Bitcoin, and all the cryptocurrencies that came after, revolutionized the way how you can make money.
With real-time transaction speed and low costs, cryptocurrencies attracted all kinds of investors. But cryptocurrencies are profitable for miners (the people at the other end of the transactions) too.
But with the recent technology development, the mining business has become more competitive. Is it still profitable? That depends on your circumstances.
To decide if you should mine your cryptocurrencies, let’s first explain:
- What is mining?
- Why is its profitability questioned? and
- What do you need to know before deciding to mine cryptocurrencies?
What is cryptocurrency mining?
Cryptocurrencies are attractive because they operated on a peer-to-peer network. The system does not rely on one company processing all the transactions and data (such as a bank processing the transactions). Instead, the contracts are executed by everyone who has computer power and joins the network. This process is called mining and involves verification and adding up the transactions to the blockchain public ledger.
The miners process the transaction and add them to the blockchain by solving complicated math. The process is called proof-of-work. When the computer solves the problem, it generates a 64-digit hexadecimal number. The number is known as hash in the cryptocurrency world. Due to the complexity of the problems, computers spend a high amount of energy.
For each transaction verified, new bitcoins are created and given to miners as a “block reward”. But as the number of blocks increases, the block reward decreases. For example, the block reward for bitcoins currently is 6.25, while in 2009, it was 50.
Earning money from cryptocurrency mining (especially bitcoins) seems like an easy thing. But why is its profitability questioned?
Back in the days, a personal computer was all you needed to mine bitcoins. But in 2013, the introduction of application-specific integrated circuit chips known as ASIC rapidly increased the efficiency of bitcoin mining. AISC are devices designed particularly to mine bitcoins, which made the mining in old computers unfavorable.
ASIC revolutionized the mining game in several ways. First, it was because it increased the efficiency of processing transactions. Second, because the technology put constraints on individual miners by:
- Making them invest more in new efficient equipment
- Paying the increased costs of electricity used to run the equipment
- Making them compete against big mining rigs (one of more computers designed specifically for mining cryptocurrencies).
Now that you know how the mining game work, should you mine cryptocurrencies?
Despite the limitations and the new changes in cryptocurrency mining (especially bitcoin), for some, the process of mining can be profitable. To make sure that mining is paying before you spend tons of money, here are a few things you should ask yourself:
- Equipment cost: What equipment do I need to buy? How much does the equipment cost in my area?
- The equipment efficiency: How much energy do my computers use?
- Hashrate: What is the hashrate of my computers?
- The electricity cost: How much electricity will I spend? What are the electricity rates in my area? (This is the kWh measured in your electricity bill)
- Time: How much time am I going to spend mining cryptocurrencies?
- Value: What is the value of the cryptocurrency I am mining?
Use these questions to create a brief cost-benefit analysis. If the results show that you will make a profit, then go for it. But if your costs are too high, then the best solution is to invest and trade cryptocurrencies.