Bitcoin is a cryptocurrency that gained a lot of traction due to its wild price swings and surging value ever since it was created. Bitcoin mining, as many of you may know, is the process of creating new bitcoins by solving extremely complicated mathematical problems that verify transactions in the currency. After a bitcoin is mined successfully, the miner receives a predetermined amount of bitcoin. The difficulty level of mining increases as more miners join the network.
China is the largest Bitcoin mining country in the world. Miners use ASICs (Application Specific Integrated Circuits) to complete the mining process. This costs up to $10,000 and also consumes a lot of electricity. The maximum supply of bitcoins is about 21 million coins and the last one is predicted to be mined by 2140.
How Bitcoin Mining Works?
Bitcoins are powered by a blockchain. Blockchain is the technology that powers many cryptocurrencies, it is a type of ledger database that uses cryptographic techniques to secure data and record transactions. A group of approved transactions together form a block. These are joined to create a chain. Bitcoin mining is the process of adding a block to the chain.
To add a block, Bitcoin miners compete to solve extremely complex mathematical problems that require the use of expensive computers and a lot of electricity. To complete this process, the miners have to reach a close answer to the question. The correct number will be in the hash, and the process miners go through to guess the correct number is called proof of work.
The Costs of Bitcoin Mining
As of November 2024, for validating a new block on the Bitcoin blockchain, a miner will earn 3.125 Bitcoin, which is approximately $82,000+. Cracking these problems requires a lot of charge, we’re talking 166.75 terawatts/hour of electricity each year. To give you a perspective, that is the electricity used by the whole of the Netherlands.
The price of Bitcoin has been very volatile over time. In 2020, Bitcoin hit as low as $4107 and now it has reached an all-time high of $82,182 as of November 2024. As the computational power required to mine is very high, it is almost close to impossible to mine solo. Even if a person gets to solve the puzzles, the odds are about one in 26.9 million.
Is Mining Bitcoin Actually Profitable?
Mining bitcoin is profitable but it totally depends on whether it is worth the effort and the upfront costs of the equipment and the electricity costs it takes up. The electricity consumption is so high that even reports claimed that Texas made more than $31 million in energy credits for not mining than with mining previously this summer.
As each level of difficulty increases, the energy consumption also increases to a point where
166.75 terawatt-hours of electricity is being consumed each year. To counter this, many people came up with the idea of joining a mining pool. Pools allow shared resources to be traded which also means that the resources will also be shared. This makes the potential payout to be less in case one of the currency values goes down.
The volatility of each cryptocurrency also makes it difficult for investors to know how much they are looking at immediately. One other thing to have in mind is that the IRS is looking to crack down on the owners and traders of cryptocurrencies as the asset prices have been spiraling in recent years. Now, if mining Bitcoin is your business, you may be able to deduct expenses from the Bitcoins you earn.
If your earned bitcoin is your income, then the fair market value of the currencies will be taxed at ordinary income rates. Another case is if you are selling the bitcoins at a rate above from which you bought it, this will be considered as a capital gain and would be taxed the same way it would be taxed for traditional assets like stocks.
In conclusion, even though bitcoin mining seems to be profitable it is only rewarding to those who invest huge amounts of money to make mining profitable. The extreme volatility of Bitcoin also makes Bitcoin’s price add uncertainty as to how much money an investor has to have in mind.
As these coins do not hold any intrinsic value, the returns an investor gets for selling these for a higher price than the market price are also questionable as the price set to the buyer may turn out to be lower or enough for the investor to make a profit.
So, if you play smart enough to keep your cards and have money even if this was not an option, this will be profitable. In my opinion, bitcoin mining should only be done by the people who are confident enough to invest three times the current money they are putting into the mining process.