What is Bitcoin?
Bitcoin is a digital currency created in 2009. Digital currency is a virtual currency that is backed cryptography, making it extremely secure from counterfeiting. It doesn’t require a back as the currency is based on a decentralized large network of computers. One of the defining aspects of digital currency is that is doesn’t require a government or authorities to issue the money. In digital currency, the money exists in a public ledger with all the transactions being verified by computers. In Bitcoin, a collection of computer nodes run and stores its blockchain, which consists of a chain of blocks or transactions. It is the world’s first peer to peer technology used for payments. As new miners join the network, the difficulty of miner increases in proportion to the number of Bitcoins being created. This makes sure there is a steady flow of Bitcoin being introduced to the market.
Revenue from Mining Bitcoin
People who process the blockchain, are known as miners. The way to make money from Bitcoin is to become a miner. The miners are rewarded, usually in the form of Bitcoin currency, to complete the transactions. The miners act as a decentralized authority to validate the transactions and ensuring the specific transactions cannot be replicated. Mining allows for Bitcoin currency to be released in the circulation. The process of mining requires hardware processing power to solve computational puzzles to find new blocks that can be added to the blockchain. For every new block added to the blockchain, the miner receives a reward. This is how revenue is generated from Bitcoin mining. Miners are critical to any cryptocurrency network as they are doing the work required to secure the digital currency.
For the cost of mining, the cost is divided into two major categories, the purchase of hardware equipment required and the maintenance and operational expense of the equipment. The operational expenses include electricity cost, which ends up as one of the most significant costs of mining. The profitability of Bitcoin mining depends on the balance of cost-efficient mining and revenue generation. There are a few strategies that can be used to increase the profitability of Bitcoin mining. For hardware, miners assemble their “mining rigs” or ASIC machines that can cost from a few hundred dollars to several thousand dollars depending on the specification of the machine. In 2020, a high-end Bitcoin ASIC device such as the M20S by Whatsminer can generate $8 of revenue per day in Bitcoin currency. Compared to Ethrerium, another type of cryptocurrency, Bitcoin offer twice the revenue. Each type of cryptocurrency is going to requires its type of ASIC machine. So, an ASIC machine will only be able to generate revenue in the currency of Bitcoin. Older GPU based mining machines can be considered obsolete for Bitcoin mining. They stand little chance of consistently solving the computational puzzles required to earn rewards.
How to increase Bitcoin mining profitability?
There are a few different factors that determine the profitability of Bitcoin mining. As the rewards for mining as paid in the currency of Bitcoin, the price of Bitcoin is an important factor in the overall profitability of Bitcoin mining. However, as this factor is not in control of individual miners, there is not much that can be done to increase the market Bitcoin price. As the cryptocurrency market evolves into a more mature market, the price of Bitcoin is expected to rise. So far until the year 2020, it has seen a rollercoaster ride with highs of late 2017 to the lows of early 2019. Investment money and effort into Bitcoin mining is worth it if miners believe the price of Bitcoin will increase. The market is still young, but analysts believe there is great potential. However, there is an inherent risk in cryptocurrency.
One of the most important factors in Bitcoin mining is cheap electricity. Not only does electricity tariff varies from country to country, within a country, but it can also vary from city to city. Generally, location close to energy sources such as dams, offer the cheapest rate of electricity. For miners, if they are mining from home, residential rates will apply but if they mining from an office or industrial region, then commercial rates will be used to determine electricity usage cost.
The state of Washington in the USA generates excess hydroelectric power. Most of the surplus electricity is exported to metropolitan cities such as Los Angeles. The extra supply allows for lower electricity rates. It has become a popular destination for miners. The strategy to reduce costs should consider moving to a location with cheap electricity. As more miners move to cheaper electricity zones, the consumption will increase and tariffs might be changed. Therefore, the pursuit of cheap electricity is going to be a moving target. Miners will have constantly look for ways to optimize their electricity costs. About 40% of the total cost of mining comes from electricity use. To increase Bitcoin profitability, miners have to look at other creative ways to reduce costs.
One such strategy is to use a mining colocation facility for mining Bitcoin. Such facilities offer the option of outsourcing your infrastructure costs to a data center. Miners have the option of sending their hardware to a colocation site or buying a machine from the data center. The data centers provide all the infrastructure requirements of mining including electricity, internet, security, cooling, and other maintenance services. These colocation facilities can be a game-changer for miners. The feasibility of using a colocation will depend on the expected revenue generation from the ASIC machines minus the cost of colocation services.
Miners have also used Bitcoin cloud mining as an alternative to using standard mining rigs at home. Similar to colocation services, cloud mining offers purchases a certain processing power from a cloud mining platform. These online mining platforms offer virtually rent some of the mining hardware to the customer. There are different packages offered depending on the type of service selected. The fee for such service can be a flat rate over a period of time or a percentage of revenue from the mining activities. Each miner has to calculate the benefit of cloud mining or colocation services to determine the feasibility of using such platforms.
Apart from reducing the energy cost of mining, miners can look at optimizing their hardware to maximize profit. There are several hardware machines to choose from such as Antminer S9 or the Antminer R4. The more the computer power, the more Bitcoin can be mined. However, with an increase in processing power, comes an increase in monthly power consumption. The profitability of a mining machine is determined by the relationship between processing power, energy costs, and other related expenses such as hosting fees. Miners also have to consider the upfront cost of purchasing the machine. The longevity of the machine and flexibility to upgrade are important factors in making a purchasing decision. Miners can take an analytical approach to determine what type of hardware is best suited to their needs. For example, they can use online calculators to determine what hardware to buy to get a certain revenue per day.
Another strategy to increase Bitcoin profitability is to consider using a mining pool. Individual miners have the option of joining a mining pool to increase the probability of finding a block and earning rewards. The concept of a mining pool is that a group of miners share their mining processing power, called the hash power, with other miners, in return for sharing the rewards of completed blocks. It is especially difficult for new miners to make money because they tend to machines with less processing power. They tend to struggle to compete against more established miners.
One of the greatest challenges to Bitcoin profitability is the fact that the network halves the number of Bitcoin rewards for miners every four years. Not only is the difficulty of completing block increasing, but the rewards are also decreasing for the same number of blocks completed. It can be argued that the processing power of ASIC machines is also increasingly making miners more capable of completing blocks. However, this race of hardware advancement vs. the difficulty of mining is going to get tougher as hardware advancement starts to reach a limit. A Bitcoin miner should be aware that rewards are going to continue to decrease in the future, they are going to need innovative solutions to continue making Bitcoin profitable.