Economics says that mining should be profitable... So why is it unprofitable?

[Bizmark13]

In the very, very early days of Bitcoin mining and markets (i.e. early 2009), there was one miner called NewLibertyStandard who mined bitcoins and then sold them on his website via email. His prices dictated the market at the time and it was based solely on electricity costs:

During 2009 my exchange rate was calculated by dividing $1.00 by the average amount of electricity required to run a computer with high CPU for a year, 1331.5 kWh, multiplied by the the average residential cost of electricity in the United States for the previous year, $0.1136, divided by 12 months divided by the number of bitcoins generated by my computer over the past 30 days.

Because of the way mining works, if the reward exceeds the electricity cost, lots of people will jump in and the network difficulty should adjust itself so that mining becomes more difficult. If reward is lower than the electricity cost, lots of people will jump out and the network difficulty should adjust itself so that mining becomes less difficult. Therefore, the economics suggest that mining should be profitable, but only barely so.

However, the reality today is that most miners do not make a profit - i.e. the above model does not explain why things are the way they are. Does anyone know the reasons for this?

Now if I had to guess, it would be because many miners are not rational actors motivated solely by profit but are either mining for fun or as a hobby. With a large chunk of the hashrate being controlled by miners who don't care whether they are losing money, this messes up the equilibrium and turns mining into a generally unprofitable thing for everybody.

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[MegaFall]

It's not profitable because the hardware manufacturers are charging 300+% mark up on the hardware. So it's take a friggin year to even breakeven there. By the time you do, another unit comes out and the difficulty goes up by 50% because it has a faster hashing speed.

Then on top of that the units are built in such a way that the electricity used to power the units costs more than the what is generated in revenue; thus unprofitable. The problem is miners are willing to buy the crap the manufacturers made, at the prices set by the manufacturers, so they have no reason to make something significantly more technological advanced and/or priced fairly.

[jimmothy]

It's really quite simple.

Home miners electricity cost = $0.08-0.20/kwh

Mega farm's industrial electricity cost = $0.03-$0.06/kwh

Mining is still very profitable for those with access to sub $0.05/kwh electricity.

[MegaFall]

Mega farm's industrial electricity cost = $0.03-$0.06/kwh

I've always wondered how people do this? If I bought some land and built a warehouse to start a large farm... how do I get power that cheap? My local power company has nothing on their website for offices,commercial and industrial customers other than information on how to cut power consumption.

[jimmothy]

Mega farm's industrial electricity cost = $0.03-$0.06/kwh

I've always wondered how people do this? If I bought some land and built a warehouse to start a large farm... how do I get power that cheap? My local power company has nothing on their website for offices,commercial and industrial customers other than information on how to cut power consumption.

I've noticed many power/utilities company websites aren't exactly the greatest. Normally you can find industrial/commercial rates right next to residential, but sometimes you have to dig deeper.

Here's an example of what it should look like: http://www.grantpud.org/customer-service/payments-billing/rates-and-fees

[MegaFall]

Yeah, this is all I got:

http://www.atlanticcityelectric.com/my-business/large-business-customers/

and this:

http://www.atlanticcityelectric.com/my-business/large-business-customers/large-business-tariffs-and-rates/

[notlist3d]

It all depends on so many variables.  Electricity is the main one though. I still say home can mine but takes some things such as costs being low.

On the "mega" miners they are buying huge amounts, most likely that means a little lower cost since buying in bulk.  They also have the ability to follow cheap electricity and build in very very low priced electricity areas.

So yes both big and small can make ROI, just as a little guy it is harder.

[Syke]

However, the reality today is that most miners do not make a profit - i.e. the above model does not explain why things are the way they are. Does anyone know the reasons for this?

.5 J/GH miner, 1 TH/s, $.15/kwh:

Daily Income: $2.87
Daily Expense: $1.80

Still quite profitable if you have a modern miner.

[Mikestang]

In the very, very early days of Bitcoin mining and markets (i.e. early 2009), there was one miner called NewLibertyStandard who mined bitcoins and then sold them on his website via email. His prices dictated the market at the time and it was based solely on electricity costs:

During 2009 my exchange rate was calculated by dividing $1.00 by the average amount of electricity required to run a computer with high CPU for a year, 1331.5 kWh, multiplied by the the average residential cost of electricity in the United States for the previous year, $0.1136, divided by 12 months divided by the number of bitcoins generated by my computer over the past 30 days.

Because of the way mining works, if the reward exceeds the electricity cost, lots of people will jump in and the network difficulty should adjust itself so that mining becomes more difficult. If reward is lower than the electricity cost, lots of people will jump out and the network difficulty should adjust itself so that mining becomes less difficult. Therefore, the economics suggest that mining should be profitable, but only barely so.

However, the reality today is that most miners do not make a profit - i.e. the above model does not explain why things are the way they are. Does anyone know the reasons for this?

Now if I had to guess, it would be because many miners are not rational actors motivated solely by profit but are either mining for fun or as a hobby. With a large chunk of the hashrate being controlled by miners who don't care whether they are losing money, this messes up the equilibrium and turns mining into a generally unprofitable thing for everybody.

The majority of the hash power is in the hands of a relative minority of miners, so the wealth is not evenly distributed.  Since the network sets difficulty based on the total hash rate of all miners that's what we're left with.

[notlist3d]

However, the reality today is that most miners do not make a profit - i.e. the above model does not explain why things are the way they are. Does anyone know the reasons for this?

.5 J/GH miner, 1 TH/s, $.15/kwh:

Daily Income: $2.87
Daily Expense: $1.80

Still quite profitable if you have a modern miner.

You have to add in cost of the miner aswell.   But I do agree small miners an still profit.

[medUSA]

It's not profitable because the hardware manufacturers are charging 300+% mark up on the hardware. So it's take a friggin year to even breakeven there. By the time you do, another unit comes out and the difficulty goes up by 50% because it has a faster hashing speed.

This is the key reason! Mining profits goes to overpriced mining hardware. Hardware manufacturers have no reason to sell miners at a price lower than the value of bitcoin it can mine. When mining becomes unprofitable, they will drop their prices and becomes marginally profitable again. Once they have sold their old stock, they start on the next generation and the cycle goes on.

[Amph]

However, the reality today is that most miners do not make a profit - i.e. the above model does not explain why things are the way they are. Does anyone know the reasons for this?

.5 J/GH miner, 1 TH/s, $.15/kwh:

Daily Income: $2.87
Daily Expense: $1.80

Still quite profitable if you have a modern miner.

that's only because of the cheap electricity, many country can't afford that value of power, they are more on the range of 0.25-03 kw/h, this mean unprofitable or on par

[notlist3d]

However, the reality today is that most miners do not make a profit - i.e. the above model does not explain why things are the way they are. Does anyone know the reasons for this?

.5 J/GH miner, 1 TH/s, $.15/kwh:

Daily Income: $2.87
Daily Expense: $1.80

Still quite profitable if you have a modern miner.

that's only because of the cheap electricity, many country can't afford that value of power, they are more on the range of 0.25-03 kw/h, this mean unprofitable or on par

I would say anything over 10 cents look into hosting centers.   Mining in 20+ just will not be good overall.

[adaseb]

Its not only the power. If you buy large quantities you can huge discounts compared to buying one or two units.

A company ordering $1,000,000 of miners might get 50% discount from an individual buying one or two miners. The company will get ROI much faster then the individuals.

[Mikestang]

Its not only the power. If you buy large quantities you can huge discounts compared to buying one or two units.

A company ordering $1,000,000 of miners might get 50% discount from an individual buying one or two miners. The company will get ROI much faster then the individuals.

And anyone ordering that many miners will have access to industrial grade power at affordable rates, so everything works in favor of "the big guy", leaving home miners in the dust scratching their lotto tickets.

[Quickseller]

However, the reality today is that most miners do not make a profit - i.e. the above model does not explain why things are the way they are. Does anyone know the reasons for this?

.5 J/GH miner, 1 TH/s, $.15/kwh:

Daily Income: $2.87
Daily Expense: $1.80

Still quite profitable if you have a modern miner.

Your calculations do not include deprecation on the value of the miner. After taking this into account mining will generally be unprofitable unless you can properly time the sale of your miner.

It all depends on so many variables.  Electricity is the main one though. I still say home can mine but takes some things such as costs being low.

On the "mega" miners they are buying huge amounts, most likely that means a little lower cost since buying in bulk.  They also have the ability to follow cheap electricity and build in very very low priced electricity areas.

So yes both big and small can make ROI, just as a little guy it is harder.

The big mining farms can also sell their miners at retail prices before they cease being profitable which means that they need to mine for less time before effectively breaking even which means they lose less to deprecation as well. 

[notlist3d]

However, the reality today is that most miners do not make a profit - i.e. the above model does not explain why things are the way they are. Does anyone know the reasons for this?

.5 J/GH miner, 1 TH/s, $.15/kwh:

Daily Income: $2.87
Daily Expense: $1.80

Still quite profitable if you have a modern miner.

Your calculations do not include deprecation on the value of the miner. After taking this into account mining will generally be unprofitable unless you can properly time the sale of your miner.

It all depends on so many variables.  Electricity is the main one though. I still say home can mine but takes some things such as costs being low.

On the "mega" miners they are buying huge amounts, most likely that means a little lower cost since buying in bulk.  They also have the ability to follow cheap electricity and build in very very low priced electricity areas.

So yes both big and small can make ROI, just as a little guy it is harder.

The big mining farms can also sell their miners at retail prices before they cease being profitable which means that they need to mine for less time before effectively breaking even which means they lose less to deprecation as well. 

Small miners  can also sell their also tword the end of life for that miner.  Someone with lower priced electricity, or "free" electricity most likely will buy it.

[xhomerx10]

In the very, very early days of Bitcoin mining and markets (i.e. early 2009), there was one miner called NewLibertyStandard who mined bitcoins and then sold them on his website via email. His prices dictated the market at the time and it was based solely on electricity costs:

During 2009 my exchange rate was calculated by dividing $1.00 by the average amount of electricity required to run a computer with high CPU for a year, 1331.5 kWh, multiplied by the the average residential cost of electricity in the United States for the previous year, $0.1136, divided by 12 months divided by the number of bitcoins generated by my computer over the past 30 days.

Because of the way mining works, if the reward exceeds the electricity cost, lots of people will jump in and the network difficulty should adjust itself so that mining becomes more difficult. If reward is lower than the electricity cost, lots of people will jump out and the network difficulty should adjust itself so that mining becomes less difficult. Therefore, the economics suggest that mining should be profitable, but only barely so.

However, the reality today is that most miners do not make a profit - i.e. the above model does not explain why things are the way they are. Does anyone know the reasons for this?

Now if I had to guess, it would be because many miners are not rational actors motivated solely by profit but are either mining for fun or as a hobby. With a large chunk of the hashrate being controlled by miners who don't care whether they are losing money, this messes up the equilibrium and turns mining into a generally unprofitable thing for everybody.

 In 2009 there were 7200 new bitcoins becoming available each day with a base of zero bitcoins.  Today there are 3600 per day becoming available with a base of nearly 14 million.  It was much easier for the producers to dictate the value while satisfying the demand in 2009.  You now have a pool of coins to chose from which were bought at various valuations (bleow and above todays value) and there are a great many speculators who either don't know or simply don't care that mining is necessary in order for bitcoin transactions to be verified.  Those people are not necessarily miners and therefore are not constrained by the cost of electricity and the equipment required to produce new coins and verify transactions.
 

[Quickseller]

However, the reality today is that most miners do not make a profit - i.e. the above model does not explain why things are the way they are. Does anyone know the reasons for this?

.5 J/GH miner, 1 TH/s, $.15/kwh:

Daily Income: $2.87
Daily Expense: $1.80

Still quite profitable if you have a modern miner.

Your calculations do not include deprecation on the value of the miner. After taking this into account mining will generally be unprofitable unless you can properly time the sale of your miner.

It all depends on so many variables.  Electricity is the main one though. I still say home can mine but takes some things such as costs being low.

On the "mega" miners they are buying huge amounts, most likely that means a little lower cost since buying in bulk.  They also have the ability to follow cheap electricity and build in very very low priced electricity areas.

So yes both big and small can make ROI, just as a little guy it is harder.

The big mining farms can also sell their miners at retail prices before they cease being profitable which means that they need to mine for less time before effectively breaking even which means they lose less to deprecation as well. 

Small miners  can also sell their also tword the end of life for that miner.  Someone with lower priced electricity, or "free" electricity most likely will buy it.

That is true however small miners generally have a higher starting price that they paid for their machine so they have a smaller window they can sell at - they need to mine for long enough so they earn enough revenue after expenses to make up for the loss they get on the sale of their miner.

[Minerjoe]

Economies also says economies or scale and scope always generated comparative advantage.

In other words, it all comes down to the size of the farm, price per unit and electricity costs. If there are people somewhere who can better deal on these elements, they ll profit and you will not.