Mining prospects in 2022 is the rush not appropriate?
The rapid growth of bitcoin in the last months of 2020 caused an unprecedented boom in the mining world, and the growth in the profitability of cryptocurrency mining sparked another gold rush.
Let’s try to find out whether mining is really profitable today and what difficulties beginners will face. And also try to understand whether it is worth entering this business now. Or is it better to remember the popular expression – “during the gold rush it is more profitable to sell shovels” – and take a closer look at other areas?
How did the income of miners grow at the end of 2020?
Experts from Luxor Technologies found that bitcoin miners’ profit per unit of equipment capacity increased 3 times in the last quarter of 2020. The last time a similar indicator of cryptocurrency profitability was observed was in August 2019.
In November, cryptocurrency mining earnings soared 48% compared to October. December showed another +33%. And if we assume that all mined coins were immediately sold by their owners, then during the last month of last year, miners earned $692 million. Glassnode experts painstakingly calculated that in December 2020, bitcoin “crypto miners” received a total of $1 million per hour.
The next 2021 did not interrupt this trend. In January, Bitcoin continued to rise to new high prices. It seems that the current market situation will allow miners this month to approach the income level of the fabulous December 2017. It was then that the peak of mining profitability was recorded – more than $1.2 billion.
Paradoxically, at first glance, the situation is developing: the bitcoin price is 2 times higher than 3 years ago, and for some reason, the profitability is significantly lower. In fact, everything is simple: profitability depends not only on the cost of production but also on a number of associated costs. Let’s take a closer look.
What determines profitability?
There are several main factors that have a key impact on mining revenues in general and its profitability in particular:
- cryptocurrency cost. With this point, everything is clear and logical: the higher the price, the higher the income.
- block prize. On average, every 3-4 years, the reward for miners for a found block is reduced by 2 times. In 2009 it was 50 bitcoins, in 2012 – 25 bitcoins, in 2016 – 12.5 coins. In May 2020, there was another reduction in the block reward, and now it is only 6.25 BTC.
This suggests that in bitcoin, miners get less for their work. To offset the increased costs, they need to mine more blocks or wait for the fiat price of BTC to rise.
- mining difficulty. The Bitcoin blockchain is designed in such a way that the number of blocks found remains approximately the same for a certain period of time. In practice, this means the following: with an increase in the number of miners and the power of their equipment, the complexity of mining also increases. That is why it is necessary to constantly update and upgrade the equipment or acquire new, more powerful items. This is the only way to keep the amount of mined coins stable.
In fact, at first, bitcoins were easily mined on the CPU and later on the GPU. Now, only specialized devices, ASICs, have the necessary power for this process.
The scale of growth in bitcoin mining capacity can be judged by the following facts:
- in 2011, the hash rate of the bitcoin network was around 500 gigahash/s;
- in September 2013 it had already reached 1,000 Terahesh/s (that is, it multiplied by 2,000);
- in February 2016 it reached 1 million Terahesh/s (an increase of another 1,000 times).
Today, this figure is 150 million Terahesh/s or 150 Exahesh/s (10 raised to the 18th power). For comparison, the power of a processor in bitcoin mining is tens of kilo hash, video cards – megahash, ASIC – hundreds of trash per second. Thus, one ASIC in the bitcoin mining process replaces millions of video cards or billions of processors.
- transaction fee. The second source of income for miners is transaction fees on the Bitcoin network. If in the early years its value was imperceptible in the context of the block reward, today the situation is radically changing. In December, miners earned around $70 million in total from fees alone, which is around 10% of their total revenue. As of December 2017, commissions typically amounted to 25% of the miner’s earnings. In the future, with a decrease in the block reward, the share of fees in the treasury of crypto miners’ income will only grow.
- equipment cost. The excitement surrounding the growth in mining profitability is causing bitcoin mining equipment prices to rise rapidly. However, even a twofold increase in ASIC selling prices does not stop those who want to buy them. All manufacturers of such devices are talking about a full prepaid purchase of future ASIC batches by the largest mining center operators, until the summer of 2021.
For example, Marathon ordered 70,000 of these devices from Bitmain for a total of 170 million dollars, moreover, the first 7,000 units will reach the customer only in July 2021, and the rest not before December. At the same time, in September of last year, Marathon already acquired more than 10,000 ASICs from Bitmain itself, and in October – another 10,000.
Core Scientific’s appetites are a bit more modest. The company paid for “only” 58,000 specialized mining devices for delivery in September 2021.
Well, Riot Blockchain’s $35 million order for 15,000 ASICs seems downright “frivolous.” Or the purchase of several thousand units for 15 million dollars by 500.
- electricity cost. Mining equipment consumes a lot of electricity. The top ASIC in overclocking can require up to 5 kW of electricity per hour. Therefore, their cost largely determines the location of mining farms. The largest operators of cryptocurrency mining centers have equipment near power plants in regions with cheap energy: China and, more recently, in the Scandinavian countries. For example, in Norway, due to excess hydroelectric power generation, the price of electricity for industrial consumers has fallen to almost zero.
- Associated costs. This includes other expense items, whose share of total profitability is insignificant. This is the salary of maintenance personnel (in the case of industrial-scale mining), rent, Internet payment, etc.
It is precise because of the increased complexity and increased cost of equipment that the profitability of mining remains lower than it was in December 2017, even though the price of bitcoin doubled.
Should you start right now?
Taking all of the above into account, we can talk about the lack of profitability of bitcoin mining for the average user. To enter the crypto mining market today, you need a starting capital of several tens of thousands of dollars (at least!) To buy several ASICs.
But even here, a novice miner is disappointed – the lack of offers to sell devices. Even future deliveries are scheduled and distributed to industrial mining companies six months in advance. And even more. It is not surprising that “home” miners simply cannot compete with them.
However, mining is not alive with bitcoin alone. There are still many cryptocurrencies based on mining algorithms that differ from the bitcoin algorithm. For example, Ethereum. For its production, ordinary video cards are enough. True, the same problems are felt here:
- inflated component prices, particularly GPUs;
- insufficient supply in the market;
- relatively high entry threshold;
- unpredictable income.
The growth of bitcoin led to an increase in the price of other cryptocurrencies. And this increased the profitability of their production and stimulated the mass purchase of video cards. The actual models were already supplied by the manufacturers in very modest quantities. Excessive demand led to the redemption of even previous model years from stores. Today, if video cards that give good profits are offered somewhere, then the price of them is overestimated by 2-3 times.
Although those who managed to assemble personal farms before the disappearance of components from the shelves of specialized stores now feel great. So, Simon Byrne from Las Vegas in the fall of 2020 bought 78 GeForce RTX 3080 video cards for around $100,000.
With the current cost of Ethereum and the current difficulty of mining it, the farm brings in an enterprising American about $670 per day or $20,000 in net income per month. It consumes about 24 kWh of electricity, and an American spends about $1,200 a month to pay for electricity.
Therefore, as long as the cost of cryptocurrency is high and it is possible to purchase the required number of video cards, mining remains a very profitable activity. But don’t forget, it’s right now, right now.
When the market crashes, the profitability of mining also falls. But who will definitely win, both now and in the foreseeable future, are the “shovel manufacturers” (ASICs and video cards)? As well as happy owners of their own farms.
Entering mining today from scratch is an extremely risky undertaking. It is better to wait for a more favorable moment, for example, the next “crypto winter” or at least a temporary and slight decrease in the prices of crypto mining equipment. But it’s up to you to decide!
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