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What are the key variables to a successful bitcoin mining business?
Hello! Thanks for your question about the key variables to a successful bitcoin mining business. Your request included a link with details on the technical set-up of the business (with details for example on cooling the server) and stated a preferred strategy of information on financials first and then other variables.
The short version of a response to your request is that there are two key financial variables to setting up a bitcoin mining business. The first is access to an inexpensive energy source. In the United States energy costs average about 10 cents per kWh which is fairly low but not the lowest of about 7 cents per kWh in countries like Sweden. The second variable is access to the best process for "hashing" or solving the bitcoin block problem to verify transactions for which miners are paid in bitcoin currently 12.5 bitcoins per block and also receive related transaction fees. The current best process involves operation of an ASIC model blade server, recommended model an S9, and participation in one of the mining pools for solo operators. With these cost variables, in mind 2017 sources show that a solo operator will earn around $500 in annual economic profits. The more machines owned the more profits and one source showed that with very inexpensive energy and operation of $1000 units, $200,000 in annual economic profits are possible, although this work would mostly likely be part of an industrial operation in a remote region. The best sources are Source 9 the article from Business Insider which gives current rates for mining and Source 19 the article that shows the risks of operating and likely profit for a small scale operation.
Methodology
I started the research by confirming the technical set-up information provided in your link to the bitcointalk.com blog. With this understanding of the technical requirements, the research was provided to support entry into the market by an individual with the necessary computer and hardware technology and an understanding of the technology. Since the physical barriers to becoming a bitcoin miner were reasonable, the next focus was to search websites for the energy requirements and the cost of the energy.
Additional resarch mostly from industry and trade publications provided the value of the bitcoin operation with consideration of small and large scale operations. Next the research looked at website recommendations for overcoming challenges of a small bitcoin mining operation.
Finally, although this request does not respond to the regulatory challenges of bitcoin mining, the research considered whether the business model is sustainable in the long term or just a short term option in which all of the fixed costs might not be recovered.
This information forms the basis for developing a business plan which addresses the market including obstacles, the methods to overcome the obstacles and the level of economic profits available to a solo operator alone or in a pool.
Variable 1 - Financials or Income and Profits
A writer on Business Insider in August 2017 sets forth the high profits that may be available to a bitcoin mining operation. In a post titled Bitcoin miners are making a killing in transaction fees, the writer states that at that time the rate for verifying a blockchain was 12.5 bitcoins for unlocking the block. The site coindesk.com shows the United States dollar price for a coin at $5,551.30 today. Other evaluations reflect limitations on generation of the bitcoins such as energy usage equivalent to the annual usage of the average US household to produce 4 bitcoins. These evaluations counter with assessments of profits closer to $500 with the possibility of a loss in this amount as well.
Variable 2 - The Cost of Equipment
The research looked at any difficulties with the acquisition of equipment with a focus on the ASIC (blade servers) required as of 2017 for competitive acquisition of bitcoins through mining. The recommended model was an Ant Miner S9. However, much of the analysis in the blogs is based on use of the Ant Miner S7 and other models. The research confirmed that the cost of a model is impacted by the variability in the value of the mined bitcoins. The range of costs shown were as low as $345 for industrial level miners buying in bulk and $3500 for a model available in stock on Amazon. In any event since the cost tracks to some extent the value of bitcoin in the market place, this is a reasonable investment. Some sources discussed cloud mining but this method is largely dismissed by the industry blogs and publications as subject to scams.
Variable 3 - Energy
The impact of available low cost energy is a critical variable in the operation of a bitcoin mining operation both large and small scale businesses. Also, interruption of the hashing operation can lead to a complete loss for the operator of the related bitcoin. In a blog post dated 9 months ago and entitled "Bitcoins Energy Consumption An Unsustainable Protocol That Must Evolve?", the post writer explains that creating 4 bitcoins uses the same amount of energy as used by the average United States household in a year. Because of this high level of energy usage, the lower your cost of energy and the more reliable the energy source, the more bitcoin your business can generate. Many of the most profitable operations are now at the industrial level of operation and run in remote areas. Also, at one time a dark market existed where unsanctioned individuals took advantage with laptops and personal computers to access power and server systems without authorization. These unregulated businesses reflect the vulnerability of any bitcoin operation to regulatory and legal challenges. The extent of such challenges can be provided in a response to an additional request.
Variable 4 - Pool Mining
Since industrial scale operations are shutting out many smaller scale businesses, pool mining offers a method to participate that is still effective for smaller businesses. The miner gets paid for the portion of work done in mining the block chain transaction. These pools are described as either shifting risk of failure to the miner or the pool operator. Higher fees to the pool operator/owner are required when the risk is primarily with the pool operator.
Variable 5 - Sustainability
Some economists question the sustainability of the bitcoin model and challenge whether the fees paid to the bitcoin miners for transactions related to the mined bitcoin are reasonable. The fees vary greatly depending on the market for bitcoin but are part of the siginificant profits to the miner. Others question whether the amount of energy usage for the bitcoin operation is unreasonable and will result in a failure of the industry in the long term.
To Wrap it Up, a business plan for a bitcoin mining business will show that both moderate and greater profits are possible. When the rate for bitcoin mining is high with miners receiving 12.5 bitcoins for each blockchain transaction that "hashing" verifies, this business seems highly profitable. On the other hand, when rates are lower profits may be as low as $500 and even losses can occur. The key variables to start up of this business are purchase of the most energy efficient and reliable equipment and use of low cost energy resources to operate the mining. Energy constraints and high transaction fees paid to bitcoin miners may impact the longterm sustainability of any business model.
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