Is Bitcoin Mining Still Profitable?
Is Bitcoin Mining Profitable or Worth it in 2021?
The short answer is yes. The long answer is.....maybe it’s complicated.
Bitcoin mining began as a well paid hobby, and for early adopters it provided them the chance to earn 50 BTC every 10 minutes, mining from their PCs, in comfort of their homes.
All that you had to do was to successfully mine just one Bitcoin block, and holding onto it since 2010 would mean you have $450,000 worth of bitcoin in your wallet in 2020.
What is Cryptocurrency Mining?
Cryptocurrency mning is the backbone of all proof-of-work blockchains and can be described with the help of following concepts:
Bitcoin Block Reward
Miners are rewarded with 6.25 bitcoins. This number will reduce to 3.125 bitcoins after the halving in 2024. The reward (plus transaction fees) are paid to the miner who are successful in solving the puzzle first.
This process repeats approximately every 10 minutes for every mining machine on the network. The difficulty of the puzzle (Network Difficulty) adjusts every 2016 blocks (~14 days) to ensure that on average one machine will solve the puzzle in a 10 minute period.
Network difficulty is calculated by the amount of hashrate contributing to the Bitcoin network.
What is Mining Hardware?
Mining hardware is specialized computers, created solely for the purpose of mining bitcoins. The more powerful your hardware is–and the more energy efficient–the more profitable it will be to mine bitcoins.
What is Hashrate?
Hashrate is a measure of a miner’s computational power.
The more computing power a machine has, the more solutions (and hence, block rewards) a miner is likely to find.
Cost of Mining
The underlying cost of mining is the energy consumed. The revenue from mining has to outweigh those costs, plus the original investment into mining hardware, in order to be profitable.
Mining Revenue
In 2020, one modern Bitcoin mining machine (commonly known as an ASIC), generated around $8 in Bitcoin revenue every day. If you compare this to the revenue of mining a different crypto currency, say, Ethereum, which is mined with graphics cards, you can see that the revenue from Bitcoin mining is twice that of mining with the same amount of GPUs (Graphic Processing Unit) that you could buy for one ASIC.
How do Bitcoin miners earn?
Bitcoin miners earn bitcoin by collecting something called the block reward plus the fees bitcoin users pay the miners for safely and securely recording their bitcoin transactions onto the blockchain.
What is the Block Reward?
Roughly every ten minutes a specific number of newly-minted bitcoin is awarded to the person with a mining machine that is quickest to discover the new block.
Transaction fees:
The second source of revenue for Bitcoin miners is the transaction fees that Bitcoiners have to pay when they transfer BTC to one another.
This is the uniqueness of Bitcoin. Every transaction is recorded in an unchangeable blockchain that is copied to every mining machine.
Another salient feature of Bitcoin is that it doesn’t rely on a central bank to keep records. It is the miners themselves that keep the records, and they get to keep a share of the transaction fees as well.
Taxes on Bitcoin Mining Profits
While profiting on Bitcoin mining isn’t certain, paying taxes on your mining rewards is. Every miner needs to know the relevant tax laws for Bitcoin mining in his area, which is why it is so important to use a crypto tax software that helps you keep track of everything and make sure you are still making enough money after you account for taxes.
How to know if you are making profit from Bitcoin mining?
Since Bitcoin mining has a lot of variables, buying bitcoin on an exchange can be a simpler way to make a profit. However, when done correctly and efficiently, it is possible to end up with more bitcoin from mining than from simply hodling.
One of the most important variables for miners is the price of Bitcoin itself. If, like most people, you are paying for your mining hardware, and your electricity in dollars, then you will need to earn enough bitcoin from mining to cover your ongoing costs; and also recover your original investment that you have made into the machine itself.
Bitcoin price, naturally, impacts all miners. However, there are three factors that separate profitable miners from the rest:
1.Cheap electricity
- Low cost and efficient hardware
- Good mining pool.
Cheap Electricity
Electricity prices vary from country to country. Many countries also charge a lower price for industrial electricity in order to encourage economic growth.
The Price of Hardware
The price of hardware varies from manufacturer to manufacturer and depends largely on how low the energy use is for the machine vs the amount of computing power it produces. The more computing power, the more bitcoin you will mine. The lower the energy consumption the lower your monthly costs.
Reliable Mining Pool
These days, every miner needs to mine through a mining pool. Whether you are mining with one machine, or several thousand, the network of Bitcoin mining machines is so large that your chances of regularly finding a block (and therefore earning the block reward and transaction fees) is very low.
Important Tip:
Unless you have access to very cheap electricity, and modern mining hardware then mining isn’t the most efficient way to stack satoshis. Buying bitcoin with a debit card is the simplest way, besides using other payment network like Skrill.
As far as profit making is concerned, It all boils down to economies of scale and access to cheaper prices. When people enter the space, without prior relationships, they struggle to compete with established mining operations.
"Bitcoin mining is starting to resemble similar indu//scales as more money flows in and people start to suit up. With increased leverage, margins are lower across the whole sector. Soon, large scale miners will be able to hedge their operations with financial tooling to lock in profits, whilst bringing in USD denominated investments like loans or for equity."
-Kristjan Mikselsson,
Managing Director of the Icelandic Blockchain Foundation
As mining becomes more professional, it will make things even harder for DIY miners.
Can you Mine direct to an exchange?
If you have put in the effort to learn about mining, and you have found a location with low cost electricity for your machines, then you still need to consider where to store the bitcoin that you mine.
It is possible to mine direct from the pool to an exchange, but it is recommended that you keep your bitcoin in a wallet where you have access to the private keys.
Is CPU mining profitable?
No, and in the case of Bitcoin, it never was, unless you were one of the very first people to mine Bitcoin on CPU.
Conclusion
The average home miner is unlikely to recover the cost of mining hardware and electricity, as a result of which profiting on your own is highly unlikely.
The situation may improve in the future once ASIC mining hardware innovation reaches the point of diminishing returns. That, coupled with cheap, hopefully sustainable power solutions that retail customers can access in some shape or form, may once again make Bitcoin mining profitable to small individual miners around the world.
If small miners can re-enter the network it greatly increases decentralization and supports the original intentions of Satoshi Nakamoto even further.