Cryptocurrency mining - A comprehensive overview

Explore the world of cryptocurrency mining, from its origins to ROI calculation, and discover the potential of cloud mining and Proof of Stake (POS) as alternatives in this comprehensive overview.

Cryptocurrency mining - Where it all began

As you may already know, On 18 August 2008, the domain name bitcoin.org was registered and in the same year, on 31 October the Elusive Satoshi Nakamoto released the first Bitcoin whitepaper, titled A Peer-to-Peer Electronic Cash System.

The fully open-source code inspired the creation of many other cryptocurrencies, each with their own unique ideas aimed at changing the world.

You're probably wondering how this all translates to the main topic of this blog; cryptocurrency mining.

All of these groundbreaking ideas share something fascinating in common: they require a means of transferring funds, executing smart contracts, and everything else associated with 'cryptocurrencies.' .

And how is all of this made possible? You guessed it – through mining! (And yes, mining isn't the sole method of acquiring crypto or sustaining a blockchain-based ecosystem.)

Miners receive a small portion of the block's rewards for verifying cryptocurrency payments, validating legitimate transactions, and adding them to the blockchain.

This validation can be achieved through two principles: Proof of Stake (POS) and Proof of Work (POW). We'll delve into POS later in this article.

In the early days of cryptocurrency mining, validation (POW) could be done on a simple home-pc. The CPU would validate everything and mining was quite profitable.

Nowadays, cryptocurrency mining is primarily carried out by large factories that house extensive ASIC mining equipment. Small-scale miners are finding it increasingly challenging to get a share of the rewards, as these large factories dominate the scene.

According to bitinfocharts, the mining hashrate (calculations per second) reached its peak in September 2023, but it has been steadily increasing since July 2021. This suggests that it's just a matter of time before the hashrate hits a new peak.

Cryptocurrency Mining - Calculating the ROI of Your Mining Rig

When diving into cryptocurrency mining, calculating the return on investment (ROI) for your mining rig is a crucial consideration. But how can you do it effectively? Here are the key factors to keep in mind:

The Initial Cost

This might sound obvious, but it's a step many people overlook when they become fixated on the potential benefits of generating passive income.

If you invest $15,000 in building and setting up a rig, it's important to recognize that you may not see a return on that investment unless the mining earnings are exceptionally high.

Additionally, as hashrates increase, your returns tend to decrease. Therefore, consider this carefully when purchasing a mining rig!

The cost of running your rig

Cryptocurrency mining is a very resource intensive process, not only on your hardware but on your electricity bill as well. An ASIC tends to run at around 3,250 Watts for 95 TH/s (95 Terahashes per second) when it comes to Bitcoin. This equals a ratio of 34.21 Watts per TH.

With an average electricity cost of around 28 cents / kwh (can differ in your region!) your rig needs to generate atleast 15,46 euro's per day to break even!

Degradation of your hardware

Keep in mind that most mining hardware doesn't have the longevity you might expect. Even if all your calculations show that the initial cost will be recouped in 2.5 years, factoring in electricity costs, there's a critical question: Will that rig actually last for 2.5 years, and perhaps even more importantly, will it remain powerful enough to be profitable?

The mining pool fee's

A minor cost, but not one to skip over. When you mine in a mining pool the pool administrator typically takes a percentage of your earnings to cover operating expenses. While it may seem small, it can have a noticeable impact on your long-term ROI.

As we've discussed, calculating the ROI of your rig is relatively straightforward. However, the initial investment can be substantial. If you don't have such large funds readily available, does that mean there are no alternatives?

This leads us to the next topic: cloud mining.

Cryptocurrency Mining - in the Cloud!

Cloud mining is a relatively new concept. It involves outsourcing your mining hardware by paying a cloud mining group. These cloud miners operate large facilities, and when you participate, you essentially rent a portion of their mining infrastructure.

Cloud mining typically involves entering into contracts that commit you to a predetermined period, which can range from as short as one month to a few years.

While we can't endorse specific cloud mining services, it's worth noting that there are reputable options available. However, you should be vigilant for potential scams.

Cryptocurrency Mining - the Final Verdict

The tone of this article might seem a bit negative, but that's because cryptocurrency mining is primarily dominated by large players.

Unless you're willing to make significant investments in both technology and the market, the chances of achieving a positive return on investment (ROI) can be quite low.

As a hobby, cryptocurrency mining can be great. Plus, if you manage to acquire a mining rig at a reasonable price from an old mining farm or another hobbyist, your chances of achieving a positive ROI will increase significantly.

As an honorable mention, I'd like to touch on an alternative mining method called Proof of Stake. However, for all the intricate details, a separate article will be written.

In a Proof of Stake environment, coins essentially compete against each other for the chance to create the new block. This makes it quite rewarding to hold a significant number of coins for an extended period.

The major advantage of a POS environment is that it takes away the enormous electricity consumption that the Proof of Work mining method requires. This has led many to believe that POS represents the future of mining.