Is Bitcoin Mining Still Profitable?
Bitcoin mining is the process of earning bitcoins in exchange for running the verification process to validate Bitcoin transactions. These transactions provide security for the Bitcoin network, which in turn compensates miners by giving them bitcoins. Miners can profit if the price of bitcoins exceeds the cost to mine them. The recent changes in mining devices and technology and the creation of professional mining centers with enormous computing power, as well as the shifting price of bitcoin itself, has shifted the incentives and landscape for mining. Many individual miners now ask themselves: is Bitcoin mining still profitable?
There are several factors that determine whether Bitcoin mining is a profitable venture. These include the cost of electricity to power the mining machines, the availability and price of machines, and mining difficulty. Difficulty is measured in the hashes per second of the Bitcoin validation transaction. The hash rate measures the rate of solving the problem—the difficulty changes as more miners enter because the network is designed to produce a certain number of bitcoins every 10 minutes. When more miners enter the market, the difficulty increases to ensure that the number of bitcoins produced remains the same.1
The last factor for determining profitability is the price of bitcoins as compared to that of standard, hard currency.
KEY TAKEAWAYS
Bitcoin is mined using computing rigs, which include expensive hardware.
Miners are rewarded with Bitcoin for verifying blocks of transactions to the blockchain network.
As more miners compete for Bitcoin rewards, the process becomes more difficult.
To determine whether Bitcoin mining is profitable for you, consider costs of equipment and electricity as well as the difficulty associated with mining and how the price of bitcoin will affect potential rewards.
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The Components of Bitcoin Mining
Prior to the advent of new Bitcoin mining software in 2013, mining was generally carried out on personal computers. But the introduction of application-specific integrated circuit (ASIC) chips offered up to 100 billion times the capability of older personal machines, rendering the use of personal computing to mine bitcoins inefficient and obsolete.2 Though Bitcoin mining is still theoretically possible with older hardware, there is little question that it is not a profitable venture.
This is because of the way that mining is set up: Miners are competing to solve hash problems as quickly as possible, so those miners at a serious computational disadvantage essentially stand no chance of solving a problem first and being rewarded with bitcoins. When miners used the old machines, the difficulty in mining bitcoins was roughly in line with the price of bitcoins. But with these new machines came issues related to both the high cost to obtain and run the new equipment their lack of availability.
Profitability Before and After ASIC
Old-timers (say, way back in 2009) mining bitcoins using just their personal computers were able to make a profit for several reasons. First, these miners already owned their systems, so equipment costs were effectively nil. They could change the settings on their computers to run more efficiently with less stress. Second, these were the days before professional Bitcoin mining centers with massive computing power entered the game. Early miners only had to compete with other individual miners on home computer systems. The competition was on even footing. Even when electricity costs varied based on geographic region, the difference was not enough to deter individuals from mining.
After ASICs came into play, the game changed. Individuals were now competing against powerful mining rigs that had more computing power. Mining profits were getting chipped away by expenses like purchasing new computing equipment, paying higher energy costs for running the new equipment, and the continued difficulty of mining.
Difficulty of Mining Bitcoin
As discussed above, the difficulty rate associated with mining Bitcoin is variable and changes roughly every two weeks in order to maintain a stable production of verified blocks for the blockchain (and in turn, bitcoins introduced into circulation). The higher the difficulty rate, the less likely it is that an individual miner can successfully solve the hash problem and earn bitcoins.
In recent years, the mining difficulty rate has skyrocketed. When Bitcoin was first launched, the difficulty was 1. As of November 2021, it is more than 22 trillion.3 This provides an idea of just how many times more difficult it is to mine for Bitcoin now than it was a decade ago.
Shifting Rewards
The Bitcoin network will be capped at 21 million total bitcoins. This has been a key stipulation of the entire ecosystem since it was founded, and the limit is in place to attempt to control the supply of the cryptocurrency. Currently, over 18 million bitcoins have been mined. As a way of controlling the introduction of new bitcoins into circulation, the network protocol halves the number of bitcoins awarded to miners for successfully completing a block about every four years.4
Initially, the number of bitcoins a miner received was 50. In 2012, this number was halved and the reward became 25. In 2016, it halved again to 12.5. In May 2020, the reward halved once again to 6.25, the current reward.5 Prospective miners should be aware that the reward size will continue to decrease in the future, even as the difficulty is liable to increase.
El Salvador made Bitcoin legal tender on June 9, 2021. It is the first country to do so. The cryptocurrency can be used for any transaction where the business can accept it. The U.S. dollar continues to be El Salvador’s primary currency.6
Profitability in Today's Environment
Bitcoin mining can still make sense and be profitable for some individuals. Equipment is more easily obtained, although competitive ASICs cost anywhere from a few hundred dollars up to about $10,000. In an effort to stay competitive, some machines have adapted. For example, some hardware allows users to alter settings to lower energy requirements, thus lowering overall costs. Prospective miners should perform a cost-benefit analysis to understand their break-even price before making the fixed-cost purchases of the equipment. The variables needed to make this calculation are:
Cost of power: What is your electricity rate? Keep in mind that rates change depending on the season, the time of day, and other factors. You can find this information on your electric bill (measured in kWh). Electricity is not only required for running computations on mining systems but also to cool them and prevent them from overheating.
Efficiency: This value is a function of the difficulty level and efficiency in the number of calculations that your mining system to win the puzzle. Briefly, it can be formulated as the amount of power that your system consumes (in watts).
Time: What is the anticipated length of time you will spend mining? To maximize the chances of finding a block, most individual miners run their systems for extended periods of time, even 24 hours, if they can afford the bills.
Bitcoin value: The current value of bitcoin is the return on investment of your expenses to mine the cryptocurrency. What is the value of a bitcoin in U.S. dollars or another official currency?
There are several web-based profitability calculators, such as the one provided by CryptoCompare, that would-be miners can use to analyze the cost-benefit equation of Bitcoin mining. Profitability calculators differ slightly, and some are more complex than others.
Run your analysis several times using different price levels for both the cost of power and the value of bitcoins. Also, change the level of difficulty to see how that affects the analysis. Determine at what price level Bitcoin mining becomes profitable for you—that is, your break-even price.
For example, in November 2021, the price of a bitcoin was hovering around $55,000. Given a current reward of 6.25 BTC for a completed block, miners are rewarded around $344,000 for successfully completing a hash. Of course, because the price of bitcoin is highly variable, this reward figure is likely to change.7
Mining Pools
To compete against the mining mega centers, individuals can join a mining pool, which is a group of miners who work together and share the rewards. This can increase the speed and reduce the difficulty of mining, putting profitability in reach. As difficulty and cost have increased, more and more individual miners have opted to participate in a pool. Although the overall reward decreases because it is shared among multiple participants, the combined computing power means that mining pools stand a much greater chance of actually completing a hashing problem first and receiving a reward in the first place.
The two most commonly used payout methods used in Bitcoin mining pools are briefly described below:
Proportional Mining: In a proportional mining payout method, miners receive rewards proportional to the amount of effort expended by them in finding a block. The payout amount also depends on whether the pool finds a block. Thus, miners will not earn anything unless they find a block. In the opposite scenario, they stand to maximize their profits if they find multiple blocks. This payout method is profitable during times when the price of bitcoin surges. Even though the difficulty level increases correspondingly, the payout from rising prices of bitcoin will ensure that the miner profits.
Pay-Per-Share Method: As its name denotes, the pay-per-share method distributes payouts based on the mining power of the entire pool. It is the opposite of a proportional mining system. A miner’s share is determined not by their effort but by an equitable division of the rewards received by the pool. A miner receives their reward regardless of whether the pool finds a block. Since it guarantees a flat fee, this payment model is best suited for periods when bitcoin price is low because it translates to sustained income for miners during lean times.
As bitcoin's ecosystem has developed, a new form of payment method has developed to overcome drawbacks inherent in both payment method types. For example, a pay-per-share model can remove the incentives for miners from finding blocks altogether since a payout is guaranteed. A proportional mining method is problematic during bear markets or as bitcoin rewards decline.
In response, many miners have taken to switching their resources between mining pools based on their payout method and bitcoin price. Some mining pools have also adapted their rewards strategy between the two payout methods in response to declining rewards of bitcoin.
Is Bitcoin Mining Profitable for Individual Miners?
To answer the question of whether Bitcoin mining is still profitable, use a web-based profitability calculator to run a cost-benefit analysis. Determine if you are willing to lay out the necessary initial capital for the hardware and estimate the future value of bitcoins as well as the level of difficulty. When both Bitcoin prices and mining difficulty decline, it usually indicates fewer miners and more ease of receiving bitcoins. When Bitcoin prices and mining difficulty rise, expect the opposite—more miners competing for fewer bitcoins.
According to recent research, Bitcoin mining is a highly concentrated business, with 10% of bitcoin miners controlling 90% of mining capacity on Bitcoin's network. Even more telling is another statistic from the research: 0.1% of all miners own 50% of the network's mining capacity.8 This means that bitcoin rewards are distributed disproportionately in bitcoin's network. When you sign up to mine independently, bear in mind that you are competing against established outfits that have enormous capacity, amounting to megawatts, at their disposal.
The Bottom Line
Bitcoin mining is the process by which miners earn bitcoins in exchange for running the verification process to validate bitcoin transactions. It involves solving math puzzles and requires the application of brute force, in the form of computing power, to solve.
During the early days of Bitcoin, mining could be a profitable activity for individual miners. With an increase in difficulty levels of Bitcoin's algorithm and entry of large institutional players into the bitcoin mining ecosystem, its economics have changed, and it is now dominated by mining pools. Individual miners should perform a cost-benefit analysis, taking into account variables—electricity costs, efficiency, bitcoin price—before committing to the activity.
Frequently Asked Questions
What is Bitcoin mining?
Bitcoin mining is the process of earning bitcoins by running the verification process to validate Bitcoin transactions. Miners earn rewards in the form of bitcoin for running the validation process.
Is Bitcoin mining profitable for individual miners?
In the early days of Bitcoin, when it was mined using CPUs and the difficulty levels for its algorithm were easy, a rising price for the cryptocurrency ensured that mining was profitable for individual miners. An increase in difficulty levels of the cryptocurrency's algorithm has skyrocketed electricity costs for mining operations and made the activity uneconomic for individual miners.
What factors should you consider for a cost-benefit analysis of bitcoin?
In the main, there are three variables needed to calculate bitcoin profitability:
Electricity costs
Efficiency of mining machines
Bitcoin price
Two other factors that influence bitcoin mining profitability are the difficulty level of its mining algorithm and bitcoin price.
Which mining machines are commonly used to mine Bitcoin?
Application-Specific Integrated Circuits (ASICs) are custom mining devices used to mine the cryptocurrency.