The imagination to find new opportunities to generate income is skyrocketing and lately, more and more people are encouraged to mine cryptocurrencies at home. However, some questions arise, such as the investment required, payback time, and risks.
“Can I mine virtual currencies from home? This is one of the most frequently asked questions in relation to the world of crypto assets,” says Ben Pence, writer of The Advertiser Mirror. In this sense, he adds that “the short answer to this question is ‘Yes’, since the process consists of solving algorithms that can be calculated by any computer, “but he clarifies that this “does not mean that it is convenient or profitable.”
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What is cryptocurrency mining
The specialist Clement Paulin who writes for the Market Times tells that mining “is the process by which transactions are recorded on a blockchain or chain of blocks. This term was chosen as an analogy to precious metal mining.”
“That is, once these are extracted from the ground and begin to circulate in commerce then they will have a value. In a similar way, it could be said that through ‘mining’ new cryptocurrencies could be extracted which in turn will begin to circular and will have value“, complete.
However, the expert remarks that the activity does not only fulfill an extractivist or creationist purpose. “It also allows other very important things in decentralized networks, such as the registration of transactions and also the possibility of voting on modifications to the network.”
“Therefore, the answer to the questions about ‘how much goes in’ and ‘what can be won’ is much more complex than a mere number,” he says.
How cryptocurrencies are mined
There are different ways of “mining” crypto assets, known as “consensus mechanisms”: processes by which the different participants of the network that register transactions (miners) agree to consider a certain “block” as valid.
How is this agreement reached? “The short answer is: ‘Through a competition’. Basically, it consists of who discovers the answer to a mathematical puzzle first. Whoever gets it first will have the right to be the first to register that block and will be rewarded with new coins.” Paulin explains.
Depending on the consensus mechanism, the competition changes. The expert remarks that there are two methods:
- Proof of work (PoW): “It is the one that owns Bitcoin par excellence. The competition to register the block will depend on the computational capacity (hashrate) dedicated to solving the previously mentioned problem. The higher the capacity, the greater the probability of registering a block and get the reward.”
- Proof of stake (PoS): “It is based on the choice of validators that will record operations in proportion to the possession they have of the asset”
The Ethereum network, which initially operated through proof of work, is migrating to a proof of stake.
“The main difference is that the so-called proof of stake does not require computational capacity. This makes it much cheaper in terms of the resources required to participate as a validator,” says Paulin.
Mining is an activity that is not always profitable: it depends on the fluctuations of the price.
So can you mine from home? For Paulin, “the answer is: ‘It depends’. To know what are the elements that would allow us to determine if it is possible, the first thing to ask is what is the consensus protocol used by the crypto active that we want to mine”.
” If the currency uses ‘proof of stake’, the answer is an undoubted yes. The only thing that would have to be done is to obtain the crypto active determined in the amount required by the protocol to act as a validator of the transactions, Paulin completes.
But the expert remarks that if the currency uses proof of work, “the answer will depend, basically, on whether you have a relevant percentage of the hash capacity to have a high enough probability in order to obtain a reward that covers initial expenses and recurring”.
What are the costs
The elements that should be taken into consideration to calculate whether it is profitable to mine a cryptoasset that uses proof of work are the following, according to Paulin:
- Price of the hardware (computers) that one is going to mine
- The existing internet access where it will be mined
- The cost of electricity
- Hardware power consumption
- The physical space to install the equipment
- Resources to make the corresponding modifications if something goes wrong (chillers, electricians, among others)
“To mine crypto assets that use proof of work, it is necessary to foresee enough things to carry out this activity in the most efficient way possible. Today it is difficult to think that a person can mine from home in an efficient and sustainable way over time,” says Paulin, since the necessary resources are very high.
Just for reference, the specialized hardware (called ASIC) required to mine Bitcoin costs between $6,000 and $10,000. To this must be added the cost of electricity, since it takes a lot of energy and the rest of the elements.
On the other hand, the reward is uncertain and will depend on the price of the crypto active, and the possibility of obtaining it, in turn, will depend on the hashrate of the machines that are used.
Are there cheaper mechanisms?
There are mining protocols that allow the use of GPUs, as video game cards are called, which are much cheaper and more efficient to mine certain currencies, such as Ethereum.
According to Paulin, “what is earned with a home ‘farm’ will depend on many variables: it can be just a few cents or thousands of dollars a month,” says.
“This activity, unlike its beginnings, when it was not professionalized, is extremely complex and anyone who is interested in exercising it should take enough time to understand all these variables and many others in order to ensure that it will be profitable”, he emphasizes the expert.
The race to mine is global: you compete with server farms from all over the planet.
For this reason, and to benefit from economies of scale, Paulin affirms that “there are ‘mining pools‘, companies that take funds from retail investors and take charge of controlling all these variables in exchange for a commission.”
“However, it is necessary to consider that some are usually pyramid schemes with the purpose of defrauding investors, ” warns Paulin, who recommends consulting experts before entering a pool.
Pence points out that “the mining algorithms of the main cryptocurrencies were designed to be ‘inefficient’ and adjust their difficulty to the computing capabilities provided by the miners.”
“This ‘inefficiency’ increases the use of the computer’s processor and directly impacts electricity consumption. We could say that it is the investment we must make to participate in the process,” he warns. As this requires strong hash power, it qualifies as “unreasonable” to use a cell phone or a notebook, since “the capacity and useful life will be affected”.
How to calculate cost benefit
According to Pence, “the overcrowding of equipment and the creation of large mining farms around the world raised demands, making mining from homeless and less profitable.” For this reason, he recommends the following points before starting:
- Cryptocurrency: the most popular are the most difficult to mine at home, since they require greater computing capabilities. This will impact the initial investment and energy consumption.
- Operation cost: electricity, Internet, purchase of equipment and its depreciation must be taken into consideration, etc.
- Regulatory framework: in some countries, it is necessary to have licenses to install mining machines at home and even pay a fee. It is also necessary to validate the provincial regulations and the limitations on the type of use of the property.
- Mining rate: the “Hashrate” must be determined, that is, the number of operations that the equipment will solve per second. The higher this number, the higher the estimated income.
- Estimated revenue: any mining calculator available on the Internet can be used: the hashrate is entered and returns the estimated gross revenue based on the current price of the selected coin.
- Taxes: do not forget that it is a commercial activity.
- Volatility: the mining product is a crypto asset of which a part must be converted to pesos to pay the expenses. Profit can be affected by jumps in value and time to return on investment is uncertain.
- Accelerated depreciation: due to their deterioration or constant increase in computing capacity on the network, devices generate less crypto assets over time. If the profit margin is low, you will not be able to cover expenses or recover the investment.
Home mining in numbers
According to Pence, whoever wants to mine Bitcoin must purchase ASIC equipment, whose used value costs between $375 and $1,250 and offers an estimated hashrate of 13.5TH/s.
At the current price of Bitcoin ($50,000 at press time), the team would generate a gross income of $150 per month, with electricity consumption of 1,500W whose monthly cost is around $100.
With this simplified example, a net income of $42 per month would be generated, without considering other costs such as air conditioning, maintenance, commissions and taxes. And not to mention that the price of Bitcoin is volatile and a decline can translate into losses.
“Mining is becoming more and more a commodity business, in which volume, market value and proper cost management are very important,” Pence emphasizes.
For his part, Ben Pence assures that “the competition among miners today is fierce“, therefore, “the time to turn the investment curve and start making profits is at least 24 months“.
“This is combined with the risk inherent in the price of cryptocurrencies to make mining activity very risky,” he says. “The promise of sudden profits and simple startup businesses is no longer the same as that seen in the early days of Bitcoin and Ethereum,” Pence closes.
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