During the crypto boom at the end of 2017 and the beginning of 2018, cryptocurrency mining and more specifically bitcoin (BTC) mining, became a big hype world wide. By just turning on your computer or ASIC-miner and letting it do its thing, you could earn bitcoin and thus potentially a lot of money. After the boom, the bitcoin price fell significantly leading to plummeting mining revenues. But what exactly determines whether a mining operation is profitable or not?
One of the most important factors that determines the profitability of a mining operation is the local cost of electricity. To be profitable, the costs of mining a single bitcoin must be lower than the current value of one bitcoin. The higher the bitcoin price, the higher the possibility that mining can be profitable. However, there is a catch.
If the bitcoin price goes up, mining profits go up, which leads to bitcoin mining becoming more popular as a means to earn money. As a result, the number of miners on the Bitcoin network will increase, which in turn causes rising competition. The Bitcoin protocol has a built-in mechanism to prevent bitcoins being mined too fast as the total computing power of the network rises when more miners join the network.
So, as the bitcoin price goes up, bitcoin mining becomes more popular. The more miners are part of the network, the higher the total computing power. This means that a bitcoin will be mined increasingly quicker as more miners enter the network. As mentioned above, the Bitcoin protocol has a built-in mechanism that increases the required labour in order to prevent bitcoins from being mined too fast: mining difficulty.
Mining difficulty determines how difficult it is to mine a block. The more miners there are, the higher the mining difficulty and the more electricity it takes to mine a block. The main goal of the set mining difficulty is to prevent bitcoins from being mined too quickly, which keeps inflation for example as low as possible.
Efficiency of mining rigs
As the crypto mining industry evolves, manufacturers such as Bitmain are constantly looking for ways to make their miners more efficient. Since the popularity of mining rose significantly, the competition between different miners became more fierce. This lead to a situation in which even the tiniest advantages can help you come out on top. You can compare this to a professional cyclist that tries to make his or her bicycle as light as possible, as that 1 gram less weight could lead to winning a race.
According to a recent Coinshares study on sustainable energy sources and bitcoin mining, mining rigs have become more efficient every year since 2014. The study further states that mining rigs saw an increase in efficiency of around 10% since November 2018. Based on this, the argument that with the newest ASIC miners you will have a big advantage compared to miners that use older machines, becomes a very valid one. This is the reason why you see bigger mining farms constantly update their machines to maintain their top position in the cryptocurrency mining world.