cryptocurrency mining

Is mining cryptocurrency worth it? This is a very good question, but not one that has a straightforward answer. There are a few factors to consider. But the short answer is no; the overall cost of mining is such that it is not profitable in the short-term. As a simple cost to profit comparison, the profits of mining cryptocurrencies are very, very modest.

But that is not the full story. This is not to say that there is no profitability in mining. However, the profits might be more long-term rather than short-term. For starters, when mining Bitcoin started in 2009, a miner could use a personal computer. Moreover, the competition with other miners was not so fierce as it is presently.

This is in large part because now most mining takes place in China. It’s also primarily performed in pools, rather than independently. As a result, mining is no longer an after-school activity. Miners need to consider a few factors when thinking about profitability; both short term, and long term.

What cannot be overlooked is the burgeoning acceptance of cryptocurrencies and their growing influence upon fiat markets. So there is no doubt that cryptocurrencies have value. But how much and for how long is a question no one can answer with certainty. And this volatility, along with the cost of energy to mine makes for some real uncertainty.

Here are a few numbers that need to be considered:

  • On December 11, 2017: Bitcoin value: $14594.78, then 10 days later: $17010.53 (an increase of over $2000 in value).
  • On June 26, 2018: Bitcoin value: $6215.85, then 10 days later: $6656.48  
    • A smaller increase, and worth about $10 000 less than six months earlier.
  • On December 3, 2018 Bitcoin value: $4177.35, then 10 days later: $3468.52  
  • While writing this article: Bitcoin price is valued at $5,191.75

Although the volatility of a currency like bitcoin is not likely a surprise to anyone, the value of the currency and the cost of mining are interdependent. This interdependence is based on a few significant factors. When the market is good, miners have a lot to gain. Presently, mining a bitcoin block with two bitcoin worth of transaction fees will yield a mining payout of 14.5 BTC.

Based on a current estimated value of bitcoin at about $5000 USD, that is a value of $72 000, not including the miner’s fees. However, when mining there are a few necessary considerations. The fundamental concern is the significant amount of energy needed to mine cryptocurrency and the corresponding cost.

Let’s take a look at the nature and cost of mining in a bit more detail. This article will consider bitcoin mining more than other currencies. However, these costs are in many ways ubiquitous in the world of mining cryptocurrencies.

To understand the costs associated with mining, the main items that we will look at in relation to the profitability of mining are:

  • Difficulty
  • Hash-rate
  • Transaction fees
  • Mining pools
  • Energy costs

What is cryptocurrency mining?

When a miner is mining for bitcoin, they need to do two main things:

  • Solve for the hash-target of the transaction
  • Then add the successful hash to the blockchain

Solving for the target-hash of a transaction is not as easy as it sounds. While the heavy math is done by a computer, in order to solve for the hash, the program must run a significant amount of computations. So a miner can no longer use a personal computer to do. Instead, they would need specialized hardware, or ASICs. Despite the cost, if you are successful you will become the owner of the valuable and newly minted bitcoins, as well as the transaction fees.

Difficulty rate:

Difficulty rate, in many ways, is as variable as the market value of bitcoin. Bitcoin is mined at a steady rate, at about 1 bitcoin every 10 minutes. In order to maintain this rate, the program must adjust itself. That means that when there are more miners mining, not only does the competition to solve for the target-hash increase, but the system adjusts to respond to this increase to maintain the 10-minute process.

Hash rate:

The hash-rate is the speed of computation of a bitcoin transaction. A miner is better off with a higher hash-rate, as a higher rate increases their chances of solving for the target-hash. However, the difficulty is in direct relation to the number of miners trying to solve for the hash. So if the difficulty is high, then an individual miner will need to process more computations.

Mining Rewards: New Coins and Transaction Fees

Each time a transaction is made on the Bitcoin Network, or any other decentralized blockchain network, there is a transaction fee. In a broad sense, you can think of these fees in the same way that you pay bank or credit card fees.

Such fees are a necessary part of a decentralized system. The reward both encourages miners and participating networks to conform to the consensus protocols. This is key in maintaining the health and functionality of the system. Fees also incentivize participation on any blockchain. There must be some sort of give and take for a decentralized system to function.

The major differences with transaction fees for a cryptocurrency are that you are paying the miner directly, no middle-man. Additionally, there is no set rate for transaction costs.

Transaction Fees

Transactions fees are for the most part dictated by the theory of scarcity; supply and demand. When there are many miners participating, this is typically good for the user, because fees are lower as there is more competition. However, so the reverse is also true. When there are fewer miners, transaction fees can skyrocket.

Similarly, if there is increased activity on the Bitcoin Network, miners can take advantage of this need and exploit it for higher fees. Bitcoin and similar cryptocurrencies are the ultimate expressions of the free market. Therefore the market regulates itself and only the consumers and supplies dictate the price of a transaction.

Rewards

The most profitable aspect of mining is not the fees, however. The new coins minted are the most profitable part of mining. New coins are minted each time a transaction is approved. Every 4 years bitcoin’s program is set to decrease the number of awarded coins by about half.

The program schedule looks like this:

  • 2009 (when Bitcoin was first mined) mining one block would earn 50 BTC.
  • 2012, this was halved to 25 BTC.  
  • 2016, this was halved to the current level of 12.5 BTC.
  • 2020 (approximately) the reward will be halved again to 6.25 BTC.

The value of the reward will obviously vary based on the market value at the time.

cryptocurrency mining

Cryptocurrency Mining Costs

If you are successful, the rewards are nothing to sneeze at. Even with the volatility of cryptocurrencies, bitcoin continues to rebound. Not only that, blockchain is becoming a more appealing technology in its own right. So with some investment and serious computational power, not only does your newly minted coin have cash value on the market, but currencies like bitcoin, Ethereum, and Litecoin, to name a few, are proving to have serious staying power.

All that being said, the cost of powering the hardware necessary and energy needed to mine for bitcoin are significant.

To learn more, read our article about mining Ethereum.

Cost of hardware:

Initially, when Satoshi Nakamoto started bitcoin in 2009, it could be mined using a CPU, a personal computer. However, as mining has become more popular, and therefore more competitive, in order to mine you now need specialized hardware called ASIC (Application Specific Integrated Circuits).

The basic cost of these devices is variable, running from about $1000-$3500. However, in order to make a significant profit, you will need more than one. And you may be better off pooling your resources with other miners.

Energy Costs:

It is not the hardware that is the real expense; it is the energy necessary to repeatedly run computations competitively. For example, when bitcoin was worth $8,000 USD, the power usage of the bitcoin network peaked at 7.67 gigawatts. That’s 1/5 of Britain’s annual energy consumption. As the difficulty of mining increases, so do the number of computations, and so does the consumption of energy.

In order to manage the rise energy consumption of bitcoin mining, many miners currently operate in areas with cheaper power, like rural China and America. The areas with available hydroelectric power offer electricity prices that can be a 20% reduction from elsewhere in the country.

To respond to miner’s exploitation of lower energy costs, in the western United States, for example, some utility companies have responded by freezing service to new cryptocurrency installations or by charging them higher rates.

Similarly, Chinese authorities have started dismantling certain hydroelectric projects. These smaller hydro projects are then connected to national grids. As a consequence, rural-run hydro is becoming more valuable. All that being said, the vast majority of mining pools are working from China presently, where energy is still the most affordable.

Mining Pools

In response to the high cost of mining and the need for more hash-power, miners can join pools to share their power and resources. A mining pool is a collection or group of miners collaborating to increase their odds of finding a block.

In pools, miners combine their individual computational resources with the other members. Pools result in increased processing power, which makes solving for the target-hash more likely. Members are rewarded accordingly based on the conditions of the pools and on the applicable shares of the pool participants.

So what’s the verdict?

My best answer is that it is too early to tell if cryptocurrency mining is profitable. And here’s why:

Based on what we have seen with cryptocurrency trends, we know that cryptocurrencies are holding strong, and the strongest continue to prove their staying power. Clearly, there is a need in the market that cryptocurrency is filling.

Nevertheless, we don’t see a lot of short-term gains in the market anymore. Early investors are feeling the volatility of the market, while simultaneously reaping the rewards of the slowing long-term.

However, with increasing concern for the energetic cost of hash-rates, it is unlikely that governments and utility companies will overlook this conspicuous consumption for much longer. For now, I think the best and most honest answer, if not the most dissatisfying one, is that only time will tell how profitable cryptocurrency mining will be in the future. But for now, the potential reward of striking gold will cost you.

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