Investments in cryptocurrencies: ICO or mining?
11 July 2017
11 July 2017
Currently, the ICO and cryptocurrency market (including Bitcoin, Ethereum and others) provides business community with one more chance to participate in successful digital economy projects. But how to use the new opportunities wisely? What is the best option to invest money: cryptocurrency mining or ICO? To find out an answer, one should examine each of them.
It is necessary to know the basic concepts and key stages of this process in order to realize advantages of investment in an ICO.
ICO is an analogue to IPO (Initial Public Offering). However, the ICO campaign sells cryptocurrency tokens instead of shares. The process is carried out on the cryptocurrency exchange. Its advantage is that ICO expenses are ten- or even twenty-fold lesser than IPO ones ($10-20k on ICO vs. $200k on IPO). Besides, the results in both cases can be equal. By the way, Bitcoin has not involved an ICO but investments in this cryptocurrency are still quite popular.
Most commonly, large companies with the strong financial system enter exchanges using IPO campaigns. An ICO is primarily used by startups, being just at the beginning of their way to big business. It is a some kind of crowd funding for them. But newcomers should announce themselves one way or the other, thus the first thing to do for the company is announcement.
The company aimed at creating an ICO gives a short announcement on online portals, which most frequently bring together cryptocurrency community, such as Bitcoin Talk, Reddit and others. It makes a presentation, describing the ICO concept and goals for investors.
It is this very stage where investors find the most interesting startups. After project discussions, one makes some corrections in the business mode, and the next stage starts.
2nd stage. Offer
The startup creates an offer: a partnership proposal for the certain scope of persons or general public. It specifies all conditions and details: investment sums, project duration etc. The statutory point includes the subject to be sold on the exchange. As a rule, it refers to cryptocurrency tokens.
Cryptocurrency token is a digital asset, which price is determined by project managers. It is usually related to a certain cryptocurrency. Bitcoin is the most typical one. Then, the price of tokens is strictly bound to the bitcoin exchange rate. But they can be also supported by fiat currencies or even by gold.
3rd stage. Advertising campaign
After signing the offer, it is necessary to make as many people as possible be aware of the ICO in order to raise money. Therefore, startups hire advertising agencies to create an appropriate information level. This stage is primarily aimed at business community. When the advertising campaign comes to an end, the project enters the ICO.
4th stage. ICO
The company that has entered the ICO can launch its tokens using several ways:
When sales are completed, the issuer is obliged to execute their obligations. At that moment, there are risks for investors.
Discovering the ICO concept and all stages of this process, one should focus on risk assessment. Investors should realize that Russia is not the only country without ICO regulation. It is also absent in the majority of countries. This fact is a good chance for frauds who simply disappear after getting a required sum. Thus, those desiring to invest in the ICO of any startup should be especially careful and conduct their own analytics. And the deeper it is, the better: one should examine company’s operations, its market position, financial condition, and offer.
There are special agencies, publishing a credit rating of companies planning the ICO. ICORating is one of them. They check business model relevancy and experience of the team, study financial stability, and analyze competitors.
There is one more way to protect your own investments. You should monitor companies engaging third parties for fund raising – independent agents. In such a case, money comes on the Multi-sig wallet controlled by agents only. When the ICO completes, they provide the startup with the minimum required sum and monitor fulfillment of its obligations. If everything is going well, the company obtains the next sum of money. Otherwise, agents block startup activity and none of transactions will be supported. Then, money returns to investors.
There is another kind of investments in bitcoin and other cryptocurrencies: mining. It is the process of obtaining digital currencies. Besides, one can find freely available devices designed for a certain cryptocurrency. So why not just buy one or more equipment? It's not all as easy as it sounds. Like in any other business, one should estimate a potential benefit and expenses. It requires knowledge of main aspects, influencing the amount of obtained cryptocurrency.
The essential variable is hashrate or hardware computation power. It is a speed at which the mining system solves mathematical tasks. This power is measured in hashes per second: MH/s, GH/s, TH/s. The higher speed you have, the more cryptocurrency you get.
One should not forget that the solution of mathematical tasks leads to the strictly determined amount of bitcoins. This figure decreases twice each 210 thousand blocks (approximately every four years). Currently, the reward for a block is 12.5 bitcoins. It will be 6.25 bitcoins at the next stage in 2020.
The additional factor influencing cryptocurrency obtaining is mining complexity. Briefly speaking, the more miners the network includes, the more difficult cryptocurrency mining is. Besides, to start mining, you should join one of group of miners – pools. Each pool has its own fee.
The electricity price is also important, as all mining systems consume it heavily.
The amount of money that miners can finally get depends on the bitcoin exchange rate. By the way, Russia has banned the issue of cash equivalents, which could be also referred to cryptocurrencies. But in November 2016, the Federal Tax Service of Russia said that bitcoins were quite legal.
Let’s review the most popular mining systems as an example: AntMiner S9, Antminer S7, and Avalon6.
|Output||4,73 TH/s||13,5 TH/s||3,5 TH/s|
|Energy efficiency||0.25 W/Gh||0.098 W/Gh||0.29 W/Gh|
|Energy consumption||1210 Watt||1375 Watt||1100 Watt|
Let’s suppose that we have all data to calculate whether cryptocurrency mining is profitable for us or not. How to do it? There are a lot of online calculators where you should just enter information and find out how much we will earn. It concerns electricity prices, pool fee and other parameters. One of the simplest and most popular tools can be found on the CryptoSompare website.
Assume that the price of 1 kWh = 5.38 RUB. It means that the most expensive and powerful Antminer S9 will be able to obtain 1.74 BTC per year. The bitcoin exchange rate as of the time of writing article is $2525.
Antminer S7: only 0.6126 BTC per year.
Avalon 6: just 0.4533 BTC per year.
It is obvious that the profit highly depends on the electricity price. Moreover, it is necessary to realize that hardware overheats and requires additional cooling. Giant mining farms are equipped with special cooling systems. Besides, take into account that any equipment may break.
But there is one aspect that cannot be considered: mining complexity. It is impossible to predict it for the next year or even for a month, because nobody knows how many people will join this activity. Thus, figures provided by any calculators are approximate. And given current explosion of miners’ activity, such investments in bitcoin and other cryptocurrencies require special care.
Obviously, investments in ICO and mining have pros and cons. One thing is clear: before putting your money into any sector, you should consider all risks and benefits. Thus, arm yourself to the teeth with knowledge. It will definitely help you to make a right choice.
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