Bitcoin mining in 2022: Is it still profitable & what are the challenges?

Bitcoin mining in 2022: Is it still profitable & what are the challenges?

Despite the slowdown, crypto adoption has been on a rise with more people wanting to dabble a little in crypto investments. However, crypto mining does not come cheap as mining one Bitcoin isn’t as valuable as it used to be a few months ago.

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Cyrus John ‘New DelhiAugust 18, 2022UPDATED: August 18, 2022 12:59 IST

Bitcoin mining consumes a lot of energy. (Photo: Sourish Samanta/Canva)

HIGHLIGHTS

Network difficulty and electricity cost are key factors for Bitcoin miningMiners prefer cooler climate for setting up rigsBitcoin mining is key for maintaining the decentralised ledger

Bitcoin has been the de facto gold standard for cryptocurrencies around the world. The fact that a majority of the top cryptocurrencies are affected by Bitcoin’s performance corroborates its value in the crypto ecosystem. However, two of the biggest reasons that Bitcoin is the most-valued crypto globally are due to its limited supply and because it’s tough to mine.

A recent report by 911Metallurgist, which is a mining research and analysis firm, says that the mining cost of procuring 1 Bitcoin in India as of March 2022, is around $40,425, which is roughly Rs 32.13 lakhs. Now, this calculation is based on the data acquired from the World Bank and Cable.co.uk and also the number of days and wattage that is required to mine Bitcoin using the Avalon 1246 miner from Coinwarz.

Just for context, the price of 1 Bitcoin at the time of writing this story is $22,993 (Rs 18,33,944 approx).

The report also highlights the mining cost of Bitcoin in other countries, where the highest cost has been recorded in Venezuela ($246, 531) while the lowest has been reported in Kuwait at just $1,394. In countries like Qatar, North Korea, Kazakhstan, Angola, Zambia and Sudan, the mining cost for 1 Bitcoin is less than $10,000.

Though Bitcoin isn’t the only crypto that is being mined around the world, it certainly is the most coveted one that offers the maximum returns possible on each token mined.

However, the vertiginous drop of Bitcoin from an all-time high of near $68,000 to a current trading value of $23,953 has made it difficult for miners to sustain operations and reap profits at the same time.

Despite the downfall, there are still many mining farms and nodes that are mining Bitcoin relentlessly. Why is mining important? Is there still profit in mining Bitcoin in 2022? What is the cost that miners are incurring and what are some of the challenges? Let’s find out.

Bitcoin mining & its importance

Bitcoin mining is a complicated process that involves validating Bitcoin transactions on the blockchain. Bitcoin miners use powerful computers to run mathematical calculations where the resulting output is a 64-digit hexadecimal code. This happens through a process called a hashing function. This code is added to a decentralised ledger where transaction blocks are created. These blocks are then added to the Bitcoin blockchain, which is a network of computers globally running the Bitcoin software.

The process of mining is extremely power-intensive and miners currently get rewarded with 6.25 BTC ($148,786) tokens for mining a block and adding them to the blockchain. Today, miners are deploying powerful machines called Application-Specific Integrated Circuit (ASIC) that are much smaller in size and have more computational power than conventional GPU (Graphics Processing Unit) and CPU (Central Processing Unit) mining rigs.

The Bitcoin blockchain works on the proof-of-work consensus method. (Photo: Sourish Samanta/Freepik)

Mining is quintessential to the Bitcoin blockchain’s security and validity. It sits at the core of Bitcoin’s consensus method, which is proof-of-work (PoW). With the help of PoW, miners in the blockchain reach a consensus on a transaction before adding it chronologically to a blockchain. This is how the Bitcoin blockchain is able to maintain a decentralised ledger.

What factors determine the cost of Bitcoin mining?

Though the market price of the token plays a crucial role in the Bitcoin mining ecosystem, there are other key aspects that determine the cost as well.

“Bitcoin mining cost depends on 2 factors: Network difficulty level & electricity price. Electricity is the most important raw material for Bitcoin mining. Network difficulty decides the reward for each block that an ASIC pod completes.”

– Vikash Agarwal, Bluewheel Capital

The difficulty is a measure of how difficult it is to mine a Bitcoin block. If the difficulty level is high, rewards are less and if difficulty levels are low, the rewards are more.

Recently, due to a crash in Bitcoin prices, many ASIC miners with high electricity costs were switched off, due to which the difficulty level dropped by 10 percent simultaneously, resulting in a 10 percent increase in Bitcoin production.

Factors that determine Bitcoin mining. (Photo: Sourish Samanta/Freepik)

Miners also need to factor in the climate in an area before setting up a Bitcoin mining setup.

“One of the most important factors in Bitcoin mining is controlling the temperature of these ASIC pods. Russia has cheap electricity, a cold climate & low humidity, which increases machine efficiency and reduces the cost of production. Dubai has a very hot climate & high electricity prices. Bitcoin can be mined in Dubai using liquid cooling, but higher electricity prices make it expensive to mine.”

– Vikash Agarwal, Bluewheel Capital

It is estimated that the Bitcoin mining network alone uses over 120 Terawatt-hours of energy per year. That’s around 0.6 percent of the global energy supply and almost the whole of Argentina’s electricity supply in a year!

Miners at Bluewheel Capital use hydro & nuclear power sources of energy that are more sustainable and environment-friendly compared to coal and fossil fuels. However, even these do not help reduce the cost of mining.

Additionally, you also have to factor in the cost of setting up a mining rig. You might have to consider the cost involved when choosing between ASIC and GPU mining hardware for a better mining strategy.

Both GPU and ASIC mining hardware are pricey, so the cost of setting up will depend on the size of the rig. For example, one powerful ASIC might be priced the same as a couple of GPUs, while there may be times that several GPUs might be cheaper than a single ASIC unit. Therefore, you also have to consider factors like cooling units and physical space for your operation to yield profits in the long run.

Is Bitcoin mining still profitable?

Being the most-valued crypto in the market, the returns on mining Bitcoin are also on the higher side compared to other cryptos. Considering the current value of Bitcoin, many miners in countries where electricity is cheap are able to yield profits as opposed to places where hardware and electricity costs are more.

But here’s the thing, in order to get profits out of Bitcoin mining, you need to make sure that your mining rig setup plus electricity cost is less than the value of Bitcoin mined.

Is Bitcoin still profitable with prices down? (Photo: Sourish Samanta/Freepik)

Just like the mining of physical assets like gold and silver is affected by their prices, even Bitcoin’s mining cost is affected by its trading price. Back in November 2021, Bitcoin was trading at almost $68,000, which is an all-time high for the token to date. Today, it’s trading at between $23,000-$25,000, which has made a substantial number of miners jump ship.

Despite the dip, there are a lot of miners who are still invested in this space and mining Bitcoin. Vikash Agarwal from Bluewheel Capital, which is a crypto mining firm headquartered in Dubai, said that Bitcoin mining is still profitable.

“We mine in Russia and the average cost of production at the preferred location is approx. $12,000 to $13,000 which makes it viable to mine. Bitcoin miners usually use the ‘hold & mine’ strategy to sell bitcoin at a higher price to earn a higher profit. Liquidity can be arranged by staking Bitcoin in various Defi (Decentralised Finance) projects instead of selling.”

– Vikash Agarwal, Bluewheel Capital

Rohit Khandelwal, who is the co-founder of CoinGabbar.com and also a crypto influencer, also believes that Bitcoin mining is still profitable and miners are accumulating the mined crypto right now to sell it later when the Bitcoin price is up.

Since many of the crypto miners have already established their mining rigs, there isn’t any additional cost involved apart from the electricity cost which they’re ready to bear. Since Bitcoin is at a low and the cost of electricity is getting higher, most of the miners are looking to adopt the ‘mine and hold’ policy.

Also, you also need to understand that mining rigs require regular maintenance, so you need to be wise before choosing between the ASIC and GPU mining strategies for maximum profitability.

“Mining machine repair service centers are also important to look at while selecting a country to mine. Else you could end up paying high charges for transporting faulty rigs to the nearest mining centers with a delay in repair time. This would lead to a high cost of production and loss of time.”

– Vikash Agarwal, Bluewheel Capital

So, while crypto mining is still considered profitable in many parts of the world, one primarily needs to factor in the cost of mining in their country as it differs from one region to the other.

Bitcoin mining in India vs other regions

Stringent policies and the increasing antagonistic demeanour of many people who lost money in crypto investments in India have led to crypto being crucified on TV debates and social media. Crypto adoption is taking a hit and so has mining.

Compared to countries like Russia and Dubai, crypto mining in certain parts of India is more expensive because it mostly boils down to the cost of electricity and climate.

Crypto adoption picked up in India in Q4 2021. (Photo: Sourish Samanta/Freepik)

As per Vikash Agarwal from mining firm Bluewheel Capital, in Russia, with the electricity cost at 6 cents per kWh, it costs $11,600 to mine 1 Bitcoin. In the USA, at 8 cents, it would cost $13,500.

In India, at an average electricity cost of Rs 10 (12.5 cents) per kWh, it would cost around $23,900 per Bitcoin at the current difficulty level. Though electricity costs vary across states in India, certain states like Chhattisgarh, Orissa and Jharkhand, offer electricity at an average of Rs. 5 (6 cents) per kWh for information technology & data centres. In these states, mining Bitcoin would cost around $12,000. These numbers tend to vary depending on how expensive your mining rig is and also the rent you pay for your setup.

Also, mining in countries that have a cooler climate is cheaper compared to India due to low temperatures, so less airflow management is needed.

But the climate isn’t the only challenge for Bitcoin mining operations in India. Ever since the Indian government imposed heavy taxes on digital assets including Bitcoin, people have been dissuaded from investing in this space. To make things worse, there are no tax exemptions when you’re venturing into the mining side of the business.

“All the infrastructure cost, electricity cost, resources and allied costs incurred in the mining of VDA’s (Virtual Digital Assets) will not be allowed as a deduction against the income generated from the sale of VDA earned from mining. As VDA’s are earned through mining, the cost of purchase is zero and the actual cost to earn them is the mining setup cost. But currently, as per the provisions of section 115BBH, no deduction apart from cost of purchase is allowed and therefore the cost of acquisition of VDA earned from mining is zero and the entire sale consideration from it is taxable.”

– Tarun Modi, VDA Legal and Taxation Consultant

Just like how crypto investors are recommended to do their own research before investing in cryptocurrencies, businesses looking to enter mining also need to consider factors that will ensure their businesses thrive in the long run.

“I would suggest mining in countries that have proper laws for Bitcoin mining. Smaller countries usually get electricity drained and later they increase electricity prices or ban mining. It is also important to consider the legal import of machines at mining destinations by legitimate customs clearances. There have been instances where mining was banned, or data centers were audited & machines were seized due to lack of documentation. Well-developed nations and legitimate documentation are two key factors for a safe & long-term mining operation.”

– Vikash Agarwal, Bluewheel Capital

The future of crypto in India hangs in the balance with ambiguity around regulations and laws for crypto. With countries like Russia, Dubai, and some middle-eastern nations offering better returns for miners with lenient tax laws and the availability of hardware, it’s no surprise that these places are becoming more popular for the crypto mining industry.

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