 Hey guys, it's MJ the students act tree and in this video. We're going to be talking about depreciation of mining hardware So in this video, I'm going to give a brief history of Bitcoin mining. I'm then going to talk about depreciation I'm then going to be you know little tongue-in-cheek why act trees are better than accountants And then there is going to be a dog coin giveaway So this is going to be very interesting for people studying subjects CT2 this is chapter 9 for for the actuarial students and Just to make it more fun I have themed it around Bitcoin just because depreciation can be quite a dry subject unless you have something to talk about and I mean, what's more fun to talk about then gold So if we had to jump into the the history of gold We would see that there was a big gold rush people would come out and try and get gold Using a gold pan that go in the river and try find some gold amongst the rocks They then improve their technology to something called a sluice box. I don't know if I'm pronouncing that correctly sluice a sluice box Which was a little bit more? Technologically advanced it allowed them to sort through the rocks much quicker Then they started getting even better with things called a placer a place of mine Which was an advancement in technology and finally they went to put mining Which is what's done now big heavy drills very much industrial very machinery And actually drill the rocks in order to get the gold Now funnily enough the same kind of story or the same evolution is happening with cryptocurrencies and The way they are mined It was originally thought that mining will be done on a normal computer You know you use your CPU one CPU equals one votes in the whole mining protocol And the idea was that every computer could could mine But then people found out that they could do mining much more efficiently if they use graphic cards or GPUs and A lot of people's realized that these components were much better more effective in CPUs at mining at certain algorithms Then for a brief period people started using something called an FPGA So something I had never heard of before but again It was an advancement in the technology to make mining better and then what we have today are things called asex Which are dedicated machines for the mining of cryptocurrencies? I mean if we look here at say bit furry I mean these are big boy miners and they have got like just rows and rows of these machines And they just mining which means if you're using a CPU or a GPU Your technology is kind of inefficient and it is something what we call it is obsolete at Achieving that task so what we mean by something becoming obsolete its new technology can do a better job And this is going to be one of the factors of depreciation The other thing to remember with depreciation is wear and tear and this comes to something more scientific You know the law of entropy and that assets disintegrate with time So if we had to look at say you want to get into Bitcoin mining and you want to get an ant miner You can see that this one goes for 408 US dollars If you want to get the very same thing on the second hand market You can see you can get a used one for a hundred and sixty seven dollars So this difference between the new price and the old price is quite a significant difference And this is what we refer to as depreciation. It is the decrease in an asset's value and There are two main ways to to calculate depreciation There is the absolute method Also known as the straight line basis where you say cost minus the estimated residual value divided by the estimated useful life And it's an absolute method in the sense that every year you're removing an amount of the values Sorry the assets value. So a thousand ran or a thousand dollars this year thousand dollars the next year thousand dollars going forth It's it's quite a linear decline in value There is another method known as the relative method or the reducing balance method and it's given by the formula here and Why it's relative is because you're reducing by a certain percentage. So 20% reduction every year This means in the first few years Depreciation is going to be more than in the final years and some people feel that this is more of an accurate representation of how assets depreciate in real life Now depreciation came about with accounting It was meant to you know for that whole accrual principle You know if you're using an asset for 10 years then that cost should be spread over those 10 years Instead of just one big payment at the beginning the accrual principle the whole thing of the expenses you paid and the money You earn should be within the same period But depreciation is therefore labeled as an expense and so this has given accountants the opportunity to use it in Tax loopholes and to try and avoid tax because you write off depreciation You can decrease your profits and therefore have to pay less tax now. This abuse has been Exaggerated in certain areas such as art So there are rumors or tales of companies that buy art for millions of dollars So they buy all this fancy fancy art collectible art and they depreciated year on out So they just depreciate depreciate depreciate until it becomes to a minimal value And then they give it to one of their managers as a gift, you know, and they say oh, this is a $1 gift Meanwhile that art in real life has might even have Appreciated so you're giving a manager a $1 gift that is actually say a $10 million piece of art so there is abuse with depreciation now depreciation is something that Actories get very excited about and Accountants might understand tax laws and the loopholes, you know be the best profession for that But act trees are the best at understanding uncertainty and with depreciation There is a lot of uncertainty the reason for that is that there are random variables Okay, a random variable is a value whose future amount cannot be forecasted with certainty If we go back to those depreciation formulas, we're gonna see that there are two random variables the residual value and The useful life Okay, now each one will have to be estimated from their own statistical distribution and this is no easy task. I Mean useful life can be calculated with say a survivorship model, which you'll learn in subject CT4 and But sorry in order to do that you are gonna need a lot of data in order to make sure that it's accurate Residual value, which is the one at the top there will require you to forecast future cash flows using something that we call a Discounted cash flow model because one way of looking at an asset is saying that an asset is Something that generates future cash in the future Sorry, I said future too many times there But the idea is that this is what we have the idea you buy an asset or you buy a bitcoin miner And you expect to earn money at certain intervals for a specific period of time However, the amount that you're receiving every, you know certain We go at the end of every month. It's more random Especially say with Bitcoin where the price is fluctuating or even mining with the blocks They're not coming at a steady rate. There is a bit of a random distribution towards them Depreciation takes us one step further in realizing that the future income streams are expected to decrease or season the future And I mean this is very much the same with Bitcoin in the sense that the mining block reward is going to be halving soon And why you want to calculate the expected life of an asset is because if say your miner Overheats and burns and just you know breaks then it's going to seize all future income streams and you need to apply that risk You know to your cash flows So actually can create really cool Sophisticated depreciation models compared to just say what the accountants use Which is just a standard formula that they plug into their Excel spreadsheets and these models will allow for better decisions and This is important because if you can calculate depreciation more accurately It gives you an opportunity because you can now spot other's mistakes You know if someone has depreciated the asset too much. Well, guess what? You could actually profit from the second-hand market If you buy these over depreciated assets and then resell them at the more accurate price You could potentially make money. However, this strategy does depend on Liquidity risk, which you'll come across in the later actuarial subjects But that's all I have time for so thanks so much for watching this video on depreciation And yeah, it is important if you are considering to go into Bitcoin mining You should factor in that your hardware will be depreciating and you need to you know balance that when you're calculating your final profits but otherwise For anyone who wants to get started with cryptocurrencies, I mean, I've got a whole bunch of dog coin So I'm gonna be giving a hundred dog coin to the first five people who should share this video and comment below with their dog Chain wallet address. This is a very small amount But it's just to get you started with the cryptocurrency and start playing around with it Feel free to send it to your friends and yeah, just have fun with it Best way to learn is to actually do it So otherwise that is the end of the video stay subscribed I will be making some more videos on subject CT2 and possibly more videos on modeling. Thanks guys. Cheers