Is bitcoin mining real

Earning Money With Crypto Mining: Opportunities, Risks, Alternatives

Cryptocurrencies, above all Bitcoin, have been experiencing a - at times changeable - boom for several years. From an alternative means of payment, virtual money has developed into a popular object of speculation over the past five years.

The equivalent in “real” currency has risen exorbitantly in some cases, as has the desire of many people willing to invest to participate in the hype. After all, even in short periods of time, there are significant profits.

On closer inspection, however, it is not that easy to get your own piece of the crypto cake.

Crypto Mining: The Easy Road To Wealth?

In theory, the concept of mining sounds quite simple: You get a computer with sufficient computing power, the necessary software and from this point on you can (theoretically) watch the so-called mining rig pull in the money. What sounds like a possibility with which even absolute technicians can land the big hit, but turns out to be a thoroughly complex matter.

On the one hand, this is due to the fact that the underlying blockchain technology is already based on complexity. In order to be able to carry out transactions with their help, highly complex cryptographic algorithms have to be resolved. In theory, this can also be taken over by commercially available computers. In fact, there are even smartphone apps in circulation that use the computing capacity of the phones without the knowledge of the owner to mine bitcoins or other cryptocurrencies.

The biggest problem, however, lies in the nature of the technology itself - it is designed in such a way that the greater the number of transactions, the greater the complexity of the algorithms to be solved. If you actually want to earn money from mining under these conditions, you will not be able to avoid some investments. To make matters worse, Bitcoin and Co. belong to the type of investment in which the return on investment depends on a large number of variables.

The different ways - Proof of Work and Proof of Stake - to get the coveted Bitcoins do not change that much. The factors that influence price development and thus revenue always remain the same.

Above all, the limited number of available Bitcoins, which caused prices to skyrocket due to the drastic increase in demand. It is ultimately the effects of this simple supply-and-demand principle that ensure the ongoing run on virtual currencies.

Because investors speculate on a further increase in Bitcoin prices, which means that the sums invested can be quickly amortized again. Nevertheless, the only question that remains to be asked again is whether it is really that simple.

Crypto mining: the prerequisites

A fundamental prerequisite for being able to start mining for crypto currencies at all is an understanding of the interrelationships. Broken down to a very simple calculation, it is as follows: First and foremost, it is about converting electricity into money.

As the introductory section has already shown, this is a greatly simplified and abbreviated representation of what actually happens in mining.

Basically, however, it is the same: Resolving the algorithms requires immense computing power, which in turn requires a large amount of electricity. In order to be able to earn money successfully under these conditions, the following factors must be taken into account:

  • a high megahash or gigahash performance per second
  • the lowest possible electricity costs
  • the lowest possible power consumption per mega or gigahash - or even per bitcoin generated

So it boils down to an equally simple cost-benefit calculation, in which the expenditure on electricity is the most important factor. Of course, one can argue that financial success is always at the miner's discretion anyway.

But even for those who would be satisfied with minimal income, the increasing demands will eventually come to a point when mining is no longer even cost-effective.

In addition, there is the need to invest in hardware, since a standard computer at the present time could hardly even come close to providing the computing power that it actually needs.

The hardware

ASICs

In mining, profit maximization only works by maximizing computing power. That is a question of the hardware, which should be coordinated as well as possible to solve the algorithms. The "simplest" solution are so-called ASIC special chips, which stands for Application Specific Integrated Circuit. Translated, this means that this type of chip has an application-specific integrated circuit. This defines its function after production and cannot be changed afterwards.

However, this is also irrelevant for mining, because the adaptation ultimately ensures that the ASICs can be used to work much more efficiently and quickly than, for example, solving the same tasks using software. Since the chips can actually be manufactured according to the needs of the users, they seem ideal for Bitcoin mining. However, tailor-made production is associated with high investment costs for development - which could be offset by lower production costs.

However, if capital is only available for a small number of items, an investment may no longer be worthwhile. Especially against the background that the development time is significantly longer than with other components.

Under certain circumstances, chips that have been developed and produced no longer meet the demands of algorithms that are becoming more complex, if they can be built into the existing mining rigs.

Graphics cards

Another way to generate sufficient computing power with your rig is to use powerful graphics cards. Instead of creating detailed, realistic computer game worlds, graphics cards from AMD in particular can be used to mine bitcoins. However, they cannot match the performance of the special chips, which is why the additional hardware is increasingly designed to integrate more than one graphics card into the system.

However, this cannot be implemented on a mainboard because the necessary slots are missing. In order to still be able to access three or more graphics cards at the same time, PCIe x1 adapters and corresponding cables, for example, are used instead to implement the connection.

This in turn gives rise to another problem, since not only the mainboards, but also the housings are not designed for such a number of graphics cards. If between six and eight graphics cards are to be connected to the mainboard, in principle only an open mounting frame remains as a useful alternative.

It can of course also be smaller, various manufacturers have recognized the trend and are delivering the finished special hardware to the house, so to speak. It starts with the size of a USB stick, but can also be larger and therefore more powerful if desired. As a potential miner, you save yourself having to look for and build the required components in this way.

That could prove to be difficult anyway, because time and again we hear of such excessive demand for certain graphics cards that the market situation lies between delivery bottlenecks and sell-out. At the moment, however, the market for graphics cards looks more like a bit of relaxation. The reason for this, however, is once again an ASIC developed for mining, with which Ethereum mining is now also possible.

Hardware aftermarket

As a result of the demand, the prices for graphics cards in particular have risen sharply, which only makes it even more difficult for private users to put together a cost-efficient mining rig. Alternatively, however, there is the possibility of purchasing such rigs - even if you have built them yourself - directly. Analogous to the prices for the cryptocurrencies, the prices for such computers have risen, which is why it has now also become a lucrative business to sell mining rigs via various sales portals.

It is by no means cheaper for the end user, the prices are well in the four-digit range. The quick entry into mining therefore costs and in the end it always remains questionable whether this sum can be amortized within an acceptable period of time. After all, investing in higher computing power also means higher follow-up costs for electricity.

The market for beginners who do not want to rely on their own hardware knowledge still seems to exist. After all, work is currently underway to find new algorithms that will also make mining with standard hardware more efficient again.

Software, pools and clients

In contrast to the software, the demands on the software are comparatively low. Nevertheless, it has important tasks, such as monitoring the entire mining process, which not only includes the hashrate and mining speeds achieved, but also the fan and temperature control of the computer. Otherwise the software is required to

  • establish a connection between the miner and the blockchain (this applies to those who want to mine alone);
  • Establish a connection with the mining pool (this applies to everyone who prefers to mine in conjunction with others).

Wallets - digital purses

In addition, the appropriate software must be installed to create a so-called wallet (Note: There is also a synonymous use of wallets and clients. In some cases, wallet management is just one of the features that belong to the functional scope of a client - for example with the Bitcoin Core or BitcoinQT, which is the very first Bitcoin client).

The eWallets serve as a virtual wallet in which the collected (or bought, given) Bitcoins or other crypto currency units are deposited. Although this is not entirely correct, in fact only the digital keys are stored in the wallet in order to be able to access the bitcoins at all. The keys are available in two variants, the public one is intended for receiving the bitcoins, the private one can be used for payments.

There are several options for the wallets themselves, including:

  • Desktop wallets
  • Browser wallets
  • Hardware wallets
  • mobile apps

The different eWallets each make more or less sense under different conditions. The question is what exactly should be done with the wallets. For example, to transfer Bitcoin amounts quickly and from anywhere, an app for the smartphone is certainly the most sensible option. Hardware wallets that are not connected to the Internet at all (at least not permanently), on the other hand, are more suitable for back-ups.

Apart from the type of use, it is of course a question that needs to be clarified individually what is expected of a wallet - in addition to anonymity, usability or speed, security is an important aspect. Last but not least, this concerns the possibility of being able to manage and save the private key locally. In fact, this is not possible with all providers; instead, some rely on storing the keys on external servers.

The mining pool

Since the prospects of big profits for so-called standalone miners have worsened for various reasons (one of which is the often-cited difficulty of the blockchain, i.e. the complexity of the algorithm), it is an easier alternative for many miners to join one of the numerous mining pools to connect.

Your own computing capacity is linked to that of other miners in such a pool, which overall increases the chances of generating more units in the crypto currency of choice.

The earnings are divided among the miners involved, which is usually supposed to happen evenly according to the service rendered for finding a block in the chain. However, there are different methods for calculating the proportional reward. Basically, not much more is necessary to participate in a mining pool than to register with the favored pool.

However, the expectations should not be raised too high: Only sufficiently large pools can make a significant contribution to the overall mining, which means that the proportion will still be smaller depending on the added computing power. Conversely, with smaller pools it is not to be expected that the overall rewards earned will reach the same level as is possible with larger pools.

Alternative cloud mining?

Theoretically, however, it is even easier, without using your own hardware: With cloud mining, the computing capacity is rented or possibly even bought from a corresponding provider in the cloud. The computing power (in hashes per second, mostly in the kilo-, mega-, tera- or peta-hashes) is contractually guaranteed; the term is usually one year.

The profit sharing is a percentage, consequently higher profits are achieved with higher hash values. Accordingly, the costs (i.e. the one-off payment for the contract initially) should be able to be recovered more or less quickly, depending on the computing power rented.

Taxes and other costs for cloud mining

But that also depends on other costs (for more on mining costs in general, see below) that are still incurred. So-called maintenance fees are not uncommon, for example, with which the providers cover their expenses for system maintenance, electricity and personnel.

In addition, from a tax law perspective, it is completely irrelevant whether the mining was carried out locally and personally or whether the necessary computing power was “borrowed” from someone - “digital mining” is taxable, just like any other type of mining Minings (see also below).

In addition, when selecting the provider, it is important to ensure that it can be assessed as serious. The principle is basically very simple: the provider purchases the necessary equipment and provides the computing power achieved with it for a fee. In order to be able to achieve such computing power at all, real mining farms are required under normal conditions.

Risks from dubious providers

However, they are not mandatory for the business model as such. There is a real risk of being caught by a provider who does not have its own mining hardware and earns its money within the framework of a pyramid scheme. New customer contributions are used to pay for existing customers' profits. A steady flow of such new customers (who are usually lured with significantly more favorable contract conditions) ensures that the system is maintained for at least a certain period of time. New bitcoins or units of other currencies are not produced with it at all.

Otherwise, the same difficulties apply to (serious) cloud mining as to all other variants: There is no guarantee that the investment can really be obtained within the contractually agreed period. Since the rented computing power does not change, but the requirements do, there is a very good chance that the contract will become unprofitable before the end of the term. For such cases, some contracts therefore contain additional clauses that then even suspend the contract. The money invested must then be recorded as a loss.

Crypto Mining: The Cost

What should not be neglected, however: The pool operators charge a fee for participating in the collective mining. This is usually deducted from the reward distributed, but is still a cost item that can depress the ultimate return. The same applies to the fees for online wallets.

Equipment expenses

Of course, and that has been mentioned often enough by now, these are not the decisive costs. The biggest items are and will be hardware and electricity. The expenses for a mining rig can possibly still be argued with the reference to the break-even point, i.e. the point in time when those costs were earned again by mining. At this point, the amortization is complete and all future income could be booked as profits.

The problems with the break-even point

However, this calculation only works under certain conditions, primarily the profits made with the available computing power would have to remain at a constant level over the entire amortization period. However, such an approach is quite optimistic for a number of reasons:

  • In view of the sometimes rapid price development, as was observed with Bitcoin, for example, a steady development cannot be assumed.
  • Even if there were no price drops, the problem of increasing difficulty still arises, which also places higher demands on computing power.

But more computing power also means higher electricity costs. They are high enough anyway, because mining is only worthwhile if the mine is in continuous operation. Those who do not have an extremely cheap electricity tariff will have to record the greatest losses at this point.

Taxes for mining

In addition, the virtual currency has to be taxed in real terms: the profits made fall under income tax, as the European Court of Justice (ECJ) ruled. However, levying taxes is not entirely unproblematic. There is currently no official regulation of cryptocurrencies (which makes them so attractive for miners and investors), and registration by the tax authorities is difficult - especially when the transactions are processed through foreign trading venues.

Nevertheless, according to the ECJ ruling, there are some aspects to be considered when dealing with crypto currencies:

  • The profits are tax-free if they have been held for a period of one year. Otherwise they fall under the respective income tax rate, including solidarity surcharge and church tax.
  • In contrast to stocks or bonds, the withholding tax does not apply.
  • In addition, it makes a significant tax difference whether mining was only occasionally operated privately or on a commercial basis - which in theory would already be fulfilled at the moment if hardware were bought specifically for the purpose of mining.

Overall, one of the difficulties in handling taxation is that taxation takes effect in a wide variety of situations. For example, when you pay with Bitcoin in a shop or restaurant or exchange the virtual currency back into real euros - because that is counted as a sale. So if you want to be on safe ground in terms of tax law, you are well advised to carefully document all your transactions plus price-relevant data at all times.

Conclusion: high profit prospects with even higher risks

With all the possibilities that blockchain technology may offer, it is nevertheless accompanied by many imponderables in the field of crypto mining. Mining, unless it is done with great effort, comes at the end of a bet - even several, if you want to be precise:

  • The miner bets, for example, that the mined cryptocurrency will at least retain its value, if not even increase it.
  • He also bets that he will be able to generate constant profits at a constant level with the computing power that has been brought in.
  • Finally, he bets that the profits made will be higher than the running costs (especially for electricity).

As the recent past has shown, these factors, starting with the value of a cryptocurrency, are by no means constant for a limited good with increasing demands on the extraction. In the long term, at least for mining, it is hardly possible to achieve the manageable profits that many investors and newcomers are hoping for.

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