Opinion: Profitability of mining - myth or reality?

Many analysts use the term profitability when forecasting the price of bitcoin and other cryptocurrencies. Let's try to figure out what it is and how much it affects the price of cryptocurrencies.

Wikipedia tells us that Profitability is a relative indicator of economic efficiency. Economic efficiency, in turn, is the ratio of the results obtained to the costs. 

How to calculate the “profitability” of mining? 

We will consider the example of bitcoin, although the scheme will remain the same for all more or less common cryptocurrencies that use PoW (that is, mining). 

Very conditionally, for mining we will need: a device that will calculate hashes (for bitcoin ASICs have driven out all other solutions from the market). You will need the Internet - but the traffic created during mining is so tiny that it can be ignored. But we will need electricity. And you will need a lot of it.

If electronics are doing very well with physical wear and tear, then with moral obsolescence everything is sad. New chips for mining are constantly being released, manufacturers compete to improve technology, and each new generation of ASIC, if not throwing its predecessors into the trash, then greatly reduces their efficiency. And this, in turn, will force anyone who decides to become a successful miner to change equipment sooner or later.

In general, we have identified the main costs - equipment and electricity. And if everything is clear with the equipment, then how to calculate the amount of electricity? 

And this is where the fun begins. Most likely, the profitability of mining, which analysts operate on, is “temperature average in a hospital” - that is, the total hashrate of the network was taken, which can be calculated based on the current difficulty, the average power of modern ASICs was taken, and the calculation was made based on their energy consumption. 

Voila! And we can say that “the profitability of mining is at least 3,000 US dollars per bitcoin.”

But, as Raikin said: “In principle, you are right. But in essence, you are deeply mistaken.” And now we'll look at why. 

This calculation does not take into account one of the main properties of mining as such. 

Namely - "the winner takes all". 

That is, the miner or pool of miners who signed the block receives the entire reward. And they distribute it among themselves “according to the tickets purchased”.. And there is no guarantee that if you have an ASIC with a certain hashrate, you will be one of the lucky ones. But you will burn electricity in any case. And so do the funds spent on equipment. And it turns out that “on average” has already distorted the above calculations. 

Suppose statistically that over a sufficiently long period of time your pool still receives favors from the theory of probability, and on average your hashrate pays off quite well. And even for the indicated amounts.

But the problem lies in the fundamental organization of the PoW algorithm itself.

Mining, as a process, was initially intended to motivate network users to spend resources on calculating not very useful hashes in order to ensure the viability of the network and the immutability of the blockchain. And the reward of a miner in the network is not a goal, but a means. 

Initially, it was proposed to release blocks every 10 minutes in Bitcoin - approximately this time was calculated to prevent double spending. Other cryptocurrencies “play” with this constant, some claim a decrease in the interval as an advantage. However, the creators of bitcoin set exactly 10 minutes.

Let's consider a hypothetical situation: after seeing how interesting and profitable it is to mine, one hundred new miners join the newborn bitcoin. With those existing at that time, for example, fifty. Simple mathematical calculations say that the total hashrate will increase at least three times. But the time passing between blocks will drop, and also threefold. For example, up to three minutes. But this would clearly contradict the ideology of the network itself. 

A simple and elegant solution was found. This is the samecomplexity of calculation. It is not a constant, but changes dynamically throughout the network depending on the time it takes to sign blocks. The more miners entered the game for a “valuable prize,” the higher the difficulty becomes. But the opposite is also true - the fewer miners, the lower the difficulty.

In practice, this makes bitcoin viable even with 100 live miners on pocket calculators. That is, if “mining has become unprofitable”, inevitably a certain number of miners will turn off their farms, sell off the remaining scrap metal and leave to “do startups.” But the reward will not change, but there will be fewer people willing to apply for it.. The network will adapt to the new hashrate and maintain on average the same block output rate - one per 10 minutes.  

So what happens: they lied to us all this time? 

Not really. Over short periods, of course, economic efficiency can influence the price of bitcoin - miners will simply hold onto their rewards in anticipation of a more favorable rate. 

But in the medium term, this indicator no longer seems to me to be a reliable parameter for forecasts.