After a difficult year, the price of the leading cryptocurrency – Bitcoin – is enjoying a huge resurgence at the time of writing, with its price jumping up to just over $8,000, having tumbled to below $4,000 at the end of 2018. This has been welcome relief to those who have invested in Bitcoin mining set-ups, as the leap in price has made such operations profitable again.
But what is it that affected profitability in the first place? Price is obviously one factor, but far from the only one. Still, it’s a logical place to start.
The volatile nature of cryptocurrency prices over the past two years in particular has made crypto mining a not-always-certain business. Prices haven’t just varied, they’ve varied fast, with days of double percentage points rises and falls not uncommon. Still: the ultimate value of a coin remains a key determinant of profit. Predicting said profit is a sizeable challenge in its own right.
In basic terms, the hash rate of a cryptocurrency is a measurement of the processing power a coin’s network is requiring to keep going. An individual hash isn’t the decoding of the next block for a coin, but an attempt to do so. As such, an individual mining rig – be it a laptop with some software or a dedicated ASIC (Application-Specific Integrated Circuit) mining set-up – will have its own hash capabilities per second. But as a cryptocurrency matures, the difficulty of mining new coins increases, and that requires more ‘guesses’ to unlock one. This in turn requires more processing power, for harder-to-reach rewards. And that hits the bottom line. Almost all miners will join a pool to mine a cryptocurrency – the days of mining individually are long gone.
Not all cryptocurrency algorithms are created equal. The most popular – SHA-256 – is used by Bitcoin most notably, as well as an assortment of altcoins. Given Bitcoin’s the most lucrative cryptocurrency, it’s an algorithm that attracts targeted ASIC-mining rigs, which in turn tend to make things unworkable for more casual miners. Conversely, ETHASH, the proof of work hashing algorithm used by Ethereum and Ethereum Classic, requires more memory than CPU work, and as such, an ASIC-setup – whilst an option – isn’t the only way forward. Different algorithms tend to require different hardware setups to optimise mining coins. One size rarely fits all.
The profit and loss of mining crypto is also linked to the price of electricity. This is the reason that some companies are setting up mining farms in areas of the world where the cost of electricity is cheaper – such as near hydroelectric in China or coal power stations in Russia. The brute force mining of Bitcoin, for instance, tends to demand a lot of electricity per coin, and that’s what was discouraging so many from continuing with Bitcoin mining farms in 2018. Coins were getting more difficult to mine, their value was dropping, and the electricity bill was soaring.
Finally, the hardware itself. It’s accepted that as a crypto matures, it becomes more complex to mine new coins. What’s evolved is a sort of power race, between the ASIC rigs in the case of Bitcoin, and the growing amount of processing power required to mine one. And that’s taken significant hardware investment on the part of serious miners. ASIC rigs are tailored to mine individual coins whose algorithm demands CPU processing over GPU. They tend to be cheaper at first, but should an algorithm alter or a coin fork, they at least require a solid update. GPU rigs, meanwhile, have been hostage to the fluctuating price of GPU cards. Those prices were soaring during the crypto boom of 2017 and early 2018, before falling again. But as mining certain coins becomes more popular, it goes hand in hand that a growing hardware investment tends to be required to keep up.
The upshot of all of this is that not all coins are created equal, that a miner’s approach to mining Bitcoin will need to be different to mining Ethereum, and that will have a hardware knock-on too. There’s profit to be found, clearly, not least from the altcoins on the sidelines of mainstream crypto. But it can clearly widely vary, for a variety of reasons.