Having shown incredible growth in 2017, Bitcoin has conquered the minds of many people all over the world and not without a reason. Just imagine, you simply install a piece of software onto your machine, launch the Bitcoin mining process and make money out of thin air! Sounds very simple and tempting, but is it really worth it? How does mining new Bitcoins work and how high is cryptocurrency mining profitability in 2018? What is the connection between mining Bitcoin and energy consumption? Let’s find out.
Bitcoin mining explained
First, let’s get an explanation of how Bitcoin mining works.
Imagine the huge network of PCs and specialized equipment (Bitcoin miners) that are located in different parts of the world and are trying to find decryption keys to an encrypted piece of data by trying a random combination of numbers and digits (the SHA-256 algorithm). Depending on the operating systems, the Bitcoin mining software such as CGMiner, RPC Miner, EasyMiner, BFGMiner or Bitcoin Core is used for this purpose.
The Bitcoin miner who finds the key first is declared to be a winner and gets a block reward to the bitcoin wallet. The newly found block is added as one more link to the chain of blocks (or blockchain) that have been discovered before, all other participants of the network immediately stop trying to solve this computational task and start working on the next one.
All these blocks are used for storing information about Bitcoin transactions that the participants of the BTC network make between each other, and this is exactly what the miners are rewarded for.
Bitcoin mining is getting monopolized
With every newly discovered block, the Bitcoin mining difficulty increases. The first BTC could be easily obtained on a home PC with the help of a usual built-in video card, as mining software needed less computing power back then.
When Bitcoin showed tremendous growth for the first time in 2011, it attracted the attention of some geeks, but at that time the topic didn’t get that popular and was gradually forgotten. However, when Bitcoin has grown much more in 2017, you could hear many sad stories about people who threw away their old computers with Bitcoins that they obtained back in 2011.
What’s more, apart from losing the mining hardware with precious digital coins, now it’s impossible to obtain Bitcoins with the same ease as you could 7 years ago. According to Coinmarketcap, more than 17 million Bitcoins have already been found while the maximum supply is only 21 million. It’s no longer profitable to perform Bitcoin mining by yourself on your private computer.
Standalone cryptocurrency enthusiasts join Bitcoin mining pools in order to consolidate the efforts and get a fair share since bitcoin pooled mining in such groups as BTC.com or BW Pool still gives some hope to get easy profits by creating new bitcoins. The miners are rewarded via Pay-per-share (PPS) payment method which provides instant payouts for their contribution of computing power or via Pay-Per-Last-N-Share (PPLNS) method which implies getting a reward only when a block is actually found. The last method works best for long-term participants of the Bitcoin network rather than for those looking for quick profits.
Among the most popular mining pools are the following groups:
- BW Pool
However, the biggest profits are gained by huge companies such as Bitmain (the most popular product is Antminer S9) and Genesis Mining (the largest cloud mining company) that have enough resources to buy specialized equipment called ASIC miners and monopolize cryptocurrency creation. Thus, the very idea of decentralized currency and the new fair world gets buried by the huge market players who can afford ASIC.
Bitcoin mining and energy consumption
Apart from the centralization, there is another acute problem associated with Bitcoin mining: electricity consumption. Mining and energy costs are tied together: whether you mine Bitcoins on your home PC or have a huge factory with a whole set of mining equipment, the Bitcoin mining hardware consumes electricity to resolve its computational tasks. In a way, it’s a vicious cycle: the more bitcoins are added to the network, the higher is the difficulty of finding a new block to add to the blockchain, and the more electricity you have to consume. Ultimately, this means that you have to spend more money on electricity supply – and the numbers on your bills could quickly become quite frightening.
During Bitcoin euphoria in December 2017, it was a popular topic for jokes. For example, crypto fans were excited and amused to hear about the new startup Cryptomatoes that utilized the excess heat produced by Bitcoin miners in order to grow vegetables. But as the market correction inevitably followed a few months later and Bitcoin price dropped, people started to think more about the seriousness of problems that come with cryptocurrency mining.
The problem of energy consumption was especially serious in May and June 2018. At that time, the popularity of Bitcoin reached its maximum and according to estimates, the energy needed to earn Bitcoin through mining was enough to power an average house for 9 days.
Apart from high electricity consumption, Bitcoin mining leads to depreciation of equipment. The prices for new mining rigs and video cards have literally soared ever since cryptocurrency mining became popular and tons of advertisements about used video cards now flood eBay and other peer-to-peer online marketplaces. That’s why you should be very careful when you see any Bitcoin mining machine for sale as most likely, you will just get a used machine standing on its last leg.
Is Bitcoin mining profitable?
As we’ve already stated above, Bitcoin solo mining is no longer profitable for usual people. If you are a fan of computer games, you can purchase an expensive video card that would enhance your PC performance and at the same time help you earn Bitcoins, but it will hardly ever pay off even within a year timeframe.
You can check Bitcoin mining calculator and see yourself. The hashing power with the abbreviation GH/s stands for GigaHash per second. This index shows the amount of hash power that your miner generates and the higher it is, the more profits you will get. Knowing the costs for electricity in your region and the amount of power you are ready to spend you can easily find out the conditions for your bitcoin mining hardware to come over the point of self-sufficiency and to start generating profits. And unless you have an access to really cheap energy or endless power supply, bitcoin mining is not something to make you rich in a blink of an eye.
The same applies to Ethereum mining and all other digital coins that are based on the proof-of-work algorithm, such as Litecoin, Bitcoin Cash or Dash. Also, keep in mind that Bitcoin mining profitability decreases with time as the reward for finding a new block on Bitcoin halves every 210,000 blocks.
With all this said above, there must be a solution that would eliminate all the Bitcoin mining issues and still help cryptocurrency enthusiasts make money.
Bitcoin mining alternatives
For those who are still interested in making money on cryptocurrency mining, we’ve got good news. Bitcoin mining is not the only way of making profits in crypto. There are other projects that avoid the problem of mining and energy that are based on other algorithms, such as:
- Proof-of-stake (PoS): With this approach, no electricity is required. You simply purchase a bunch of cryptocurrencies and get your share of the Bitcoin network income depending on the size of your stake. Such coins as Dash, NEO, Navcoin, and Stratis are based on this protocol.
- Delegated proof-of-stake (DPoS): It’s similar to PoS with the only difference that you delegate your coins to the holder of the node and get your share of profits accordingly. This method is used by Tezos, EOS, Lisk and a few other projects.
- Proof-of-capacity (or proof-of-space): This algorithm is used only by the BURST coin and it implies getting a reward for allocating some amount of your disk space to solve the computational tasks.
- Proof-of-elapsed-time: This algorithm is developed by the company Intel and is much similar to proof-of-work. Mining and energy consumption at this point do not correlate as drastically in this case.
All-in-all, traditional means of cryptocurrency mining are getting less profitable and huge crypto projects now think of changing their course. Vitalik Buterin, the creator of the second most popular cryptocurrency Ethereum, declared his plans to switch to PoS in May 2017. Let’s hope that this purpose will be achieved at some point.
Bitcoin, being the pioneer of the cryptocurrency industry, still dominates the market and the chances for any other project to replace it are not very high, at least not in the nearest future. Mining profitability has significantly decreased over the last two years, so think twice before you decide to purchase a Bitcoin farm for solo mining. However, cryptocurrency mining is not the only way of making money in the crypto space and a person with the cunning mind can always find a workaround.