Mining Bitcoin has become increasingly popular over the years as the price of Bitcoin has skyrocketed from its humble beginnings.
At first thought, Bitcoin mining might sound like a good strategy for acquiring passive income.
However, many factors come into play that determine the profitability of a mining operation.
Today we’re going to look at the various aspects of Bitcoin mining to give you better insight into the costs associated with mining.
We’ll also be exploring the mining process behind Bitcoin.
Let’s dive in.
6 Mining Profitability Factors
Mining Bitcoin often makes the eyebrow raise because it sounds like "free money." However, this is not the case, and today we’ll be looking into the six main factors that impact mining profitability.
Hashrate is a measure of a miner's power — the higher your hash rate, the better. Especially considering Bitcoin's ever-increasing block difficulty, a profitable Bitcoin miner must have a good hash rate to power consumption ratio.
Bitcoin runs on a Proof-of-Work consensus algorithm, which means computers are trying to solve a complicated, evolving algorithm that creates a 64-hexadecimal number. If answered correctly, it can be extremely profitable as you get a Block Reward in the form of Bitcoin.
Today's block reward is 12.5BTC per block, but that number is constantly diminishing. More on that below.
According to Digiconomist, Bitcoin’s estimated electricity consumption is 60.82 (TWh). This equates to $3,040,896,211 per year spent on electricity and mining equipment. That's more than $8.3M a day devoted solely to Bitcoin mining.
Thousands of currencies run on similar consensus mechanisms, so the actual cost of cryptocurrency mining is far higher.
Bitcoin's electricity consumption is sufficient to power 5,631,289 homes every single year.
Carbon footprinting (kt of CO2) leads to 29,801, and Carbon footprints per bitcoin and transaction can equal up to 481.85.
According to Bitcoin Energy Consumption, Visa can make well over 999,999 transactions more efficiently than one bitcoin transaction.
To stay competitive in the mining economy, investors need to figure out ways to cut costs. As we can see, Iran has the cheapest electricity per kWh in the world, coming in at $.01. To put this in perspective, the United States is averaging around $.15, meaning you’d save 15X more by mining in Iran.
However, another huge factor is the governmental regulation on cryptocurrencies. If a government has banned the use of cryptocurrencies, then it doesn't matter how cheap the electricity is. Because of these bans, many mining companies decided to build in China where the electricity is around $.08, almost 50% less than the US.
A block reward is the amount of Bitcoin miners receive as a reward for creating a block. The reward in the block makes up new Bitcoins that release into the ecosystem with miner fees.
After 210,000 blocks, Bitcoin goes through a "halving," which is the cutting of the block reward, thus making the supply smaller. The current estimation of the next halving will be May 2020. Currently, the block reward is 12.5 BTC but will reduce to 6.25 BTC after the next halving.
Typically miners aren’t trying to mine a single block on their own, so they join "pools." Pools allow the miners to add their computational power and share the rewards to make mining more efficient.
From this picture, you can see that Poolin.com found a block 48 minutes ago, so the 12.5 BTC has been shared with all the miners in the pool relative to their power contribution. The chances of finding a block reward on your own are near zero, so miners tend to pool together their computing power even in large warehouse operations because the pool can split relative based on output.
The price of Bitcoin is extremely important to miners because it dictates their profits.
Example: If Bitcoin is $1,000 a coin and a mining pool gets a block of 12.5 BTC, then they have generated $12,500. However, if Bitcoin drops to $500, then that same pool might only get $6,250 when they find the next block.
As we have talked about before, cutting expenses is essential for miners since they’re competing for blocks based on massive amounts of computing power.
Do you sell the bitcoin as soon as you receive it, or do you hold on to it and sell when the price goes back up? With the high expenses associated with mining, it can be hard for many companies to hold on to the bitcoin in fear that the price will continue to drop. Many mining companies go out of business eventually and force them to liquidate their mining equipment.
The network can only produce 21,000,000 Bitcoins, and we’re getting very close to the maximum capacity of bitcoins.
The "Halving" is when the network increases the level of difficulty that computers must undergo to create new bitcoins. This network operation happens every time 210,000 bitcoins are mined.
The Bitcoin halving inherently makes the cost of a Bitcoin increase as the expense of creating bitcoin is also increased.
We can take a look at the previous halving dates and the respective Bitcoin price to validate the narrative that Bitcoin's price will increase due to this added difficulty.
As demand for an asset increases and supply decreases, the price will naturally increase. Bitcoin's demand is verifiably high, and it'll only continue to rise as the utilization of bitcoin increases, but the supply of Bitcoin won't change with demand.
Once all of the bitcoin mining is complete, there won't be any more Bitcoin created, meaning as the demand rises, the price will exponentially rise. The price spike might not occur immediately after the halving, but as adoption and usage of the coin are explored, the price will increase.
There are a few costs that are associated with mining.
- The first cost is the mining equipment. Currently, one of the best miners is the Bitmain Antminer S17+ (73Th), which will cost around $2,400, and according to CryptoCompare, US based miners can expect to make a profit of $129.92 a year. Other expenses aren’t included, and we're assuming $0.15 per Kwh was spent on electricity.
- Storing your equipment is the second cost. With a small operation of 1-20 ASICs, you can expect to pay around $550/m in storage costs and temperature control. This comes out to be around $6,600 a year.
- The last cost is the electricity cost associated with your mining operation. If we use the equipment above, we can estimate that the electricity would cost $3,836.88/yr per miner. (assuming we are using $0.15 per KWh)
Income: Profit per year: $2,753.40
Will Bitcoin Mining Be Profitable In The Future?
The secret to mining bitcoin efficiently lies in the country that it's mined in, and how the mining equipment is purchased. Some bigger plants can purchase the equipment cheaper since they buy in bulk.
The timing of the market is also a very important factor. A bullish market is great for miners, as the value of their Bitcoin will only increase over time.
However, the block reward is getting smaller over time, and will eventually reach 0BTC. At that point, miners will be paid via transaction fees instead of Bitcoin. It's hard to say how that'll affect Bitcoin mining profitability in the future.
Given past price movement before and after a block reward halving, mining should remain profitable even as block reward halves because the value of Bitcoin will rise (or at least, it's supposed to in theory).
Mining Bitcoin can be very lucrative if a lot of planning goes into the operation, and using the best cost-cutting methods.
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