Is Bitcoin Mining Profitable?
Table of Contents
- Bitcoin mining is a competitive industry with thin profit margins.
- The profitability of mining depends on the price of bitcoin, the price of electricity, and the hardware being used to mine.
- Household electricity costs are normally far too high to allow profitable mining.
- In order to make revenue streams smoother and more predictable, small miners will often join mining pools.
Bitcoin Mining Economics
Bitcoin mining is like any other economic activity. Miners provide a service, batching transactions into blocks and adding those blocks to the blockchain, and in return, they receive bitcoin. This bitcoin is called the block reward, and is composed of all of the fees paid by transactions in the block plus a subsidy of new bitcoin.
Who Can Mine Bitcoin?
Because Bitcoin is an open system, anyone can mine Bitcoin. However, not everyone can mine Bitcoin profitably. Bitcoin mining is an extremely competitive industry, so profit margins are generally slim. In addition, Bitcoin mining is capital intensive and requires a significant upfront investment.
When Is Bitcoin Mining Profitable?
Bitcoin mining profitability depends on a few factors, including the cost and type of hardware, the cost of energy, and the price of Bitcoin itself. Additionally, government regulations, taxes, and subsidies, and environmental factors like temperature can affect profitability.
Bitcoin miners only receive revenue when they mine a block, making the benefits atomic and unpredictable. However, the costs of mining are continuous and predictable.
If an individual is mining with a relatively small amount of hash rate, they will have a very low probability of mining a block. Indeed, a small miner could go months without earning any revenue.
Mining pools exist to mitigate this imbalance between constant costs and inconstant revenue. Mining pools allow individuals to aggregate their hash rate and their rewards. If a small miner joins a mining pool, they will receive a payout every time any miner in the pool finds a block. This payout will be proportional to the amount of hash rate they have contributed to the pool.
Bitcoin Mining Hardware Considerations
Bitcoin is usually mined with ASICs, specialized computers meant solely for Bitcoin mining. Several versions of these machines exist, each with varying levels of energy efficiency.
Newer, more efficient machines will produce more bitcoin per unit of electricity, but are generally more expensive than older, less efficient machines. This presents a trade-off for Bitcoin miners.
Hardware is an expensive, upfront investment, so the potential profitability of mining should be considered before purchasing any ASICs.
The Energy Cost of Bitcoin Mining
The most significant variable cost for Bitcoin miners is electricity. Bitcoin mining hardware consumes significantly more electricity than an average laptop, and most mining equipment is run 24/7 to maximize revenue.
For these reasons, obtaining the lowest possible cost of electricity is critical to miners. This incentive shapes the geographical distribution of Bitcoin mining. Specific regions of China where large, government-funded energy projects have resulted in excess hydroelectric power host significant amounts of Bitcoin mining. Mining also takes place in oil-rich regions such as Texas, regions with geothermal energy such as Iceland, and in places where government subsidies have created energy surpluses.
Most Bitcoin mining uses energy priced between 2.5 and 8 cents per kilowatt hour. This is significantly lower than the retail energy prices of most households, meaning that mining from home is usually unprofitable.
Miners with newer, more advanced ASICs can afford to pay higher electricity costs because their machines are more efficient. For this reason, miners with lower energy costs tend to use older equipment, as they are the only ones capable of running it profitably. Miners with higher electricity prices must use more advanced hardware in order to make a profit.
Bitcoin miners receive their revenue in bitcoin, but they usually pay their costs—energy, rent, hardware, salaries, and maintenance—in their local fiat currency. Thus, the price of Bitcoin is central to the profitability of a mining operation. Every Bitcoin mining operation has a breakeven price, below which they cannot mine profitably.
As the Bitcoin price rises, new miners find it profitable to mine, even if their electricity costs were previously prohibitive. When the Bitcoin price falls, these miners will no longer be able to mine profitably, and will be forced to shut down. This creates a causal relationship between the price of Bitcoin and the security of the Bitcoin network. As the network grows more valuable, it becomes more secure.
Miners with low energy costs and miners with more efficient hardware will be able to continue operating despite low Bitcoin prices. Miners with higher electricity prices or older equipment tend to have higher breakeven prices.
Other Financial Factors
Regional laws and regulations can impact the profitability of mining operations. In jurisdictions with significant mining activity, governments have taken different regulatory positions on Bitcoin mining.
Local governments in some regions of China have outlawed Bitcoin mining. Some jurisdictions, including South Korea, have levied additional taxes specifically on Bitcoin mining operations. On the other hand, other jurisdictions have granted tax breaks and even subsidies to Bitcoin mining operations in order to stimulate economic growth and job creation.Notice: River Financial does not provide investment, financial, tax, or legal advice. The information provided is general and illustrative in nature and therefore is not intended to provide, and should not be relied on for, tax advice. We encourage you to consult the appropriate tax professional to understand your personal tax circumstances.
Invest in Bitcoin.