By: Sameer Zubairi | 3 min read | 23/01/2019

The Profitability of Crypto Mining Explained



Once upon a time, cryptocurrency mining was a hobby that could be taken up by pretty much anyone. University students would have mining rigs set up in their dorm rooms verifying transactions at all times of the day. A nice profit could be made without paying much attention to the computer eating up electricity in the corner of your room. Those were the good old days of crypto mining, better known as 2017.

In 2018, something interesting happened. As Diar published in a report, 2018 actually raked in more mining revenues than even 2017, despite the bear market. Just in the first three quarters, Bitcoin mining revenues reached $4.7 billion. This sounds like promising news for those interested in setting up their own rig. However, the figures for net profits actually tell a starkly different story.



THE STORY OF AN AVERAGE MINER

Ascertain cryptocurrency networks, like Bitcoin and Ethereum, increase in scale, the difficulty of mining these coins also increases. This means that better hardware and more power is required to produce the right hashes. The Diar report has recognized this as a problem for independent miners looking to make a profit.

The report shows that until September 2018, mining was still yielding some profits for individual miners, but as the required kW/h electricity usage and hardware become more expensive, the net profits dwindle. Based on retail kW/h prices, the report shows that estimated mining profits in September were nonexistent.

The truth of the matter is, mining is no longer a game for lone wolves. It has evolved to favor the big guns and larger mining pools. Evidence of this is in major losses posted by Bitmain in 2018. Bitmain is a company that relies on selling mining hardware. Which is to say that Bitmain’s business model relies on the profitability of independent mining since this directly drives the sale of its mining processors, called ASICs.

The comprehensive mining report released by Diar also notes that at $0.08 kW/h, China remains the only country where mining at retail electricity prices can still yield profits. However, for new miners, the supplementary costs of things like hardware and storage space may still push their bottom line into the red. Therefore, those interested in taking on mining as a hobby should first estimate their profitability accordingly.

MEASURING MINING PROFITS

For anyone planning on setting up a mining rig, it’s really important to forecast your estimated profits before investing in expensive computer equipment. There are a number of factors that go into calculating these estimates, including the hash rate, the difficulty factor of producing hashes for a specific currency and the cost of electricity.

There are several mining calculators that can be used for measuring your profits, but the best ones take the most factors into account. Shown below is a free mining calculator provided by CoinSmart.

LET’S GO THROUGH EACH FIELD:

  • Difficulty Factor: Refers to how difficult it is to find a hash below a specified target. Due to the limited amount of hashes possible on the network, this difficulty is always increasing for larger networks.
  • Hash Rate: The number of hashes a miner is able to find per second. This value is related to the difficulty factor.
  • BTC/CAD Exchange Rate: Since the calculator measures profits in terms of CAD, this exchange rate is how your reward is converted to a CAD amount.
  • BTC/Block Reward: For each block that a miner is able to verify, this field displays the number of coins they will be rewarded.
  • Pool Fee %: This is the supplementary cost or fee of joining a mining pool.
  • Hardware Cost (CAD): This is the cost of processors and storage space required to set up a mining rig.
  • Power (Watts): This is how much power will actually be used in the timeline specified.
  • Power Cost (CAD/kWh): This is the cost of electricity per kWh that the miner must pay.

It’s important to note that the calculator will allow any of these fields to be left blank. However, the more information that you are able to provide, the more accurate your estimation will be.

MINING IN 2019

The mining trends observed in 2018 may or may not carry into 2019, but there is certainly speculation as far as profits are concerned. At the start of the year, the three major trends that continue to diminish mining profits are:

  • Increasing energy costs
  • Increasing hardware costs
  • Increasing difficulty of producing hashes (which requires a very high hash rate)

However, the returns from mining can vary significantly between coins. Where Bitcoin mining may not result in significant profits, another coin might be a much better venture. Especially when a coin rapidly increases in value, the difficulty of hashing is still low, but the rewards end up being worth a lot more.

Taking this into consideration, mining in 2019 might be more of a speculative sport. Instead of committing to a coin that has already plateaued in terms of profits, you can consider doing research on coins anticipated to have a good market return and mining metrics in favor of independent miners. Bottom line – always do your research.

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