Cryptocurrency mining became a thing with the advent of the bitcoin network back in 2009. Cryptocurrency mining is a process through which transactions are processed over the blockchain network, and new cryptocurrencies are created. In this article, we want to explore one of the most commonly asked questions, “Is cryptocurrency mining profitable?”
What is Cryptocurrency Mining?
Before we explore the feasibility of setting up a cryptocurrency mining operation, let’s briefly go over what mining is. The term mining was borrowed from the mining industry because mining also generates new cryptocurrency.
Most people think mining is the process of creating new cryptocurrencies. However, that’s not entirely true. Miners are not creating new cryptocurrencies; instead, they are verifying, authenticating and facilitation cryptocurrency transactions. New cryptocurrencies are created as a byproduct of this process.
How are New Cryptocurrencies Created?
Let’s look at bitcoin. Bitcoin, like every other cryptocurrency, is a decentralized P2P network. The network is known as blockchain, where all of the transactions are recorded. Since the network is decentralized, there is no one company responsible for maintaining the network.
Instead, the network incentivizes individuals to dedicate computing power for the maintenance of the network. These miners attempt to solve cryptographic mathematical problems, which are indirectly used to verify and authenticate all of the transactions over the bitcoin network.
People maintain the blockchain network through mining for a profit motive. There are two financial incentives to mining cryptocurrencies. First is the creation of new cryptocurrencies. Every time a block (group) of transactions is processed, new bitcoins are created. This helps regulate the supply of bitcoins and incentivizes more people to maintain the network.
Second is the transaction fees paid for each and every transaction. The transaction fees we pay when sending bitcoins is paid to the miner by the network. This way, when the supply of new bitcoins runs out, miners will still be incentivized to invest in and maintain the blockchain network.
Is Cryptocurrency Mining Profitable?
Well, the answer is not as straightforward as a simple yes or no. The blockchain network is functional, correct? This means there are a lot of miners still maintaining the blockchain network. If individuals and companies are still maintaining the network, we can also assume that they are making enough money to continue mining, right?
It wouldn’t make sense to assume that all of these miners are operational despite a lack of profitability in the business—unless there are people investing millions of dollars out of the goodness of their heart. Based on this reasoning, yes, cryptocurrency mining is profitable.
Can You Mine Cryptocurrency Profitability?
Does that mean anyone can set up a mining operation? Most definitely. Aside from capital requirements, there aren’t that many barriers to entry. If you have enough capital, you can easily rent out a warehouse and set up a mining operation.
That’s also the major barrier to entry. In the early days of cryptocurrency mining, you could easily set up your daily-use laptop as a miner and successfully mine a decent amount of cryptocurrencies. The token you would mine at the time wouldn’t be worth much, but you could still mine a decent amount.
Later in 2011 and 2012, you could no longer mine with a simple computer. You would need powerful computers customized with expensive graphical processing units (GPUs). But it was still possible to mine cryptocurrencies profitably.
Soon after that, mining migrated from GPU-based mining to field-programmable gate array (FPGA). After that, miners were investing in ever more powerful hardware which is manufactured primarily for mining cryptocurrencies. These miners are called ASIC miners, which are essentially modern-day supercomputers.
Such hardware doesn’t come cheap. But more importantly, they are extremely energy intensive. There are two costs involved in setting up and running a cryptocurrency mining operation. First is the cost of hardware, the fixed cost of setting up a cryptocurrency mine. Second is the variable cost, energy-use.
The cost of electricity is such a big factor that most mining operations are located in countries with the cheapest electricity such as China, Finland, etc. Initially, all of the miners were cryptocurrency enthusiast.
When the first bull market was underway, and people realized the potential for outsized gains they started investing in the hardware necessary for mining bitcoin and other altcoins. However, the number of new bitcoins that can be created at a time is limited to a predetermined amount. So increasing capital and processing power was competing for a decreasing number of bitcoins.
Suddenly, the dynamics of the market had completely changed. Within a few years, bitcoin mining had gone from individuals to large multimillion dollar corporations, all strategically located in a handful of countries around the world.
So yes, cryptocurrency mining is profitable—there is no doubt about that. But if you’re looking for a business model around cryptocurrency mining, you would need a lot of capital and access to cheap electricity.
How Set up a Mining Operation?
We’re going to do a feasibility study to determine the scale you would need to break even and so forth. The problem with such a feasibility study would be that the numbers which you would use for your research might no longer be relevant in a matter of week or two. In two months, bitcoin can go from $100 to $1,000, and within a week it can be down to $500.
The market is incredibly volatile. But this is not really a bad thing; you just need to understand how the markets operate. You can still build a mining operation without millions of dollars. You would obviously not mine bitcoins or ether or any other large-cap cryptocurrency.
Small investors can still profitably mine small-cap and mid-cap cryptocurrencies. But your feasibility study would need to take into account for the market cycle. If you’re calculating your profitability on a month-on-month basis, those numbers won’t mean much the next month.
First, you would need enough capital to be able to get the necessary hardware. After getting the miners, you would need, at least, enough capital left for one year’s electricity use, rent and other ancillary expenses. And this is the bare minimum. The previous bear market lasted a year, from 2014 to 2015. The next one might last longer. There is no way to know for sure.
Bitcoin went from $1,000 to $150 and then to $20,000 over the course of just four years. If you want to mine successfully, you need enough capital to weather through when the prices are depressed and sell once the markets are up. If you are forced to sell your cryptocurrencies while the markets are depressed, you will go bust. It really is that simple.
Many companies, even non-mining companies, hold on to, at least, some of their cryptocurrencies. These companies would, for example, sell 80% of all payments received in the form of bitcoins and hold on to the rest for when the price is higher.
Is cryptocurrency mining profitable? Yes, it is. Just like many of the companies involved in commodities, bitcoin mining companies need to account for market cycles in their strategic planning. Remember, a barrel of crude oil was trading for around $26, down from over $100 a barrel. Very few companies were actually profitable at such depressed prices. In such businesses, you need to understand market cycles.