Crypto mining returns — what should you consider?
The majority of people get into crypto mining with a straightforward goal, which is to make money. Unfortunately, this same majority won’t bother taking the time to grasp the intricacies of the mining processes and can be quite sincerely and often unpleasantly surprised when their final income does not match their optimistic plans and bold dreams. The rate jumps up and down at astronomical speeds, and the rate of return loses its precious percentage points.
To ease the growing tension, we decided to take another look into how the world of cryptocurrencies works and what your mining — including HashFlare mining — revenue depends on, so you can see why the falling cryptocurrency rates are not the reason for panic.
Your mining revenue depends on the global situation
… and a whole range of fundamental factors at the same time. Which ones? First of all, the difficulty, the reward, the fees, and the exchange rate. And also the news: bad news, good news, and the media buzz in general. Let’s figure out all these factors one by one.
Mining difficulty and reward reduction
Mining as such is the process of generating new blocks in a blockchain and recording transactions within them. When an individual miner or a group of miners manages to find a new block, they receive a reward for the work done — a certain amount of cryptocurrency of the respective blockchain. For example, bitcoins.
This can be compared to usual work for hire: People do something to maintain the network — find new blocks and confirm transactions — and get paid for it with bitcoins.
It is believed that it takes 10 minutes for some information to be verified by all network members and go all the way from the first to the last node of a transaction.
If it happens faster, it means that the aggregate power of all miners combined has increased. How does the system respond to that? It increases the mining difficulty in adjusting the time needed back to 10 minutes. Similarly, if the process slows down, it means that some miners have left the game, so the hashrate of all the mining devices in the world has decreased. Then the system will reduce its difficulty.
The difficulty is recalculated automatically every 2016 new blocks by the Bitcoin network itself and does not depend on the desires of individual players, whether large or small, or mining services. On average, this happens every two weeks.
The reward is paid to the miner who found the last block. But since this is a lengthy process, it is more advantageous for people to group to find new blocks faster. Thus, they sum up their hashing power and increase the chances for a group reward. If everything works out, the reward is split among all group participants depending on the hashrate — the standard “put more, get more” principle is at work here. This is exactly how mining pools work. But the reward directly depends on the network difficulty — the higher it is, the harder it is to find a block. In other words, having a lot of hashes alone does not guarantee a reward, it just increases the odds of finding a block.
Moreover, with time miners start getting smaller rewards at the same hashrate. Why? Because, first, the block reward in the Bitcoin blockchain is fixed and, second, it decreases with time.
Right now, 12.5 bitcoins are mined in the world every ten minutes. In 2012, the reward was 50 bitcoins, in 2016 it was 25, and approximately by 2020, it will be half of what we have today.
At the same time, Bitcoin is becoming more and more popular, and more and more people are getting into mining for the same amount of reward. So the current 12.5 coins can be split between 100 people or 100,000 people. Feel the difference?
The more miners, the less the revenue of each of them — as the competition for a limited reward becomes tighter.
Thus, one who wants to get the same share from all mined bitcoins at a globally growing number of miners must regularly upgrade their equipment. And this must be done in proportion to the number of people joining the mining ecosystem around the world. It is difficult and, in fact, unrealistic.
The takeaway? Just remember that the number of miners in the process will always affect the mining profitability one way or another. And keep an eye on the network difficulty dynamics.
Fees
First of all, there are two kinds of fees. There’s HashFlare’s internal maintenance fee, and there’s the external network fee for Bitcoin transactions.
The HashFlare fee is fixed. We use it to pay electricity bills, provide support to miners, replace outdated hardware, account for depreciation, and so on. In the real world, where governments use fiat currencies, we just can’t pay our bills with bitcoins, so we bear our costs in dollars.
We show the maintenance fee for each specific contract on our website. For example, an SHA-256 contract has a daily fee of $0.0035 for each 10 GH/s.
For your convenience, the system automatically converts US dollars to bitcoins, since your balance is in the latter, and deducts this amount from your daily revenues. Although this BTC amount is always different due to the fluctuations in the Bitcoin rate, its USD equivalent always stays the same. You can check this for yourself using a currency calculator.
The Bitcoin transaction fee is an entirely different story. This value is not fixed and changes all the time depending on the overall situation around Bitcoin and its rate. If you look at the dynamics, you’ll see a peak in December 2017, when the average transaction fee reached US $50.
What does it mean for you? Before withdrawing or making a transaction, take a look at the current fees and think once again: Do you really want to withdraw $50 while paying $10 to do it? It is this fluctuating fee and our desire to have a process that makes sense for our users that forces us to impose restrictions on BTC withdrawals on HashFlare from time to time. None of these limits should be considered permanent. Our goal is to make it possible to withdraw any balance. Plus there is the highly anticipated Bitcoin Lightning protocol, that should solve most of the transaction time&cost issues.
Rates
Just like any other currency, Bitcoin has an exchange rate in relation to, e.g., US dollar, euro, yen, or any other fiat currency, for that matter. The higher the rate, the more profitable is your mining.
Why?
Because mining gets you bitcoins, and you can exchange them at any time for fiat money — say, US dollars. Naturally, exchanging them at a rate of 1:20,000 is more profitable than doing so at 1:8,000. But the fact that the rate is going down right now does not mean that your mining becomes unprofitable. It continues to work with an eye to growing rates.
See for yourself. We see major recessions in the Bitcoin rate every year. Crypto enthusiasts and major players alike saw risks and reasons to be worried about both in 2015, when the exchange rate dropped down four times, and in 2016 when the per-block reward was split. But after a temporary period of instability, the Bitcoin rate always goes back up.
Here are the biggest drops of the BTC rate so far:
94% in June–November 2011, from $32 to $2
36% in June 2012, from $7 to $4
79% in April 2013, from $266 to $54
87% in November 2013–January 2015, from $1166 to $170
40% in September 2017, from $5000 to $2972
60% in January 2018, from $19,000 to $7,600
The best thing you can do in such a situation is just continue mining. Do not succumb to the panic and sell the bitcoins right away — just wait for a suitable opportunity and a new round of growth.
What are the main exchange rate form factors? The short and nasty answer is the supply and demand — as is the case with most consumer goods. The price of any cryptocurrency is essentially a balance between the price tag the sellers put and the amount the buyers are willing to pay. In many respects, all of them rely on the overall situation in the world of cryptoeconomics and economics in general.
Therefore, the profitability of mining depends on a combination of multiple factors, most of which are hardly predictable. Nonetheless, keeping track of all cryptomarket changes will make price reversals and revenue changes less bizarre.
Just a reminder: you can calculate your mining profitability and double-check the transparency and honesty of our profit forecasts anytime using a special open-access calculator.
NB! When using the calculator, please keep in mind the service maintenance fee.
