Crypto Mining 101: Calculating Profitability
Investing in cryptocurrency mining can be a costly decision. How do you know whether or not your venture will be profitable? And if so, how profitable will it be? In this post, I’ll break down how to calculate the revenues and costs of mining, and how to assess whether or not investing in miners is the right choice for you.
Let’s start by learning how to calculate total revenues and total costs, while utilizing a real-world example.
Revenue
When mining, your main (and only) revenue stream is the value of the cryptocurrency you mine. To start, you need to consider which cryptocurrency would be most profitable to mine. Since each miner can solve only certain types of algorithms, you need to decide which cryptocurrency to mine before you purchase a miner. But how do you know which cryptocurrency would be most profitable to mine? Consider the following example:
Let’s go back in time to New Year’s Day 2018. Bitcoin has just made all-time highs, and you’re considering investing in a miner to cash in on this bull market. Since Bitmain dominates the mining gear industry, you’re considering purchasing one of their Antminer S9’s. Each miner mines Bitcoin at a rate of 13.5 TH/s (see archived webpage here).
To figure out how much we would earn from investing in this one miner, we need to first figure out how many bitcoins this machine would mine in a given time period. In this example, we’ll calculate everything on a daily basis.
The first step would be to calculate what percentage of the total network hashrate our miner would represent. At the time of this example, the network hashrate was 15 million TH/s.
our hashrate share = (our hashrate) / (network hashrate) = (13.5 TH/s) / (15,000,000 TH/s) = 0.00009%¹
Now that we have our hashrate share (and yes, it’s supposed to be a very low percentage), we need to calculate how many Bitcoins are earned by miners each day.
Since July 2016, the block reward has been 12.5 bitcoins per block. However, miners also receive all the transaction fees for transactions included the block they mine. With fees being high at the time, miners were earning roughly 3 additional bitcoins per block. Thus, the per-block reward for miners was 15.5 bitcoins.
A new block is mined on average every 10 minutes. Since there are 1,440 minutes per day (1 day * 24 hours/day * 60 minutes/hour), there are 144 blocks per day, each yielding 15.5 bitcoins.
daily block reward = (bitcoins per block) * (blocks per day) = (15.5 BTC) * (144 blocks) = 2,232 BTC per day
our daily bitcoins = (total bitcoins mined per day) * (our network hashrate share) = (0.00009% * 2,232 BTC) = 0.002 BTC per day
At the then-exchange rate of $13,500 per bitcoin, that would equal $27.12 per day. Now that we have our revenue, let’s start thinking about some of the costs we might encounter.
Costs
Our costs can be broken up into two categories: one-time costs and recurring costs.
The only one-time cost is the price of the miner itself and associated gear. If we don’t account for capital depreciation, we can assume each miner to have an infinite lifetime. (Of course, in real life most miners will last only a few years until they break down and/or become obsolete, so our calculations here can only forecast a couple years into the future.)
Going back to our example, the price of a Bitmain Antminer S9 was $2,320. However, the miner will also need a power supply, Ethernet cable, and power cable, among other accessories. Assuming the price of these is roughly $180, that means we’ve spent $2,500 on startup costs. It’s important to note that these expenses need to be paid before we’ve generated any revenue.
Our only recurring cost is the price of electricity (assuming we already have internet access). Before we can start calculating this cost, we need to discuss how we measure power. Most of us are at least vaguely familiar with the watt, however the electrical consumption of most appliances is measured in kilowatt-hours. A kilowatt-hour (kWh) is the number of kilowatts (thousands of watts) used per hour. Straightforward enough, right?
Because electricity is priced differently in different parts of the country/world, it’s important for us to know our local price before investing in a miner, because the price of power could make or break our investment. The price you pay per kWh can usually be found on your past electricity bills, but to get an idea of the price range, this handy table shows the average kWh price per US state.
In our example, Bitmain’s website lists the Antminer’s power consumption at 1,323 watts. (Note that a device’s wattage is the number of watts used per hour.) Now let’s run some numbers:
(1,323 watts) / (1,000 watts per kilowatt) = 1.323 kilowatts
Assuming we run the miner all day, we now need to find how many kWh our miner is using per day.
(1.323 kilowatts) * (24 hours per day) = 31.752 kWh per day
For this example, let’s assume that we live in Texas (why not?). From the table I linked to above, we can see that the average price per kWh in Texas is 8.38 cents (or $0.0838). Thus, our daily power costs are:
(31.752 kWh) * (0.0838 $ per kWh) = $2.66 per day
At this point, we’ve finished calculating all our costs (yay)! Now that we have our expected revenues and expected costs, we can move on to the final step of our investment evaluation, which is our expected profitability.
Profitability
Let’s start by revisiting our numbers from above:
Daily revenue: $27.12
Daily costs: $2.66
One-time costs: $2,500
Despite the large initial costs, we can see that our mining venture will be net profitable at some point, because our daily revenues are larger than our daily costs. To calculate our daily profit, we can use the following formula:
Daily profit = Daily revenue - daily losses
For our example, our daily profit is as follows:
Daily profit = $27 - $2.66 = $24.34
This means that after paying our power costs, we will be able to put nearly $25 in our pocket every day. Not bad!
However, we can’t forget about our one-time costs. We now need to know how long it will take for our mining venture to break even. In the charts below, I’ve plotted our expected payoff over our first 2 years of mining. The first chart shows how both our total revenue and total costs will grow over time, while the second chart shows our net profitability over time. What’s important to note on the second chart is the point where the line crosses the x-axis; that is, what day will our mining venture become net profitable?
I made an Excel spreadsheet that automatically calculates daily net profitability (see download link here). With this spreadsheet, you can plug in your own numbers and see just how profitable (or unprofitable) mining would be for you. Using the spreadsheet, I found that our example mining venture will become profitable on our 103rd day of mining.
Final Notes & Words of Caution
Hopefully this blog has given you a stronger grasp of what factors to consider when investing in cryptocurrency mining. Although it may seem complicated, following these basic steps will give you a good idea of whether or not mining would be profitable for you.
However, I want to stress that all these calculations will only give you an approximation of total costs, revenue, and profitability. When running the calculations above, we had to make some strong assumptions about future cryptocurrency prices, network hashrate, electricity prices, and hardware durability. All these variables are far from stable, and any deviations from your assumptions can dramatically change your profit outlook. A prime example of this is the outcome of the most recent Bitcoin bubble; our sample case in this post uses numbers from January 2018, when mining Bitcoin was extremely profitable. Since then, the price of Bitcoin (along with most cryptocurrencies) has collapsed, leaving most mining investments underwater. If we had bought the miner based on these calculations alone, we likely would still be at a net loss.
Before deciding whether or not to invest in mining, consider how each of the variables in the spreadsheet could change over time. Is it possible that cryptocurrency prices could take a downturn? Do you plan to sell the cryptocurrency you mine immediately, or hold it for a certain period of time? Is it likely that a new, more efficient wave of miners will hit the market soon, leaving your device uncompetitive? Are there any upcoming changes to the mining rewards schedule? These questions (and many more) all need to be considered before pulling the trigger on any mining venture.
As with any investment, mining is extremely risky and these calculations are designed to give you a rough guide of profitability, not a certainty.
1: This formula is only accurate if we represent a very low percent of the total network hashrate. If we had a warehouse of miners, we would have to use the following formula: (our hashrate share) = (our hashrate) / (our hashrate + network hashrate)
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