The Economics of Mining
Cryptocurrency mining has long been viewed as a highly rewarding activity for early adopters of blockchain technology to get involved in a particular blockchain ecosystem.
By mining cryptocurrencies, you get to actively participate in securing the network through your hashing power, validating transactions and adding new blocks to the chain, all of which are essential for enabling a proof of work (PoW) blockchain to function.
There are many factors to consider when deciding to mine a cryptocurrency.
The first is the consensus mechanism. The act of ‘mining’ is most commonly associated with proof of work blockchains like Bitcoin, Litecoin, Bitcoin Cash or Horizen.
Under a proof of work consensus mechanism, like on the Bitcoin network, miners compete to solve mathematical puzzles using computing power in order to earn the right to add transactions to the next block in the chain and receive newly issued bitcoin from the network, known as the block reward.
Computing power, otherwise known as hashing power, is generated through the computer that runs the Bitcoin software in addition to hardware machines called mining rigs, which are computer systems built specifically to mine cryptocurrencies.
Crypto Mining Rigs
The most common mining rig used in PoW blockchains like Bitcoin is the ASIC Miner.
An ASIC Miner is a type of integrated circuit computer hardware that is designed for the sole purpose of mining cryptocurrencies on a proof of work blockchain. Cryptocurrencies that are mined using ASICs include Bitcoin, Litecoin and Bitcoin Cash.
ASIC machines comes in different variations, the most popular of which are the following:
|Antminer S19 Pro
Bitcoin Mining - How Much Does it Cost to Mine 1 BTC per Day?
In order to calculate the cost of mining bitcoin, one has to factor in the hashrate, the number of machines required to mine 1 BTC, and the costs paid for electricity, which is estimated to be around 5¢ per kWh.
Other expenses include the costs of building and maintaining a mining facility to store your mining rigs.
According to Miner Daily, it currently costs $7,000 to $11,000 of electricity to mine 1 bitcoin per day, which at the time of writing sits between a price of $40,000 and $50,000 (though not the case at the moment), netting miners a profit of about $36,000 on average per BTC mined.
The mining cost is based on the costs of electricity (priced at 3.5¢-5¢ per kWh) spent by ASIC machines to mine 1 bitcoin.
It takes 148,450 TH/s (or tera hashes per second) to mine 1 BTC per day. This means that it currently requires an average of 1,484 Antminer S19 machines contributing 100TH/s in hash power to mine 1 BTC per day.
For better understanding of the units used to measure hashing power, here is a chart displaying the different measures of data volumes and how they compare to each other:
|A paragraph of a text document
|A small novel
|Beethoven’s 5th Symphony
|All the X-rays in a large hospital
|Half the contents of all US academic research libraries
|About one fifth of the words people have ever spoken
|As much information as there are grains of sand on all the world’s beaches
|As much information as there are atoms in 7,000 human bodies
A Teraby divided by 1,000 divided by 1,000 is equal to an Exabyte (1,000,000 Terabyte is equal to 1 Exabyte).
1,484 Antminer S19 machines x a unit price of $8,000 = $11.8 million in upfront hardware costs.
At an average of $9,000 in electricity spent per day to mine 1 BTC, total cost of electricity to power the ASIC machines for a year = $3.2 million.
Cost of electricity + mining hardware = $15million
Note: It is not possible to mine exactly 1 BTC per day.
The network currently issues 6.25 bitcoin every 10 minutes to the miner that is the first to solve the mathematical problem that earns them the right to validate transactions within a block and earn a reward for doing so.
To mine 1 BTC per day really means to win a block reward of 6.25 bitcoin roughly once per week.
Mining hardware and electricity should account for the majority of your costs.
However there are other expenses to consider, such as the costs of renting and managing a mining facility that can host your 1,484 machines.
These costs include:
- Power Supply Units
- Internet Service Providers
- Cooling Costs for Rigs
- Security, CCTV, etc
… And frequent support from a qualified electrician to ensure that the facilities electrical systems are maintained properly.
We can expect these additional expenses to increase your costs by about 20%, bringing it to a total of $18 million in upfront and operating expenses to be capable of mining 1 bitcoin per day.
While this may seem very expensive, with earnings of $36,000 per day on average (75% profit margin when counting just the cost of electricity) your annual revenue would be $13.1 million.
This means you can expect to earn a profit within 2 years when factoring in all other expenses.
This of course depends on other factors such as the price of bitcoin (which has shifted since writing), the hashrate and difficult adjustment set by the network.
Correlation Between Price and Hashrate
Bitcoins value as a secure payment network is tied to its hashrate and the price of the asset.
The more hashing (computing) power is added to the network, the greater its security and its overall resistance to attack.
As the price of bitcoin rises, so does the hashrate, as more people are incentivized to mine bitcoin because the value of the blockchain rewards in USD terms is greater.
This increase in demand to mine bitcoin naturally leads to an increase in the difficulty adjustment such that it continues to take roughly the same amount of time, 10 minutes, to mine a new block.
Conversely, falling prices correlate to a decrease in the hashing rate as fewer miners are able to remain profitable to secure the network.
The decrease in hashrate makes the network less secure, as it is an indicator for the amount of energy a bad actor would potentially need to exceed in order to successfully perform a 51% attack.
As price and hashing power decreases, we see a decrease in the difficulty to mine new blocks over time. This acts as a counterbalance to the decrease in miner participation caused by lower profitability, inviting a new wave of miners to start contributing hashing power to secure the network.
This dynamic between price and hashrate has historically been used to create a ‘price floor’ for bitcoin investors and traders based on the energy costs required to mine bitcoin, known as the ‘cost of production’.
As price falls below the cost of production and miner profitability is at its lowest, this can trigger a ‘reset’ in the difficulty of mining new blocks to a level in which the cost of mining is once again below the price of bitcoin, which has historically been viewed as a signal to mine and/or purchase more bitcoin.
Proof of Work vs Proof of Stake?
When it comes to proof of stake systems, the economics of validating transactions and earning rewards are very different.
Proof of Stake (PoS) requires validators to stake a minimum number of the network's native tokens into a smart contract in order to validate transactions.
A randomized process is used to determine which validators will get to produce the next block. This means that PoS does not require the use of mining rigs to solve complex math problems in order to earn block rewards.
Instead, the process is more deterministic and works in such a way that every validator ends up generating roughly the same APY on their staked coins. The exception being in cases where a validator loses a portion or all of their staking due to ‘slashing’, which is an event that occurs when a validator attempts to submit a fraudulent transaction or fails to keep their computer operating with near 100% uptime.
While the PoS consensus mechanism does not require mining hardware or facilities to house them, the process of storing all or even parts of the blockchains data overtime can become quite costly.
‘State bloat’ is a common problem that popular blockchains tend to incur over time.
Essentially, as more transactions are recorded on a blockchain, more blocks are required to store those transactions. Overtime, the massive amounts of data that is accrued from defi, gaming, NFT and other types of transactions puts stress on the network, making it more costly to set up a node because of the size of the data that needs to be downloaded.
This is particularly true for full nodes, which are responsible for storing an archive of the entire history of the blockchain dating back to its inception. While it is difficult to place specific numbers on these costs, what’s clear is that the longer a blockchain exists, the greater the state bloat and the more expensive it becomes for validators to run nodes.
One of the ways in which the state bloat problem is being resolved is through creating a more modular blockchain design in which sidechains can be sprung up for the purpose of storing parts of the mainchains history so that nodes on the mainchain can reduce the amount of data their nodes need to store.
Through a process called ‘anchoring’, a cryptographic hash of the data can be stored on another chain and validated by the nodes on that chain. You can think of this like a zip file that is stored in a separate computer server in order to free up space on your current computer.
In Conclusion - Crypto Mining
Mining cryptocurrencies has historically been one of the most common ways for retail users to get involved in the operations of a blockchain network.
It helps you understand how the proof of work consensus mechanisms are designed, and gives you the ability to get paid by performing a valuable service; to store the blockchain history and validate transactions.
The rising prices of cryptocurrencies have made certain coins like Bitcoin more expensive to mine profitably. However, this doesn’t mean that all PoW coins are inaccessible for the average retail investors to mine.
Alternatives like Litcoin, Horizen or even Dogecoin offer the ability to mine new coins at a much lower hashrate than bitcoin, which means the amount of energy one needs their mining rigs to expend in order to consistently earn block rewards is lower and therefore so is the cost.
In the past 2 years, PoS has become a more common consensus mechanism for blockchains to adopt due to environmental and scalability concerns. The fact that one only needs to acquire a certain amount of tokens and operate a basic computer in order to validate transactions also makes PoS more appealing to retail users.
Ultimately, both consensus mechanisms have their pros and cons in terms of their impact on blockchain security, scalability and decentralization.
However, where they are similar is in their use of economic incentives to bring people together in order to validate transactions and provide greater security to the network.
WIthout the secure foundation enabled by the economics of mining or validating, blockchains would not be able to operate at a scale that allows millions of people to send payments, deploy smart contracts, trade NFTs and perform other activities every day.