Considering the rapidly changing economies and the heavy maintenance costs associated with crypto mining, it is natural to have doubts over the profitability of bitcoin mining. If you are wondering if bitcoin mining is profitable and you are unsure whether to be involved in bitcoin mining or not, we are here to help you out.
Bitcoin mining began as a hobby that paid well for early miners who could mine 50 bitcoins every 10 minutes, however, the mining process today has become much more complicated. Bitcoin mining has become highly monopolized with the multi-million dollar companies in China having entire warehouses dedicated to bitcoin mining. Consequently, this has made it harder for an average miner to earn anything substantial from mining bitcoins.
What is Bitcoin Mining?
Bitcoin mining is the process of earning bitcoins (BTC) as a reward for validating bitcoin transactions around the world. These transactions provide security for the bitcoin network, which in turn compensates miners by rewarding them with bitcoins. The profits are only possible if the price of the bitcoins earned is more than the total money spent on mining.
Factors Determining the Profitability of Bitcoin Mining
There are several factors for determining whether bitcoin mining is a profitable venture or not. Such factors include the cost of electricity that will power the computers or the mining equipment, availability and price of the mining equipment, and the difficulty in providing the services by the system. The difficulty is dependent upon the hashes per second of the Bitcoin validation transaction as the hash rate is the measure for calculating the rate of solving the puzzles in the blockchain network.
The complexity of mining is bound to increase when more miners join because the network is meant to produce only a certain quantity of bitcoins every 10 minutes, and when more miners join the market, the difficulty rises to ensure that the mining rewards in a certain period remain static. The final factor that determines bitcoin mining’s profitability is the price of bitcoins against the price of the non-digital currency, i.e. fiat currency.
Key Concepts of Bitcoin Mining
The process of bitcoin mining can be understood easily with the help of these three major concepts:
1. Transaction Records
Whenever a transaction is verified, it is added to the public blockchain ledger; this holds the record of every single transaction that has ever occurred in the bitcoin’s blockchain network.
2. Proof-of-Work Calculations
To validate a transaction, the mining machine needs to solve an energy-intensive puzzle every ten minutes, which adds a new block to the blockchain.
3. Bitcoin Block Reward
The miner that solves the puzzle first is rewarded with 6.25 bitcoins along with the transaction fees.
This entire process is repeated every 10 minutes for every miner on the blockchain network, and the difficulty of the puzzle, also known as network difficulty, is adjusted every 2016 locks (14 days) so that, on average, one machine can solve the puzzle in 10 minutes.
How has Bitcoin Mining Changed Over the Years?
Before the release of the new bitcoin mining software in 2013, mining was performed on personal computers. The introduction of ASICs (application-specific integrated circuit) changed everything as it offered 100 billion times more computing power required for mining bitcoins. The practice of mining bitcoins through personal computers turned to be futile and antiquated, even though it is still possible. ASICs have such high computational power that they can solve the puzzle required for validating bitcoin transactions much faster than ordinary computers. This means that by the time ordinary computers solve a puzzle, ASICs have already solved numerous puzzles and gained several bitcoins in return.
Earlier, all you required was your personal computer, and the electricity required to power them was not much. But now, these ASIC machines are meant solely for bitcoin mining and cost a lot more than desktop computers and use a lot of electrical power. Their maintenance costs are also higher. Therefore, this has resulted in costing a lot of miner’s money before they can earn anything from the mining itself. Due to this, many people now shy away from mining, and they are not wrong to do so.
Change in Profitability After the Introduction of ASICs
Early bitcoin miners will tell you that making profits through bitcoin mining used to be much simpler and easier. They owned normal computer systems and were not required to spend a huge amount of money on buying dedicated mining hardware. The competition in the mining world is only against miners who are mining bitcoins with their personal computers. Today, there are extravagant bitcoin mining centers that have massive computing power, and it is very difficult to compete with them as hobbyist miners. The competition is completely fierce now, which results in many individual miners leaving the network or trying other means to own bitcoins.
After the introduction of ASIC machines, individual miners have hardly been making any profits at all due to the higher hardware costs, higher energy costs. and tough competition against multi-million dollar companies.
The Difficulty of Mining Bitcoins
As discussed before, the difficulty rate in mining bitcoins varies and fluctuates approximately every 14 days so that a stable production of validated blocks for the blockchain is maintained. This also results in the circulation of bitcoins, and with increasing difficulty rate, it gets harder for an individual miner to solve the puzzle and earn bitcoin. Unfortunately for individual and small-scale miners, the difficulty rate has soared higher and higher in the last few years, making it incredibly difficult to make any profit.
Let’s provide you with some data.
When bitcoin was first launched, the difficulty rate was 1, and in May 2020, it went above 16 trillion, which is just insane. This will help you become aware of the real situation of bitcoin mining and why it has become so difficult to make profits through bitcoin mining.
How to Decide if Bitcoin Mining Will be Profitable for You?
First of all, bitcoin mining has many variables, so buying bitcoins on an exchange is a much easier option if you want to make some profit. Having said this, if you do it efficiently, bitcoin mining can be a lot more profitable than simply buying bitcoins.
The price of bitcoins is in itself one of the most important variables of whether mining bitcoins will be a profitable endeavor for you. As you have to pay for your mining equipment and your electricity bills, you need to cover those costs by earning enough bitcoins from mining before earning profits.
Here are four variables that you should ideally have in your favor to make good profits from mining bitcoins:
Electricity prices vary from country to country and even region to region, and there are some countries that charge a lower price for industrial electricity so that economic growth can be encouraged. This is the reason why most of the mining farms are located in China; due to low electricity cost. So, if you live in a region that charges less for electricity, you can easily cover the power costs when mining bitcoins.
This chart gives you the data on electricity costs around the world. According to this data, if you live somewhere in China and Russia and your electricity rate is $0.045 kWh, then using a Whatsminer M20S for one month will result in you paying $110 for powering your mining equipment.
However, in other countries, such as the USA, where the electricity rates are quite high ($0.12 kWh), you will be running your ASIC machine at a loss, and you can forget about making any profit with your Whatsminer M20S.
There are plenty of hardware manufacturers that offer powerful and efficient ASIC machines. These machines’ prices vary from brand to brand and are dependent on how powerful and energy-efficient the machine is. It is obvious that the more powerful and energy-efficient is your ASIC machine, the more profitable it will be for you in the long run; however, the cost of such a machine will be quite high.
Thus, you should consider your budget when buying an ASIC machine, but the main concern should be its hash rate and its energy-saving feature. However, if you live in a place like China or Russia, energy efficiency is not your major concern, so you can go for hardware that is less energy-efficient.
The company MicroBT manufactures Whatsminer M20S and other Whatsminer models and boasts the lowest failure rate among all the ASICs manufacturers.
There is a great way to make profits from mining as an individual miner, and that is to send your mining hardware to mining farms as this will save up your electricity costs, and you will get the bitcoins earned by your machine.
Reliable Mining Pool
Mining through a mining pool is the best option and it does not matter whether you are mining with one machine or thousands of machines. The network of Bitcoin mining machines is huge, and so the probability of finding a block is immensely low, and this is why a mining pool can help.
Slush Pool and F2Pool are the oldest of the mining pools, and F2Pool is also the largest mining pool, and it supports around 20% of the entire Bitcoin network. The payout method used by F2Pool is known as PPS+, which does a good job of eliminating the risk from mining. It does so by paying out block rewards and transaction fees to miners, and even if it is not able to mine every block successfully and typically, the miners are paid at the end of each day.
The fees of such mining pools usually fall somewhere between 2.50 and 4.00%, and you should check the fees before using one.
Bitcoin Selling Fees
This is something that people often forget to consider, but there is also a fee when you sell your bitcoins. It should be noted when evaluating the profitability of bitcoin mining because you do lose coins or real money while selling bitcoins on an exchange. Small-time miners may have to sell bitcoins on an exchange like Binance or Kraken, and it depends on the exchange whether the fees are low or high. You should check the fees an exchange is charging before you decide to sell your bitcoins on it.
However, professional miners like F2 or Bitmain have deals with OTC desks that allow individuals to sell their bitcoins for a little fee or no fee at all. Therefore, mining bitcoins professionally will save you the fees charged by the exchange when selling your bitcoins because they deal with bitcoins on a large scale and have more leverage to get beneficial deals.
After going through all the factors that affect the profitability of bitcoin mining, it is safe to conclude that small-scale miners will surely face difficulty earning any good profit. However, this may change in the future when ASIC mining hardware innovation starts getting diminishing returns and if sustainable power solutions become accessible to average miners. However, until then, bitcoin mining will have to be done very wisely and efficiently by average miners if they want to gain considerable profits.