Bitcoin Mining Analysis

If earlier a simple computer with a central or graphics processor was required to perform mining, today it has developed to such an extent that even the most powerful of the existing hardware cannot keep it up to date for a long time.

The ups and downs of the Bitcoin price, regulations and fierce competition that exists in this industry make many people think about whether it is profitable to continue mining today.

There are many factors that make BTC mining both profitable and not. These include the cost of electricity used to power equipment, the availability and cheapness of machinery, and the complexity of mining.

The latter is one of the most important aspects and refers to the number of hashes that the network as a whole can check per second. If more miners join the mining game, more blocks will be mined in a certain time, so it is necessary to adjust the complexity and make the process much more difficult.

And so, is it possible to make a profit here or not?

What you need to mine Bitcoin

To understand how easy or difficult this profession is, it is important to look at the resources that are used to mine BTC.

In the beginning, when Satoshi Nakamoto created Bitcoin, he and other users only needed the processor of their laptops to get up to 50 BTC.

But, according to the data Coinmarketrate.com as the price of Bitcoin rose, so did the competition and the desire to gain an advantage over other people. Therefore, hardware parts called ASICs were created that had efficiency and power that the CPU or GPU could not compete with.

We are talking about the fact that these integrated circuits for specific applications have a performance millions of times higher than the performance of the processor installed in a conventional laptop.

Although today we can still mine with it, the reality is that it is almost impossible to make a profit because it is not profitable by any standards. This is due to the fact that the cost of electricity significantly exceeds the cost of Satoshi that we could earn in this way.

Mining is a process in which miners have to solve a problem in the form of hashes. Basically, they have to find a hash that is smaller than the target. The more hashes they can try out per second, the more likely they are to find a winner.

Here, processors or video cards have no chance against equipment created exclusively for this task.

This has practically supplanted the type of equipment that is used for more general tasks, and has freed up space in this industry for the type of equipment that has only one goal – to find this hash as quickly as possible, and consuming the least amount of electricity.

Is it profitable to mine BTC today?

At first, mining using a computer at home was quite profitable. There was practically nothing to buy since you had the hardware and it just needed to be set up to start mining using Bitcoin software.

In extreme cases, people will try different configurations to get some advantage, but no more.

It was possible to spend less than to receive, and all because there were no data centers focused on Bitcoin mining, which would put miners out of the game.

At this time, they only competed with other people like them. They could have had a slightly more powerful processor, but at the end of the day they didn’t have such a clear advantage as they do now.

Despite the fact that the cost of electricity varied depending on the country and region you were in, the reality is that it was still profitable for everyone who wanted to take part in this new experiment with a digital currency called Bitcoin.

After the advent of ASIC, everything changed dramatically. Although GPU mining was still possible, soon these miners saw that their profits had declined so much that it became impossible to continue mining.

These mining rigs had more power than any home equipment could ever have, and the efficiency was high enough to displace any competitor.

The result was an increase in the complexity of mining, which eliminated smaller competitors from the market and left only those who had large funds to spend.

• The difficulty of mining BTC

We have already mentioned the complexity of Bitcoin mining and how it roughly works. It is adjusted approximately every 2 weeks in an attempt to ensure that blocks are created no faster than the 10 minutes set by the Bitcoin protocol.

The goal is to ensure that the production of these blocks is stable and to a certain extent predictable. However, this entails problems for miners, who now have to solve the more difficult task of finding a much more complex hash.

This in itself is not bad for the Bitcoin network, but it can cause profitability problems for those miners who have very small margins.

As Bitcoin’s popularity grew, more and more miners joined the network, seeking to earn their own BTC. This has led to a significant increase in complexity.

Now it is more than 26 billion hashes per second. If we compare this with the first years, when it was about a few million, then we will see more than a significant increase.

• Changes in remuneration

The golden rule of Bitcoin is the fact that only 21 million BTC can exist. This is a parameter that has existed since its creation thanks to its creator, and it is very difficult to change.

The goal is to ensure that the supply of this cryptocurrency remains constant and reaches the point in its history when new cryptocurrencies do not appear. This is a clear difference from fiat money, where the issue of a new currency is constantly increasing.

Currently, there are almost 19 million in circulation, i.e. they have been mined. Therefore, it is necessary to issue a few more BTC to reach its limit. This is achieved by mining, as those miners who open a block will be able to create a certain amount of Bitcoins, known as a block reward.

But this number is not determined by each miner, but is part of the network consensus, according to which only a certain number can be created in a certain period of time.

Initially, it was possible to mine 50 BTC per block, but this reward was halved every 4 years or so, which is known as the “halving” event.

Currently, only 6.25 BTC can be mined, and each time the reward will be halved, until eventually, after 100 years, Bitcoin can no longer be divided (Satoshi is the minimum unit), and the reward will be zero.

What factors affect profitability

The profitability of production depends on a number of factors, which are not so many, but which are very difficult to analyze. Among them are the type of equipment, the cost of electricity and the price of Bitcoin.

However, there are others that we will discuss in the last paragraph and which are related to other factors that are not as pronounced as those mentioned by us, but still have little or great significance depending on the context.

These are, for example, government regulation, taxes, subsidies and environmental issues such as temperature.

Miners make a profit only when they mine a block of Bitcoin, which makes profits atomic and unpredictable. However, the costs can be predicted to a certain extent, and this is what the mining company should focus on.

If the miner has a very low hash rate, the chances of finding the right hash for the block are significantly reduced. However, there is a chance that they will get it, if only they have the patience to wait a few months for such a situation to happen.

The best alternative for these small miners is to join a mining pool that mitigates the effect of uncertainty by providing a stable source of income.

These groups mainly consist of several miners working together and sharing the hashrate to find a block among themselves. As a result, regardless of who finds it, everyone will participate in the profit in proportion to the work invested.

Thus, a person with a small hashing will receive a more stable reward than if he waited for the confirmation of the block alone.

• Hardware equipment

We have already said that currently Bitcoin mining uses ASIC in order to be profitable. Mining equipment varies in its ability to check hashes and power consumption, but in the end it is much more efficient than other alternatives.

New versions and more powerful and efficient equipment are constantly appearing, but the problem is that in the end they turn out to be more expensive than previous generations.

This is an expensive and difficult to manage resource that requires significant investments at the initial stage and is one of the most important in calculating the profitability of production.

• Energy cost

A very important variable cost for Bitcoin mining is electricity. The equipment we are talking about consumes large volumes, higher than what we see in computers.

For this reason, getting the cheapest electricity is crucial for miners. This encourages the geographical spread of the industry in places where electricity is very affordable.

For example, for a while China was very important for the mining industry, because electricity was subsidized there, and this led to the fact that most of the hash capacity was concentrated there.

Subsequently, countries such as Canada and others that use energy from hydroelectric dams have become an interesting place for miners.

This means that enterprises tend to move to a place where energy is cheap, and it can be cheap (without subsidies) only if it is very easy to produce and cannot be consumed entirely.

• Bitcoin Price

Miners receive their income in the form of BTC, but they have to pay their expenses (energy, rent, equipment, salary and maintenance) in fiat money.

That is why the price that this cryptocurrency has in relation to the fiat money they operate with is very important for the profitability of their operations.

When the price of Bitcoin rises, new miners discover that this activity is profitable, even though the cost of electricity up to this point did not allow it.

When the price of Bitcoin falls, these miners can no longer mine profitably and are forced to curtail their activities.

This creates a relationship between the price of BTC and the security of the network.

• Other financial factors

Regional laws and regulations may have an impact on the profitability of cryptocurrency mining. In areas where there is a high concentration of mining, governments may take measures to restrict or tax these mining centers.

Solo Mining VS Group mining

Returning to the issue of mining alone or in a group, this is a factor that can help profitability. It probably doesn’t matter much in the long run, since eventually a block can find one miner, but it makes the whole system more stable.

If a miner with one or two ASICs wants to compete with large mining centers that have hundreds or thousands of such hardware, he can take the opportunity to join the mining pool.

By combining your hashrate with the hashrate of others, you get Bitcoins on a more stable basis than if you hoped to mine one alone. If in the first situation you can receive a salary every week, then in the second you will have to wait, perhaps for months.

Mining pools

Each pool has its own rules, but in general they use two payment methods that may be interesting depending on your mining.

1. Proportional mining

This is a payment method in which users pay proportionally.

In this system, miners receive the amount of BTC in proportion to the work they have done to find the block that a group of miners discovered.

2. PAYMENT BY STOCKS

Here, the profit distribution method is based on the distribution of the total hash power of the mining pool.

What matters here is not so much how much effort the miner has put in, but what hashrate he has compared to the general pool. Thus, you will make a profit both when the pool detects a block and when it does not.

Even better, the amount you receive is always the same, which allows you to keep track of your income and expenses.

This system is ideal when the Bitcoin price drops, as the participant receives a predictable inflow of money, which allows him to smoothly manage his operations.

But there is nothing static in this world, because the Bitcoin ecosystem is constantly evolving, and new forms of payments are appearing all the time. The idea is that the people running these groups make higher profits, and the miners are also willing to work with them.

Solo mining

Whether solo mining will be profitable or not depends largely on some factors, which we will talk about now.

In addition to the initial equipment costs and other expenses necessary to get started, it is important to know that for some time we will not receive Bitcoins/dollars/euros until we find a blockchain. In this scenario, we will need additional capital to cover the weeks or months during which we will have no income.

There are those who prefer to use this free capital and buy more equipment by working with the pool, and there are those who prefer to act independently.

There is no right answer to this question, because it depends on the scale of the operation.

Conclusion

Bitcoin mining is a business, and even more so when it has developed so much. It can no longer be perceived as a hobby or something that we can do in our free time.

We also cannot enter this industry with a small capital and expect huge profits. Of course, it is necessary to evaluate all the information that we have presented today and analyze whether it will be enough to make a profit.

Despite this, there is a certain veil of uncertainty around the industry. As in any other business, there is always something unforeseen that we cannot foresee.