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Mining Will Die? Long Live The Mining! On Cryptocurrency Mining Investment Prospects


Research team:

Yury Anikin, PhD in Engineering sciences, a Novosibirsk State University lecturer, a head of a research group on open-source data processing methods and blockchain technologies, a co-founder of the Novosibirsk foresight club.

Stas Chulkov, CEO & Co-founder, MBA. Has been managing information and digital technologies since 2001. Founder and director of TsVT since 2009. Implementation and introduction of large information systems at state and finance companies. Proprietary information systems. Graduated from Novosibirsk State University.

Alex Semisynov, Marketing & Technical Partner, Co-founder, PhD. Unique experience in developing hi-tech production startups (TermoMet). Has implemented design and construction projects on a state order (GiproNiiGaz).

Ilya Skribunov, Finance Director & Co-founder, MBA. For more than 10 years, Ilya had been studying biophysics of living systems at Novosibirsk State University and the Institute of Biophysics in Krasnoyarsk. Industrial and social consulting.

Alexander Golantsev, crypto-enthusiast and entrepreneur with two graduate degrees in Psychology (ASU, MIIP). The founder of digital marketing agency “Miranit”, specializing in the promotion of projects emerging on the ICO.

Vladimir Popov, advisor, IT  &  blockchain  lawyer,  author  of  studies  on  ICO, blockchain and cryptocurrencies. Specializes in project assessment. Provided ICO support to more than 20 projects. At  the  request  of  founders,  reviewed  token  economy.

The consensus mechanism of blockchain networks, based on confirmation of a computation (proof-of-work, PoW) will be gradually replaced by other mechanisms that do not require an existing amount of equipment for specialized computing (miners). However, investments in this equipment will not be lost forever – created computing power will be aggregated and used for other, useful and relevant calculations.

Mining will die

Lately the amount of news about blockchains, cryptocurrencies and ICO has been off the charts. One of the reasons is that it resonates with so many involved ones. Just recently Ethereum blockchain network has implemented Byzantium update. This modification is meant to prepare the network for future smooth replacement of a proof-of-work (hereinafter "PoW") consensus mechanism with a proof-of-stake (hereinafter "PoS") mechanism. Without exaggeration, this news has alarmed hundreds of thousands, perhaps millions of mining (utilizing graphics cards and special equipment to obtain cryptocurrency) investors. Is it possible that mining farms will become useless and investments in computing power will be lost? Let's look into this issue as closely as possible.

Thesis 1: a growing PoW network can't keep working forever.

There are at least four reasons why.

The first reason (and the most frequently ventilated Greenpeace complaint) is the following: if the blockchains are the key to the joyful future of humanity, then why are they producing so much useless energy just to heat the atmosphere? Indeed, in the Novosibirsk branch of the Blockchain Competence Center created by the Ethereum foundation and VEB (Vnesheconombank) we explore the size and structure of the blockchain technology market. Our evaluation of the energy being spent on Bitcoin mining is more than 5 GW, and about 1 GW on Ethereum mining. An article with a thorough analysis is coming out soon. We have to accept that the mining hardware is working for nothing, other than providing the network stability. No matter how many devices are involved, they are all solving the same task, and the prize only goes to one of them every 10 minutes (in a Bitcoin network). The results of computations are simply thrown away after the winner is chosen.

The second reason is the increasing complexity. This is a frequently mentioned reason, but not a critical one. An algorithm can be simplified, if necessary.

More important is the third reason: the profitability of mining is going down. To keep mining profitable, the exchange rate of Bitcoin or Ethereum to dollar should go up as fast as the computing power of the network grows. And this can't go on forever.

The fourth reason: PoW has accomplished its main tasks: initial user attraction by giving out coins and more or less equal initial coin offering. We estimate the number of mining investors to be thousands of large ones (owning more than 1000 graphics cards or ASIC devices) and millions of medium and small ones. The stability and, more importantly, growth of a network depends on the number of participants. And as soon as the coins are evenly distributed, you can switch to PoS.

Is there a life after a bubble?

Besides the preceding, the blockchain creators admit that their technologies are still far from perfection, they have technical restrictions that can interfere with implementation of many systems that were promised on numerous ICOs. But the news itself, especially its frequency, and the stock charts seem to ignore the aforesaid factors. Is it really a bubble? Will it really burst? What about the mining prospects? When is it going to burst? Do we at least have time for the mining investments to pay back? These questions are not idle at all.

Thesis 2. Cryptocurrency exchanges and ICO processes are in for a more or less rapid downturn.

How much money?

How much money has been invested in cryptocurrencies? Surely the total capitalization of all coins doesn't match with the amount of money invested. Suppose that once I mined one million coins almost for free. And today I sold one coin for 5000 dollars. The capitalization is 5 billion dollars, and the invested money are: one thousand dollars for my miner 5 years ago and 5000 dollars from the buyer. That makes 6000 dollars in total.

Let's evaluate the lower boundary, which is the hardware investments. Our estimate is from 1 billion to 3 billion dollars for Bitcoin miners and 2.5 billion dollars for Ethereum mining graphics cards. Let us note that about 20% of hardware investments have already been paid back. So, 20% of investors are mentally ready for a significant drop in profit. This year's ICOs have gathered a bit more than one billion dollars (suppose that it was in cash). The upper boundary is 7 billion dollars. And the total capitalization is 20 times higher. This economy has produced almost nothing tangible yet.

Whose money is it?

Actually, 7 billion dollars is not such a big amount, there have been startups sold to IT giants for that cost on a good year, but still it is very significant. Here's the reason why. Let me remind you that this money includes hardly any funds, Wall Street or corporations' money. Most investments are from small and medium private investors. This money comes from angel investors who decided not to invest in the latest startup. This money comes from an individual investor or a stockbroker who used to invest in risk assets before. This money comes from a large business owner who took it from a vault to seize the moment and try cryptoeconomy in practice. This money comes from a medium business that has set a new project aside for a year, while the mining is profitable. This money comes from a small business that didn't use it for a long-needed modernization. This money comes from office employees who have cut down on vacations or a new car.

What do all that investments have in common? They cannot be controlled from one or several locations. This definitely isn't a Soros's or Buffet's speculation.

Thesis 3. All crypto investments are basically from ordinary people.  

What about the concept?

What is this money invested in? What value do people see in cryptoeconomy? It's obvious that besides the concepts and prospects there's nothing to evaluate yet. And the main concept of cryptocurrency is crypto-anarchism. Are there so many people who need anarchism?

I don't think so. And the motivation to invest in cryptoeconomy is a "motivation against", not a "motivation to". There have been too many doubts on where the world is going, and the public confidence is growing that we have to search for alternative paths. And blockchain-based projects are not only promising, but already showing that alternatives and that search exactly.

In the wide variety of projects anyone can find something that resonates with them. Ones who are afraid of the debt of United States or a dollar collapse invest in currency that is neither pegged to the dollar nor bound to any economy in the world. Ones who are afraid of their personal data being gathered and used to manipulate them invest in transparent social networks with the gain being distributed between the users. Ones who are afraid of the domination of lawyers invest in smart contracts. Ones who are afraid of an artificial intelligence controlled by corporations or the government invest in the distributed intelligence.

Thesis 4. Cryptoeconomy capitalization is the capitalization of uncertainty regarding the stability of the existing systems and institutes, dissatisfaction with the suggested ways out of the crisis, and the need of finding alternative development strategies. 

Besides, you can also check your ICO project in this perspective: what fear does it work with and what alternative (decentralization, anarchy) does it promise?

Thesis 5. Even if the bubble bursts, the capitalization of the cryptocurrency market won't go down.  

First of all, the bubble will be associated with an ICO, not with cryptocurrency in general. Even if some blockchains' cryptocurrencies go down, it will be a disappointment in the implementation, not in the concept. Nothing has happened to the trust in Internet economy after the dot-com crash. The people's fears won't go anywhere and no one will promise them an alternative. So the market expectations will recover, maybe even faster than they did for the dot-coms.

Long live the Mining!

We are accustomed to hear that the information is the currency of the 21st century. Of course, this is not about music and video storages. The valuable information is the data on processes and activities. This is the information to be stored in blockchains of all kinds. What we didn't notice is that in a blockchain no one tries to enclose or monopolize the possession of the data. It belongs to all users. This is a radical change that demonstrates the actual alternative future.

However, turning the data into knowledge requires processing methods. Startups are working on that now on small datasets. The teams that are doing it better than the others are being bought by corporations and gain access to really big data. So, the corporations start from exclusive possession of the data, because they can afford huge investments in data storage systems, and then they monopolize the data processing and mining methods, because only they are able to buy the successful teams for a specified price and possess the required computing power.

On the other hand, blockchains not only distribute the data but also enable the creation of distributed resources (disk space and computing power) aggregation systems.

Thesis 6. The main benefit of investing in mining is the possibility to eliminate the corporations' monopoly on the data and data mining tools.   

The only thing to do is to create GPU clusters and find the problems for them to solve. Note the quality of today's distributed computing resources. Some latest top500 supercomputers are actually using GPU clusters. During the last few years the video card manufacturers have been investing in GPU neural networking functions and they have succeeded. Now the GPU-based neural networks' efficiency is higher than the efficiency of the CPU-based ones by an order of magnitude.

What tasks can be performed on such clusters? There already are lots of them. Decoding the DNA and solving the tasks of bioinformatics. Performing scientific and meteorological computations that are being done by supercomputers now.  Processing streaming video from thousands of street cameras in metropolises. Parsing and content analysis of the providers' traffic, for legal reasons as well. Video rendering and video games, so the gamers won't have to renew the hardware for the new games regularly. And machine learning, of course. For instance, Google was running neural networks on thousands of servers simultaneously to process 14 billion of satellite images (350 terabytes in total) to create a population density map with 5-meter resolution.

Thesis 7. The miners' clusters will be used to extract the knowledge on activities that was collected in blockchains.

Who is able to create solutions for transforming miners into computing clusters? The ones who are working with miners, optimizing and improving the mining process, creating mining software, organizing miner pools and cloud mining services. We'll be waiting for their news and new ICOs!

So, ladies and gentlemen, we can confidently declare that the Mining will die, long live the Mining!

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