Is Bitcoin Mining Profitable?

Bitcoin is mined using custom-built computing systems and miners earn bitcoin in exchange for validating bitcoin transactions by solving a “hash” on the blockchain. These transactions provide security for the bitcoin network, which compensates miners through payment in bitcoin.

Changes in mining devices and technology, the creation of professional mining centers with enormous computing power, and the shifting price of bitcoin have affected the incentives and landscape for mining. Individual miners wonder if bitcoin mining is still profitable.

According to recent research in 2021, bitcoin mining is a highly concentrated business. 10% of bitcoin miners control 90% of the mining capacity on bitcoin’s network with 0.1% of all miners owning 50% of the network’s mining capacity.

Key Takeaways

• Bitcoin is mined using custom-built computing systems which include expensive hardware.
• Miners are rewarded with bitcoin for verifying blocks of transactions or solving the “hash” on the blockchain.
• A “hash” is an alphanumeric code that is used to represent words, messages, and data of any length.
• Bitcoin mining profitability is affected by the costs of equipment and electricity, the difficulty associated with mining, and the market value of bitcoin.

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Components of Bitcoin Mining

Several factors determine whether bitcoin mining is a profitable venture, including the cost of electricity to power the mining machines, the availability and price of machines, and mining difficulty.

Hash Rate

Hashrate is the speed of mining used to mine and process transactions on a blockchain, such as bitcoin.

The hash rate measures the rate of solving the problem and the difficulty changes as more miners enter as the network is designed to produce a certain number of bitcoins every 10 minutes. When more miners enter the market, the difficulty increases to ensure that the number of bitcoins produced remains the same.

Because each hash created is random and impossible to predict, it can take millions of guesses, or hashes, before the target is met and a miner wins the right to fill the next block and add it to the blockchain. Each time that happens, a block reward of newly minted coins is given to the successful miner along with any fee payments attached to the transactions they store in the new block. 

ASIC

Before the advent of the bitcoin mining software, early miners used personal computers and were able to generate a profit. Miners owned their systems, so equipment costs were negligible and they could change the settings on their computers to run efficiently. Also, professional bitcoin mining centers with massive computing power had yet to begin. Miners competed only with other individual miners on home computer systems.

In 2013, a China-based computer hardware manufacturer called Canaan Creative released the first set of application-specific integrated circuits (ASICs) for bitcoin mining. Individuals were competing against powerful mining rigs with more computing power. Mining profits were slashed by the growing expenses for computing equipment, higher energy costs, and the continued difficulty of mining.

Bitcoin Mining Difficulty Rate

To ensure bitcoin blocks are discovered every 10 minutes, an automatic system is in place that adjusts the difficulty depending on how many miners are competing to discover blocks at any given time.

The difficulty rate is a measure of how difficult it is to mine a bitcoin block or to find a hash below a given target. The higher the difficulty rate, the less likely it is that an individual miner can successfully solve the hash problem and earn bitcoins.

The rate associated with mining Bitcoin is variable and changes approximately every two weeks to maintain a stable production of verified blocks for the blockchain with a finite number of bitcoins introduced into circulation.

In recent years, the mining difficulty rate has skyrocketed. When Bitcoin was first launched, the difficulty was 1. As of June 2022, it is more than 30 trillion, confirming the growth of difficulty associated with mining compared to a decade ago.

The Bitcoin network will be capped at 21 million total bitcoins. This has been a key stipulation of the entire ecosystem since it was founded, and the limit is in place to attempt to control the supply of the cryptocurrency. Currently, over 18 million bitcoins have been mined. As a way of controlling the introduction of new bitcoins into circulation, the network protocol halves the number of bitcoins awarded to miners for completing a block about every four years. 

Initially, the amount of bitcoin a miner received was 50. In 2012, this number was halved and the reward became 25. In 2016, it halved again to 12.5. In May 2020, the reward halved once again to 6.25, the current reward. Prospective miners should be aware that the reward size will continue to decrease in the future, even as the difficulty is liable to increase.

El Salvador made Bitcoin legal tender on June 9, 2021. It is the first country to do so. The cryptocurrency can be used for any transaction where the business can accept it. The U.S. dollar continues to be El Salvador’s primary currency.

Profitability

Bitcoin mining remains profitable for some individuals. Equipment is more easily obtained, although competitive ASICs’ cost varies from a few hundred dollars up to about $10,000. To stay competitive, some machines have adapted. For example, some hardware allows users to alter settings to lower energy requirements, thus lowering overall costs.

Prospective miners should perform a cost-benefit analysis to understand their break-even price before making the fixed-cost purchases of the equipment. Variables to consider include cost of power, efficiency, time, and market bitcoin value.

A profitability calculator, such as the one provided by CryptoCompare, helps would-be miners analyze the cost-benefit equation of Bitcoin mining. Profitability calculators differ slightly, and some are more complex than others.

In June 2022, the bitcoin hash rate fell to 5.4% when the price of Bitcoin fell below $25,000. The price of graphics processors, which provide computing power, fell by an average of 15% in May, indicating miners are offloading their chips on the secondary market.

With the price of bitcoin falling, the decline in hash rate and the increased availability of GPUs indicate that some miners may be questioning the bitcoin mining business. “Supply and demand regarding bitcoin mining have not been favoring the price this year (2022),” Yuya Hasegawa, crypto market analyst at bitbank.

Mining Pools 

To compete against the mining mega centers, individuals can join a mining pool, a group of miners who work together and share the rewards. This can increase the speed and reduce the difficulty of mining, putting profitability within reach.

As difficulty and cost have increased, more miners have opted to participate in a pool. Although the overall reward decreases among multiple participants, the combined computing power means that mining pools stand a much greater chance of actually completing a hashing problem first and receiving a reward.

Two common payout methods used in bitcoin mining pools include proportional mining and the pay-per-share method. In a proportional mining payout method, miners receive rewards proportional to the amount of effort expended by them in finding a block. The payout amount also depends on whether the pool finds a block and this payout method is profitable during times when the price of bitcoin surges.

The pay-per-share method distributes payouts based on the mining power of the entire pool and is the opposite of a proportional mining system. A miner’s share is determined not by their effort but by an equitable division of the rewards received by the pool. A miner receives their reward regardless of whether the pool finds a block. Since it guarantees a flat fee, this payment model is best suited for periods when the bitcoin price is low.

To answer the question of whether Bitcoin mining is still profitable, use a web-based profitability calculator to run a cost-benefit analysis. Determine if you are willing to lay out the necessary initial capital for the hardware and estimate the future value of bitcoins as well as the level of difficulty. When both bitcoin prices and mining difficulty decline, it usually indicates fewer miners and more ease of receiving bitcoins. When Bitcoin prices and mining difficulty rise, expect the opposite—more miners competing for fewer bitcoins.

According to recent research, Bitcoin mining is a highly concentrated business, with 10% of bitcoin miners controlling 90% of mining capacity on Bitcoin’s network. Even more telling is another statistic from the research: 0.1% of all miners own 50% of the network’s mining capacity. This means that bitcoin rewards are distributed disproportionately in bitcoin’s network. When you sign up to mine independently, bear in mind that you are competing against established outfits that have enormous capacity, amounting to megawatts, at their disposal.

What Is Bitcoin Mining?

Bitcoin mining is the process of earning bitcoin by running the verification process to validate bitcoin transactions. The verification process requires solving complex mathematical problems and competing with other miners to solve these calculations quickly.

How Has Bitcoin Mining Profitability Changed Over Time?

During the mining of cryptocurrencies, a computer is trying to solve complicated logic puzzles to verify transactions in the blockchain. When this process is completed, the miner receives cryptocurrency as a block reward. In December 2017, the profit in USD per hash was $2.28 and in April 2022 it was $.22.

What Factors Should Be Considered for a Cost-Benefit Analysis of Bitcoin Mining?

Variables needed to calculate bitcoin profitability include electricity costs, the efficiency of mining machines, and bitcoin price. Companies such as Nicehash provide online calculators to determine mining profitability.

The Bottom Line

Bitcoin mining is the process by which miners earn bitcoins in exchange for running the verification process to validate bitcoin transactions. With an increase in difficulty levels of the bitcoin algorithm and the entry of large institutional players into the bitcoin mining ecosystem, economics have changed. Individual miners should perform a cost-benefit analysis, taking into account variables such as electricity costs, efficiency, and bitcoin price before committing to mining. 

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