Cryptocurrency mining is the process in which transactions between users are verified and added to the public blockchain ledger.
Mining is also responsible for introducing new coins into existing circulation and is one of the key elements that allow cryptocurrencies to operate as a peer-to-peer decentralized network without the need for a third-party central authority.
| Please read a definition of the term hashrate below, which is necessary for further understanding of the article.
Hashrate is the speed at which a computer performs an operation in bitcoin code. The higher the hashrate of one single bitcoin mining machine, the more bitcoins that machine will mine. The higher the hashrate of the entire Bitcoin network, the more machines in general there are, and the more difficult it is to mine Bitcoin.
What determines profitability of a miner
Bitcoin mining economics can be divided into three components: revenue, operational expenses, and capital expenses. These three pillars can be used together to better understand the profitability of mining and its return on investment.
- Revenue. There are several leverages miners can use to increase their revenue:
- Elimination of hashrate. Miners produce hashrate the value of which is largely beyond their control — it primarily depends on the networks they are mining in. However, the miner decides which pool to sell his hashrate to.
- Coin selection. At any given time, profitability between coins varies based on ever-changing variables such as network complexity, coin price, transaction fees, market depth, and other factors.
- Forecasting income. Miners need to make assumptions about a new hashrate going into the market, the amount of hashrate, electricity, and operating costs for miners, broken down by the type of hardware they use, coin prices, transaction fees, etc. Building a model with this general architecture will allow a miner or investor to predict the value of his hashrate in the future.
- Operational expenses. Undoubtedly the most important part of a mining company’s long-term success is the cost of electricity. Reducing electricity costs even by 1 cent saves miners almost ~ 90 thousand USD / MW per year in electricity costs. Low maintenance miners are isolated from large fluctuations in mining revenues. They can also buy old equipment at a very low price and still use it profitably.
- Capital expenses. The important part here is the purchase of equipment. The most experienced miners know how to work with both hardware manufacturers in the primary markets and resellers in the secondary markets. For example, the Hashrate Index service has a machine price tracker, which can be conveniently used by mining operators to determine when in a cycle is the best time to buy machines. Miners need to consider when in the mining cycle to buy machines. There are times when the machines are cheap and their return of investment period is fast.
By 2019, mining cryptocurrency has become a bit more difficult. In bitcoins, the reward gradually decreases every four years. On top of this, serious miners have built huge mining arrays, making it difficult for smaller miners to compete.
Regardless of whether you are mining cryptocurrency on your own equipment or using cloud mining services, it may take several months before your investment becomes profitable.
| However, Bitcoin and other cryptocurrencies are still high-risk investments with high returns.
Let’s recall that you don’t need to be a miner to own cryptocurrency tokens. You can buy cryptocurrency with fiat currency and trade it on the exchange.
The attractiveness of the cryptocurrency market is growing, and more and more investors every year include cryptocurrency in their investment portfolio.
What to do with mined cryptocurrency?
There are many investment opportunities both inside and outside mining. Instead of mining, you can buy bitcoins, buy stocks, or invest in fiat currencies.
Crypto exchange Cratos allows its users to create up to 50 wallets in different cryptocurrencies for free. Each wallet is protected and insured by Cratos, and cryptocurrency transfers between Cratos users are free (excluding blockchain fees).
You can store the mined currency in the Cratos crypto wallet and make an exchange for fiat currency when the time is right or send the cryptocurrency to any other wallet.
Is mining profitable in 2020-2021?
As with any investment, it is imperative to consider the potential risks and rewards of mining before making a decision.
By using their experience in buying hardware, operating at low-cost power, employing sophisticated profit switching algorithms, and more, miners can generate solid risk-adjusted returns even in an increasingly uncertain macro environment.
Therefore, in the emerging global crypto economy, cryptocurrency mining is likely to become more profitable in the coming years.