Is Crypto Mining Still Profitable?

How to mine crypto

Crypto mining has become a controversial subject within the cryptosphere. Some regard it as wasteful while others argue it is an important element for maintaining the decentralization of the blockchain. However, another question commonly asked is whether or not crypto mining is a profitable venture.

As a fundamental part of the blockchain process, it is necessary for mining to take place. To ensure there are enough miners in operation to maintain the growth of the cryptocurrency, they need to ensure that they are duly compensated. Incentivization is the main driver for miners, especially due to the associated costs with the process.

What is Crypto Mining?

mining cryptoMining refers to the processing and verification of cryptocurrency transactions, which are immutably added to the blockchain. Firstly, they take the transactions of the cryptocurrency, be it Bitcoin or otherwise, and bundle them into a block. The blocks have a maximum capacity (1MB in the case of Bitcoin) that, when reached, will see them added to the Blockchain.

The creation of a block involves the solving of a complex Proof of Work cryptographic algorithm, also known as a hash. The newly created block would then be added to the Blockchain. Should the miner be lucky enough to do so, they are rewarded with a certain number of the cryptocurrency. Miners are also able to earn a fee for processing transactions that are stored on blocks. The higher the transaction fee, the sooner the transaction is processed by miners.

These tasks are performed using computing power. While there are some parameters, most personal computers and mid-range laptops are capable of being used for mining. The more powerful the hardware, the more effective it will be at mining.

What is the Purpose of Mining?

Every cryptocurrency uses a consensus mechanism for the purposes of maintaining trust in the decentralized blockchain network. Mining is an element seen in the Proof of Work (PoW) process. The process of hashing the current blocks act as proof of the miner's investment of work.

The main benefit of this is the protection it provides against attempts to modify data within a block. If someone were to attempt this, they would then have to modify all subsequent blocks which becomes increasingly difficult as more blocks are added.

Masternodes follow a similar principle and can also enable traders to make cryptocurrency. They are a server on a decentralized network that allows users to earn cryptocurrencies by providing computing power. They are a sizeable investment and so incentives are provided to offset the costs.

How Much can be Earned?

The amount earned changes constantly and varies between cryptocurrencies. For Bitcoin, the reward is currently 12.5 BTC in addition to the transaction processing fee received. This reward is set to halve in value every 210,000 blocks.

The associated costs of mining will hamper the overall earning and ROI. These will potentially tip the scales between profitability and loss.

The Costs to Consider

investing in cryptoWhile the rewards may seem high at first sight, miners must also consider a number of other factors that will determine the amount ultimately received.

Naturally, the value of the cryptocurrency itself will impact the value of the reward. This is one of the biggest impacting factors in profitability. Those looking to exchange this income to fiat will be hardest hit by the current bear market. While some may choose to keep the rewards in crypto form, there is the issue of the fiat costs of running the operation. Until such a time that electricity and the like can be paid in crypto, miners will have to either exchange their rewards to help towards the costs or otherwise pay out of pocket.

Costs associated with the mining process are an important consideration. There are some pretty hefty upfront costs for new miners setting up their rig. While at the beginning it was possible to mine using CPUs and GPUs, the increase in competition has lead to the development of optimized, dedicated mining equipment such as ASICs. These days, this specialist equipment is all but required for any chance of making money. As to be expected, these do not come cheaply and their availability may be limited or difficult to come by.

Other Costs

There is then the costs of running these machines and the general power consumption of the process. Electricity costs can greatly reduce the profits made, especially when factoring in things such as cooling solutions. For larger scale operations, the cost of the facility can also be substantial.

By design, Bitcoin becomes more difficult to mine as the network gains more mining power. This balances out the rate of block creation, but at the same time can lead to potential fluctuations in output.

While it is nice to receive rewards for the work, after calculating the costs of the whole process, it becomes clear that it is not the easy money-making scheme it may first appear to be. Of course, for the less taxing mining needed by alt-coins and the like, there is still an opportunity to make some profit using less specialized equipment.

Which Cryptocurrencies Require Mining?

While Bitcoin is the most famous cryptocurrency that uses this technique, it is far from the only one. There are a few notable mentions that use mining.

Monero is another example of a prominent token that utilizes mining. Most notably, Monero has safeguards in place that make it resistant to ASICs mining to an extent and so makes it viable for CPU and GPU mining.

Ethereum uses a PoW mechanism that requires mining, similar to Bitcoin. Since the coming of the Constantinople hard-fork however, there was a transition from Proof of Work to Proof of Stake.

Zcash also has a mining system that uses the “Equihash” algorithm which makes it resistant to ASICs. This greatly reduces the costs associated with the process.

Litecoin follows the trend of lacking dedicated ASIC competition for mining. It uses the Scrypt hashing algorithm for mining.

So, Is Mining Still Profitable?

Gone are the days where mining Bitcoin was a guaranteed way to earn some money. The combination of the falling value of Bitcoin, together with increasing equipment costs and lower rewards, have all impacted the profitability of mining cryptocurrencies. Even location is a factor, as places with cheaper electricity and cooler temperatures can save on cooling costs and face lower bills.

While other cryptocurrencies are faring better, mostly thanks to the measures in place that resist the use of the expensive, optimized machines, they are starting to face a crunch due to the market conditions. There are many resources online such as mining calculators for popular cryptocurrencies like Bitcoin that help determine the profitability based on different factors.

However, the general consensus is that it is becoming less profitable, especially for individuals without specialist equipment. It is difficult to make a defining answer due to the many factors that may impact each individual’s situation. Due diligence is, as always, the key to getting an answer.

Othewise, there are other methods for generating cryptocurrency include running a masternode or through bonus programs such as the KuCoin Bonus.

 


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References:

Bellerive, J. (2018, April 13) How to Mine Monero: Complete Beginner’s Guide. Retrieved from: https://blockonomi.com/how-to-mine-monero/

BitcoinWiki. (n.d) Difficulty in Mining. Retrieved from: https://en.bitcoinwiki.org/index.php?title=Difficulty_in_Mining

Coindesk. (n.d) How Ethereum Mining Works. Retrieved from: https://www.coindesk.com/information/ethereum-mining-works

Coindesk. (n.d) How to Mine Litecoin and other Altcoins. Retrieved from: https://www.coindesk.com/information/how-to-mine-litecoin

Fortney, L.  (2018, December 29) Bitcoin Mining, Explained. Retrieved from: https://www.investopedia.com/terms/b/bitcoin-mining.asp

Genesis Mining. (n.d) How To Mine ZCash: The Ultimate Guide. Retrieved from: https://www.genesis-mining.com/zcash-mining-guide

Jenkinson, G. (2018, April 18) GPUs And ASICs – A Never Ending Battle For Mining Supremacy. Retrieved from: https://cointelegraph.com/news/gpus-and-asics-a-never-ending-battle-for-mining-supremacy

Rooney, K. (2018, November 13) This chart shows how cryptocurrency mining on your own is no longer profitable. Retrieved from: https://www.cnbc.com/2018/11/13/this-chart-shows-how-cryptocurrency-mining-on-your-own-is-no-longer-profitable.html

Shilov, K. (2018, December 3) Crypto Profitability Analysis: Holding vs. Mining. Retrieved from: https://hackernoon.com/crypto-profitability-analysis-holding-vs-mining-c562e0959f1f

Tuwiner, J. (2018, June 30) What is Bitcoin Mining and How Does it Work? Retrieved from: https://www.buybitcoinworldwide.com/mining/

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