Understanding ⇢ Difficulty in ⇢ Bitcoin Mining

  

                

In the last 6 months, bitcoin has come down quite a bit. Gone are the days where everyone was buying cloud mining contracts by the droves and thinking “I’m gonna be rich”. Yes, I know, it’s even worse if you invested in ICO’s. But here’s the thing. 

Mining is like buying a bond, you buy a bond that pays you  4% or 5% a year, and you just want to keep your money safe. Well, to me, bitcoin is money- better money. It’s money 2.0 and it’s going to take time for adoption, and ‘currency status’ to take effect. So what are we mining for? 

We mine because we would rather get a monthly payment in bitcoin than receive interest payments in the form of fiat currency. Now, this is hard to explain if you don’t understanding inflation, and I’m not going to get into that now, but the main principle is that if currency goes lower in value because of inflation, the interest payments you receive are quite possibly going to be less than the interest payments you receive. This means you actually lost money, even though you were getting paid interest. 

Now, miners are not like ICO’s, you are not going to make 10x’s your money in 1 year, although making 300-400% in mining has been done. The point is, if you’re going to mine, it should be done with a more long term approach, without such high expectations. After all, we are just the data processing center for the blockchain. We are not creating new technology that is going to change people’s lives, we are like the utility company, making sure the transactions are safe and accurate. 

Now, there is upside in mining, times where you return in one month to another can go from 3%-4% to 15%, and more importantly, if you hold on to the bitcoin you mine, you will also get the full upside benefit on your ROI. I talk to people who want to get involved in mining, and they ask what the returns are now. Well, if I told you that in November the returns were $3 (btc equivalent) for the month, and then in December they were closer to $15 how would you be able to normalize that? Not easy, and there isn’t  a good way to do it I think. That’s why my approach to mining is, “I prefer to make my returns in bitcoin, some months will be good, others will be so so, and sometimes you can get amazing ROI. 

When do you get that crazy 30% in 1 month? Well, there are different ways it could happen, but here is the one that comes to my mind a lot. You see, the network difficulty is a mechanism that ‘moderates’ miners. Now that we have many miners not mining, difficulty has gone down, making it easier and more profitable for us, and the other miners who can still mine profitably. So what happens is that because difficulty only changes every 2 weeks, we have this ‘delay effect’ where any increase in btc price will generate real alpha for anyone mining BEFORE the difficulty rate has a chance to adjust. It’s like being able to make more while doing the same work- that’s what we call alpha. 

This very reason is why you cannot really time the mining market, when looking for alpha. You can just decide that you want to mine bitcoin, because you like the passive income, the relative stability, and the fact that this might become a world currency one day. So you mine, and you don’t pay attention to what you made this month, because you are going to do this for the next few years, and that’s when the numbers really count. That is where the potential to make 300% to 400% is real. 

All this opportunity has been created because bitcoin stands to become a real currency, one that cannot be inflated, and one that might well perform better than fiat currencies. If we see countries starting to buy bitcoin, the way we are now seeing institutions do that, we might well see bitcoin at 1 million or more. 

So if you’re going to mine, get into the right frame of mind first. Understand what bitcoin is, and what it has the potential to become. 

Amir Ness
Founder of Elevate Group 
http://bit.ly/Elevatedaniel

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