How we calculate earnings and information about our 100% luck guarantee
Here we break down the 3 most important concepts with mining bitcoin: Luck, difficulty, and price. This should also offer some guidance on when and when not to use our 100% luck guarantee.
What is luck?
In the bitcoin mining sense, luck is basically what it sounds like. Bad luck means less bitcoin was mined than expected, good luck means more bitcoin was mined that expected.
More specifically, if we know the speed (in GH) and the difficulty, we can calculate what we should expect to make in a time frame in BTC on average. But this is theoretical.
In real life, it doesn't always work out this way. We can (sort of) compare this to winning a lottery. Each GH someone has to mine with we could compare to buying tickets in a lottery. Having more increases the chance you will win the lottery by giving you more chances to win. So if you have more processing speed, you will win the lottery more. If you have less, you'll win less. However, each individual lottery ticket has the same chance to win. Over a long period of time, the amount made per unit of speed will be the same, but someone with less "tickets" to the lottery will have to wait longer to win than someone with more tickets.
So in the actual mining of bitcoins, a more realistic example might look something like this:
The red line shows the luck value for each week, 45%, 250%, 55%, 50%. The blue line shows how the average flattens out over time. Now when we speak about luck value, we mean a percentage of the expected earnings for a period of time. If we expected to make 1 BTC a week (just to make the numbers easy), then the first week we would have made 0.45 BTC, the second week 2.5 BTC, third week 0.55 BTC, and 4th week 0.5 BTC.
In real life, variability depends on the mining pool you are using. From testing, the pool we use (kano.is) was selected as it tends to give the best return over the long-term. But, because it is smaller (less tickets in the lottery), we hit blocks less often, so there is a longer period of time before this averages out to 100%. I believe it currently takes about 4 months for this to even out to 100% with this pool.
Difficulty refers to how hard it is to "crack" a block, and changes with the state of the entire bitcoin network. Higher difficulty means it's harder to crack a block, and so the same hash rate will produce less bitcoin than during times of lower difficulty. Difficulty needs to be factored in when trying to calculate earnings in bitcoin over time.
This is entirely dependent on the total network hash rate. Every 14 days the network recalibrates, setting the difficulty rating up or down in order for blocks to be found on average every 10 minutes. So depending on when in this cycle you start mining, difficulty rating may change once or twice during a monthly contract.
If difficulty increases or decreases, the expected earnings will change by that amount. For example if expected earnings were 1 BTC for a week and the difficulty increased 10%, then earnings would decrease by 10% and the following week we would expect to make 0.9 BTC.
As you can see, the general trend is that difficulty will increase over time (especially as new machines come onto the market) and this will decrease the earning potential over time.
Note that while we can somewhat predict the amount of bitcoin earned, price is another matter. It is not something one can predict with any real accuracy. The best advice we can give our customers is that in general, bitcoin tends to increase in value over time. But we urge you to do your own research and talk to us about this. There are a couple of reasons for our recommendation to hold:
- Fiat currencies like the dollar inflate over time.
- There is a limit to the amount of bitcoin produced. Only 21 million will ever be produced, with the last bitcoin to be mined probably happening around the year 2140.
- The supply dwindles over time. The block reward halves roughly every 4 years. It started at 50 BTC, then 25 BTC, and currently we are at 12.5 BTC.
- Bitcoin gets lost. By some estimates some 4 million bitcoin is lost, by people losing access to their wallets and by accumulation of "dust," small amounts of basically worthless sums of bitcoin. When bitcoin is lost it reduces the supply of bitcoin and increases its value.
In the most concrete terms, the value of bitcoin depends on the number of coins actually in circulation and the number of people using it.
Over this time frame we can see that the price of bitcoin does tend to increase over time.
How customer earnings are calculated
Plattsburgh BTC uses a fairly straight forward calculation for this.
Actual Earnings=The earnings for the week (Monday-Sunday) are tallied, including all transaction fees.
Hashrate*=The average actual hash rate for the week.
Expected earnings= The expected earnings if luck at 100% is assumed.
Customer earnings= What you actually receive.
*Note that in real life conditions hashrate will fluctuate with things like heat and possible failure of units or even internet/power outages. Downtime does not have a detrimental effect on customer earnings as we will simply increase the hash rate of our customers in order to offset any loss of hash rate, thereby protecting you from potential loss at our cost. Additionally if the speed of the whole is lower, then your share of the earnings will increase, so this will also not have an effect either.
As an example, say we have a hash rate of 100 TH and our expected earnings are 1 BTC but we have good luck and our actual earnings are 2 BTC in a week (this is not realistic at all, just to make numbers easy). If you were to order 25 TH, then you will receive a quarter of the earnings, or 0.50 BTC for that week. So the calculation looks like this:
(Customer hashrate/Total hash rate) X Actual Earnings=Customer Earnings
Now if the mining pool suffered very bad luck, and instead of earning 1 BTC as expected, it earned 0.5 BTC (for luck of 50%), then the customer would receive 0.125 BTC.
If you opt in to use our luck protection, then we will do a second calculation:
(Customer hash rate/Total hash rate) X Expected earnings=Customer earnings
If luck fell to 50%, then we will use whichever formula gives the greatest customer earnings. So in this case, the customer would earn the expected 0.25 BTC instead of the actual 0.125 BTC.
Please note: if luck protection is opted out the customer would receive the actual 0.125 BTC. This is explained in the next section.
We are able to offer our luck guarantee because, as explained in the above section about luck, the bitcoin earnings we produce eventually even out over time. But, this occurs over a long-term.
For this reason, we have a contingency fund of no less than 1 BTC. During times of bad luck, BTC is pulled from this fund in order to cover the gap. Using the above example, 0.125 BTC is actually earned in the week, meaning to meet the luck guarantee 0.125 BTC would be pulled from the contingency fund equaling the 0.25 BTC total.
However the numbers in this example are not realistic. 1 BTC was chosen as it currently allows Plattsburgh BTC to maintain this promise to it's customers even in the statistically impossible event of not hitting a block for +5 months. Though obviously we would not wait this long to take corrective action, and the actual value of our contingency fund is publicly available for this reason.
To ensure this is sustainable, a portion of Plattsburgh BTC's mining is reserved for "self mining" to maintain the contingency fund. During good luck weeks, a small surplus is realized and the contingency fund grows.
This is normally factored into the price at a cost of +35% that goes directly to overhead costs. Any cash from customer sales is put towards overhead costs, and each week a portion of bitcoin is sold to meet any gaps to fully cover our cash bills.
Our 100% luck guarantee: general information about how it works for us
When/how should I opt out of Luck Protection?
We offer this in order to stave off potential losses to our customers over a short period and protect you from potentially bad luck during a downswing. It is possible for us to not hit any blocks for a week or two, and so the risks for opting out of luck protection for less than a couple of months are higher. Of course, because this also reduces the price by 35%, there is greater potential for reward. Here you can decide how much risk/reward you are willing to take for short term contracts.
You are not required to use it by any means, so free to opt out of luck protection. We recommend that you leave this default option on if you're going to run a contract for a couple of months.
However, I did mention that luck on this pool balances out at about 4 months or so. For longer term contracts of at least 4 months but ideally 6 to be safe, we recommend waiving our luck protection. This amount of time should allow ample time for luck to balance out to around 100% and will give you more bang for your buck.