Bitcoin ETFs are exchange-traded funds that track the value of Bitcoin and trade on traditional market exchanges rather than cryptocurrency exchanges. They allow investors to invest in bitcoin without having to go through the hassle of using a cryptocurrency exchange while providing leverage to its price.
How It Works
An ETF (exchange-traded fund) is an investment fund that tracks the price of an underlying asset or index. Today, ETFs are available for several assets and industries, ranging from commodities to currencies.
A Bitcoin ETF would work the same way – the price of one share of the exchange-traded fund would fluctuate with the price of bitcoin. If bitcoin increases in value, so does the ETF, and vice versa. But instead of trading on a cryptocurrency exchange, the ETF would trade on a market exchange like the NYSE or TSX.
Advantages of Bitcoin ETFs
1. Convenience
Investing in a bitcoin ETF provides leverage to the price of bitcoin without having to learn about how bitcoin works, having to sign up for a cryptocurrency exchange, and taking on the risks of owning bitcoin directly. For example, bitcoins are held in a wallet, and if an investor loses the password to the wallet, their bitcoin is lost forever. A bitcoin ETF simplifies the process of investing in bitcoin.
2. Diversification
An ETF can hold more than just one asset. For example, A Bitcoin ETF could comprise bitcoin, Apple stocks, Facebook stocks, and more—providing investors with the opportunity to mitigate risk and diversify their portfolio. Similarly, by trading on a regulated market exchange, a bitcoin ETF would provide investors with the chance to diversify their existing equity portfolios.
3. Tax efficiency
Given that bitcoin is unregulated and decentralized, the majority of the world’s tax havens and pension funds do not allow for purchases of bitcoin. On the other hand, a bitcoin ETF trading on traditional exchanges would likely be regulated by the SEC and eligible for tax efficiency.
Disadvantages of Bitcoin ETFs
1. Management fees
ETFs usually charge management fees for the convenience they provide. Therefore, owning a significant amount of shares in a bitcoin ETF could lead to high management fees over time.
2. ETF inaccuracy
While ETFs track the price of an underlying asset, they can also have multiple holdings in a bid to diversify the portfolio. However, this suggests that a 50% rise in the price of bitcoin may not be accurately reflected in the value of the exchange-traded fund due to its other holdings. Therefore, while an ETF provides leverage to bitcoin’s price, it may or may not be an accurate tracker of its price.
3. Limits to cryptocurrency trading
Bitcoin can be traded for other cryptocurrencies, like Ethereum, Litecoin, XRP, and more. A bitcoin ETF would not be eligible to trade for other cryptos, as it is not a cryptocurrency but simply an investment fund that tracks the price of bitcoin.
4. Lack of Bitcoin ownership
Bitcoin serves as a hedge against central banks, fiat currencies, and equities. By being independent of central banks, bitcoin provides a way to mitigate risks associated with the financial system. Bitcoin also protects users and investors by providing privacy through the bitcoin blockchain. A bitcoin ETF would be regulated by the government, eliminating these benefits.
Do Bitcoin ETFs Exist?
No, there are no bitcoin ETFs as of yet. It is largely due to the unregulated nature of bitcoin and the cryptocurrency market, which makes the bitcoin market easy to manipulate by investors with large holdings. The U.S. Securities and Exchange Commission (SEC)‘s blocked several proposals for bitcoin ETFs on the grounds that the market is unregulated.
While there is no bitcoin ETF, there are publicly-traded funds that invest their money in bitcoin. Unlike bitcoin ETFs that directly purchase bitcoin, shares in the funds represent a pool of money invested in the cryptocurrency. Another way to gain exposure to bitcoin without actually purchasing it is to invest in cryptocurrency and blockchain companies, which provide leverage to the crypto market.
If you only have a small volume of potential Bitcoin users, the easiest way to accept BTC would be to ask your customers to transfer the money directly you. But before being able to do so, you need to set up a Bitcoin wallet first.
Essentially, a wallet is just a string of random letter and numbers. Numerous Bitcoin exchanges are catering for different needs that offer wallet services as well as independent wallet platforms. All you need to do is register with one of them, receive your wallet address, which is also your public key, and a private key, which is necessary for signing for transactions and should be kept secret.
In order to be able to withdraw funds from your Bitcoin wallet in flat currency, you will need to link your bank account or your credit card.
To make things easier for your customers, it might be a good idea to present your wallet address in the form of a QR-code. All they will need to do is to scan it, put in the amount of Bitcoins necessary and sign with their private key. Bitcoin’s value is known to fluctuate a lot, so make sure to look up the current exchange rate on any major exchange before conducting the transaction.
Creating a short and easily understandable tutorial on how to transfer Bitcoins to your wallet would also be a good idea.
In a pursuit of streamlining Bitcoin payments for businesses, software developers have been coming up with various touchscreen apps. These apps work much like direct transactions to online wallets do. The merchant needs to connect their wallet address with the app, put in the required amount in fiat currency, and the app generates a QR-code containing the address and the amount of funds that need to be sent in BTC. All the customer has to do is scan the QR-code with their Bitcoin mobile wallet app and sign for the transaction. These services can be used on most smartphones and tablets.
Bitcoin’s recognition as a viable form of payment has lead to the emergence of an ever-rising number of commerce-specific hardware point-of-sale solutions. Those can come in the form of Bitcoin-specific payment terminals as well as Bitcoin-oriented APIs that can be integrated in some of the existing point-of-sale terminals, and so on.
Their capabilities vary depending on a manufacturer.
List of services:
Coinkite — A Bitcoin payment terminal similar to chip-and-PIN terminals. It can scan Bitcoin-based debit cards, issued by the same company, operate as a Bitcoin ATM and print out QR-codes for customers to scan.
BitPay — A global payments processor, streamlined into the SoftTouch POS system. It contains an API that can be integrated into almost every point-of-sale system with a bit of programming job.
Revel — A company that offers a range of POS solutions for various types of businesses and incorporates Bitcoin as a payment option.
BitXatm — A startup from Germany that created Sumo Pro – a cryptocurrency ATM that incorporates a point-of-sale.
XBTerminal — A Bitcoin POS device that allows customers to pay from any mobile Bitcoin wallet by NFC of QR-code. It also facilitates payments from offline mobile devices via Bluetooth.
Gift Cards
When it comes to Bitcoin, gift cards are often used as a medium of exchange. Even though major retailers like Amazon, Target or H&M are yet to start accepting Bitcoin as a form of payment, there is always an option of buying a gift card to one of those establishments with Bitcoins.
If your business sells gift cards or gift certificates, you will find that perhaps the easiest way of accepting Bitcoin is to accept it for the purchase of gift cards or sell those cards on designated Bitcoin-accepting platforms. Obviously, those gift cards will then be used to purchase goods or services from your business.
If you’re running an online business, you can of course still accept manual payment directly to your wallet, providing customers with either a public key or a QR-code. However, there is also a way of streamlining online payments in Bitcoins by implementing a ‘pay with Bitcoin’ button on your website.
Several different services offer solutions for this. Some of them even provide button generators, where all you need to do is fill in a short form. As a result, you will get a few lines of HTML code to copy and paste into your website. While it is a relatively easy process, it is recommended you entrust an experienced programmer with this task.
In case your business receives payments via invoices, there are a few things you need to consider. Besides the required amount in fiat currency, it is recommended that you include at least a suggested amount in Bitcoin or an instruction on how to calculate it. Due to Bitcoin’s constant fluctuation stating a certain amount in BTC may incur significant losses either on your part, or on your customer’s part.
The invoice should include a wallet address for the customer to send the funds to. As the public key is a long and random string of numbers and letters, both upper and lower case, including a QR-code would also be a good idea. This is especially necessary if you’re sending out paper invoices.
In many jurisdictions, Bitcoin and other cryptocurrencies are still in the legal grey area. Lawmakers, tax authorities and financial regulators are still trying to understand where it fits in within existing legal frameworks and are crafting new regulations to govern it.
In most countries worldwide, Bitcoin is either legal or unregulated. This means that accepting payments in BTC is legal in those jurisdictions, at least for now. However, the laws and regulations in different countries can view and treat merchants accepting Bitcoin differently. Moreover, those regulations are obviously subject to change. So, before deciding to accept Bitcoin as a form of payment, make sure to consult with a legal advisor and be prepared to adapt.
The only countries where Bitcoin and other cryptocurrencies is outright banned are Bangladesh, Bolivia, Ecuador, Kyrgyzstan and Vietnam. China and Russia are about to join those jurisdiction in due time.
Depending on a jurisdiction you live in, once you’ve accepted payment in Bitcoin, you might need to include it in your tax report. In terms of taxation, Bitcoin is treated very differently from country to country. In the US, the Internal Revenue Service ruled that Bitcoins and other digital currencies are to be taxed as property, not currency.
In theory, this really complicates merchants’ lives. This is because when acquiring property, the merchant is required to record the fair market value of the property. When the asset is later exchanged, if the fair market value has increased, then the owner has a taxable gain. So, when a merchant receives multiple payments in Bitcoin over a month during which the exchange value fluctuates and decides to exchange all of them for a flat currency, the taxable gain of every single transaction might be significantly different.
However, in practice, most of the merchant service providers mentioned above offer an instant exchange service. This means that once you receive a payment in Bitcoin, it is exchanged into a traditional currency of your choice instantly, allowing for minimum fluctuation.
It is recommended that you consult with a tax specialist in order to get a better understanding of how Bitcoin is taxed in your jurisdiction and how income gained through Bitcoin should be reported.
Pros
When it comes to accepting credit and debit card payments, a lot of small businesses often find themselves in a position where they have to set a card purchase minimum. This is because of the fees, which can range from two to five percent of the transaction total. On the other hand, one of Bitcoin’s main advantage is the lack of any central intermediary, which dramatically reduces transaction fees.
One of the main problems that any money transfer system, including standard bank cards, needs to solve is so-called ‘double-spending.’ Oftentimes, a transaction can be reversed with just a simple phone call, and the fraudster is able to spend that same amount of money again. Bitcoin, thanks to its distributed public ledger called the Blockchain, offers protection from such fraudulent schemes. Once the transaction is confirmed, it is recorded in the Blockchain and after that it becomes irreversible and unchangeable. In this respect, accepting Bitcoin is pretty much like accepting cash.
Bitcoin holders are always looking for new ways to spend it. Even though there are a lot of different businesses accepting Bitcoins these days, your business will not get lost among them. By accepting the cryptocurrency, you will attract a whole new group of customers, especially if you’re running an online-business.
Finally, accepting Bitcoin means giving your customers an extra way to pay, while also providing them with an extra layer of protection for their personal information. All in all, Bitcoin has a potential of significantly increasing your businesses’ profits.
Cons
The biggest disadvantage of accepting Bitcoin is the cryptocurrency’s insane volatility. For instance, in the beginning of 2017 one Bitcoin was barely worth $1,000. Then, it got to almost $5,000, quickly dropped to $3,200 before hitting its historical maximum of $8,000 in mid-November.
This means that you’ll need to adjust your prices on the daily, if not hourly basis. Moreover, you will have to translate Bitcoins into your currency of record quickly and regularly in order not to sustain a loss. Some of the merchant service companies mentioned above provide an instant exchange service, which means that prices in BTC are adjusted in real-time and Bitcoin payments made by your customers are immediately exchanged for cash value at BTC’s current value.
Even though Bitcoin transactions are safe and fraud-free, there is still a chance of hackers getting their hands on users’ wallets. The story of Mt. Gox, an infamous exchange that lost approximately 850,000 of its users’ Bitcoins, which amounted to more than $450 mln at the time still haunts the Bitcoin community. Overall, around a million of Bitcoins have been stolen from exchanges since 2011. Unlike most traditional currencies, Bitcoin is not backed or insured, so the loss of funds will most likely be irreversible.
However, there are steps that you can take to avoid that. In order to better protect your funds, store them outside of popular exchanges, use multi-factor authentication on your accounts, secure and take care of your private keys and do regular backups of your data.
Perhaps the most complicated problem with accepting Bitcoin is the regulatory grey area the cryptocurrency finds itself in right now. Existing laws and regulations are sparse and differ drastically depending on a jurisdiction. Moreover, they are subject to change, which means business-owners have to constantly monitor new developments in the world of Bitcoin and be prepared to adapt.
Stablecoin supply quietly surged last year to $28 billion after starting the year below $5 billion. And the market continues to see substantive growth. As of January 2021, the current stablecoin supply is over $33 billion.
The two largest stablecoins — Tether and Coinbase’s USDC — account for most of the market by total supply. Tether’s USDT comprises over 75% of the market at $25 billion in total supply. On the other hand, USDC comes in second, far behind Tether at 14% of the market and nearly $5 billion in total supply.
So which USD-backed stablecoin is better for B2B payments: USDC or USDT?
It helps to weigh the pros and cons of each in order to make an informed decision based on your unique circumstances. But before we get into specifics, let’s think more broadly about the fundamentals and underlying technology.
Stablecoins are a cryptocurrency whose value is backed 1:1 by another asset, such as the US dollar, euro, yuan, or gold. This keeps the price stable relative to that asset.
With 24/7 availability, near instant settlement, and lower fees, people are turning to cryptocurrency to make payments.
As the first cryptocurrency, bitcoin paved the way for blockchain payments. In 2010, Laszlo Hanyecz bought two pizzas from Papa John’s for 10,000 bitcoin (worth $30 at the time) which is thought to be the first instance that crypto was used to pay for goods or services. In today’s value of bitcoin, those pizzas cost approximately $350 million.
That’s where stablecoins come in. While many top cryptocurrencies are still in price discovery, you can take advantage of the benefits of blockchain payments without subjecting yourself to volatility or complicated tax calculations. Stablecoins allow institutions, traders, and individuals to hold crypto without dealing with the highs and lows of bitcoin or ether.
How does it work? The stablecoin issuer will typically hold a reserve in a bank for the asset that is backing the stablecoin. Then, this reserve will serve as collateral for the stablecoin. This is similar to how both USDC and USDT collateralize their stablecoins with fiat.
Other more complex stablecoins (such as Maker’s Dai) are borrowed against locked collateral and destroyed when the loans are repaid. But we’ll spare you the details, since we’re focusing on USDC and USDT.
Total Stablecoin Supply (as of Jan. 18, 2021)
The economic data speaks for itself. Stablecoins exploded in 2020. Total stablecoin supply ballooned by more than 5X in 2020 from around $5 billion to over $28 billion. And for good reason.
For starters, the growth of DeFi in summer 2020 likely would not have happened if stablecoins did not have sufficient liquidity in the market to counter the unpredictable pricing of other crypto assets. Stablecoins are key to making the sophisticated tools being built on top of blockchain technology attractive and usable for developers and traders alike.
Along with the need for stablecoins in DeFi and trading, institutions across the world are using stablecoins to make cross-border (or intra-border) payments in a fraction of the time as fiat payments. This trend accelerated in 2020, with businesses increasingly relying on cryptocurrency for payments. Many companies prefer to transact with a currency that is tied to the global reserve currencies.
In January 2021, the Office of the Comptroller of the Currency (OCC) officially announced that they will permit federally regulated banks to facilitate stablecoin payments and other blockchain activities. There still seems to be plenty of room for growth in 2021 with this news.
Now let’s explore the two biggest stablecoins (by market cap) in crypto: USDC and USDT.
What is USDC?
The USD Coin (USDC) was launched in October 2018 by the Centre Consortium, powered by the massive cryptocurrency exchange Coinbase and Circle Internet Financial. USDC is the only stablecoin currently supported by Coinbase. It’s built on the Ethereum blockchain as an ERC-20 token.
As of January 14, 2021, USDC is a top-15 coin on every exchange. It has a $4.75 billion in total supply (up from $518 *million at the start of 2020), and holds a 14.5% market share for all stablecoins. It’s quickly become one of the largest coins, and it looks like it’s continuing to build serious momentum.
How is USDC stabilized? USDC is pegged 1:1 to actual U.S. dollars (USD) and held in reserve bank accounts. It’s subject to regular audits to ensure that it’s staying an actual dollar. This is how you can trust that USDC will remain $1 regardless of what happens.
USDC is available to trade at seven different exchanges, including Coinbase, Poloniex, Binance, and KuCoin. For Coinbase Pro or Coinbase Prime users, you’re able to purchase and sell USDC from all regions of the world. If you have USDC on Coinbase, it’s simple to convert your USDC back into fiat and withdraw to your bank account.
How can I use USDC?
Since USDC is an ERC-20 token, any two ethereum wallets can send and receive USDC to anyone in the world almost instantly.
This ERC-20 based token can be used by any new decentralized application (dApp) built on the Ethereum blockchain. That’s why USDC is popular in the DeFi community. USDC holders are free to explore the wild west of DeFi lending, high-yield savings accounts, and other possibilities.
Most recently, USDC partnered with the exiled government of Venezuela to provide aid to people and healthcare workers in Venezuela. According to the CEO and founder of Circle, stablecoins are now a tool for US foreign policy and USDC is leading the charge.
Many believe that coins like USDC go against the crypto narrative of being anti-fiat, but there’s an opportunity here. In order for crypto to go mainstream, it needs to work collaboratively with traditional finance. Fiat-to-crypto payment rails are going to become more and more prevalent in the coming years.https://www.youtube.com/embed/wmCwPXLQveU?feature=oembed&enablejsapi=1&origin=https://blog.gilded.finance
How to get paid in USDC?
With Gilded, it’s easy to send and receive payments using USDC. You can send invoices to your customers priced in USD (or other global currencies) and then accept the payment in USDC.
When you pay with USDC, the fees are lower, payment is faster, and you don’t have wait for an intermediary. Gilded never touches your funds. For those that prefer the convenience of a trusted custodian, Gilded’s Coinbase integration allows you to send and receive USDC payments directly in your Coinbase account.
What is USDT?
Tether, known by its ticker symbol of USDT, is widely known as the first stablecoin project. Originally known as MasterCoin, the idea for Tether was first conceived in January 2012 and officially launched in 2014 by Bitfinex. It’s a fiat-collateralized currency, meaning that the value is supposed to be pegged 1:1 to the U.S. Dollar.
USDT has nearly $25 billion in supply and accounts for greater than 75% of the total stablecoin supply (which fell below 80% for the first time last year). It’s the third biggest cryptocurrency by market cap as of today and it’s the reigning king of stablecoins.
How do I use USDT?
Since USDT is the biggest stablecoin by high margins, it provides high liquidity to its users. Most notably, USDT has a daily 24 hour volume of well over $100 billion, almost double that of Bitcoin. It’s the most liquid cryptocurrency in the world.
This makes it perfect for traders who need easy access to transfer funds. You can enter and exit trades without huge changes in price (like you would with Bitcoin or Ethereum). And if you’re only trading between various digital currencies, then the tax liability is lower or non-existent.
It’s also a good use as a medium of exchange, and not just for traders. More and more businesses and freelancers are using Tether as a form for B2B payments.
But Tether also is not without controversy, which center around whether it’s fully backed by the U.S. Dollar.
In 2019, Bitfinex, the exchange that shares a parent company with Tether, reportedly raided $850 million of Tether reserves for their outstanding debt.
We won’t get into too much detail here but it’s worth mentioning. We recommend that you to do your own research and reach your own conclusions.
75% of the stablecoin market believes that Tether is still trustworthy.
How to get paid in USDT?
Getting paid in USDT is super simple with Gilded. Since Tether is such a liquid asset, you never have to worry about the supply running low or the price becoming volatile.
And just like USDC, you’re going to save yourself time and fees by making or accepting payments with USDT.
Should I use USDT or USDC?
Short answer: it depends. From our research and conversations with hundreds of customers and prospects, it depends on your specific needs, preference, and your customer profiles.
USDC is most commonly used by institutions in the United States (or where Coinbase is offered in other countries). If your customers are businesses, then you will likely want to use USDC to send invoices to your customers. If you’re a Gilded user working with Gilded’s Coinbase integration, it makes sense to use USDC.
On the other hand, USDT is most commonly used by traders and investors. Tether is a tool that allows traders to protect profits and stay in crypto. It allows you to keep your money on exchanges without subjecting yourself to volatile bitcoin prices. If your customers are traders, then perhaps USDT is the right choice.
There are three main categories of stablecoins available to users, all of which peg their units in different ways.
Fiat-backed This is the most common form of stablecoin in the market, consisting of crypto assets that are directly backed by a government-issued currency (or commodities such as gold) with a fixed 1:1 ratio. Their value is based on the value of the backing currency.
In this setting, a central issuer or bank holds a certain amount of fiat currency in reserve and issues a proportionate number of tokens. The key requirement is that the amount of backing currency reflects the circulating supply of the stablecoin. For example, the issuer holding $100,000 dollars would equate to 100,000 tokens with the value of $1 each, which can be freely traded between users.
While they are registered with regulatory bodies such as US Securities and Exchange Commission, the off-chain nature of the system – i.e only the issuing financial institutions have complete oversight into the fiat money deposits – necessitates a certain degree of trust. There is no way for a user to be sure whether the issuer actually holds the funds in reserve, so the stability of the stablecoin’s price depends on their trust in the issuer.
Crypto-backed In this case, stablecoins are issued with cryptocurrencies as collateral instead of being backed by fiat currencies. The main idea here is to peg them to a basket of cryptos or a cryptocurrency portfolio. Since everything is done digitally on the blockchain, the system depends on the use of smart contracts to handle the issuance of units, ensure governance and establish trust.
This creates a decentralised ecosystem that is regulated by the users themselves, as opposed to one issuer or third-party regulatory body dictating monetary policy. Users have to trust that all the network participants will act in the best interests of the group as a whole, which is one of the big draws of cryptocurrencies in general.
To acquire crypto-backed stablecoins, users lock their cryptocurrency into a contract, which then issues the token. Stablecoins must then be paid back into the same contract before their collateral can be returned, with price stability achieved through various supplementary instruments and incentives.
Algorithmic Also referred to as non-collaterised stablecoins, these aren’t backed by any fiat currency, commodity or cryptocurrency reserve. Instead, algorithms and smart contracts manage the supply of tokens issued to maintain a stable price, mirroring the monetary policy used by central banks around the world to manage national currencies.
These smart contracts are implemented on a decentralised platform and can run autonomously, reducing or increasing the supply of tokens in circulation based on the price of the stablecoin relative to the price of the fiat currency it tracks. If the price falls below the value of the fiat currency, the token supply is reduced and vice versa.
Although they aren’t collateralised in the same way as fiat and cryptocurrency-backed stablecoins, algorithmic stablecoins may have a pool of collateral in reserve in case of black swan events.
What makes stablecoins different?
In a nutshell, stablecoins are cryptocurrencies that are designed to minimise price volatility relative to a particular “stable” asset or basket of assets. Unlike traditional cryptocurrencies such as Bitcoin, a stablecoin is one that is pegged to a real-world asset like fiat money (e.g. the Euro) or exchange-traded commodities (e.g. gold).
This means they maintain a steady value against a target price, making stablecoins an attractive proposition for investors as well as providing the much-needed stability for merchants looking to participate in the crypto space.
Most importantly, it makes them more viable as an actual currency because they aren’t subject to wild, daily fluctuations in price and are useful for all the things people actually want to use money for. As such, they can enable a number of practical use cases that traditional crypto-assets simply can’t – from insurance and loans, to payments and investments.
They also substantially reduce friction by letting people use something that they’re familiar with – such as the Pound or the Dollar – as well as allowing users to cheaply and quickly transfer value around the globe while maintaining price stability. This will all be key to fostering mass adoption in the future. By increasing confidence that they are stable enough to be used as a daily medium of exchange, consumers will be more likely to trust the technology.
Ultimately, they offer users the best of both worlds: the processing speed and security/privacy of cryptocurrency payments, combined with the volatility-free valuations of fiat currencies.
无论去中心化的支付结算网络如何发展。在很长一段时期内，银行账户体系仍将占据业务主导权。决定了“跨境支付协议”离不开银行的业务开拓。2020年11月，Velo与VISA全球达成合作，以Velo通证为金融解决方案中作为抵押数字资产，共同开发针对亚洲中小微企业贷款的支付解决方案。随后Velo与其生态公司Lightnet宣布与泰国第一家本土银行泰国汇商银行（SCB）合作，为规模高达万亿美金的跨境汇款市场提供跨境汇款服务，并利用区块链技术为东南亚数百万外籍劳工提供汇款服务。2021年1月，Velo与亚洲数字银行（Asia Digital Bank）开始开发跨境业务解决方案。
Mining is the process of creating valid blocks that add transaction records to Bitcoin’s (BTC) public ledger, called a blockchain. It is a crucial component of the Bitcoin network, as it solves the so-called “double-spend problem.”
The double-spend problem refers to the issue of needing to find consensus on a history of transactions. Ownership of Bitcoin can be proven mathematically through public key cryptography, which cannot be broken with today’s technology. However, cryptography alone cannot guarantee that one particular coin hadn’t previously been sent to someone else. In order to form a shared history of transactions, one needs to have an agreed-upon ordering that is based on, for example, the time of creation of each transaction. But any external input can be manipulated by whoever provides it, requiring participants to trust that third party.
Mining (and blockchain in general) leverages economic incentives to provide a reliable and trustless way of ordering data. The third parties ordering transactions are decentralized, and they receive monetary rewards for correct behavior. On the contrary, any misbehavior results in loss of economic resources, at least as long as the majority remains honest.
In the case of Bitcoin mining, this result is achieved by creating a succession of blocks that can be mathematically proven to have been stacked in the correct order with a certain commitment of resources. The process hinges on the mathematical properties of a cryptographic hash — a way to encode data in a standardized manner.
Hashes are a one-way encryption tool, meaning that decrypting them to their input data is near-impossible, unless every possible combination is tested until the result matches the given hash.
This is what Bitcoin miners do: they cycle through trillions of hashes every second until they find one that satisfies a condition called “difficulty.” Both the difficulty and the hash are very large numbers expressed in bits, so the condition simply requires the hash to be lower than the difficulty. Difficulty readjusts every 2016 Bitcoin blocks — or approximately two weeks — to maintain a constant block time, which refers to how long it takes to find each new block.
The hash generated by miners is used as an identifier for any particular block, and is composed of the data found in the block header. The most important components of the hash are the Merkle root — another aggregated hash that encapsulates the signatures of all transactions in that block — and the previous block’s unique hash.
This means that altering even the tiniest component of a block would noticeably change its expected hash — and that of every following block, too. Nodes would instantly reject this incorrect version of the blockchain, protecting the network from tampering.
Through the difficulty requirement, the system guarantees that miners put in real work — the time and electricity spent in hashing through the possible combinations. This is why Bitcoin’s consensus protocol is called “proof-of-work,” to distinguish it from other types of block-creation mechanisms. In order to attack the network, malicious entities have no method other than recreating the entirety of its mining power. For Bitcoin, that would cost billions of dollars.
How Bitcoin miners are paid
The network recognizes the work conducted by miners in the form of providing rewards for generating new blocks. There are two types of rewards: new Bitcoin created with each block, and fees paid by users to transact on the network. The block reward of newly minted Bitcoin, amounting to 6.25 BTC as of May 2020, is the majority of miners’ revenue. This value is programmed to halve at fixed intervals of approximately four years, so that eventually, no more Bitcoin is mined and only transaction fees guarantee the security of the network.
By 2040, the block reward will have reduced to less than 0.2 BTC and only 80,000 Bitcoin out of 21 million will be left up for grabs. Only after 2140 will mining effectively end as the final BTC is slowly mined.
Even though the block reward decreases over time, past halvings have been amply compensated by increases in the Bitcoin price. While this is no guarantee of future results, Bitcoin miners enjoy a relative degree of certainty about their prospects. The community is very supportive of the current mining arrangement, and has no plans to phase it out like Ethereum, another major mineable coin. With the right conditions, individual miners can be confident that the venture will turn a profit.
Though mining is a competitive business, starting out is still relatively easy. In the early years of Bitcoin, hobbyists could simply boot up some software on their computer and get started right away. Those days are long gone, but setting up a dedicated Bitcoin miner is not as hard as it may seem at first.
How to choose hardware for mining
The first thing to note is that for mining Bitcoin, your only option is to buy an Application-Specific Integrated Circuit device, commonly referred to as an ASIC.
These devices can only mine Bitcoin, but they are highly efficient in doing so. In fact, they are so efficient, that their introduction around 2013 made all other types of calculating devices obsolete almost overnight.
If you are looking to mine with common CPUs, GPUs or more advanced FPGAs, you will need to look into other coins. Though these devices can mine Bitcoin, they do so at such a slow pace that it’s just a waste of time and electricity. For reference, the best graphics card available just before the rise of ASICs, the AMD 7970, produced 800 million hashes per second. An average ASIC today produces 100 trillion hashes per second — a 125,000-fold difference.
The number of hashes produced in a second is commonly referred to as the “hash rate” and it is an important performance measurement for mining devices.
There are two other main factors that should be considered when purchasing a mining device. One is the electricity consumption, measured in watts. Between two devices that produce the same number of hashes, the one that uses the least electricity will be more profitable.
The third measure is unit cost for each device. It is pointless to have the most energy-efficient ASIC in the world if it takes 10 years to pay itself back.
Bitcoin has a fairly vibrant ecosystem of ASIC manufacturers, which often differ on these three parameters. Some may produce more efficient but also more expensive ASICs, while others make lower-performing hardware that comes at a cheaper price. Before analyzing which device is best suited for your needs, it is important to understand the other factors influencing profit.
The economics of mining Bitcoin
Like the real estate business, mining is all about location, location, location.
Different places in the world will have a different average price of electricity. Residential electricity in many developed countries is often far too expensive for mining to be financially viable. With the price of electricity often ranging between $0.15 and $0.25 per kilowatt hour, mining in residential areas runs too high a bill to remain consistently profitable.
Professional Bitcoin miners will often place their operations in regions where electricity is very cheap. Some of these include the Sichuan region in China, Iceland, the Irkutsk region in Russia, as well as some areas in the United States and Canada. These regions will usually have some form of cheap local electricity generation such as hydroelectric dams.
The prices enjoyed by these miners will often be below $0.06 per KWh, which is usually low enough to turn a profit even during market downturns.
In general, prices below $0.10 are recommended to maintain a resilient operation. Finding the right location is largely dictated by one’s circumstances. People living in developing countries may not need to go further than their own home, while those in developed countries are likely to have higher barriers to entry.
Aside from the choice of hardware, an individual miner’s profit and revenue depend strongly on market conditions and the presence of other miners. During bull markets, the price of Bitcoin may skyrocket higher, which results in the BTC they mine being worth more on a dollar basis.
However, positive inflows from bull markets are counterbalanced by other miners seeing the increased profits and purchasing more devices to tap into the revenue stream. The result is that each individual miner now generates less BTC than before. Eventually, the revenue generated trends toward an equilibrium point where less efficient miners begin to earn less than they spend on electricity, thus shutting devices off and allowing others to earn more Bitcoin.
Usually, this does not happen instantaneously. There is a certain lag, as ASICs can sometimes not be produced quickly enough to make up for the increase in Bitcoin price.
In a bear market, the opposite principle holds: Revenue is depressed until miners begin to turn off their devices en masse.
To avoid being outcompeted, existing miners must find a winning combination of location and hardware that would allow them to maintain their edge. They must also constantly maintain and reinvest their capital, as more efficient hardware can throttle older miners’ profits completely.
Comparison of mining hardware profitability
There are several calculators online on websites such as AsicMinerValue, CryptoCompare and Nicehash, where the profitability of a mining device can be quickly checked. It’s also possible to estimate profit manually with the following formula:
This is the formula that many of these calculators use, and it simply represents your share of the overall hashrate divided by the network’s total issuance in dollars. The input values required are either fixed parameters (the block time for Bitcoin is 10 minutes, so there are six blocks mined in an hour and 144 in a day), or they can be found on data websites like Blockchain.com or Coinmetrics.
To find the profit, one also needs to subtract the cost of electricity. Thanks to the equivalence between kilowatts and kilowatt hours, this can be as simple as multiplying the device’s power usage by 24 hours in a day and the electricity price per kilowatt hour.
Below is a table illustrating major ASICs on the market today and their payback period — that is, how long it would take for the investment to break even on current revenues. It’s worth noting that a miner’s profit fluctuates wildly over time, and extrapolating a single day into the future can lead to inaccurate results. Nonetheless, it’s a useful metric to understand the relative effectiveness of each device.
As can be seen in the table, none of the ASICs turn a profit at prices of $0.20 per KWh. The relative performance is mostly the same for each of the new-generation ASICs, while older models can be an attractive proposition if electricity is cheap.
For example, the Canaan AvalonMiner 1066 has low energy efficiency but also a very low price, making it fairly competitive at the low electricity price bracket despite being a fairly old model. The Bitmain S17 Pro, a previous-generation ASIC, still holds its ground due to its lower cost, but quickly becomes unattractive when the reference electricity price rate is raised. MicroBT’s devices appear to have the most balanced performance overall.
One final issue to consider is that this table was compiled in a bull market. Profits may be higher than average, though the halving of 2020 is still fresh and may counterbalance the effect with lower Bitcoin issuance.
Buying and setting up the hardware
There are several shops that sell ASICs to retail customers, while some manufacturers also allow direct purchases. Though they are more difficult to source than common graphics cards, it is still possible for anyone to buy an ASIC at an acceptable price. It is worth noting that buying from shops or manufacturers shipping from foreign countries may result in hefty import dues.
Depending on the manufacturer or the shop, ASICs may be offered without a power supply unit, which will then need to be purchased separately. Some ASIC manufacturers sell their own units, but it is also possible to use PSUs built for servers or gaming computers, though they are likely to require special modifications.
ASICs need to be connected to the internet via an ethernet cable, and they can only be configured through a web browser by connecting to the local IP address, similar to a home router.
Before carrying on, it is necessary to set up an account with a mining pool of choice, which will then provide detailed information on how to connect to its servers. From the ASIC’s web panel, you need to insert the pool’s connection endpoints and account information. The miner will then begin working and generating Bitcoin.
Mining through an established pool is strongly advised, as you will be able to generate constant returns by pooling your hardware with others. While your device may not always find the correct hash to create a block, your contribution will still be rewarded.
Considerations and risks of Bitcoin mining
In addition to the financial risk of not turning a profit, there are technical risks involved in managing high-power devices such as ASICs.
Proper ventilation is required to avoid burning out components due to overheating. The entirety of the miner’s electricity consumption is dissipated into its environment as heat, and one ASIC is likely to be the single-most powerful appliance in your home or office.
That also means you need to carefully consider the limits of your electrical grid. Your home’s electricity network is rated up to a maximum level of power, and each socket has its own rating too. Exceeding those limits could easily result in either frequent outages or electrical fires. Consult an expert to determine whether your electrical setup is safe.
Regular maintenance against dust and other environmental factors is also required to keep the devices healthy. While failures are relatively rare, ASICs can go out of commission earlier than expected without proper maintenance.
While single ASICs may fail, the largest threat to their profitability is them becoming obsolete. More efficient miners will eventually crowd out older devices.
Historic generations of miners like the Bitmain S9, released around 2016, lasted approximately four years before becoming unprofitable under any electricity price configuration (except zero). However, the speed of advances in computing technology is largely unpredictable.
Bitcoin mining is no exception to any other venture. There is potential for rewards as well as risks. Hopefully, this guide provided a decent starting point to further evaluate both.
