Is Bitcoin mining still profitable in 2016?
Does crypto mining have a future?
Crypto mining - the "mining" of crypto currencies has meanwhile become known to a broader public (even if by far not everyone). It became known in the media primarily through the ongoing topic of the extremely high power consumption of Bitcoin. There is talk of a global value in the amount of Slovakia's consumption, for example. In another statistic, the electricity consumption of around three million US households is used as a comparison value - and that for around 100 million transactions annually. This is countered by the consumption of the credit card provider Visa: 50,000 US households - 82 billion transactions. Since mining is directly linked to the conclusion of transactions, the number of transactions also increases energy consumption - but more on that later.
+++ Basic knowledge: (crypto-) mining - simply explained +++
Many a crypto enthusiast noted in the discussion that the global electricity consumption for gold mining and paper money production is still higher than that of Bitcoin. The comparisons are lagging. After all, a large part of the world's population is currently still supplied with paper money - despite the hype, Bitcoin is still a minority program. And gold mining, which is extremely laborious (and energy-intensive) due to exhausted deposits, is being driven forward today mainly because of the great demand for electronics production. In other words: the computers that are used for mining even take part of this energy consumption with them.
Electricity consumption cannot be managed in the case of mass distribution
It doesn't take a high mathematical performance to realize: If Bitcoin or another mining crypto currency (in its current form) were to establish itself globally in the masses, power consumption would reach absurd heights. You could also say that it cannot be lifted. But why does mining actually consume so much electricity? To explain this one has to understand the idea behind the process. This is as old as Bitcoin itself, so it will "celebrate" its tenth birthday soon. In the crypto world, that's (still) an eternity. It is not known how the Bitcoin developers, known under the pseudonym Satoshi Nakamoto, imagined the future with the system at the time. In principle, however, they should have already known that it can only be continued to a certain extent. In the early days and until relatively recently, there was no problem with power consumption.
In a decentralized system, users have to provide these services themselves.
Why is there mining?
Crypto mining has an easily explainable background. A fair system had to be found how newly created bitcoins (and later other coins) could be brought to the users. The solution: They are rewarded with coins for the services they provide for the entire system, i.e. the blockchain. And in a decentralized system, the users have to provide these services themselves. Specifically, it is a special process that must be carried out in the blockchain by individual users for the entire community: the creation of so-called hashes, for which the term mining was later established.
Significance for the blockchain
Explanation: A block in the blockchain contains information about a certain number of transactions (or other peer-to-peer processes). If the amount of transactions has reached a certain memory size (with Bitcoin around one megabyte), the block must be "closed" so that the overall system remains fluid. The chain of closed blocks is - of course - the blockchain. This concludes with a hash. The hash is often described as a kind of digital seal. The information from the block is calculated and coded into this code. Once the hash has been calculated, the content of the block can no longer be changed.
+++ Basic knowledge: The blockchain - simply explained +++
Who will get a piece of the cake?
And how much computing power do you need to encode the information from a block of around one megabyte? (With other cryptocurrencies it is sometimes several MB). Actually it wouldn't be much. In the early days of Bitcoin, this was done by the few users at home with their laptops or PCs. But Satoshi Nakamoto was already clear in the conception: If the interest increases and the number of users increases, more and more users want to get their reward. And if it's that easy, how do you decide who gets the train and gets a piece of the pie?
The overall system is known as the "Proof of Work"
More difficulty, less reward
The solution: It can't stay that simple. If the number of miners or the total mining performance increases, the algorithm also artificially increases the complexity of the computing process required for the hash (mining difficulty). (The complexity drops again when the mining performance goes down - but more on that later). In order to get your reward, you have to invest something. The overall system is known as the "Proof of Work". But there is also a second function of the algorithm: With a certain number of completed blocks (210,000), the number of Bitcoins that you get for a hash is halved. It was 25 at the beginning, and since July 2016 it has been 12.5. And with the current rapid expansion, it shouldn't be long before 6.25.
You need a lot of capital to be able to play
Back to the mining difficulty. Since mining has proven to be lucrative with steadily rising Bitcoin prices, more and more companies jumped on the bandwagon. The process was professionalized - so-called mining farms were created. These are large data centers that do nothing other than calculate hashes. And if you bring in more computing power, you can complete more blocks. In other words: you need a lot of capital to be able to play. The largest mining farms are in China, where electricity from mostly unfiltered coal-fired power plants is extremely cheap. The simple user with his laptop no longer has a chance. Due to the continuously expanding mining performance worldwide, the difficulty is also getting higher and higher. Even with special systems for domestic use, which were lucrative just a few months ago, there is in fact nothing left to do. They do drop coins, but the high hardware costs, combined with the high electricity costs, only pay for themselves after a very long time, if at all.
The business is (still) lucrative mainly because the price of the crypto currencies is rising so strongly at the same time.
Electricity consumption increases disproportionately to the spread
Which brings us back to the electricity problem. With the increasing number of transactions and the rising price goes hand in hand with a continuously increasing total mining performance. This leads to a constantly growing mining difficulty. And so the power consumption increases disproportionately to the spread of cryptocurrencies. This means: The output is getting lower and lower in relation to the electricity costs used. The same applies to the large mining operators: The business is (still) lucrative mainly because the price of the crypto currencies is rising so strongly at the same time.
At 21 million Bitcoins it's over anyway
But what if the price falls or does not rise strong enough? If the electricity costs actually become higher than the yield, the mining operators will shut down their computers. The overall mining performance drops. And after some time (it can be up to 14 days) the algorithm also adapts the mining difficulty and lowers it. So does that solve the problem? No, because first of all, many miners will then restart their computers. Second, the problem remains that every 21,000 blocks the number of bitcoins per hash is halved (there are similar functions in the algorithm for other minable cryptocurrencies). And the big end: At 21 million Bitcoins, it's over anyway. Because more cannot arise due to the algorithm (there are currently almost 17 million. Other crypto currencies such as Ethereum do not have this restriction). It is also unclear who generates the hashes afterwards.
Mining has an expiration date
The time comes when it is no longer lucrative
At the moment, mining companies still make do with flexible solutions. By using several optimized hardware systems, you can always mine the crypto currency that is currently the most lucrative. They are also finding cheaper power sources and more energy-efficient systems. But - here the phrase repeats itself - you don't need a high mathematical performance to recognize that mining has an expiry date.
First, at some point there will inevitably come a time when it is no longer lucrative. The big mining companies shouldn't care, because they can get enough money out by then. For customers of cloud mining solutions and the like, this will become a problem. And secondly - and this is probably the even bigger topic - the breakthrough of cryptocurrencies to the great mass of people is simply not possible in terms of power consumption. Apart from that, the project is sheer madness from an environmental point of view. As a reminder: Bitcoin is about the encoding of one megabyte of data. That this is so complex is artificially caused by the algorithm. With Ethereum it is (still) quite similar.
+++ Bitcoin: 8 problems of the most famous cryptocurrency +++
Alternative "Proof of Stake"
All of these arguments are of course well known in the crypto developer scene. And they are viewed with concern. That is why work has been going on for a long time to replace this “proof of work” concept. The biggest challenger at the moment is the “Proof of Stake” concept. Here, too, the hashes are generated by users and there is a reward. However, it is not those users with the highest computing power that get the chance. Instead, the algorithm decides on the basis of different parameters. Different blockchains use different criteria here. For example, the assets (i.e. the number of coins held by the user), the "loyalty" (i.e. the time the user has already been there) and sometimes simply chance are used for this.
Ethereum is working on the switch
The Coin Dash is considered to be the most prominent representative and yet by no means a fully developed implementation of the “Proof of Stake” concept. There, however, only users who hold over 1000 coins (currently around one million US dollars) can enjoy a corresponding option. The new Coin Cardano recently started with a "Proof of Stake" concept and landed in the top 10 of the world's largest crypto currencies within a very short time. At the moment, Ethereum is working intensively on the switch from the “Proof of Work” concept to the “Proof of Stake” concept. A certain percentage of blocks are already encrypted via the new system. This should now grow steadily. In addition to “Proof of Stake”, blockchain developers are currently constantly bringing up other alternatives and are trying to get to the top in the race for coins.
Conclusion: crypto mining has no future
The gradual implementation of other proofing concepts could ultimately mean the end of mining. Because the process is simply no longer needed. However: A switch is almost impossible on the Bitcoin blockchain. Because if the algorithm changes, all users have to go along with it. After all, this has led to hard forks several times. But even there, due to the reasons mentioned above, a clear answer to the question asked in the title applies: It will probably still work for a while. But crypto mining has no future.
+++ “Danger to the financial system” - do central bank warnings inspire the crypto community? +++
Disclaimer: This article was created on the basis of extensive research and numerous expert discussions. The conclusion of the analysis reflects the opinion of the author. The facts presented do not necessarily have to lead to the result described.
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