Bitcoin Mining in 2014
How Skyrocketing Difficulty has Massively Diminished Returns
Bitcoin mining is a game of numbers. The most important number is this:
25 Bitcoins are mined approximately every 10 minutes on planet Earth.
Regardless of the number of miners or mining machines in the world, this fact remains constant with one caveat: the number of bitcoins mined per 10 minute block is cut in half every four years by the software protocol. Thus, we can calculate the entire mining cycle of bitcoins, from beginning to end.
This chart shows the approximate number of bitcoins that have been mined and will be mined over the next decade.
In the next 10 years, approximately 20 million bitcoins (94% of all possible bitcoins) will have been mined. In fact, 58% of all bitcoins have already been mined.
How does mining work?
Miners verify and record bitcoin transactions in an online ledger with their computers. A transaction does not become valid until a consensus is reached by miners that it actually took place. This process makes sure that bitcoins are not “double spent”, and keeps the system secure from fraud. Because this work must be done, miners are rewarded for their work with newly generated bitcoins.
However, the new bitcoins are awarded as a lottery that pays 25 BTC every 10 minutes to one lucky winner!
But if it’s a lottery, why mine at all?
Because mining pools ensure payment.
Imagine that all the people that play the lottery joined together into groups. Each group agrees that if any one of them win, they must share it with everyone else in the group according to the number of lottery tickets they had bought.
Mining pools work in this way. Their combined hash rate (mining speed of their computers) and the high frequency of payouts (every 10 minutes) ensures that miners get paid for the work they do, regardless of who in the pool finds the block of bitcoins.
As time passes, luck becomes obsolete in the process.
Is it worthwhile to become a miner?
Bitcoin mining is a financial gamble, not an investment.
Profitability depends on three key numbers:
1. Difficulty
2. The value of bitcoins
3. The price and speed of hardware
Difficulty
Bitcoin wiki explains difficulty in technical jargon that is not easy to understand. The underlying concept, however, is simple.
Let’s take the lottery example from earlier. Imagine that as people learn about this Bitcoin lottery, they begin buying tickets at scale. Also imagine that the number of tickets that could be bought is unlimited, but the award remains static (currently 25 BTC every 10 minutes until 2016). As more and more people buy tickets, it becomes harder and harder to win.
Lottery tickets in our analogy are equivalent to the speed of mining hardware, known as hash rate. Thus, the higher the hash rate of the hardware, the more revenue it will generate.
This fact has created an epic mining hardware arms race across the globe. Racing to build more and faster “money” machines has come to fruition during the last nine months, skyrocketing the difficulty.
The combined total hash rate of all the mining machines on Earth determines the difficulty, which is adjusted every 2,016 blocks (10 minutes each), or approximately every two weeks.
This graph shows how the difficulty has increased ten-fold since July of last year because of the sheer computing power introduced into the system. A miner today makes only 10% of the bitcoins that she made with the same hardware only eight months ago.
Mining chip technology and hardware production has advanced at such a pace that it has created exponential growth in the difficulty. Top of the line technology from only a year ago is nearly obsolete today.
The Value of Bitcoins
The price of a bitcoin today, March 28, 2014, in US dollars is approximately $520.00.
At this price, even the most advanced and powerful hardware on the market will show a loss in the long term.
It is very important to use a mining calculator that factors in some form of growth in the difficulty, on average 20% every two weeks. New miners sometimes do not realize that the difficulty level of the Bitcoin protocol adjusts every two weeks, which is like taking a massive 20% pay cut twice a month in perpetuity. Some online mining calculators fail to calculate long term difficulty increases.
For a new miner today, profitability entails a substantial increase in the price of bitcoins. In some cases, more than a 50% price increase is necessary to turn a profit on hardware that will become increasingly obsolete.
A Personal Perspective
I believe that bitcoins have intrinsic value that is not yet reflected in their actual price, and may never be. I want to create value for the system, not take value from it. This is why I chose to become a miner at a time when losses seem eminent for every piece of hardware on the market. My participation as a worker in the ecosystem validates my love of it.
The Price and Speed of Hardware
Knowledge that hardware loses its value at a rate of 40-50% a month is a very powerful deterrent. The best mining rig on the market today is made by an American company based in Austin, Texas, named CoinTerra. The rig is called the TerraMiner IV, and has a speed of 1,700 GH/s, and can operate approximately 10% faster if overclocked.
With a price tag of $5,999.00, it is possible to turn a profit with this machine, if it was delivered today. But ordering it now means receiving it three months from now. By then this machine is no longer profitable.
Even finding the best deal on the market for the best machine today still results in a loss without an increase in the price of bitcoins.
It is important to note that this phenomenon has caused the price of some hardware to drop dramatically over the last month.
Currently, the most popular machine is the Chinese made Antminer S1. This hardware has a speed of 180 GH/s, which means it will mine roughly 1 BTC before it becomes obsolete. The price of this machine has dropped from $1,100.00 to under $700.00 in just one month.
It is not too far fetched to think that 1 BTC is worth more than $700, but this machine’s lifetime production decreases roughly 2% a day! That is an intense race against time.
Mining bitcoins becomes an exercise in futility when considering that it is cheaper today to buy 1 BTC than it is to mine 1 BTC and entering the market costs $700.00.
The Future of Mining
Some argue that the network difficulty will plateau and make mining profitable again. Some argue that the price of bitcoins may triple in just a couple of years. But in reality, any speculation regarding profitability is just that, speculation. Bitcoin miners love the underlying principles of Bitcoin and what it means to the world. Profiting is a byproduct.
