Mining profitably

[rpietila]

A miner would do well to base his calculations on profitability solely on BTC value. Many miners confuse their anticipation of BTC/fiat exchange rate appreciation with the profitability of mining.

Let's assume BFL ASIC is not a scam, and it will ship exactly the same time as the block reward is halved. From then on, the next year will see approximately 1.5 MBTC generated. (The figure would be 1.3 MBTC without the lag in difficulty adjustments, which causes more coins to be generated).

Some sources say that in ASIC preorders alone, more than 0.5 MBTC has been spent. This is a lot, considering that:
- the preordered capacity is unlikely to represent more than half of the hashrate, 2-3 months after launch.
- there is the electricity cost, which grows proportionally bigger the bigger the network grows.
- the more BTC price rises, the quicker is the network growth.

If the preorder figure is correct, an investment of 0.5 MBTC needs to be amortized during a period that does not generate more than approximately 0.3 MBTC. Clearly this is not possible, regardless of other factors.

So if you anticipate BTC appreciation, you should buy BTC. The more BTC appreciates, the worse bet mining is, because difficulty increases. If it stayed the same, mining would be proportional to direct holding of BTC. To add insult to injury, it does not even scale the other way round making mining better if the BTC fiat price dropped - in this event the hashrate declines only slowly, making it punitive to sell BTC to cover the cost of electricity. In any event, the ASIC manufacturers would likely lower their prices for existing equipment, and develop more power efficient technology.

TL;DR If you consider mining, forget about BTC price and its future. You need to amortize your BTC investment in 2 months with the BTC you generate by mining, taking into account the ever-increasing difficulty. If this does not pay off, you better purchase BTC and forget mining.

[Stephen Gornick]

TL;DR If you consider mining, forget about BTC price and its future. You need to amortize your BTC investment in 2 months with the BTC you generate by mining, taking into account the ever-increasing difficulty. If this does not pay off, you better purchase BTC and forget mining.

Until there is another use for ASIC hardware should mining with it no longer is profitable for mining, that is nearly the exact conclusion I come to as well.   With GPUs, you can always liquidate the hardware for use in gaming or to other miners whose cost of electricity is significantly less.  What will likely happen is that the only market for a used ASIC will come from a miner with really cheap (or free electricity).

But any miner roughly breaking even in two or three months then can mine until profitability drops near zero or goes negative for them.  There is zero risk after break-even, and potentially, there is a huge upside of continued fantastically profitable mining for many more months if delivery estimates ended up being too high (which is entirely possible if shipments only slowly leak out, especially if the block reward drop sends most GPU mining to pasture).

Just like BFL's announcement in June put a damper on competing FPGA manufacturers, there very well could be some innovation that will slow demand for more of the first generation of ASIC miners.  [Edit: Like what would happen if this suggestion to increase the Nonce size were to end up on the schedule:
 - http://bitcointalk.org/index.php?topic=89278.msg1250067#msg1250067 ]

So between the uncertainty about when these ASIC ship, what volume of hashing power ships, future price of hashing power, and the future BTC/USD exchange rate, there's no guarantees whatsoever here.  Who thought mining would become a bigger risk than investing in coins even?

[Statesman]

So if you anticipate BTC appreciation, you should buy BTC.

Am I wrong to anticipate depreciation of BTC? My reasoning is that upon the first wave of ASICs going live, that the BTC market gets inundated with BTC volume. I say that because I don't imagine the developers being ready to increase difficulty/reduce block rewards at a perfect 1:1 ratio against the increase in hash/s. I feel that more BTC will be produced than expected, or at least at some skewed rate, reducing the USD-BTC exchange.

Poke some holes in that (/no sarcasm). I'm new to BTC, and would appreciate educated opinions.

[Statesman]

Hi,

The difficulty is adjusted automatically, so no developer concensus is needed. But the readjustment occurs only after every 2016 blocks, so if the network hashrate is on a tear, the difficulty adjustment "lags" a bit, resulting in somewhat more coins produced per month than intended. I estimated that 2013 the total mining would be 1.5 vs. 1.3 million BTC.

So if I am understanding your post, the developers don't have difficulty level control of blocks? How will that effect the introduction of ASICs and the resulting effect on the BTC market? Do you personally expect a drop in BTC-USD exchange when they go live?

[Statesman]

That makes sense to me. I'm currently trying to assess the overall feeling towards the ASIC release, and see if I can join the fun. I missed the good days of GPU mining, and I know it's too late to smartly invest in FPGAs, so ASIC seems like my last chance at making a good mining cut.

I'm in the US. I have a thread live on bitcointrading if you're interested in buying. I ship international. Otherwise, PM me for anything else. Cheers.

[nobbynobbynoob]

I've taken the ASIC plunge with no illusion that it's a risk-free get-rich-quick scheme. But I've done this with the understanding of the possibility of going bust...

[Aahzman]

Yeah, I placed a pre-order for tools that may help me earn BTC  marginally faster than GPU mining, but like the poster above, I certainly do not foresee BFL Jalapenos making me rich.  For me, it's more about being in on the (close to) ground floor of something cool and interesting, and going along along for the ride to see where it goes and what it becomes.

[BobbyJo]

Exactly.  Unless you buy a lot of ASIC (and risk a lot of cash), mining will not make you a ton of money.  I do this as a hobby, but ASIC is a must if you want toearn anything in the future.

[legolouman]

Hi,

The difficulty is adjusted automatically, so no developer concensus is needed. But the readjustment occurs only after every 2016 blocks, so if the network hashrate is on a tear, the difficulty adjustment "lags" a bit, resulting in somewhat more coins produced per month than intended. I estimated that 2013 the total mining would be 1.5 vs. 1.3 million BTC.

So if I am understanding your post, the developers don't have difficulty level control of blocks? How will that effect the introduction of ASICs and the resulting effect on the BTC market? Do you personally expect a drop in BTC-USD exchange when they go live?

The network controls the difficulty. Bitcoin could run indefinitely without the developer base as long as the network is still there. Bitcoin is a protocol that is followed by the network.

[nobbynobbynoob]

Exactly.  Unless you buy a lot of ASIC (and risk a lot of cash), mining will not make you a ton of money.  I do this as a hobby, but ASIC is a must if you want toearn anything in the future.

The amount in fiat that I've risked, ahem, invested would be a heckuvalotta cash if we'd remained on the gold standard. But I figure at my age and with the current economic/life situation, I've got little to lose investing a relative good deal of time/money in something new, and that something is Bitcoin. It's not just about mining or speculating, although I'm going to be doing some of both of those. Trying to promote/explain BTC to joes and janes in the street has been a bit of a bang-head-against-wall job thus far, although my auntie, who's hardly technically gifted or an IT expert to say the least (!), somehow seems to "get it". Or she's just good at pretending to follow.

Yes, BTC investments are pretty risky, but so's walking to the grocery store.

[Gabi]

I say that because I don't imagine the developers being ready to increase difficulty/reduce block rewards at a perfect 1:1 ratio against the increase in hash/s

Nonononono. This is totally wrong!

No one increase or decrease the difficulty! There is no one behind bitcoin, there is only MATH. Developers can only watch, that's all what they can do: watch, nothing more.
Difficulty depend on total hashing power  And reward is reduced after a certain number of blocks, roughly the number of blocks found in 4 years

[Statesman]

I say that because I don't imagine the developers being ready to increase difficulty/reduce block rewards at a perfect 1:1 ratio against the increase in hash/s

Nonononono. This is totally wrong!

No one increase or decrease the difficulty! There is no one behind bitcoin, there is only MATH. Developers can only watch, that's all what they can do: watch, nothing more.
Difficulty depend on total hashing power  And reward is reduced after a certain number of blocks, roughly the number of blocks found in 4 years

Good to know, I feel a little better about the whole situation. My main concern still is the undetermined about of hashing power that will go online when ASICs deliver. Would that not increase the volume of BTC available, thus driving down the price?(Against USD/EUR)

[nobbynobbynoob]

Good to know, I feel a little better about the whole situation. My main concern still is the undetermined about of hashing power that will go online when ASICs deliver. Would that not increase the volume of BTC available, thus driving down the price?(Against USD/EUR)

The network difficulty level adjusts to regulate the rate of coin issuance, but this happens every 2k blocks or so, so there's a bit of a lag. A glut of miners selling fresh coin, should that happen, may well depress the exchange price vis-à-vis fiat bankster paper.

[powersync]

How does Litecoin figure into this?  Will the GPUs just move over to there?

[Statesman]

Good to know, I feel a little better about the whole situation. My main concern still is the undetermined about of hashing power that will go online when ASICs deliver. Would that not increase the volume of BTC available, thus driving down the price?(Against USD/EUR)

The network difficulty level adjusts to regulate the rate of coin issuance, but this happens every 2k blocks or so, so there's a bit of a lag. A glut of miners selling fresh coin, should that happen, may well depress the exchange price vis-à-vis fiat bankster paper.

Thanks for the response.

[Stephen Gornick]

How does Litecoin figure into this?  Will the GPUs just move over to there?

Currently at $12 per BTC, the 7,200 BTC bitcoin miners earn each day are worth $86,400.  That amount is distributed among all the miners proportionally based on the amount of hashing work performed.  

Litecoin blocks are targeted at 2.5 minutes, and with 50 BTC per block that means 28,800 BTC are mined each day.  At $0.06 per LTC means all litecoin mining together produces $1,728 USD.  

I have no idea of the profitability of mining litecoin today but I'ld bet that $1,728 a day mined is stretched fairly thin already. Come block 210,000 an influx of GPU refugees from bitcoin will be making their way over to Litecoin hoping to find another revenue stream, but it is just a tiny fraction of Bitcoin's.    The cost of running a GPU is the same, whether mining bitcoin or litecoin.   The most likely result will be to simply power it all down and liquidate the hardware.

[Graet]

How does Litecoin figure into this?  Will the GPUs just move over to there?

Currently at $12 per BTC, the 7,200 BTC bitcoin miners earn each day are worth $86,400.  That amount is distributed among all the miners proportionally based on the amount of hashing work performed.  

Litecoin blocks are targeted at 2.5 minutes, and with 50 BTC per block that means 28,800 BTC are mined each day.  At $0.06 per LTC means all litecoin mining together produces $1,728 USD.  

I have no idea of the profitability of mining litecoin today but I'ld bet that $1,728 a day mined is stretched fairly thin already. Come block 210,000 an influx of GPU refugees from bitcoin will be making their way over to Litecoin hoping to find another revenue stream, but it is just a tiny fraction of Bitcoin's.    The cost of running a GPU is the same, whether mining bitcoin or litecoin.   The most likely result will be to simply power it all down and liquidate the hardware.

actually mining Bitcoin you can downclock ram - saves power
Litecoin mining on GPU requires at least stock ram for best results
so Litecoin mining will cost more

[Aahzman]

Whoaaaaa.. I got away from the Newbie-cage!! =) Goodbye, it was nice to see you

You won't get very far...you'll be back. :-)

[IntrepidMiner]

Whoaaaaa.. I got away from the Newbie-cage!! =) Goodbye, it was nice to see you

Good luck out there in the real world!