Mining

Is Ether mining profitable?

You may also ask: Is currency speculation profitable? Because there is not a big difference. The operator of a mining rig invests material (his or her rig) and energy (and nerves;-) in order to exchange the mined Ethers at some day in the future - hoping that the exchange rate will then be much higher than today. Looking at the volatility of all crypto currencies, such an endeavour bears a high risk on the one hand. On the other hand, the profit margin can be considerable. Especially in the case of Ethereum there are some arguments which seem to suggest that the Ether exchange rate will rather rise than fall in the long term:

  • The technology is still new. It is to be expected that many new applications based on smart contracts will be created during the next years. The processing of such contracts needs to be paid with Ethers. Therefore, the Ether demand should grow over the years.
  • At the same time, the planned switch from "proof of work" to "proof of stake" will make it more difficult to generate new Ethers by mining new blocks. Therefore the growth of the total amount of available Ethers will slow down. However, this also means that it might already no longer be wise to invest in new mining hardware. (See also the warning issued by the Ethereum project on GitHub.)
  • Currently, many (around 1.000) crypto currencies exist. Eventually, only few will surive. Some of them will also be exchanged into Ether, thus raising it's exchange rate.

Mine or buy?

If you should be willing to take the risk, one important question is: Should you start mining or just buy Ether? The answer depends on several factors, mainly on the current Ether exchange rate. If it should be low, it would not make much sense to invest expensive energy in mining. In such a situation it would be much more advisable to just buy some amount of Ether (e. g. via coinbase). Every Euro (or Dollar) can only be spent once … But when exactly is it more profitable to buy Ether instead of earning them by mining?

The probability to mine a new block using a mining rig having a hash rate of hRig depends on the total hash rate of the Ethereum network hE which is generated by all miners in the world:

   wB = hRig / hE

The hash rate of the Ethereum network hE is not constant. It is regularly published by etherscan.io, for example.

Example: Currently, hE has a value of about 270 TH/s. The chance that a mining rig yielding 90 MH/s mines the next block is 90 • 106 / 270 • 1012 ≈ 3,3 • 10-7. This value is obviously quite small. But we have to take into account that our little rig will get a new chance about every 15 seconds. The probability of mining a new block during a longer time interval  Δt  is: w(Δt) = wB • Δt / ΔtBΔtis the average time needed to generate a new block (currently about 15 seconds). Using these few numbers we can roughly guess how long our miner will need to mine it's first block: Setting w(T) := 1 we get: T = h/ hr • ΔtB = 4,5 * 107 s. So, it will take him about 1,4 years.

If this is worth all the hard work depends on several factors:

  • In case of solo mining, on the Ether exchange rate at the point in time when the mined Ethers are sold. This point can be far in the future if the hash rate should be low because at least one block needs to mined.
  • In case of pool mining on the current Ether exchange rate KE.
  • On the average reward gB, the miner gets for mining a single block. This value is composed of several components:
    • Three Ethers reward for mining the block. (This value might be decreased in the future!),
    • Charges for processing all transactions contained in the block (the so-called "gas"),
    • Further rewards: "uncle rewards" and "uncle inclusion incentives".
  • On the energy costs to be invested (price per kWh combined with the power consumption of the rig).
  • On the depreciation of the used hardware (procurements costs and dpepreciation period).

Further costs should also at least be mentioned:

  • A typical mining pool (e. g. Dwarfpool) withholds 1 % of all mined Ethers.
  • When the Ethers are to be exhanged into a fiat currency (Euro, Dollar, …) further charges are due. In case of Coinbase the profit will be lowered at least by another 1 %, for example.

Looking at all these factors, especially the Ether exchange rate is quite volatile. Therefore a threshold value of this parameter shall be calculated.

The profit G(Δt) can be calculated as follows:

   G(Δt) = w(Δt) • gB • KE - kS(Δt) - kA(Δt)

kS(Δt) denominate the energy costs and kA(Δt) the depreciation costs generated during the time interval Δt. The charges raised by the mining pool or the exchange office are not taken into account here. The two cost factors are:

   kS(Δt) = PRig / 1.000 • KkWh • Δt / 1 h

   kA(Δt) = KRig • Δt / ΔtA

With:

   PRig: Power consumption of the rig
   KkWh: Energy price per kWh
   KRigProcurement costs for the rig
   ΔtADepreciation period (e. g. three years)

Obviously, mining is profitable if the miner's total reward exceeds the costs. The condition is:

        G(Δt) = 0

    ⇒ KE0 = (kS(Δt) + kA(Δt)) / (w(Δt) • gB)

    ⇒ KE0 = (PRig / 1.000 • KkWh + KRig / (Δt/ 1 h) ) • hE • (Δt/ 1 h) /  (hRig • gB)

Mining is profitable whenever the current Ether exchange rate lies above this threshold value. The calculator on this site calculates this threshold value.