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ASICS: Preparing for the Future

Introduction

When it comes to Bitcoins and mining, we have gone through a few different stages so far. We started off with CPU mining, then went to GPU, then FPGA and now we are on ASIC's, the latest and greatest. Tons of money has been poured in to these new mining systems, and they are getting better and better on a monthly basis. Much like how all other technology continues to keep moving forward, ASIC's are as well; what we have today will be obsolete within a few months, and that new stuff will be obsolete within a few months from that period, etc. It is a cycle that will keep going on until it finally hits a point (if it ever does) where there is just no further to go. If that point does happen, though, mining and its hash rate will continue to grow because the last tier of equipment will become mass produced.

I think a lot of people are getting involved with the mining and ASIC's without fully considering what is going on and what the effects of progression are. We are constantly seeing people join the community with this idea that people are basically printing money and that everyone can get rich by just throwing down one or two thousand dollars in to some ASIC's. Really, this could not be further from the truth. Even without all of the scams going around, the market is just not as fluid as so many people appear to believe. Even when it comes to buying ASIC's, it is important to fully understand how the hash rate is affected and what is going to happen over time. This article's goal is to help shed some light on that, leading to better buying (or not buying) decisions in the near and distant future.

Risk Factor: Value of Crypto Currencies

The first thing that needs to be understood is that the different crypto currencies (and that does include Bitcoin) do have a major risk factor in their value. At one point they were worth nothing, and they can go right back to being worthless again in the future. The chances of this are pretty low, I think, being that we have some pretty big investors and companies jumping on board with the crypto scene, but there is still a risk regardless. It is important to realize because a million worthless coins are still worthless, regardless of how you look at it. Because of this, I try to evaluate any potential investments based on how much fiat I will get back. If the fiat I get back is going to (realistically) be equal to what I put in, it is a decent deal because the risk is low. There are essentially two different ways to look at the situation, both of which can be correct depending on how you feel:

  • Scenario One

You have invested $1,000 in to an ASIC. At the current price of a Bitcoin being $100, that would be 10 Bitcoins you invested. Your goal now is to obtain 10 Bitcoins.

  • Scenario Two

You have invested $1,000 again, with the same price per Bitcoin. Your goal this time, rather than getting 10 Bitcoins, is to simply get back $1,000 by cashing them in as you get them (at least until you have broken even).

Both of these scenarios work, but in their own way. For example, some ASIC's will never pull the same number of Bitcoins you invested, but will likely be worth more in terms of fiat down the road. For example, you may spend 50 Bitcoins on an ASIC right now, worth $5,000. If you get back 20 Bitcoins a year from now and they are worth $300 each, you have made a profit.

The real issue here, though, is that you need to consider the other side of this. Instead of investing the fiat in to the ASIC, it could have been invested in to Bitcoins directly. So now, rather than having 20 Bitcoins worth $300 each, you have 50 Bitcoins worth $300 each ($6k vs $15k). The difference between these two values is monumental, and it also means you do not have to deal with the hardware in the process. Tons of things can go wrong with hardware, and mining is pretty much just a bet that your hash rate will stay at a decent portion of the overall hash rate. If it does not, you do not make money. If it does, you are good to go.

Some people like to take the road of feeling that their 50 Bitcoins are just that: Bitcoins. As such, they are not viewing them as a sort of currency, which, based on recent findings by courts, is exactly what they are. In other words, a person should not say “I spent $10 on a Bitcoin last week so I can trade it for $20 in stuff and I still doubled up.” In fact, the Bitcoin is worth $100 so trading it for a fifth of its value is causing a loss of $80 per! The trick here is to always keep up with the value of Bitcoins; if you do not, it is easy to end up underselling them and lose money in the process.

Evaluating ASIC's

When we look at items for sale, it is easy to get caught up in the moment. We see a great price for something and think it is the best thing in the world. Sadly, when it comes to hashing hardware, this is far from the truth. There are two things that hold it back:

  • Scams
  • Companies that are using their customer's money for research and development

If you have followed Butterfly Labs, for example, you may already be aware of the negative image that surrounds them. They are viewed by many as being a scam company, but really what they fall in to is the second category: they use the money customers pay in order to pay for their research and development costs. The cost of developing new technology is great, and it has to come from somewhere. While major companies like Apple and Microsoft have their own teams that handle all of this, the companies in the crypto community are usually much smaller and can be classified more as being start ups than anything else. The reason why this is important to realize is because if you are not paying attention, you can get sucked in to some pretty horrible deals. Along with this, something we have been learning a lot as of lately is that the estimated shipping dates of ASIC's can be pretty far off, considering it is still a fairly new area and tons of things can happen during the development phase that delay it.

When it really comes down to it, out of all of the available ASIC's on the market the only ones that can be trusted to ship out when they say they will is those from ASICMiner. The problem with this is that the cost versus what they will likely earn over the hardware's lifetime does not make economical sense. When we really take it in to consideration, though, it is understandable why this is. Instead of using customer's funds for the research and development, AM uses it to produce the ASIC's to sell. This means they will need more sales in order to generate more profit, and that profit can then be used to fund further research in to faster, cheaper and more efficient ASIC's. Some companies, like Butterfly Labs, have bypassed this (although arguably in a very bad manner) and gone straight to the higher end research and development stages.

It is definitely possible that as time goes along we will see other companies pull ahead and show that they are trustworthy as well, but with all the scams going around it is going to be a rough journey for them. When you purchase from any of these companies, you are essentially taking a large risk because there is no telling what they are going to do or when (or even if) they are going to ship out their products.

Understanding Hash Rates and Difficulty Increases

The next thing you need to do is understand the hash rates and how difficulty works. Difficulty is increased as the hash rate goes up. More or less, if there is a hash rate of 100 TH today and that equates to a difficulty of 5, then if the hash rate doubles up to 200 TH tomorrow, upon the next difficulty adjustment it will be increased to 10. The same would also work in reverse: if it went from 200 TH to 100 TH the difficulty would then go from 10 to 5.

This concept is by far one of the most important because of what people do not take in to consideration. To help understand it, take this scenario:

The network's hash rate is 100 TH and the difficulty is 5. 100 coins are generated per day. You now jump in and add your own 100 TH rig to the mix. First of all, you just doubled the network hash rate to 200 TH. This means that the earnings of each TH will go down by half. Instead of getting 100 coins per day like you would if you were the only one on the network (with the same power you have) you only get 50. Along with this, the other people get 50.

This concept is lost on so many people and I can not see why. All too often people calculate how much earning potential their purchases have based on today's hash rate, but that is not accurate. Just by the nature of even adding more hash rate to the network, they have already decreased in profitability. In the example above, if the person with 100 TH were using one of the online calculators to see how much his 100 TH was worth, it would not be accurate; he would need to divide that number by half. Not following this train of thought is what leads a lot of people in to losing money with their ASIC investments; they are not taking in to consideration what their own footprint does to the network, nor other changes across it. As a result, taking the estimated earnings based on what is earned by people already hashing right now is off. If anything, that should be seen as being the maximum you could possibly earn.

Longevity of ASIC's

Next up is the ASIC longevity. They are fairly new pieces of hardware and are largely experimental. We can see this in their development phases, and they are often being rushed to market (as they are most profitable when they are released sooner, rather than later). Because of this, there is no long term testing on these systems, and there is no idea how long they are going to hold up. They could die in half a year, a year or even a hundred years. All anyone can do at this point is guess. This is very relevant to preparing before purchasing an ASIC because it means even if you were able to grab one right this second, you have no idea how long there is before it has to have achieved ROI before it is too late. Most people are estimating that there is about a one year shelf life on these, but that has yet to be proven. They could last less time or more.

Sometimes companies offer up warranties on their hardware, but that then leads on to a question about how long the company itself will last. If a company goes out of business, their warranty no longer has any value, regardless as to how long it was “good” for. Because of this, it is important to be aware that any ASIC company out there could crash at any minute, so if you are relying on them staying open, that may not be the best idea. While they could succeed, there is no guarantee.

New Hardware Releases

We are already seeing this through the Bitcoin market, but technology moves fast. What may be the fastest ASIC today is likely not going to be the fastest next month. This means that just by owning a piece of ASIC hardware, your speed relative to the cost is constantly being diminished. You can spend $100 today on something and next month be able to get ten times as much for the same $100. When we are dealing with ASIC's, the increase in speed is even greater, meaning you are taking a risk by buying now instead of later. At the same time, if something has not shipped in the next month, you win by having purchased early. It all breaks down in to a battle of deciding which side of the risk you want to take: buy now and hope nothing new is released or hold out and hope that something else is released quickly. In either case, you can win or lose big time depending on how much you are willing to put out on to the table. It is really a decision that should be fully evaluated prior to actually making it. Just jumping in without thinking about the future (and, especially researching what is going on currently) is going to cause problems.

If you need proof as to how fast technology is moving, find a new computer part like a video card or a CPU and look at its price now. Go for the fastest one possible. Then in a month, compare it to what is now the fastest, and look at the price difference from where it was to where it is. Nearly every time you do this, you will find that the upgrade is big enough to notice. ASIC's will eventually (if they are not already) work the same way, where they will be constantly evolving. As such, the only way to keep competitive is to constantly keep on top of the market and always be buying the latest and greatest machines.

Conclusion

I hope this has helped better understand what the ASIC situation is like with Bitcoins (and possibly alt coins in the future, when ASIC's are created for them). I am in no way saying not to jump on the train and make some purchases and get to hashing, but it is important to fully understand what you are getting in to prior to diving in, or else you are likely to lose money and have little, if anything, to show for it. The entire market is a big risk, but it can also pay off pretty well. Making the best choices you can with the data that is available is the best you can do. If there were a sure way to make the right choice every time, everyone who is in cryptos would be rich already, so think about it like that.

No matter what you do, always take everything in logically. All too often we are seeing companies throw around numbers that just are not possible, or dates that they are never going to hit. If you are not paying attention to the patterns with these things, you can easily be sucked in by the false promises of success, later to be let down and wish you had not gotten involved. Instead of letting this happen, vet out each company to see what their past has been like. While some people will argue that the past activity does not necessarily represent the future, in a lot of cases it does. If a company makes promises and continually fails to meet those promises, you can reasonably expect that nothing is going to change in the future, and you should avoid them. While you could luck out and catch them on a good way, it is a big risk and the reward in a lot of these cases is not worth that much of a risk.

Mining


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