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How profitable is Bitcoin mining?

by Maryna Trifonova, Head of Content at Jax.Network

The bear market has been stressful for many, including Bitcoin miners, who are urged to sell most if not all of their BTC supply just to break even. Let’s find out how profitable Bitcoin mining can be during both bull and bear markets as well as how to make extra profit on top of the BTC block reward.

Putting up some numbers

With the total market capitalization sitting below $1 trillion, hard times have dawned upon many industry players, from major mining companies to retail investors. Bitcoin is changing hands at around $18,800 at the moment of writing, which is almost a 73% drop from its all-time high of $69,000 set back in November last year. Surprisingly, Bitcoin network difficulty didn’t plummet together with the price; conversely, it has been growing all this time, as Blockchain.com shows. So, with the BTC price down and difficulty up — is it profitable to mine BTC during the crypto winter?

First of all, let us quickly remind you that mining is profitable only when the Bitcoin price is higher than the production cost, which comprises many variables, including electricity consumption, infrastructure, hardware, and labor. We can dumb down the costs into two categories: fixed costs and variable costs. The former comprises mainly of equipment (i.e. mining machines) and the latter is for and foremost electricity costs. When things go berserk in the BTC market, miners have, thus, two types of leverage: buy new and more efficient machines or lower their variable costs. If these strategies are impossible, miners might have to turn down their rigs.

According to the recent analytics published by J.P.Morgan, the production cost of 1 BTC fell to around $13,000, which provides around $7,000 of maximum profit for each BTC mined. This profit is then redistributed among miners of the pool who received the BTC block reward according to their weight in terms of computing power (minus pool fees). Assuming that your mining pool has not onboarded new miners (stable hashrate), your chance of winning the BTC block reward is going down (since difficulty has increased). In this hypothetical example, the one way to keep Bitcoin mining profitable is to cut your variable costs.

Recently, a lot of mining rigs have moved to the US, due to cheaper electricity. We can see that the decision of mining depends largely on the individual cost structure of each miner and how much expected profit he can drain from different mining pools. In this context, miners have, on average, managed to reduce their electricity bills, enabling them to decrease the BTC cost of production by around a third since the beginning of the year.

Merged mining

As we can see, Bitcoin mining is an extremely profitable business during the bull run and it still can be profitable when the bears attack, assuming the difficulty is constant. However, the above-mentioned numbers give only a rough estimate of Bitcoin mining profitability, which can differ from miner to miner simply because there are too many variables that constitute the production cost. Not to mention that the entire enterprise is built on the belief that Bitcoin is an ever-appreciating asset in the long run. But one should never forget that it can easily drop to nearly 0 at any moment in time.

An innovative technology called merged mining was first implemented in 2011 in the design of the Namecoin protocol. The idea is quite simple because it suggests that instead of spending computing power on mining one coin, i.e. Bitcoin, it would be reasonable to mine two or more coins at the same time by reusing the hashrate. Indeed, if you mine two or more coins, you get extra block rewards and transaction fees, increasing your revenues at no additional cost. When merge-mining the Bitcoin network with Jax.Network, for example, miners get 290 JXN + transaction fees on top of their 6.25 BTC + BTC transaction fees per block. If you calculate the numbers for an annum, you will see a pretty nice addition to your yearly income.

Conclusion

Bitcoin mining is considered one of the most stable and profitable business models in the cryptocurrency market today. But as any other market, it has its ups and downs, thus it’s recommended to leverage merge-mining as a way to earn extra profit at the moment of economic instability.

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