What is Cryptocurrency Mining (and is it PROFITABLE)?

I think you can agree that figuring out if mining is still profitable in 2018 is really difficult o find out?

Right?

In this guide, I will discuss what cryptocurrency mining is, how it works, and if it’s still profitable to mine cryptocurrency. I’ll go over solo mining, cloud mining and mining pools, and what I believe the best way to be the most profitable at mining based on your abilities.

If you’re at all interested in crypto or Bitcoin mining, then this guide will save you a lot of time looking through all the hype out there. I don’t give a specific yes or no to whether you should mine cryptocurrency, or which path to take in mining, but I will give you clear explanations so that you can make an informed decision, without the fear of being “sold” on an affiliate program for mining companies.

What is cryptocurrency mining?

I’ve talked about the blockchain. But a quick refresher is, the blockchain is a series of transactions. Somebody sends somebody else money, somebody receives money and so forth. For example, those series of transactions are collected and put together into what is known as a block. That block is attached to and followed by another block which is followed by another in a chain, thus blockchain. It’s just a public ledger system it just records the transactions, but the importance of this article is this: the creation of that blockchain and ledger system is done by the miners.

What exacly are miner, and can being one be profitable?

Essentially what miners are doing is they’re running a piece of software which originally ran on a computer. Then it could run only on fairly high-end computers. And then became something that could only run on extremely high-end computers, and then moved on to very specialized devices that are purpose-built for mining. When you’re mining, whether you’re using a high-end GPU or you’re using a specialized mining device, you are volunteering your work, or your computers work to power that network. And you own a piece of the network as a result.

an illustration of a person mining bitcoin out of rocks.

All miners are creating that network and volunteering computer resources for that, and that is why the miners are given a reward. Once one of those blocks is written down, and then another one is going to follow it, and that’s called a block reward. The block reward does vary from one coin to another, and it also varies over time. Part of the process to allow for a bid on currencies is to have a very steady regulated release of coins that eventually reach some kind of a cap. This cap makes it impossible to mine coins quickly, as it gets ever harder to min coins over time, and it creates competition.

The competition in cryptocurrency mining can be killer

So in cryptocurrency mining, miners have more competition, and they have to start going to smaller veins that produce less, and it gets less and less overtime, and this is a result of the competition. So this the set up in Bitcoin and other cryptocurrencies. Most of the cryptocurrencies create a certain release pace to adhere to, so the block reward is a certain amount and then it starts to get reduced over time, and that is one of the measures to control that release of currency.

The other measure is the difficulty. It is a mathematical number where the higher the number, the more difficult it is to do the mining. This mathematical number is driven upwards by more people mining, and it drops down again the fewer people are mining.

How Does Cryptocurrency Mining Works?

Let’s talk about Bitcoin mining as an example and cryptocurrency mining specifically. I wanted to answer the question, what is happening in the process of Bitcoin mining. What I mean is, when people talk about Bitcoin mining online, they always refer to the cryptographic problem that the mining is solving or the cryptographic puzzle that’s being solved in the process of Bitcoin mining.

When you solve this cryptographic puzzle, you’re the one who gets the reward and finds the block. If you’re going to understand Bitcoin mining, the first thing you have to understand is what a cryptographic hash or what is a cryptographic hash function. The cryptographic hash function is a mathematical function where you take an input, and you put it into the hash function. What you get out of it appears to be a random string of characters, but it is based on the inputs that you gave it.

diagram of a bitcoin mining block with hash and target

To be considered a cryptographic hash function it has to satisfy a few requirements.

  • It has to be fairly computationally easy to take your input (message), put it through the hash function and get the output as a hash
  • It has to be computationally infeasible to take your hash and try to extrapolate the message from the hash.
  • It has to be deterministic. So what I mean by deterministic is every time you take your message and put it through the same hash function it’ll come up with the same hash. For instance, if you do it two days later it’s going to be the same. If you do it ten years later it will be the same. The hash function you’re going to get is the same hash, always.

The next thing that you need to understand to understand what is happening in crypto mining is the anatomy of a block and more specifically the block header.

Let’s get into that the block header, like the part of the block in the Bitcoin blockchain that’s important to mining. It has six things in it, and the first two are the version and the timestamp. A version is just the software version being used, and the timestamp is just an approximate time of when the block was created. Those are pretty self-explanatory and not super interesting.

The previous block hash is a hash of the header of the previous block, so essentially it takes all of the information that is in the block header and performs a hash on it and then puts it in the next blocks block header. This is really what makes the block chain a chain of blocks. Each block header is connected to the previous block header by the hash of the previous block header.

That Merkle Root will get you every time

Then there’s the Merkle Root. The Merkle Root is all the transactions in the block hash together like a tree pattern until it creates sort of a signature for all of the transactions that are contained within the block difficulty target. This is an important one because it sets the computational difficulty of the cryptographic puzzle. So it sets the difficulty target of its value, and that gets translated by the miner to a 64 character string which is the same length as an sha-256 hash. What’s special about the difficulty target is that it is a value which usually has a bunch of zeros at the very beginning edge, which we’ll call leading zeros because they are before.

simplified bitcoin blockchain diagram showing merkle root.

What’s happening when mining software is trying to find the next block is that it’s taking this block header, and it’s performing a hash on them. The software looks at this hash that it gets it and says okay, is the value of this hash smaller than the value of my difficulty target. If it’s smaller than the difficulty target then congratulations we have found the next Bitcoin block.

As an aside, it’s extraordinarily unlikely that you’re going to get a hash that’s below the difficulty on your first try when you’re mining.

The Bitcoin mining software has to try hashing the block header billions if not trillions of times before it finds a hash which is smaller than the difficulty target. But as we know from before, hashing functions are deterministic, so if you just take your block header and perform a hash on it over and over again, you’re going to be getting the same thing over and over again. You’re just going to be wasting resources and accomplishing nothing. So, that is where the nonce comes in.

The nonce is essentially just another value that starts at zero or whatever the Bitcoin mining software will perform a hash on within the block header. If it is not smaller than the difficulty target, it will add one to the notes and then perform another hash. And if it’s still not valid it will add another to the nonce and so on and so forth and it will do these billions of times, and possibly trillions of times until it finds a hash that is valid a hash of the block header. When it does, it will become the next block on the blockchain.

It’s sort of got a beautiful simplicity once you understand what’s happening. It is quite simple and quite elegantly designed. However, as I stated at the beginning, it’s not as profitable as it once was due to competition from mining farms. You’d be better off investing your money into currencies instead of cryptocurrency mining.

Is cryptocurrency mining profitable?

If you’re serious about cryptocurrency mining, let’s just start off by saying you’re looking at an initial investment of, at the low end, around $2,700, to at the high-end around $6,000, plus. You’re not guaranteed to earn back this, and it doesn’t even take into account that every single GPU on the face of the earth right now is basically out of stock.

Sure you can cheap out on everything and build just a single card rig but even then getting a one card mining system at this point will set you back several hundred dollars. It’s not like you can get into this for next to nothing. Some parts might cost next to nothing, but you won’t be able to cheap out on the pricing of the parts that will actually carry the load of the mining. While the components needed will be the most costly part of the rig, they’re definitely are not the only costs to take into consideration.

Cryptocurrency mining and electrical costs

Depending on where you live electricity costs can make the profit from your rig seem almost too low even to bother mining. Cryptocurrency mining rigs use a ton of electricity because your GPU is running at full tilt 24/7, so it’s surely something to keep in mind. For instance, let’s look at a single rx 588 mining rig. Without electricity cost, and the card running at deadstock it should be able to bring in about 4 dollars and 18 cents per day. That’s pretty good for free cryptocurrency but let’s say you live somewhere where electricity cost you around 12 cents per kilowatt-hour. At that rate, that 4 dollars and 18 cents per day drop to 3 dollars and 64 cents.

picture of mining rig in a home with metal frame

Now, that doesn’t seem all that bad. It’s still a significant profit reduction, and it’ll be even worse in countries where electricity costs are much higher, going up to 35 sometimes even 50 cents per kilowatt-hour. More costs might arise further down the road, but this should be enough to give you a pretty good idea of just how expensive it can be to really get into cryptocurrency mining.

Cryptocurrency mining and your time investment

Beyond the physical cost of actually buying everything needed for a mining rig, you’ll also need to invest a substantial amount of time. Sure as long as you have a practical framework to work with and at least a rudimentary understanding of how to build the PC. Actually, putting all the parts together can be a quick and fun endeavor, but after that is where the real fun begins. First, there’s a high probability that not all the parts will like working together at first. For instance, building and trying to set up a six card rig can sometimes cause the system to not register at all. It sometimes can take days of troubleshooting and an enormous amount of tweaking.

But then again, you may have more luck, and everything will work as intended. But, after the prerequisite hours of finding and installing the correct drivers for your hardware, it’s time to optimize the system for maximum profitability. Fortunately, there are a ton of guides online for which settings should work the best for your specific cards. Unfortunately, it’s not an exact science and even watching videos and reading takes a significant amount of time. Finding the perfect balance between mining performance and low power draw is a tedious time-consuming but a wholly essential affair.

Are you prepared for your initial setup of a mining rig?

After the initial set up of your cryptocurrency mining rig and your software system is finally up and mining it’s all smooth sailing, right? Sure it is until you realize the likelihood that your rig will keep mining at its full potential, without fail, 24/7 is pretty much not going to happen. You’ll need to regularly check up on your system to make sure it’s doing what it’s supposed to and doing it well. If it isn’t running optimized, then get ready for some more lengthy troubleshooting sessions. Making sure the mining rig is running properly will take you a significant amount of time if things do go wrong. Of course, you have some saying their mining rig runs 24/7, and it’s been doing it for 150 days straight.

Cryptocurrency mining and environmental considerations

The third issue is just as important, even if it sounds weird. It’s environmental in nature. I’m not referring to the fact that high electricity usage is bad for the environment. I’m referring to how a cryptocurrency mining rig can drastically change the environment. I’m talking about repeat fan noise even when it’s not under load. Certain graphics cards get super loud while playing certain games because of the load. Now imagine that multiplied by six GPU mining rigs. The noise they produce is certainly not pleasant. If you and everyone you live with are prepared to walk around with headphones on you’re probably going to want to stick your crypto miner in a soundproof closet, garage, or an unused room somewhere.

a cryptocurrency mining rig putting off heat
Believe me, these things get hot!

Then there is the heat that a mining rig produces. That might be great in a cold environment, where you can literally hear your room with a mining rig, but when summer comes, you’re going to need to keep the room cool. Even with adequate ventilation, the room you decide to install the system will become a sauna. You could stick in an air conditioner in there with the monitor which should mitigate the heat fairly well, but I can almost guarantee that running the AC all day every day consume a heck of a lot more electricity than the miner, which will massively eat into the profits.

So you’ve got the cash, the technical know-how to set everything up and you understand that living with a mining rig comes with certain drawbacks. So, it’s time to sit back and watch all that cryptocurrency come in like a waterfall, right?

Perhaps…

Crypto mining is unpredictable

With a well optimized and maintained mining rig set up, mining could be more than worth your while. However, right now, my main issue with investing real money into any sort of mining setup is that nothing is guaranteed. Just because you’re mining hardware is profitable right now, there’s no guarantee that it will still be that case tomorrow. The cryptocurrency world is a dynamic place where everything can go belly-up in a matter of hours. The coins you’ve been mining for the past few months could end up being completely worthless. There are so many other unpredictable factors making investing in a GPU mining rig kind of risky, so be prepared for as many as possible.

Of course, those are worse case scenarios, and the versatility of GPU miners is one of their biggest strengths, but anyone who tells you that it’s without risks, or that guarantees returns are screwing with you.

Cryptocurrency mining recommendations

Personally, after having mined in early to late 2017, I’m skeptical on wholeheartedly recommending it because to some extent it feels like this can’t last forever. But at the same time, it has lasted long enough that many people have put money into mining rigs to get it right back out and then to put it into more mining rigs and then the cycle continues, and they make a lot of money.

I don’t think GPU mining is a bad idea. I’d be lying if I said I hadn’t earned more than my fair share for mining. And there are tons of people making enough from it to earn a very decent living. The point of this article isn’t to dissuade you from getting into mining. The point is to show you that it’s not a cheap or an easy or fast way to land yourself on a rich list.

Do the freaking research before jumping into Bitcoin Mining

If you’re going to do it, then you need to do it right. Do as much research as you can. Become educated on how mining works, and how cryptocurrency and the blockchain work in general. Be prepared to put in the effort, and understand that even though it can be lucrative at the moment, it can fall apart quickly.

Now, there is the possibility of entering into a cloud mining contract with companies like HashFlare or Genesis Mining. They allow you to get some of the benefits of mining cryptocurrencies but without the downfalls of the hardware itself. However, they come with their own set of issues that make me typically not recommend them.

What is cryptocurrency cloud mining?

Genesis cloud mining farm with thousands of miners in a warehouse.

Cloud mining comes down to basically this: there are people out there with graphics cards and mining rigs who want to make money. And then, there are people with cash on hand who are itching to turn their cash into hashing power. So, cloud mining makes it pretty simple for these people to come together and make something happen. Cloud mining boils down to the people with hardware renting their hashing power to those without hashing power.

If you’re thinking of getting into cloud mining, there are probably a few questions on your mind. Questions like how do you get into it? Is cloud mining safe, and most importantly, is it profitable? These are all important questions, and they’re what I’ll be trying to address. But before I go further, let’s get a few things straight. I have no investments in any cloud mining companies. I have none of my money connected with any of them, and I don’t directly endorse any of these companies.

Watch for the cloud mining scams

I see a lot of problems with them, and quite frankly, I’m pretty sick of seeing video after video endorsing these mining companies and how people make so “much money” doing it. So what I write below is meant to serve as informational content rather than a product pitch.

To get started you’ll need to pick a cloud mining provider. Do the required research and please make sure to read other people’s reviews. Wholly understand that if something looks too good to be true, it probably is. You’ll eventually come across relatively reputable companies that offer cloud mining contracts at ok prices. Such companies that immediately spring to mind include Genesis Mining and Hashflare.

BoxMining is one of my favorite Youtube channels for honest and worth information.

Companies like these connect buyers and sellers of hashing power via mining contracts. These contracts require you to invest a set amount of money upfront, and in return, you will receive a steady hash rate for the duration of the contract. There are contracts for almost all of the most popular cryptocurrencies right now, and they come in various durations ranging from one to two years. You can even create a custom plan in some cases.

What are cloud mining contracts and is a year lock-in worth it?

These contracts are usually split into tiers of hashing power. The more cash you’re willing to invest, the higher the hash rate you’re likely to get. There are numerous benefits (hypothetically) to taking out a cloud mining contract as opposed to mining for the coin yourself. One you don’t need to drop huge amounts of cash on expensive hardware and configure it, and build it all yourself, too. You don’t need to worry about the electricity and upkeep costs that go hand in hand with hardware mining because those are actually vast. And finally, it’s a heck of a lot simpler to get set up and get mining as you don’t have to research what algorithms you need to be using for your hardware, and what’s the best way to optimize for mining a particular cryptocurrency.

Cloud mining is the simplest way to mine for cryptocurrencies. Now, I’m sure you think that all of this sounds mighty promising. Surely there’s a catch, right? Of course, there is a catch. Actually, there are a few catches. Let’s look into those, because cloud mining contracts are usually long-term endeavors; companies can get away with charging seemingly ludicrous sums of money for relatively low hash rates.

A major drawback of cloud mining contracts is that they do very little other than guarantee your hash rate. The price popularity and especially mining difficulty of almost all cryptocurrencies are highly volatile meaning that your hash rate will be less and less relevant over time. Although it’s relatively unlikely the coin you’re mining will fall off the face of the earth, the cloud mining service you’re using is under no obligation to help you out if something like that should indeed happen. Some companies do have safeguards in place to keep you mining by switching to another currency in such an event, but that’s not exactly the most desirable outcome either.

Then again, what I just said holds true for almost all cryptocurrencies.

Is cryptocurrency cloud mining profitable?

This is my take on the whole cryptocurrency cloud mining deal. No matter what your method of mining is, at least if you went out and bought the equipment you’d always have the option of reselling them if things go south. However, with that being said, guaranteed hash rates are simple and pretty good. No one knows what the difficulty curves for mining will be like in the future. It could be that in a year the hash rate could drop down to mining less than 25 mega hashes combined on two GPU cards. At least these mining contracts (technically) guarantee that you don’t have to go through the hardware upkeep to make sure your system is still able to perform at a profitable level.

But long-term contracts offering small hash rates aren’t the only semi-reliable cloud mining options available. The ever-popular Nice Hash also offers cloud mining contracts. It’s with two major twists. Nice Hash’s contracts are only 24 hours in duration. You’ll be put on Nice Hash’s entire hash for a pool for whatever coin you choose to mine. We’re talking Giga hash and Peda hash.

Nice Hash cryptocurrency mining marketplace with contracts
Nice Hash is a pretty cool way to mine cryptocurrencies.

If you choose to mind Ethereum, then Nice Hash is cool, which currently sits at Giga hash at the time of writing. You’ll have to outbid everyone else vying for the same contract.

Nice Hash cloud mining is probably your best option

Nice Hash also offers similar contracts. Almost every popular and upcoming currency is going this route. It can be a quick way to grab as many coins as you can. Again, you also have to have a pretty good understanding of what you’re doing. If you’re paying more for the contract then what you realistically will be able to gain from it, you’re far better off just buying the currency you want outright instead of mining. Simply just buying the currency of your choice and waiting for its value to go up can be even more lucrative strategy than cloud mining (and sometimes even more than hardware mining).

Of course, the value of your coin could drop dramatically just as easily at any given point, leaving you out of pocket. But at least you didn’t wait two years to get a hold of the coins. Honestly, on paper cloud mining makes some sense. It’s far easier and simpler to do than regular mining since you don’t have to set up or maintain any of the hardware yourself physically, and it can be legitimately profitable if things go your way.

24-hour contracts vs 1-year mining contracts

However, I don’t think they’re a good way to go. Lengthly cloud mining contracts just seem kind of dumb and out of place. Not being able to switch which currency you’re mining on-the-fly makes it a scarily, rigid thing. As I’ve learned, the cryptocurrency market is the opposite of rigid.

Sure these cloud mining services typically allow you to convert the coin to other currencies once it’s mined, which is helpful. But again, these markets are fluid, and if the currency you’re mining starts to have a negative trade off to the other currencies, then you’re stuck with what you mined. New coins are being introduced at more regular intervals than ever before, and prices haven’t been this volatile in a long time. Earlier this year we were at Ethereum being worth 12% of Bitcoin’s value. At the time of this writing, it’s closer to four percent.

Being under one contract, mining one currency, just doesn’t make sense anymore. No one can tell with certainty which new or current currency will rise and become the new and most profitable crypto, so not being able to switch a contract to the currency as mentioned above is a massive turnoff.

However, I think shorter, cheaper, more powerful mining contracts like those offered by Nice Hash are a bit more relevant to the current state of cryptocurrency. These contracts like Nice Hash reduce the odds of you getting bogged down in a single currency while still being powerful enough to ensure you’re getting your money’s worth of whatever coin you’re mining.

Cloud mining isn’t the ideal solution

Cloud mining isn’t the ideal solution, in my opinion. But for many people in countries where neither hardware nor electricity cost come cheap or even at reasonable prices, it’s a very viable option. If you do the prerequisite homework, it’s a lower investment, lower risk strategy to get your skin in the cryptocurrency game. But if you want to get rich quickly off of cloud mining it’s not going to happen.

If I purchased a Bitcoin mining contract back in June when it was still $2,500 per Bitcoin, I would have far less cash than if I had just bought Bitcoin outright since its value is up close to 250% to 300%.

The volatility game in cryptocurrency markets and how it affects mining

The argument from many who have invested their cash into cloud mining is, as long as they mine more cryptocurrency during the contracts lifetime than the cash would have bought them outright at the contracts beginning, then they’re satisfied. To them, they don’t want to play the volatility game; they just want some simple easy to get cryptocurrency. But for those who can get hardware and electricity at reasonable prices, I still think hardware mining is the way to go.

As long as you pick the right tools for the job, mining with your GPU, CPU, or even ASIC Minor (as long as it’s the newest possible version) will likely be the most profitable option. As I’ve mentioned before, if you’re not happy with the profits you’re seeing you can always sell your parts and likely recover most of what you spent in the first place since other miners are almost certainly waiting to snap it all up.

a personal solo Ethereum mining rig

For instance, if I spent $1450 on a cloud mining contract for Ethereum and it somehow goes belly-up, or government regulation prevents me from owning crypto, then I spent that $1450 and have nothing besides some worthless coins at the end of it. If I invest $1450 into some RX Vega GPUs, and the entire crypto market goes belly-up, then at least I either have some decent GPUs to play my video games with or at the very worst I have equipment that I could resell and recoup at least part of my initial investment.

Cryptocurrency mining guide conclusion

That pretty much sums up this cryptocurrency mining guide. It is undoubtedly a complex and exciting space to investigate, but still relatable. I believe if you understand the blockchain, and a little about cryptography, like what I wrote above, then you’re well on your way to making an informed decision.

I see so many people who directly jump in feet first, and don’t understand the depth of what they’re trying to accomplish. Like I stated before: understand the problem first, and then you’ll understand the solution. In this case, understanding the problem of what cryptocurrency mining is trying to solve, and how it addresses it on the blockchain will help you be a better crypto miner. Understanding how crypto mining is solved by using hashing power, whether with solo-mining GPU rigs, or entering a cloud mining contract, you’ll be a step ahead.

Resources:

Investopedia
Coin Mining Rigs
Brave New Coin

 

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