Cryptomining may seem like a “get rich quick” scheme, but it is quite an 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 UK, France, and Italy. As cryptocurrencies become more mainstream, individuals and businesses alike are looking to profit from the business of cryptocurrency mining (the process of adding new cryptocurrency tokens to circulation).
Reading: Is bitcoin mining profitable in 2021
Before we jump into the crypto mining business, let’s take a look at the top three factors that affect 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 famous for using up to 91 terawatt-hours of electricity, or 0.5% of all electricity worldwide, each year. Naturally, with such high electricity consumption, the costs of crypto mining add up. A single bitcoin transaction, whether it’s a cryptocurrency transfer or the sale or purchase of an item using cryptocurrency, costs $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. Essentially, anyone who has the required setup to mine bitcoins can do so.
This is why experts have already been looking for alternatives to counteract the high electricity consumption of crypto mining. One of the ways to do this is to switch 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 a miner owns. this creates a barrier to entry for miners and ultimately reduces the energy consumption of the mining operation.
Cryptomining 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 $3000 on your mining rig. some miners even spend more than 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 the motherboard of the platform. the average lifespan of a mining rig can range from three to ten years. for bitcoin mining specifically, the lifespan of a mining rig is only 1.29 years.
hash rate refers to the computational power per second used in crypto mining. the hash rate is a point to consider for those cryptocurrencies that operate 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 a “hash”.
When we talk about hash rates, we should know that there are two types of hash rates: the hash rate of your personal device and the hash rate of the crypto network. your personal hash rate is based on the computational power of your device (which would also be affected by the stability of your connection and the processing power of your mining devices). To calculate the hash rate of your 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 the network of a cryptocurrency at a specific time. 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 to make any profit from mining. As for the hash rate of the network, if more miners join the network, the number of people trying to guess the hash increases, which increases the hash rate of the network. In the pow model, as used in the bitcoin protocol, the problems that miners must solve for each transaction will automatically adjust to become 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 each block mined. At the time of writing, a single bitcoin is worth $47,392. This means that for every block a miner adds to the blockchain, they currently earn $296,200. The reward for authenticating transactions decreases over time: it will halve roughly every four years (or every 210,000 blocks). miners also receive a transaction fee each time they authenticate a transaction. As of February this year, the average transaction fee ranges from US$24 to US$31. all of this can certainly make you quite a bit of money in the long run.
however, while you can make a profit through crypto mining, it is unlikely that you will be able to do it alone. To reduce start-up costs, it is recommended that you join a mining pool. mining pools allow miners to share resources and capabilities. Still, the high volatility of bitcoin can add uncertainty to the mining company, and you should consider that carefully before deciding to jump on the crypto bandwagon.
header image courtesy of freepik
See also: 3 Steps to Add Funds to a Bitcoin Wallet