Crypto mining might seem like a “get rich quick” scheme, but it’s a pretty expensive endeavor.
On November 9, 2021, the global crypto market hit the US$3 trillion mark, which is more than the gross domestic product (GDP) of countries like India, the United Kingdom, France and Italy. With crypto becoming more and more widespread, individuals and companies alike have been seeking to benefit from the crypto mining (the process of adding new crypto tokens to circulation) business.
Before you jump into the crypto mining business, let’s take a look at the three main factors affecting the profitability of crypto mining operations.
Cost of electricity
It is now commonly known that crypto mining consumes a lot of electricity. Bitcoin mining is infamous for using up to 91 terawatts-hours of electricity, or 0.5% of all electricity worldwide, every year. Naturally, with such high electricity consumption, the costs of mining crypto add up. A single Bitcoin transaction, be it a transfer of the crypto or the sale or purchase of an item using crypto, costs US$176 in electricity on average.
The proof of work (PoW) model, which is typically used for crypto mining, requires miners to solve complex mathematical problems and has no preconditions in place. Essentially, anyone who has the setup required to mine Bitcoin, can do so.
This is why experts have already been finding alternatives to counter crypto mining’s high electricity consumption. One of the ways to do so is shifting from the PoW model of crypto mining to the proof of stake (PoS) model. Under the PoS model, mining power is distributed based on the number of coins held by a miner. This creates a barrier to entry for miners and ultimately decreases the energy consumption of the mining operation.
Price of equipment
Crypto mining requires computers with high processing power. Such computers (also called mining rigs) can cost you an arm and a leg. Even if you are planning to mine some of the not-so-popular cryptocurrencies, you would have to spend around US$3,000 on your mining rig. Some miners even spend upwards of US$10,000 on their equipment.
It is important to note here that crypto mining equipment is not a one-time cost. Crypto mining puts a lot of pressure on the graphics processing unit (GPU) and motherboard of the rig. The average lifetime of a mining rig can be anywhere between three and ten years. For Bitcoin mining, specifically, the lifetime of a mining rig is just 1.29 years.
Hash rate
Hash rate refers to the computational power per second used in crypto mining. Hash rate is a point of consideration for those cryptocurrencies that are operating with the PoW consensus mechanism. It is a measure of the speed at which a miner can solve complex mathematical problems and authenticate transactions to generate a 64-digit hexadecimal number called “hash”.
When speaking about hash rates, we need to know that there are two kinds of hash rates—your personal device’s hash rate and the hash rate of the crypto’s network. Your personal hash rate is based on your device’s computational power (which would also be affected by the stability of your connection and the processing power of your mining devices). To figure out the hash rate of their device, miners can use online hash calculators.
On the other hand, the network hash rate is the sum of the individual hash rates of all the mining rigs in operation within a cryptocurrency’s network at a specific point in time. The network hash rates depend on the stability of a mining rig’s connection to the server, the hash rate of other miners in the network and also the number of miners in the network.
Since your personal hash rate depends on your mining rig, you will need to keep it up-to-date and make sure it runs smoothly in order to make profits from mining. As for the network’s hash rate, if more miners join the network, the number of people trying to guess the hash becomes higher, thereby pushing up the network hash rate. In the PoW model, as used in the Bitcoin protocol, the problems miners need to solve for each transaction will be automatically adjusted to be more complex when the network hash rate increases, making the mining process more difficult.
So… should you jump into crypto mining?
The short answer is no. The long answer is that it can depend. Miners receive 6.25 Bitcoins as a reward for every block mined. As of writing this article, a single Bitcoin is worth US$47,392. This means that, for every block a miner adds to the blockchain, they currently earn US$296,200. The reward for authenticating transactions drops over time—it will be halved roughly every four years (or every 210,000 blocks). Miners also receive a transaction fee every time they authenticate a transaction. As of February this year, the average transaction fee is anywhere from US$24-31. All of this can certainly make you a pretty penny in the long run.
However, while you can make profits through crypto mining, it is unlikely that you can do so all by yourself. To reduce the upfront costs, it is recommended that you join a mining pool. Mining pools allow miners to share resources and capabilities. Even still, the high volatility of Bitcoin can add uncertainty to the mining venture, and you must carefully consider that before you decide to hop on the crypto bandwagon.
Header image courtesy of Freepik
