• Understanding bitcoin mining without being a professional miner

• How to select a reputable bitcoin mining company

• Risk assessment and metrics

• advisory

Mining is capital-intensive, if not profitable data centres need to be turned down. It requires specialized labor, scouting of a proper site, finding low-cost energy (80% of the costs are electricity), the ability to optimize data centre operations (OPEX), software and firmware, and the ability to select most profitable miners/hardware (CAPEX) at the right time with the right price. 

Compare to traditional data centers, hyperscalers (Microsoft, Amazon, Google), there are many more variables to consider that can’t be controlled, one for all, bitcoin price. Throughout the years, the hash rate (the computational power needed, number of hash per second, to solve the puzzle and find the next block) reached an all-time high, that combined with the entrance into the market of several new mining companies, lead to higher difficulty in mining a block.

How to select a reputable miner

Risk assessment

What are the criteria that make a mining company reputable, and its business relatively stable, despite the cyclic challenges of this industry?

• The biggest mining companies are public. The reason why mining companies go public is because they can tap into funds much easier than others, so that they can expand, and survive, in difficult times, usually cyclic. Mining is capital intense, the majority of the companies growth thru debt and many collaps for these reason. 

• Numbers of years in the business. Mining is a new industry. Seven years in the business is the equivalent of decades in other industries. Being in the mining business for so long means that the company has been able to overcome many market ups and downs, which is a sign that it might be able to overcome others, even in the future. It also means that it is profitable, and has been able to select the right source of energy, data centre site, the right people, and manage the operations effectively and buy capex at the right time.

• Vertically integrated: companies vertically integrated have more control over their operations, and supply chain, because everything is developed internally, and not outsourced to 3rd parties. This potentially leads to increased efficiency and profitability. Usually, vertically integrated miners have built data centres, the infrastructure, operations, and software in-house.

• Mining companies’ main metrics to look after: number of data centres under management, hash rate owned, number of miners, electricity cost, power capacity of each data centre, data centre geographic differentiation. 

• Geographical diversification: having site in different regions of the world make them more resilient to unpredictable regulatory hurdles and political instability.

• Owning the mining pool: due to the increase in hash rate and number of miners, the difficulty of finding the next block continues to grow. For cash flow purposes, every miner share their computing power, the hash rate, in mining pools, so that they can increase the chance to win the block, although lowering the bitcoin rewards. Owning the mining pool reduces the counterparty risk, since mining pools are point of centralization in the distribution of the rewards.

• Be a member of Bitcoin Mining Council — Being a member of the council provides transparency and legitimacy to the mining organizations since it is the most reputable BTC mining association in the world (Microstrategy, Marathon, etc), which independently audits its members that have to have at least 500 Ph of mining power. 

• Transparency in retrieving public information: team members, data centre locations, services provided, social media presence, and all the data above already listed. The transparency can also be function of degree of regulatory compliance

• Land and site: who own the land and site where the mining far is located, what type of contract making sure that your contract reflect the ones signed with 3rd parties and their responsibilities, SLA, disaster recovery procedures in place, insurances…

Metrics

Although there are no metrics set in stone to deduct miners' trustworthiness, these criteria could be used as a foundation for due diligence, and investors risk management assessment.

• you want to see the rewards (bitcoin subsidy) coming into your wallet the day after or as soon as possible and not wait for the miners to be shipped to the data centre and  set them up. Frequency is configurable

• you want to be able to trace the rewards from the mining pool to your wallet using a blockchain explorer

• you want to verify the electricity bills, how the cost of the electricity fluctuate in the last years. Generally speaking you should avoid where there isn’t predictable electricity cost and where there isn’t an agreement upfront where the cost is fixed

you want to have a simulator to calculate the potential earnings projection based on bitcoin value, energy costs, years of investment, and other metrics. If in doubt, you can use different simulators to compare the outcome.

CONCLUSION

1) Trust no one, test and verify by yourself. Mine for free and see daily rewards coming into your wallet

2) You can monitor where BTC rewards are coming daily, from the mining pool, into your wallet, with a blockchain explorer

3) After seeing how it works, and how to verify the daily BTC rewards, check if there is a threshold and a minimum lock-in period. 

4) Eventually to invest in mining you need to make sure that the operations are optimized for efficiency, how many bitcoin (or fraction of it) you can get, and how fast. 

5) Electricity cost is what count but need to be risk assessed based on the agreement with the power provider and geopolitical stability. 

6) Last but not least you need to find the way to invest that is most tax efficient for your own jurisdiction and personal situation.