just a matter of luck. So basically, whether or not there's actually that amount of hash rate, we don't know because probabilistically sometimes miners will find blocks faster even if they don't have more hash rate, and sometimes it'll be slower, which is the same reason that with mining pools don't always find blocks. Like, for example, you, you might have five percent market share as a mining pool and still go 16, 18, 20 hours without finding a block sometimes, and that's just because, because that's how the math works. Like, there's a low probability of that happening, but, if enough time passes, those low, low probabilities eventually come to fruition. So, yeah, we, we measure the hash rate based on, with the current network difficulty, are we finding blocks faster than 10 minutes on average or slower than 10 minutes on average? and if it's faster, then that means like the hash rate has- has gone up based, relative to where it was in the previous difficulty epoch, and if it's slower, then the hash rate has gone down, and the difference between that The actual average block time and the ten minute expected block time is how we can estimate what the hash rate actually is. but at the end of the day, all of those hash rate estimates, regardless of the time period, it is just an estimate, because there's no way to account for that, that luck and the probabilities. so one of the cool metrics that we don't have yet, but we will in the future that I'm really excited for, is that we're going to have a real-time hash rate estimate which aggregates the- Reported hash rates of all the different mining pools, and then if a mining pool isn't reporting their hash rate via an API, then we will just use the estimate based on their block times. So that will enable us to have a third way of measuring hash rate, which should be more precise than the other two, but does require us to trust that the mining pools are reporting their hash

rate accurately. Right. And maybe they have an incentive to over-report to say, "Look how big we are, or how many people are using us." Right. but anyway. That aside, I think the interesting one, at least as I've seen, and maybe you have something to share as well, is sometimes in Bitcoin's history there have been more mainstream news sites or, you know, these propagandist kind of sites who basically say, "Oh, look how big the drop in the hash rate was, "when really it was like they were operating off a bad estimate basically. Like, and the short version of it was that they were operating, they were looking at some website that was just doing a really bad estimate and not looking at, a long enough period of time Of whether Bitcoin's hash rate had fallen and by how much or whether it had risen and by how much. Is that something you've seen as well?

Yeah, exactly. It's, I think like everything in the mining industry, when, whenever non-mining entities try to like analyze this stuff, if they don't actually work with miners or work in the mining industry, there's always stuff that's wrong about it. So, that was another one of the reasons that I wanted to build this ourselves, is that I think we have a really good understanding Understanding of it, and we can help share that with people. so having different metrics for hash rate, but also eventually, I'm working on now a methodology page where we can explain all this stuff. I think that will help clear up a lot of those misconceptions, and then, whenever that stuff gets, Circulating around on Twitter or wherever we can post, like, "Okay, here's the, here's our estimate and this is how we came to it, so like, let's see why there's such a big discrepancy here."

Right. So you can provide a more robust estimate given by actual technical experts in the field as opposed to sometimes when a journalist is kind of looking at, you know, and then maybe they're not a Bitcoin specialist and they're just kind of picking off a number from some random website they saw, and it kind of paints things in an inaccurate light. And I think the other interesting thing is just as, as we're speaking today, right, this is April twenty twenty-two, the hash rate is something in that range of two hundred to two hundred and seven exahash, a-and we are, I mean, just broadly where things have been after the last, the events of the last year or so, where we've seen this huge drop and then rise back up again in terms of Bitcoin's security as a network, right? Yep.

And, when I was in Miami, I talked to some guys from Bitmain who were saying Saying that they think still thirty percent or more of the hash rate is located in China, which I don't agree with that, but we know for sure there's still a good amount of mining going on in China, but I think the real story of the, the hash rate recovery is probably these very large North American miners scaling up very rapidly, particularly the, the public miners, CoreScientific, Riot Blockchain, Marathon, et cetera, BitFarms, like all these mining companies are like adding exahash Is, every quarter. So it's been a really impressive recovery, but if you were looking at the PRs, the, the press releases that those companies were putting out, you know, a year ago or even eighteen months ago, it's not all that surprising because they were putting in massive, massive machine orders back then, and now we're just starting to see a lot of those machines coming online.

Yeah. And so I'm also curious as well, do you see it like the large miner- Miners are maybe less, I guess, that maybe they're more amenable to, say, state capture, and we've seen this argument, right, like that, oh, see, the small miners are going to be more able to sort of support the true values of Bitcoin censorship resistance. But maybe on the other hand, you could sort of argue, well, okay, but at least they're helping raise the sort of amount of hash rate and in many different countries around the world, so it's kind of decentralized in that way. So I'm curious if you have any insight or anything you'd want to

Yeah, for sure. I do worry about having large miners, and particularly, public mining companies, controlling too much of the hash rate. I think there's pros and cons to it. The, the obvious pro is that, some of those companies are investing in lobbying in Washington, DC and elsewhere, which, which can ho-ultimately help out everybody, if they educate Congress and educate, other legislatures around the world about What Bitcoin mining is and the benefits of it and job creation and economic ability and for energy grids and all the different things, that Bitcoin mining can bring, I think that those public mining companies are the best entities to do that, but I also do definitely worry about, yeah, the flip side of that being regulatory capture. and for that reason, I've spent-- or that's one of the reasons I've spent a good amount of time in South America recently trying to learn about the different mining that's going on. Going on here, there's obviously a huge mining community in Venezuela, there's a lot of mining going on in Mexico, there's a lot of mining going on in Paraguay and, Paraguay in particular, I think can be a really good hotspot for mining in the future because, how much hydropower they have and, basically there's a, the second largest hydro dam in the world, called Itaipu Dam in Paraguay, is, it's about fourteen gigawatts and Paraguay owns half of that and currently they sell almost all of it back to Brazil because the Paraguayan population isn't that big and, and there's nothing else they can really do with it. so when I've visited Paraguay in the last few months, I've talked to people actually who work with the- Energy companies there about like keep a little bit more of that energy in Paraguay, sell it to Bitcoin miners, and then they can work with you on demand response programs so that you can ensure that your citizens aren't ever facing energy blackouts, and at the same time, you're keeping more of the economic value of that energy within your country instead of selling it to Brazil for pennies on the dollar. The, the thing that's always kept me optimistic about the future of Bitcoin mining and, and it being decentralized is that ultimately very cheap energy is distributed across the world. It's like the energy, the waste natural gas that's being vented and flared, there's a ton of that in the US, but there's also a ton of it in the Middle East, in Africa, in Russia, et cetera. Obviously, there's still mining going on in China, but if China were to- Actually make it legal again in the future, which I don't think is totally out of the question, then we have some real competition between US miners and Chinese miners, which I think would be great for the network. And then there's a lot of energy abundance in, Scandinavia in particular, Iceland, Norway, Sweden around there, Canada, and, yeah, over South America. So I'm definitely keeping a close eye on it. I don't wanna see the, the market share of public mining companies Get, you know, greater than fifty percent of the total network and, and it is definitely trending in that direction. But for now, I see a lot of reasons to be optimistic about decentralization. And then another point there is that we're working on Shredum v2 or actually we've kind of handed that off to some independent devs that are funded by Spiral, formerly Square Crypto, and that's making some nice progress recently. So if we can get Shredum v2 implemented on multiple mining pools And particularly the North American ones that are more likely to face that regulation, and get North American mining entities using it as well and constructing their own block templates, which isn't currently possible but eventually will be once that is merged into Bitcoin Core. then I, I think we're, we're in good spot.

Yeah. And just for listeners who aren't as familiar, could you just give a bit of a high level for them? What are some of the key benefits there for Stratum v2 if we were to be able to get more mining pools, and people on board with Stratum v2?

Yeah, the, the main benefits for, miners without considering the decentralization aspect, one, there's encrypted communication channels between the mine-miners and the mining pools. So the way it works right now with Shredum v1, the original Shredum protocol, miners and mining pools are sending back and forth JSON, human-readable data packets, and, for example, your internet service provider can see what those data transfers contain, and e- dropper who just gets into your network can see what those data packets contain, and not only can they see it, but if somebody is really sophisticated and understands what it is, then they can actually steal some of that hash rate without you even knowing it, because they would just change the pool account to their own, and the pool has no way of knowing that that's happened because as far as the pool can see, we're just sending payouts to the, to the account that mined all of those shares, and as far as the miner can see They're just submitting all of their shares to the pool, but because there, there can be that intermediary that nobody knows about in those, that interjects in those communication channels, that's a really serious security risk for miners. And Taproot v2 fixes that by having encryption on the communication channels, and then of course, the encryption adds some, some weight to the data transfers, it makes them larger, but the nice thing with Taproot v2, as well, is that the data transfers aren't longer JSON format, they're, they're Switched to binary, which is significantly wider. So even though you're adding encryption and that makes it heavier, the data transfers themselves are still about fifty percent lighter compared to Stratum v1 because of that switch from JSON to binary. so data transfer efficiency improves, which would be significant in the case of, well, latency at all, but, particularly for miners that maybe don't have quite as stable or as fast of internet connections. I get those are The two biggest benefits in terms of like the performance aspects of mining, the part that, that doesn't exist quite yet or isn't, merged into Bitcoin Core quite yet and it's being developed right now, is the block template proposals. So what that basically is, is right now, mining pools are the ones that are determining which transactions go into the blocks, so they're running the full nodes and they're constructing the block templates and they send those block templates to the miners, the miners hash them And send them back as shares to the mining pools. And what Shred and B2 will ultimately enable is for the miners themselves to run full nodes to determine which transactions go into the blocks that they hash, and then submitting those same shares to the mining pools without, without disrupting the economics of the pool model at all, because they're still gonna be paid the same way as they were before.

Yeah, right. And it's interesting because there's so many different complicated aspects of it, right? Because why do people use the pools? It's, it's to smooth out that variation so that a small miner can not be sitting there waiting for, you know, twenty years to find a block, right? Because they wanna be part of the pool, but then because they wanna be part of the pool, they're at-- currently at the whim of the pool in terms of censorship. And I guess that's where some of that argument is that could, let's say hypothetically, if censorship were to be, a regulation came down to say, "No, you must blacklist or whitelist certain coins, et cetera," then this would represent a Reject that in a way because they are forming their own template, and I guess that's, that's kind of the key argument. Although to be fair, even today, the argument is also that miners can simply switch pools, right? So if there's one pool that's doing censoring, we can, you know, they can-- It's not costless to do this, right? There is some, some work required, but they can switch pool to one that's not censoring, right? And to your point earlier, you were saying as well is that because there are many different places on

It's an incentive there to go and set up Bitcoin mining there. And there's different jurisdictions on the earth, and it's kind of harder to try to make this argument that somehow you're gonna create a successful censoring cartel across all these different countries and different jurisdictions, all of which with different rules. Some of these countries are fighting each other. Why would they coordinate and collaborate on what the blacklist or the whitelist should be to censor? And can you even make a coherent, like, singular blacklist? To a whitelist globally, I mean, that, even that, is not really a, an easy, it's not a trivial thing to do. So, yeah, but it, it's just interesting as well to see kind of these different dynamics play out, and see where the Bitcoin mining ecosystem is going, because arguably, if you, if we looked years ago, people would say, "Oh, look how much hash rate is in China." Now that, that criticism is not, is no longer as much of a criticism now.

Yeah. Yeah, now I want more hash rate back in China. That competition between the US and China grow because that would be great for decentralization, because like you said, China and the US are, are never gonna agree on, hey, let's coordinate to, to stop these OFAC addresses from sending their coins anywhere. Never gonna happen. So if we see hash rate growing, yeah, any time we see it growing in, in competing jurisdictions, that's, that's really good for Bitcoin.

Fantastic. and, so from the perspective of somebody who's looking at this industry and they're thinking- Okay, maybe I wanna start mining myself, and they're trying to learn a little bit. One, well, some interesting statistics that we can talk about, we've got here hash value. So that's, satoshis per tera hash per day. So could you tell us what is hash value?

Yeah, that's-- it's basically, it's just a revenue, a tool for analyzing the revenue that you'll produce from mining. so we don't factor in things like the electricity price or anything like that yet. There's no opex yet. It's just pure, this Bitcoin you will mine per tera hash of hash rate that you have per day. So if you, if you're looking at purchasing, Antminer S9 and you wanna know like how many Sats can I mine with this, then you would look at the hash value and multiply that by the tera hash that you would get from your S9. If you're running Grains OS+, hopefully it's like fifteen or sixteen tera hash per second, and then that tells you your Sats per day, and that should give you an idea at least of whether or not it's makes sense to even purchase that machine based on how many sats that machine costs.

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Yeah, this one gets people confused a lot because price sounds like you're paying for something, not that you're earning something. but this is also-- it's just Hash value multiplied by the current Bitcoin price, so it's actually another statistic for revenue, but in fiat terms, and we use dollars. You could do hash price in any fiat currency if you multiply the hash value by whatever the Bitcoin price is in that fiat currency. But the, the thing that people often get it confused with is dollars per tera hash as opposed to dollars per tera hash per second per day, and the dollars per tera hash is what we're referring to it as rig price, and that's The dollars that you spend per tera hash of compute power when you're purchasing a machine. So if you're buying a machine that has a hundred tera hash and you're spending, a thousand dollars, then you would be spending ten dollars per tera hash to purchase that machine, and that's, that's your CapEx. So that's why hash price is really, really often confusing for people because, and I understand it, it, it kind of makes more sense to- For something with the name price in it to be referring to a cost as opposed to a revenue, but that's how it was, set up, so harder to change it now than, than to come up with something new. So.

Right, right. And also on the dashboard, you've got here fees as a percentage of block reward. So, you know, as we speak today, that's about at one percent. What are your thoughts on where that number is today? Do you believe that number has to rise over time, or it's not a big deal?

I'm, I'm not particularly concerned about it right now. It's definitely not nice to look at that chart and see, you know, there were times where it was five percent or ten percent of the total block reward, and that looks like, okay, we're, we're moving in the right direction for mining to be sustainable ten or twenty years from now for transaction fees to be a larger and larger portion of mining revenue. And, ever since, I think it was really, when Blockchain dot com started using SegWit. And then the size of their transactions went down, but it could have been many other factors. But ever since around last summer, it's been between like zero point five and one point five percent for the most part, and that would be concerning to me if it continues through a bull market. But as far as like right now, I'm not too concerned about it, just because it's been pretty much a bear market during that time, more like sideways, but the mainstream isn't interested in Bitcoin right now and hasn't been since sixty K and since Elon was talking about and whatnot. So we typically see transaction fees rise and transaction volumes rise a lot during bull markets when, retail investors are getting more involved and starting to use it. And so if we don't see that happen in the next bullish part of the cycle, whenever that is. Then I would start to be a little bit more concerned about it. But even so, you know, daily mining revenue for, for miners right now is upwards of forty million dollars per day, maybe a little lower than that, but it's been consistently above forty million per day for the last six months to a year, and, I think that that's enough to incentivize adequate security. Like, I think I have much more hash rate than we need right now, and that's something that people- People need to consider as well as like transaction fees becoming a larger part of the block reward overall is important super long term, but how much of the block subsidy right now is, is funding hash rate that we don't actually need? How much of it is funding hash rate that, like, yes, it, it's disincentivizing anybody from even thinking about attempting a fifty-one percent attack, so in some sense the more the better. But I think if we had a hundred and fifty exa hash rate Right now, instead of two hundred or two hundred and seven, I wouldn't be overly concerned about having a, a fifty-one percent attack, still. I think that would be adequate level of security. So that's, that's how I'm looking at it long term, like, for now, no, no reason to worry, but we'll see in a few years or even in the next part of the, the bull cycle, like, what happens with fees then.

Yeah, right. And it, it also as the price rises, which we're still in- In an early phase of Bitcoin, right? So price is, is going to rise, and that is also gonna drive up the mining revenue number. Now, okay, maybe, maybe the argument could be longer, longer term, maybe, you know, it's not just gonna like keep doubling every four years forever. I mean, who, who knows, right? But it also-- I mean, my friend Pierre Rochard has also made the argument that he believes it's actually more about the function of the, mining and of the block reward and block subsidy, particularly, is more about distribution as security aspect of it, and so he's kind of almost got like a different argument as well, where he's saying, "No, it's actually better that it's like low fees, you know, that we should be-- it's, it's show-- it's a sign of scalability and that it's accessible and that, you know, it, it kind of-- all these arguments, it, it actually, there are actually kind of good arguments either side there, so we'll, we'll have to just sort of see where that goes,

but, I, I'd also like Very relevant one for anyone who is thinking about getting into Bitcoin mining. So can you tell us a little bit about this calculator and how to use it?

Yeah. it does, it does scare some people when they first look at it, there's a lot of inputs. The reason that I built it in the first place is because before this existed, I think the only way to really calculate mining projections, economic projections in a realistic way long term was with an Excel sheet because most of the mining profitability calculators out there Don't have things like increasing Bitcoin price or decreasing Bitcoin price over time, increasing or decreasing the network difficulty over time, including the upfront cost of your machine, including the residual value of your, your machine or machines over time, so your hardware inventory, all those different factors. So I wanted to make this calculator as, well, include as many different inputs that are actually important as possible so that, you know- Yeah, it's gonna be a little bit harder to understand, but once you do understand it, it will be a lot more useful. so we have things there. I could just go through the inputs, and, and talk about how, how I think about setting them and different things. Sure. so we have, like, obviously, Bitcoin price and network difficulty are, that's what determines the fiat revenue of, of your mining operation. your hash rate and power consumption determines how much you mine and how much you spend on electricity. And then your electricity price is, that's gonna be the biggest portion of your operating expenses, your OpEx. And then we have inputs for the block subsidy and the pool fee. The block subsidy, obviously, just six point two five BTC right now, that's the portion of the total block reward, which is new coin issuance, and we have it built such that if you do a three or four year time analysis, for example, you'll see the halving automatically cut that block su-subsidy. Sustey, and we calculate when that halving is supposed to occur based on ten minute average block times and the current block height and the block height of the halving. So just building in realistic things like that so that you're not projecting your profitability four years out without accounting for the revenue getting cut in half suddenly there. The pool fee, that's, that's just an inherent part of mining now that if you wanna have stable, income streams, then you need to mine with a mining pool. the typical mining pool fee is Between like probably one to three percent, but larger miners can see, lower pool fees and potentially even as low as zero average transaction fees in BTC, that's the transaction fees per block, which adds to the mining revenue. So the, the second part of the block reward, you have the block subsidy of new coin issuance, and then the miners are also earning the transaction fees for all the transactions that they include in their blocks. so you can estimate what that will be Be over the duration of your, your time analysis, the time that you analyze, I typically put like zero point one to zero point two BTC there because it's been low recently, like we were talking about, so I don't wanna overestimate that and, and make the picture too rosy. Other fees is a percentage on revenue, it's actually calculated right now the same way as the pool fee, it's just, taking out from the initial revenue. So Some examples of other fees could be, dev fees on firmware like BrainzOS Plus, maybe management and hosting fees that you pay to somebody if you're, hosting your miners with a third party. In a future update, I'm gonna actually change that so that we have one fee which takes out from revenue and a separate fee which takes out from profit, because we're seeing a much more common business model nowadays is that hosting providers will actually offer a lower electricity City price to entice miners to, to put their machines with them, but they will also take a small profit share from what's left over of the bitcoins after paying for the electricity. So that's something that I, I plan to add in the near future is, is other fees on profit as opposed to only on revenue as it is right now. And then the last two basic inputs are the difficulty increment and the price increment that I mentioned, and that just allows you to change the Bitcoin price And the Bitcoin network difficulty over time to more realistically analyze like what your profitability is going to be long term, because for example, the network difficulty since 2016 has increased by close to a hundred percent per year. I think before the China mining ban, network difficulty was increasing by well over one hundred percent per year. so that means that with your hash rate being constant, you would be mining half as much or even less BTC per day as you would Where when you initially started, after a year has passed because of difficulty increasing. So if you don't factor in a difficulty increase and you're analyzing your profitability long term, then you're definitely going to overestimate how much bitcoins you end up mining because it's just difficulty goes up over time. It's just not accurate, yeah. And then price increment is, is the same. Yeah.

so if you had to give an average of like that difficulty increase per year, what kind of ballpark are we looking? Looking at just historically over the last, you know, couple years in Bitcoin.

Historically, I think it's probably just above ninety percent right now over the last, like, in the modern mining era, which I would say started with that miner S nine in late two thousand and sixteen or early two thousand and seventeen. So typically I would tell people if you wanna do a conservative case, set difficulty increment to a hundred percent per year. And then if your economics still look good with that hundred percent per year difficulty increment, then you can rest a little bit easier because, although that has been close to the historical rate, now that hash rate is so large and And like bringing new hash rate online requires massive, massive infrastructure projects. I don't see it continuing to grow at that rate or higher than ninety to a hundred percent per year, meaning that I don't see the hash rate doubling every year, going forward the way that it has, in the past few years. But what I tell people is like more of a, perhaps the realistic case, not the best case scenario, but something where, yeah, maybe this is the most likely to happen Would be somewhere between like sixty-five to seventy-five percent per year, and that's based on like press releases from public mining companies, just the general understanding of how much hardware is being produced by the major hardware manufacturers and the rate at which infrastructure is being built and machines are being deployed. That seems like probably in that seventy percent per year range is going to be pretty realistic at least for the next year or two.

Excellent, and I think that makes a lot of Makes sense, right? Because in the early years, there was so much fast technological development, and now it's almost like we're starting to hit almost like certain bottlenecks that are slowing down that increase in the difficulty rate, right? Like, so, obviously the network is still growing very quickly, but it's just like that percentage rate is coming down over time, and it's similar even with price, right? Like, if you looked at, let's say, the price for the first, whatever, ten years of Bitcoin, it might have been like two hundred percent per year, and now It's tapering down and maybe now the expectation might be more something like, you know, sixty percent per year or something like that instead of this crazy lofty hundred and forty percent or two hundred percent.

Yeah, exactly. And because of that, like, that's such a huge unknown, that's the, the part of mining that's both scary and exciting if, if you're investing a lot of money into it, because like those two inputs drastically change the profitability of your potential mining operation. And we, we really- Don't know. Like difficulty, we have a pretty good idea because at least for the next year or so, we, we kinda know how many machines have been bought, and we know that the, the average cost to mine one Bitcoin for miners today is probably pretty far below the actual Bitcoin price. So as long as price doesn't totally crash, then miners are gonna keep bringing hash rate online even if prices would stay sideways. But with price, it's really almost impossible still to say, you know, what is the Bitcoin price gonna be? A year from now or two years from now. So that's why I don't recommend like doing one of these profitability calculations and calling it good. I recommend doing like, let's say four or five, one where you say, "Okay, difficulty's gonna go up by a hundred percent per year, but part of the reason for that is that price is going up by fifty percent per year. So this is a somewhat bearish case for mining economics because difficulty's going up faster than price, but it's still realistic. Because price is going up enough that miners will continue to close that gap between the their cost of production and the actual Bitcoin price. but then let's also analyze one where Bitcoin price does really, really well. Let's say like Bitcoin price goes up a hundred and ten percent per year, and that's like your, your high upside case where even if difficulty goes up seventy percent per year, your fiat profitability is actually improving over time. and then do the opposite Opposite, do the one where like price maybe stays flat for an entire year or maybe it only goes up ten percent per year over three or four years, which is like pretty close to a worst case scenario, I think, and meanwhile difficulty goes up, let's say thirty or forty percent per year. How does your economics look then? so that's what I recommend to people, like test out all those different scenarios, do bearish cases, bullish cases, sideways cases, and if your economics look good in most or all of those, then buy the machines and start mining.

Right. And the other aspects of it are maybe even calculating in some probability about machine failure or even like, you know, your machine going offline or maybe, let's say your, let's say your- Setting up a facility or you're setting up an area to do it, and, you know, you have a delay in how long it takes you to get that set up, right? So you have to kind of even put in a little bit of conservatism about those aspects of it too. But all those things considered, if you're careful and conservative about it and you accept that, okay, there's certain risks, it can still be quite profitable, right? And I, I think it's, just useful to think about those aspects of it, right? Have some different scenarios, think about what are On, then it's also about can you make sure you've got enough rack space, right? Because sometimes that can be the bottleneck, right? Like there were times where, you know, even during this last year, especially with this whole China mining situation, from what I was hearing, is that obviously there was a lot of mining ASIC machines out there available, like back at that time, but the rack space was the bottleneck. So that can be the other concern.

You were hearing correctly for sure. It was interesting, like during the halving and, and immediately following the halving, the big story was After chip shortages, there's gonna be ASIC supply chain bottlenecks and nobody's gonna be able to bring new hash rate online quickly enough, and that totally flipped after the China mining ban, and I think it's still the case today that the major bottleneck is on infrastructure and the supply chain issues are present in that case as well. Like there's supply chain issues with transformers, fuses, all kinds of different components that go into mining infrastructure that are hard to get a hold of right now, and especially- Especially for mar-for miners that are building multiple megawatts of infrastructure, it's not an easy thing to do, and you've got a lot of competition because, you know, everybody, all the miners around the world are trying to do the same thing. Everybody's trying to maintain their market share. So yeah, that, that infrastructure bottleneck is definitely something to consider. Yeah.

And so let's just summarize a little bit of that, so maybe if we can put that into some scenarios. Let's say you're, you're a retail stacker, you, you're thinking about, "Hey, maybe I wanna just do, you know, one or two ASICs at home. I'm just gonna run some profitability there." So as an example, you might take this calculator, you might say, "Okay, I'm gonna get, you know, two Bitmain machines or two Whatsminer machines The hash rate going to be for those two machines, okay? Punch that in. Okay, what do I estimate the consumption is going to be based on, you know, those machines? And then, you know, crunch that in, and then crunch your scenarios, and then sort of pull together a number of, okay, do I believe this is gonna be profitable? And also, interesting, if you have any insights to share or elaborate around assessing your profitability both in fiat terms and then also in Bitcoin terms.

Yeah, that's, the next version of the calcula- Trader is going to really highlight doing it in Bitcoin terms, because it is a much different calculation and ultimately I think a much bleaker calculation in the majority of cases. so what that, what I'm talking about is, if you invest, let's say, five hundred dollars into an Antminer S9, then you have a CapEx breakeven period, which is the amount of time it takes you to mine basically five hundred dollars worth of Bitcoin, or to mine five hundred dollars worth of profit after you pay for your electricity. And other expenses. So that's where, okay, now I've mined enough, my profit has been enough to offset the initial cost of the hardware. If you do that in Bitcoin terms, it's a different calculation. So you, you divide your hardware price by the, the Bitcoin price, and that tells you the amount of Bitcoin that you're spending on that hardware, and you can basically think of that as like, should I buy Bitcoin with this money, or should I buy an ASIC with this money, and then earn Bitcoin over time? So that's, that's how- How you set the CapEx in Bitcoin terms, and then the question becomes, how long does it take you to mine that same amount of Bitcoin as you could have just bought in the first place if you had bought Bitcoin rather than buying the ASIC? And that's your Bitcoin CapEx breakeven, and that's a-- like if you're a, a Bitcoiner and you're long on Bitcoin, then that's the one that you should really care about. It should be, can I ever earn as much Bitcoin from mining as I could have just bought? And is that the- The case even after I pay for my electricity bills. One of the nice things though with being a home miner or a small scale retail miner is you can, you can kind of manage your treasury however you want, you're not accountable to anybody besides yourself. So if you want to, maybe one of your incentives for mining, for example, might be that you want KYC-free Sats. You don't wanna buy it from an exchange and sacrifice your privacy, you would rather mine it yourself, get it from a mining pool. And as long as you take proper measures to ensure your privacy there, then those coins are, are far more private than they would be if you bought them from an exchange. So maybe that's your, one of your main motivating factors to mine at home. And then you would say, okay, I'm just going to foot the bill for this electricity expenses out of my pocket with fiat, and I'm gonna keep all the Bitcoin. And, that's another thing I'm adding to the calculator is those One of the inputs now is called the huddle ratio, which is, the percentage of the profit which you keep in Bitcoin. So it's a really interesting exercise to change the huddle ratio if you have a non-zero price increment for BTC. So if the Bitcoin price is going up over time in your analysis and you're holding some portion of the Bitcoin, then that will drastically change your end profitability in fiat terms. So it's the, the, the next version of the calculator I'm going to make it possible to do a Haddal ratio on revenue, not just on profit, so that you can say like, I'm going to pay for my electricity with fiat, and I'm gonna hold every single satoshi that I mine, which I think is like what most home miners should be doing if they're mining at a relatively small scale and they can afford those electricity bills without selling, then like, why mine in the first place if you wanna sell? Hold it all.

Right, and so you might think of it like, "Hey, this is just my little non-KYC premium on one side," and two, you might also think of it like, "Hey, I, I'm contributing to that sort of i-that ideological censorship resistance aspect of the network in a kind of warm and fuzzy feeling sense, let's say." And I think there's another complicating, or maybe not as complicating, but opportunity potentially using fiat credit, right? Like you might actually be in a situation where you might not be- You'll be able to get a fiat loan or fiat credit in order to buy Bitcoin, but if you're able to get a fiat credit loan in order to do some mining, then maybe that also changes your calculus too, because then it's kind of like you're not spending your own money, you're using the bank's money or some, you know, the lender's money to do this mining operation. Now, of course, there's risk, there's always a risk, but I think it could also change your decision because now you're just thinking more about the financing cost, and in fairness, this applies Miners, but potentially even for a smaller miner, it might, it might be part of the calculation here, right?

Yep. I'm glad you mentioned that. that's the most exciting part of the next update is we're actually gonna build in the ability to do debt financing. And I think that that's something people should, should think about when looking at these really large miners as they're scaling, is that like being a, a public company, one of the biggest benefits of that is cheap access to capital, and that's what all of these- Public miners are doing, granted in different ways. Marathon's doing it by just buying as many machines as they can, Riot and Bitfarms are doing it by also building out infrastructure and owning their, their infrastructure as well, CoreScientific's doing it with both hosting and self-mining and buying a lot of the machines, but then selling that to, sell, selling a portion of them to hosting clients. So looking at all those different factors, it, it really does make sense for these public miners, although I guess, I think Marathon- Did just raise money and use it to buy Bitcoin, but I think it's in the majority of cases, it's true that, most of these public miners are able to Acquire Bitcoin much cheaper by mining it than they could by just purchasing it, because it's harder to justify a loan for, let's say, five hundred million dollars if you're just gonna use it to buy Bitcoin. You know, Michael Saylor's done it pretty well, but probably it would be difficult to replicate that business model, whereas if you were to say, like, "Hey, we have really cheap electricity, we're really good at building infrastructure, we have good relationships with hardware manufacturers and other mining service providers," And we can do this really competitively long term. That's a, a easier value proposition to go to investors with. Yeah.

And because I can appreciate where some Bitcoiners and some listeners are thinking, "You know, we, we don't want it, we don't want the fiat system." But on the other hand, you can think of it also like, "This is almost like using the fiat system in a judo move against itself." So in some ways, you could see it like you're leveraging this system that we think is unjust in some ways. Obviously, many of us Bitcoiners think So we want to, we want to fix the money, fix the world, as, as my friend Marty Bents says. And so of course, with all of these things, you have to think about the risk of it, because you could get liquidated, you might do, take out a loan, and something goes wrong with the mining operation, and now you're sort of out in both ways. So obviously it's not risk-free, but for people who are able to play the fiat debt game well, they are able to do it in a way that they can stack more sats and sort of use

Yep. If you think Bitcoin is gonna go up, you know, fifty to a hundred percent per year, even more, then it makes a whole lot of sense to take out a cheap loan and, yeah, use it to mine. If, if you can't use it to just buy Bitcoin, then using it to mine is a great option.

Yeah. So I think we are going to see more financialization and products and companies that are helping around this. And so it's just an interesting area, and I, it's just, there's just so many different areas. I mean, it's Aspects to it, right? There's economics, there's cryptography, there's computer science, there's networking, there's, you know, all these different elements. But even here, we're thinking, okay, people might be thinking about, okay, accounting, you know, the hardware, you know, electricity costs, tax consequences, like interest rates, all these different elements that when combined can create a very interesting thing both from an ideological point of view and from a just a business and monetary point of view. So really interesting stuff. I think one- One other topic I wanted to hit with you, I know we, we normally go about an hour, but last question, one area that I've seen some discussion on Twitter, I've seen some people really fighting hard back and forth, and I'd love to get your thoughts on this because people are talking about cost to mine calculations, right? And what we see is sometimes people say, "Oh, is that, that's not being accurate because cost to mine oftentimes isn't counting, not accounting for the hardware cost of buying that ASIC miner. It's kind of seen like, no, Energy cost and, you know, so, but I can also hear the other argument is, well, it's just like in accounting standards, they have certain metrics that are done from a comparability point of view, right? So as an example, EBITDA is done in a certain way, it's earnings before interest, tax, depreciation, et cetera, because people have different tax rates. So to make things comparable, you need EBITDA, right? So in a similar way, maybe cost to mine is kind of like that. So what's your thought on that?

Yeah, we've So the team at Galaxy Digital, the mining team there, put out a report and an Excel model, I'm not sure when it was, probably, it might have been even in late 2021, and they had two different versions of the cost to mine one BTC calculation. One was marginal and one was total. And marginal was like just subtract your OpEx, or like it's just, it's your electricity price, and maybe your labor and, and other small factors. Like that, you subtract your pool fee and that gives you your cost to mine. But the total one was also including hardware depreciation, and I thought that those, having both of those is really important because hardware costs, at least for now, like hardware is not yet commoditized to the extent that you can not think about it, you have to consider the hardware costs as a really, really significant portion of your, like whether or not it makes sense to mine in the first place. So including depreciation Of your hardware in your cost to mine gives you a much more realistic estimate of how much it's actually costing you. So we're gonna have both of those, those will be calculated from the profitability calculator, and we're gonna update our cost to mine one BTC tool eventually, I'm not sure when that's gonna be, but that will include both marginal and total cost to mine. And I think either one of those in isolation isn't nearly as good as having both of them, because they both, like the, the marginal cost to mine Mine does still tell you like, is my electricity price competitive? Like, what's my, what's my breakeven point on electricity price? What's my breakeven point on Bitcoin price? And those different metrics that in day-to-day mining are, are really useful to know. But the total cost of mine, including hardware depreciation, is more of like, okay, what is the Bitcoin price at which I'm screwed if I make this investment into mining and then price goes down or price doesn't go up enough? If you're analyzing maybe over a two or three year time period, then you'll see your cost of mine is going up, but as long as Bitcoin price is also going up, then it's okay.

Yeah, really interesting stuff. I, I'd love to keep chatting, but I wanna keep the episodes, accessible and, you know, piecemeal sized. So we'll have to get you back on soon, Daniel. So let's finish up. If you've got any closing thoughts for listeners, maybe, any tips for them if they're thinking about how to assess profitability

Online and brains online. Sure,

my biggest tip is definitely start thinking about mining profitability more in Bitcoin terms. Hopefully we'll be able to help out with that pretty soon with the next profitability calculator update and the full mining insights update, although that's probably a month or two or three away, hard to say. But yeah, definitely start thinking in terms of Bitcoin CapEx breakeven, one hundred percent hurdle ratio on your revenue, not just your profit, things like that. Where to find me, I'm at dfrumkin. Chumps on Twitter and basically everywhere. And then also we have two Twitter accounts right now, it's kind of confusing. Brains is the umbrella company, the parent company, and then like products are brains OS plus slash pool, Stratum v2, we have a farm proxy coming out, and some other different projects that we're working on. But so the brains Twitter account is at brains underscore systems. and then the Slashpool Twitter account, which I think is the larger account by a good margin, is at underscore at slash

underscore pool. Fantastic. Well, listeners, that'll all be there in the show notes, so make sure you follow Daniel and you check out the brains dot com website. Daniel, thank you for joining me, and I look forward to chatting again soon. Thanks for having me, Stefan. Likewise. Just a quick note before we finish up, I just got back from Prague. I was over there for a Liberty conference, and actually, funnily enough, I'm gonna be back there in October, from the 21st to the 23rd, for the event Liberty in Our Lifetime. So the theme here is parallel structures for progress, and it'll be on in conjunction with some of the team from Free Private Cities. So I'm looking forward to catching up, and if you're interested to go there, it's gonna be in Prague. The website is lifetimeliberty dot com, and Code Livera twenty to get twenty percent off. You can find my show notes at stephanlivera dot com. Thanks for listening, and I will see you in the citadels.