Are you thinking about mining Bitcoin? It sounds like a good proposition. You purchase some computer equipment, connect to the Bitcoin blockchain, and let the computer do all the work while you become rich. There may have been a time when this was true, but times have changed. It is much harder to mine Bitcoin profitably today due to the increase in difficulty, the competition for each block, and the expense of operating a mining rig. Here are a few things to consider as you calculate Bitcoin mining profitability.
Determining Your Mining Rig Setup
The largest expense that you are going to encounter as you begin mining is the actual mining rig that you will use. You must factor in the cost of this rig and how long it will take you to earn the returns in Bitcoin to pay back the initial investment. Until that is done, you aren’t earning anything from your mining operation.
There are two dominant Proof of Work algorithms that are used today to solve the mathematical problems that define mining Bitcoin. These are the SHA-256 protocol and the Scrypt protocol. Each of these has its own advantages and disadvantages, and you need to consider these to determine which coin will be the most profitable one for you to mine.
Back in the early days of mining Bitcoin it was often enough to have a desktop or laptop with a simple CPU and GPU. This is simply not possible anymore. Today the ASIC processor is required in order to mine. ASIC stands for Application Specific Integrated Chips. Think for just a moment about that name. It is a very apt name for a mining processor because your mining rig is going to be application specific. This means that it is only going to be used for mining cryptocurrency.
The thing about ASICs is that the technology behind them changes rapidly. It is an inherent aspect of Bitcoin that the difficulty of solving equations for mining increases in an exponential fashion over time. It is done this way so that as time passes fewer new Bitcoin can be created. What this means for you is that you must you care in choosing an ASIC mining rig. Choose poorly and you could find that the rig is obsolete in a short period of time, perhaps even before you have recouped the cost of the rig in Bitcoin rewards.
Coins that use Scrypt might be a better option to start. The reason for this is that they are still in their infancy compared to Bitcoin. With Scrypt it is still possible to make a mining rig based on a GPU, and ASICs have yet to blossom where Scrypt is concerned. There is a much lower difficulty level for mining Scrypt coins than there is for those that use SHA-256.
You can either opt to build a miner yourself from an existing PC, or you can purchase a standalone ASIC mining rig. Either prospect is going to involve some significant expense. Grab a piece of paper and write down how much you plan to spend on a mining rig. This is your starting point in considering mining profitability.
Electricity Requirements for Bitcoin Mining
No matter which type of mining rig that you choose, you are going to have to power that rig with electricity. Lots of electricity. We’re not talking about the amount of electricity that it takes to run your refrigerator. We’re talking the kind of electricity usage that you will definitely notice when the monthly bill arrives in your mailbox.
The power that your mining rig requires is going to depend upon the type of components that you have used to build it. You will probably need a power supply that draws in excess of 900W at the minimum. We’re not going to go into the technical explanation of figuring out how much your mining rig draws on a daily basis. We’re going to keep it simple. The best thing that you can do is observe your bill after a month of mining. You should be able to easily determine how much your average bill has increased.
Write this number down and multiply it by 12. That will give you an idea of how much power you are going to be using in one year.
You’ve now covered the two basic expenses in Bitcoin mining. Of course, if you want to get very technical you could also factor in the cost of your Internet connection, an average monthly maintenance cost of your equipment, and so on. These are minor expenses, however. The biggest ones are your rig and power, so let’s just stick with that.
How to Use a Bitcoin Mining Calculator
There are many Bitcoin mining calculators that are available online. You can find them with a simple Google search. What we will focus on here is explaining how to use one of these mining calculators to estimate your profitability.
When you select a Bitcoin mining calculator you will be asked to input some basic information. You will be asked to provide the hash power of your mining setup, the wattage required by you rig, the amount of money you must pay the electric company for a KWh of electricity, and any fees that you might incur if you are participating in a mining pool.
Once all of these variables have been entered into the calculator, you will be given a projection based on the current rate of Bitcoin and he reward that you can expect to receive. We have included a graphic of a popular mining calculator as an example:
In this particular example, setting up your own mining rig doesn’t seem like such a very good idea does it? As you can see, the numbers here reflect a loss of money each month, and the cost of the mining rig itself has not even been factored in yet. If you were losing $80 or more each month trying to mine Bitcoin, you would never be able to pay back the investment on your mining equipment.
Can You Make a Good ROI with Bitcoin Mining?
We’re not trying to be a wet blanket here. All we are doing is trying to answer the question straightforwardly. The chances are very slim that you will earn enough Bitcoin to justify setting up a one-person mining operation. For one thing, you are going to be in competition with professional mining farms that have better equipment and therefore a better chance of solving a block than you do.
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Another reason is that the difficulty of mining is reaching a very high threshold. We are now nine years into the Bitcoin era. A lot of coins have been mined. Those that remain to be mined are going to require individuals who have vast computer and power resources.
Alternatives to Mining Bitcoin
Notice that we did not say mining is bad, or that you shouldn’t be involved in some way. You might want to consider alternatives like a mining pool or leasing your mining equipment to others that have an interest.
In a mining pool you will not be required to pay for upkeep on the equipment. You will not have to pay the electric bill. All you will do is buy a contract for a certain amount of hash power and collect your rewards when coins are mined.
If you opt for leasing your equipment to someone else that has an interest in mining coins, you will simply be paid for the use of your equipment. You will not generally be involved on the mining end of things. Instead of receiving Bitcoin you will be receiving cold, hard cash.
The Core Problem with Bitcoin Mining That Everyone Ignores
Here is the core problem with Bitcoin mining that everyone seems to ignore: you aren’t mining the value of Bitcoin, just Bitcoin.
What we mean by that is that Bitcoin is a volatile cryptocurrency. The price of it can fluctuate wildly from day to day. Even within a single day. This makes profitable mining a very risky proposition. When you are given a reward for mining a block – let’s say a small portion of one Bitcoin – that reward remains one portion of Bitcoin, but the value of that Bitcoin can change. The Bitcoin reward you received today may be worth $5 in fiat currency. Tomorrow it might be worth $0.05. If you have held on to the rewards you receive, the value of your investment might evaporate.
Remember, no matter how many coins you might mine in the future, you have already paid the electric bill for the month. You cannot go back and tell the electric company two months from now that your Bitcoin rewards did not add up to as much as you thought they would, so you need a refund.
It is very hard for someone to try and guess where the Bitcoin market is headed. When you mine coins you are betting that they will increase in value, and there is no guarantee of that. Consider all of these things before you take the step of buying a Bitcoin mining rig.