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What Are the Investment Returns on Bitcoin Mining

What Are the Investment Returns on Bitcoin Mining

You know about Bitcoin: The original digital currency based on blockchain. Every transaction is written to a shared ledger and verified by the rest of the network. Each set of approved transactions is a “block” added to the chain. 

But you may have missed the buzz on Bitcoin mining. It’s not just for web geeks or digital currency traders. There are thousands of people around the world looking to profit in this way. 

What is Bitcoin Mining? 

Participants try to guess a random number generated by the system. Those who get the answer “own” the next block of transactions and collect a reward; currently 12.5 bitcoins. If you manage this, you can also collect fees on transactions in the block you created. 

This number comes from a complex equation. In the early days it was handled by ordinary computers, and then GPUs (graphics processing units), which were better suited to the task. Over the years the equation has evolved in difficulty to regulate the rate of discovery. 

Technology 

Bitcoin miners now rely on hardware-intensive systems known as ASICs (Application-Specific Integrated Circuit), which appeared in 2013. If you own or can get access to such a system, you stand to guess a fair amount of numbers on the blocks constantly taking shape. 

If this sounds like an easy way to profit, it is. Many people have joined the ranks of digital currency miners. However, with so much competition, the big question is whether there are still decent profits to be made. 

Can You Still Make Money? 

The more computers that are trying to capture the number, the harder the equation becomes and the fewer numbers you get. 

But Bitcoins also tend to go up in value. It was a price spike in 2013 that launched mining as a popular investment option. Speculators agree that the value of Bitcoin should continue rising as its popularity grows. 

Investments Required 

To maximize your return on Bitcoin mining, you need an ASIC system. These computing solutions utilize high-end hardware that generates a lot of heat. Such a setup requires state-of-the-art cooling and ventilation systems along with higher utility bills to operate all of this. 

Without an ASIC of your own, your odds of scoring aren’t good. It is possible to save some money by leasing an ASIC rather than buying one outright. 

Other Options 

Fortunately for the smaller investor, recent years have seen the rise of cloud mining, or cloud hashing. This response to growing demand is basically another cloud service where you get to lease a portion of someone else’s ASCI-enabled data center. 

A cheaper option, albeit with smaller potential rewards, is a mining pool. This is a third-party service that uses investor funds to do their own mining and shares out the profits. The upside of this is that you don’t need technical or financial knowledge at all; you just need to come up the minimum investment required by the service. 

Profit Potential 

You can join some of these investment pools for as little as $500. Some of these third-party services state that you could earn your investment back in as little as two months or so, and start seeing profit after three. When these claims are legit, or even close to it, you’re seeing a remarkable and fairly consistent ROI better than most forms of investment. 

However, transaction fees are currently voluntary on the part of individual users of Bitcoin, as is whether the transaction should even be included in a block. This is encouraged as the transaction is more quickly verified if it’s part of a block. Even so, your profit depends on the current value of Bitcoin, the number and size of transaction fees involved, and the number of people sharing the rewards. 

Federal Regulation 

In 2015 the Commodity Futures Trading Commission (CFTC) declared that digital currency trading is legal and subject to fair trading laws. However, this doesn’t guarantee that you’re protected. Prudent investors always do the homework: Know who you’re dealing with and determine realistic expectations. 

Risks in Bitcoin Mining 

The Bitcoin reward is halved every 210,000 blocks, or about four years. As the reward approaches zero, it may not be profitable at all unless transaction fees are increased and enforced. And while the general trend is up, there’s also fluctuation in Bitcoin value. 

There’s also a question of integrity. As more cloud services spring up, you’ll have a widely varying scenario of payouts, contract stipulations, and the potential for dishonest reporting; even outright fraud. Also, on the downside: The IRS says that mining profits may be taxed as individual investment gains

Is Bitcoin mining still a good investment? At the present time, yes, and hopefully for years to come with appropriate changes. Are you ready to sit back and let the computers make you bitcoins?

Jen McKenzie is an independent business consultant from New York. She writes extensively on business, education and human resource topics. When Jennifer is not at her desk working, you can usually find her hiking or taking a road trip with her two dogs. You can reach Jennifer @jenmcknzie

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