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April 25, 2022

What are the economics of mining Bitcoin?

Welcome to the cryptohunt jam where we spend one minute a day to explain crypto. In plain english.

Today, let’s talk about what it takes to make money mining cryptocurrencies like Bitcoin.

You have probably heard of those large warehouses, filled with computers, that do nothing else than mine Bitcoin all day long. How do they actually make money?

Remember, mining is like making computers solve very, very complicated puzzles. With that in mind, consider three factors: The cost of computers, the cost of energy, and the price of the cryptocurrency they get rewarded with.

Sounds easy, but it’s actually quite difficult to even get started with mining. You will need special power-efficient computers to make it work. Those “ASICs” (Christian: Ey-sicks) – short for “application specific integrated circuits” – are expensive and hard to get because of high demand and chip shortages. 

Once you have the hardware, the next thing to consider is the cost of energy. A single block of Bitcoin, for example, uses the equivalent of a US household’s annual power bill. 

And lastly, mining rewards get paid in the blockchains’ native crypto currency, for example Bitcoin. That works in a miner’s favor when prices are up, but when they suddenly drop, they are stuck with an expensive machine that doesn’t make enough money.

So, how much does a single mining machine make? It obviously depends, but can currently be up to $200 per day after paying for power bills. But that’s on a machine that’ll set you back over 75,000 dollars used on eBay right now, meaning it’ll take a year to turn a profit with no room for price drops.

And that’s how people make, or lose, money with mining. And next time we’ll start talking about a specific cryptocurrency per episode to discuss what makes each of them special.

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