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Miner’s profitability metrics are based on a handful of factors that govern difficulty and issuance, which are hard-coded into the attributes of the blockchain, making it predictable to work with. While predictability doesn’t always immediately translate into profitability, it does provide a blockchain with certain parameters to rely on when predicting when cryptocurrency mining will become profitable, at what price level, and at what level of difficulty during the issuance cycle.
Some cryptocurrencies, such as Bitcoin (BTC), go through issuance cycles with events such as halving. In the case of Bitcoin, halvings occur once every 210,000 blocks, roughly every four years, until the maximum supply of 21 million Bitcoins is mined.
This self-adjusting feature provides an incentive for a single miner to join or leave the network depending on the current Bitcoin price level. Together, these incentives create a logarithmic price regression curve, which represents a probable Bitcoin exchange rate and, therefore, predictability of profitability in the current issuance cycle. If Bitcoin’s price falls below this regression curve, where the bottom line is roughly around the 200-week moving average in this issuance cycle, almost all miners should be at a net loss. If the price stays above this figure, at least some of the miners should have a net profit.
Bitcoin’s mining difficulty is currently at an all-time high between 110 and 120 million terahash per second, indicating that a lot of new mining capacity has been added to the network, but as the price has not fully recovered from the decline caused by the emergence of COVID -19, we should expect most miners to be temporarily at a loss. However, if the price of Bitcoin were to move up again in the current issuance cycle and go into a bull run, the economic risk miners would have taken at that point should be amply rewarded.
Ethereum mining has been, for a while, among the most profitable in the altcoin space mainly due to the high average price of its token. However, Ethereum as a network is primarily focused on building a blockchain with a slightly different purpose than Bitcoin. Ethereum is a smart contracts platform. Although mining has previously supported the network at the stage where it is not widely used for transactions, in the future the network will be forced to employ staking nodes as validators to provide sufficient transaction capacity. In the long run, this could have a positive effect on mining if we assume that mining will be phased out. A substantial amount of coins is expected to be stuck in staking, which will drive up the price.
Staking is a mechanism that allows users to deposit some of their coins into a staking address owned by a validation node and lock them for a period of time. The validator node then secures the network by producing blocks relating to the number of coins deposited in it. The blocks are produced according to a hard-coded voting mechanism that calculates the reward for staking from the total amount of coins staked into the network for each node.
Related: ETH miners will have little choice once Ethereum 2.0 launches with PoS
The price of electricity is a determining factor in the profitability of miners. Currently, most industrial miners reside in countries with low-cost electricity on energy purchase agreements with electricity producers ranging from hydro to solar. However, most retail miners are primarily dependent on fluctuations in retail prices and must calculate this factor in their investments. Furthermore, the price of electricity is not a factor when mining profitable altcoins with GPU platforms.
Equipment prices tend to fluctuate based on price cycles. At the end of each cycle, the purchase of equipment is relatively affordable, but for each peak of the cycle, the equipment may not be affordable but also unavailable. At this point, it would probably be profitable to take a moderate risk in mining, especially GPU mining. As far as profitability alone is concerned, mining Bitcoin would likely require an investment beyond the reach of most retail miners on the initial cost to be substantial at the peak of this emission cycle.
In addition to just making a profit, mining is a way to produce coins with no prior history. For users who care about their privacy, mining represents economic freedom, making a means of payment accessible without ties to a specific entity. This unique feature is only present in proof-of-work cryptocurrencies and connects many people on the fringes of society with often legitimate use cases to the rest of the world, acting as a guarantor of human and social rights.
For some organizations, maintaining a blockchain with a nominal loss can act as an investment by supporting profitable services or maintaining the infrastructure to run services for public use. In legacy systems, this type of arrangement is comparable to public service or utility.
While the provision of services can be a boon for a network of entities running on an authorized blockchain or a PoW blockchain intended for well-defined use, on open public blockchains, in the long run, it can be assumed that miners are operating with a reason. of profit. With difficulty and profitability adjustments in public blockchains with significant utility value such as Bitcoin, mining can be seen as a profitable business in the near future.
The only credible factor that can upset the status quo in PoW cryptocurrency mining at the moment appears to be the theoretical introduction of widespread quantum computing with tools accessible enough to create an incentive to attack public blockchains. However, this type of risk may be exaggerated because quantum computation proof algorithms exist and will likely be developed to mitigate a risk arising from this fairly predictable factor.
In this light, mining is unlikely to become profitable in the next bull market, but more relevant in ways that are not just economic.
This article contains no investment advice or recommendations. Every investment and trading move carries risk, readers should conduct their own research when making a decision.
The views, thoughts and opinions expressed herein are solely the author’s and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Iskander Khasanov is a miner and cryptocurrency trader. He first established himself as a real estate entrepreneur and then became involved in the cryptocurrency business in 2016. Iskander is the director of the Crypto Accelerator community and shares ideas on mass adoption of cryptocurrency.
