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All About Bitcoin Mining: Road To Riches Or Fool's Gold?

Financial Aspects: Income And Profitability

Income = Revenue Minus Expenses

Don’t neglect your costs when calculating income. As explained above, what you pay out of pocket includes one-time charges (typically, what you pay for the mining hardware) and recurring costs, like electricity and/or rent on a dedicated space.

More important, don’t forget to anticipate the relentless rise in mining difficulty, and thus dwindling revenue. A profitability calculation should be done at least once a month. After all, it doesn’t make sense to keep mining at a loss, unless of course you expect the exchange rate for Bitcoins to rise in the future. Since the latter is far from certain, you’re then gambling.

Efficiency (Power Draw vs. Hash Rate)  

As the mining difficulty increases, mining efficiency becomes more and more important.

HD 5830HD 6990BFL SingleBFL miniRigAvalon BoxBFL JalapenoASICminer USBASICminer Blade
Hash Rate250 MH/s700 MH/s830 MH/s25.2 GH/s66 GH/s5 GH/s300 MH/s10 GH/s
Power Draw153 W357 W80 W1200 W620 W30 W2.6 W100 W
MH/s Per W1.631.9610.421106167115100

Upgrading from GPUs to FPGAs reduced the power draw by an order of magnitude. Likewise, upgrading from FPGAs to ASICs again slashes power consumption by another order of magnitude.

Is the Bitcoin Currency Experiencing a Bubble?

Surprisingly, there isn’t an easy answer to this question. Generally, in economics, the money supply should keep pace with economic growth or a society’s productivity gains, and neither outpace it nor lag behind. If the money supply is increased faster than the economic growth, this results in too much money chasing too few goods, and consequently prices for goods will rise. This is called inflation, and more than a few percentage points of annual inflation is generally considered harmful to an economy, leading to gradual loss of savings, impoverishment of retirees, and even social unrest. However, some slight inflation is generally considered beneficial for an economy, acting as a disincentive to hoard money (as opposed to investing savings back into the economy), and as a gradual reduction of labor costs. On the other hand, if the money supply is increased slower than the economic growth, this tight monetary policy leads to less demand for goods, and hence it can harm the economy. Worse, if a glut of goods develops, the price of goods will inevitably drop due to the law of supply and demand, and a deflationary spiral can result.

Satoshi opted for a slowly paced increase of the money supply. And when 21 million Bitcoins have been minted, the money supply will come to a halt. New blocks are generated every 10 minutes, on the average. While the reward for finding a block was initially 50 Bitcoins, the block reward was halved to 25 Bitcoins in late November 2012. This reward halving will happen every four years, thus gradually reducing the money supply to a trickle.

This leads us to the conclusion that the Bitcoin currency is intentionally deflationary. If Bitcoins become more and more adopted, while on the other hand the money supply faucet is gradually turned off, the Bitcoin exchange rate to the dollar can go nowhere but up. While the incredibly quick run-up to $266 in the second week of April was, in fact, a speculative bubble, a gradual rise in the value of Bitcoins is almost assured.

There is one element of uncertainty: if all governments were to outlaw Bitcoin exchanges, it would become impossible to exchange normal currency into Bitcoins and vice versa. But there are almost 200 countries in the world, and it seems unlikely that all countries will outlaw Bitcoin exchanges.