Bitcoin mining is a central process to the entire network that validates transactions, secures the blockchain and uncovers new bitcoin. In brief, bitcoin mining requires miners to contribute computing power in exchange for the chance to unlock rewards of bitcoin. In a very basic sense, bitcoin miners are primarily motivated to participate because of the chance to make a profit.
Bitcoin mining can be quite profitable for the major operations that conduct the process on a large scale (running hundreds of thousands of miners at a time) and reduce their energy costs through sustainable sources, government subsidies or other means. But the exact level of this profitability is determined by many factors.
In addition to the costs of equipment and energy, the bitcoin price will have a large impact on the profitability of mining. Successful miners are rewarded in bitcoin which, as every Bitcoiner knows, does not have a fixed price relative to fiat currency. Thus, if bitcoin’s price rises, miners will have further incentive to run operations and better chances of turning a profit. Conversely, if the bitcoin price falls, many large operations will cease or slow their mining efforts in order to reduce energy costs.
Despite the many factors that determine bitcoin mining profitability, even with the latest and greatest hardware, a miner with high electricity costs is unlikely to ever turn much of a profit.
The Changes in Bitcoin Mining Profitability
When first introduced by Satoshi, bitcoin mining was conducted on personal computers. There is no indication that Bitcoin’s creator predicted that bitcoin miners would specialize their equipment and that an entire bitcoin mining industry would rise to the degree that it has now.
The use of GPUs for mining, then the introduction of Application Specific Integrated Circuits (ASICs) have changed the dynamics of bitcoin mining profitability dramatically, making it critical to obtain specifically-built mining rigs that optimize for hash power and energy consumption.
The likelihood of a miner being first to correctly hash a block and therefore receive the mining subsidy is determined by the proportion of hash power they are contributing to the network. The majority of the hash power on the network is now contributed by a few mining pools.
The profitability of bitcoin mining has also changed as the Bitcoin blockchain has been split.
Bitcoin Mining Profitability and the Halving
When miners solve blocks on the Bitcoin blockchain, they receive a predetermined amount of bitcoin as a mining reward, a system created to incentivize miners to contribute computing power to the network and confirm new transactions.
The block reward is based on the original block subsidy of 50 BTC, as determined by Satoshi, plus the mining fees that those conducting transactions are willing to pay to have their transactions verified. Bitcoin’s block subsidy is preprogrammed to cut in half every 210,000 blocks, an event known as the “Halving” or “Halvening.” The original subsidy of 50 BTC was cut in half at block 210,001 to become a subsidy of 25 BTC, then that subsidy was cut in half at block 630,000 to 12.5 BTC.
Because the reward for mining new Bitcoin blocks is cut so dramatically at these intervals, the Halvings have significant impact on bitcoin mining profitability.
Is Bitcoin Mining Still Profitable Today?
Although bitcoin mining has become much more competitive than when the technology was first introduced, the practice can still be profitable. The advent of mining pools and advances in ASICs mean that it’s possible for anyone, anywhere to find a way to participate in Bitcoin’s most critical process and at least offset their energy costs.
But determining whether bitcoin mining will actually be profitable for any specific individual requires a cost analysis that takes into account their particular circumstances. While many factors go into bitcoin mining’s profitability today, the primary questions to answer are:
- How much will power cost?
If you plan to mine from your home’s power grid, this can be determined by reviewing your electricity bill and calculating costs based on how much you are charged per kWh. You may be able to reduce this cost by tapping into alternative or renewable energy sources. You may also consider sending your equipment to a mining colocation that hosts your machine and delivers its power for you. Costs for managed hosting in the U.S. can range from 4 to 8 cents per kWh, depending on the number of machines you are hosting.
- How efficient is your mining hardware?
Different mining rigs have different efficiency specs, so your power consumption costs will ultimately be determined by how efficiently your hardware converts power into hash rate. Newer mining machines are the most efficient and can deliver you the highest profit margin, but they are also the most expensive to buy.
- How long until you successfully mine a block?
There is no way to determine exactly how long it will take for you to be the first to correctly guess the hash and receive a bitcoin mining reward, but this will ultimately be determined by the proportion of hash power you are contributing to the network. The more hash power you are contributing (or that your mining pool is contributing), the more quickly you can expect to receive a reward. As a miner, you are rewarded for your hash rate directly by the mining pool.
- How much is bitcoin worth?
Because bitcoin miners are rewarded with bitcoin, the “profitability” of the enterprise is largely determined by the fiat price of bitcoin. If bitcoin is priced at a relatively high amount of dollars, a mining reward will go further than if it is priced relatively low.