Crypto mining knowledge
6 common crypto mining risks you have to watch out for
Here’s some scenarios you need to keep in mind when mining crypto
Profitability is one of the most important aspects of proof-of-work mining. As such, it’s crucial for every miner to properly understand the variety of factors that affect both the revenue and costs of a mining operation.
Here are the most important risks you should watch out for when running a crypto mining operation.
Price volatility
Every domestic miner earns in crypto but pays their expenses and electricity bills in fiat.
Many miners prefer to hold their mined coins, which we refer to as inventory. That means they’ll only sell the minimum amount of coins necessary to cover their expenses. This is where the price comes in.
Because miners earn in crypto, price swings directly affect fiat-valued miner revenue. As a consequence, if the coin’s price drops, miners will have to sell more of their inventory to pay their expenses. Vice versa, if price surges, they will be able to cover their mining costs by selling a smaller amount of crypto.
Therefore, price action directly impacts the profitability of every self-sustained mining operation, even if a miner’s goal is to accumulate more crypto. The lower the price, the more coins miners need to sell to cover their expenses, and thus the less they can hold.
Network difficulty changes
Simply put, mining difficulty determines how hard it is to find a block by raising or lowering the target hash. Bitcoin, for example, automatically sets the mining difficulty every 2,016 blocks according to the total hashrate currently working on the network.
In other words, the more hashrate mining on the network, the harder it will be to find a block and earn the reward. As a result, greater difficulty means miners need to spend more power and computational resources finding acceptable hashes.
What does this mean? Basically, miners earn fewer rewards for the same amount of hashrate. After increasing difficulty, only by expanding their hashrate can miners maintain the same revenue.
Hence, an increasing difficulty hurts mining profitability and hashprice. Nevertheless, one factor can counteract difficulty’s effect on profitability: price.
Indeed, if price surges parallel to difficulty, fiat-valued mining profitability would remain unchanged.
Electricity price increases
As we always say, electricity is the most critical recurrent cost of crypto mining. Mining hardware requires to be fed immense amounts of power constantly, which is why its price directly impacts profitability.
More importantly, your local area’s electricity price per kWh is substantial in profitability and expenses calculations. In fact, many miners transfer their operations to locations with lower electricity costs to reduce costs.
That said, should the price of electricity per kWh increase in the area you’re mining in, you could see your profitability drop significantly.
New ASIC miner releases and competition
ASIC miners are a type of computer specifically designed and built for mining cryptocurrency. They are the most powerful and efficient mining equipment on the market, unmatched by other mining hardware like CPUs or GPUs.
Yet, power and efficiency come at the expense of flexibility. ASIC miners can only mine one single algorithm. They have no repurposing capabilities whatsoever and thus, quickly lose market value whenever new, more efficient models come out.
Suppose that you join a Bitcoin mining pool using an ASIC miner with a 100 TH/s hashrate. Nine other participants in this pool own the same model as you. That means the total pool hashrate is 1,000 TH/s, and you account for 10% of the pool. This means that you’ll receive 10% of the pool rewards, minus fees.
Now, suppose a new model comes out that can produce 150 TH/s for the same amount of electricity. All miners exchange their older models for the new one except you. The pool now has a total hashrate of 1,450 TH/s, and you — who used to represent 10% of the pool — now only account for 6.7% of the hashrate and, consequently, of the rewards.
In this example, you can see how even if you’re running a successful mining operation, your profitability might be vulnerable to what other miners do.
Now, this doesn’t mean that your older miner has become unprofitable. You might still turn a profit running it. However, older ASICs lose significant profitability and market price.
Furthermore, the example above also shows how newer ASIC models lead to higher hashrate overall, which also drives greater difficulty — with all its consequences and risks mentioned above.
Broken or burnout miners
Whether ASICs, GPU, or CPU, crypto miners are delicate hardware. They require maintenance, cleaning, and certain environmental conditions to function correctly and at maximum performance.
More importantly, they are also expensive. As electricity is the most critical recurrent cost, acquiring the hardware is a mining operation’s most critical capital expense. Most of your initial investment will go to these mining computers.
That said, it’s crucial to take proper care of this hardware, clean them regularly, and ensure optimum environmental conditions within your mining facilities. If you don’t, your miners may deteriorate, burn out, or even break down before you recover your investment.
Regulatory restrictions
Some governments across the world are taking a hostile instance towards crypto mining after its popularity raise, especially these last few years.
If the authorities in your jurisdiction decide to ban crypto mining, it’s game over. There’s not much any miner can do besides selling their equipment and close down shop, or moving their operation somewhere else.
Conclusion
Every crypto mining operation is subject to several risks, both internal and external, that can negatively impact profitability.
As a miner, it’s important to keep an eye on these factors and be prepared to adapt to any possible scenarios to avoid unpleasant surprises.
We hope this article helps you do just that. Happy mining!
About Titan
Titan provides powerful services for crypto mining at scale, including the first enterprise-grade mining pool. Titan is also the builder of the Lumerin Protocol, a peer-to-peer, open-source solution that makes crypto mining hashpower a tradable, liquid financial asset, unlocking mining profitability and providing greater access to capital.
