Why Mining Cryptocurrencies on Your Own Is Pointless

In the earlier days of the digital currency industry, it used to be that individual cryptocurrency miners could make a reasonable profit by setting up their own mining equipment (known as a “rig”) and using a computer to mine for tokens or coins.

The mining process, which requires a powerful computing setup in order to solve complex mathematical problems for cryptocurrency rewards, ensured that individuals willing to pay to set up and power a rig could earn money while simultaneously strengthening the digital currency space itself.

Over time, mining pools developed, in which groups of miners worked together to pool resources. In other cases, massive operations connecting multiple mining rigs were launched, particularly in parts of the world where the cost of electricity is low. However, over the years, the mining system and the payouts have changed, which has led to lower profits for miners who go it alone.

Why Mining Cryptocurrencies Is Unprofitable

Blockchain technology is a ledger system that is shared or distributed in which transactions can be recorded on the network. As new transactions are conducted, a new block is added to the blockchain. In a way, blockchain technology is similar to a shared database. The data within the platform is encrypted and only those with the proper authentication can gain access to the distributed ledger.

When a new transaction occurs, a new block needs to be added to the blockchain. However, the transaction data and information contained within that new block need to be verified by the network. Mining is the process of verifying that data by using mathematical calculations and sharing the findings with the network, which verifies that everything is correct. When the verification process has been completed, a hash is created, which is a number that uniquely identifies the transaction data within the block.

Due to the complex mathematical operations needed in the mining process, specialized computer software and hardware, including graphics cards are needed. The computer power needed during the mining process can consume a significant amount of electricity. All of this equipment and electricity needed to power it can cost thousands of dollars. As a result, cryptocurrency mining can be cost-prohibitive for miners who attempt mining alone.

Lower Profits from Mining

A report by Susquehanna, quoted by CNBC, had indicated that mining for some of the top digital tokens is no longer profitable for miners working on their own.

Per the report, the profit per month of mining Ethereum, one of the world’s top cryptocurrencies, by means of a graphics processing unit (or “GPU”) has fallen precipitously since the summer of 2017. At that time, an individual miner could reasonably expect to earn $150 per month and per rig when mining Ethereum. As of 2021, though, that same miner will likely earn only a few dollars for the same efforts.

There are several reasons why the profitability of mining Ethereum has plunged. First, the price of Ethereum itself has been volatile. In early July 2017, ETH tokens sold for close to $300, and by November 2018, they traded at barely half of that—or just over $156. For miners who rely on the sale of the tokens that they produce in order to generate a profit, a significantly lower token price means fewer opportunities to make money. Then, in late 2020 into 2021, the price of ETH increased to nearly $2,000, but that rise was also accompanied by a large increase in the mining difficulty.

Thus, the “hashrate,” or speed at which a computer can solve the math problems necessary to be rewarded with tokens, has fallen. Typically, the higher the hashrate, the better the situation is for miners. With a higher hashrate comes a greater likelihood of finding the next block in the blockchain as a result of the rig’s problem-solving capabilities, and thus comes also a higher chance of receiving a token reward.

Future of Cryptocurrency Mining

Beyond the price volatility for cryptos, there is also the broader issue of the cryptocurrency space itself. Cryptocurrencies have fallen out of favor relative to their peak in late 2017, with trading volumes and prices down across the board. Miners have fewer willing customers lining up to buy tokens, which also impedes profit-making capabilities. However, if cryptocurrencies become more mainstream and accepted by regulators, their popularity could increase, particularly if they gain approval for inclusion in popular investment vehicles such as mutual funds and exchange traded funds.

Electricity Costs

Electricity costs have forced many miners to work in groups and the creation of mining farms or companies. These companies have relocated to countries that offer cheaper electricity, such as China. However, in recent years China has begun to crack down on cryptocurrency mining since the government doesn’t recognize cryptos as legal tender and initial coin offerings (ICO)s are illegal.

The future of miming in China doesn’t look promising considering that China has capital controls in place, which prevents money from leaving China to be invested in other countries. Cryptocurrencies like Bitcoin circumvent those capital controls. Also, China is considering launching its own digital currency.

Other countries that have garnered interest from cryptocurrency mining companies for their low electricity rates include Canada, Iceland, and Eastern Europe.

Proof of Stake (POS)

As a result of the soaring cost of electricity that is involved and cryptocurrency Mining, an alternative method for mining was developed called Proof of Stake (PoS).

The Proof of Stake (PoS) concept attributes how much a person can mine based on the proportion of the cryptocurrency coins held by the miner. In other words, a person can mine according to how many coins they hold, meaning the miner is only allowed to mine transactions within the blockchain, based on the percentage of their ownership stake. The more coins held by the miner from ore mining power is available to them. As a result, less energy will be in performing all of the mathematical calculations since a PoS miner would be limited to mining only a percentage of the transactions based on their ownership stake.

In the PoS system, miners have to put up their coins as a type of collateral or stake in order to be chosen as a network validator or miner. The collateral is lost if the miner attempts to engage in illicit behavior or fake transactions. However, miners who had spent thousands of dollars on their mining equipment may go to other crypto coins to mine if they don’t own many crypto coins of the blockchain they’re mining. Ethereum, which is the second most popular cryptocurrency blockchain behind Bitcoin is in the process of testing the ability to upgrade to a PoS concept, which they call Casper.

Whether the switch to a PoS concept will work out or whether there will be some type of hybrid system between the current mining process and the PoS concept remains uncertain. However, it’s probably safe to say that the future will include attempts by blockchain networks to find alternatives to the high electricity costs involved in the cryptocurrency mining process.

Not Just Miners

Individual miners are not the only ones feeling the impact of the shifts in the Ethereum mining system. GPU manufacturers like Nvidia Corp. (NVDA), companies that saw tremendous interest in their products as the mining boom took off, have now seen revenues drop. Nvidia saw its revenue fall by about $100 million quarter over quarter. Susquehanna semiconductor analyst Christopher Rolland explained that his firm estimates “very little revenue from crypto-related GPU sales in the quarter, consistent with management’s prior commentary that they were including no contribution from crypto in their [3Q18] outlook.”

All is not yet lost for the digital currency space, though. Major asset manager Fidelity recently launched Fidelity Digital Assets in response to demand from institutional clients for better access to the space, for instance. It may simply be that individual miners and investors no longer find the quick profits in cryptocurrency, which they may once have enjoyed, and that the space may be shifting toward a new customer base.