NEW YORK (InsideBitcoins) — Between 1848-1855, California saw a massive rush of people due to the discovery of gold. Originally, it was easy to find the valuable nuggets but as time went on, it became harder to profitably mine for gold. Prospectors began using more technology to find the precious metal, resulting in higher and higher investments, eventually leading to bigger gold companies taking over where individuals first started.
While untold fortunes of gold were found and recovered, very few individuals actually gained wealth. Many of these “forty-niners” left California and returned home with little more than they had started with — if they were lucky.
This is where we are now with Bitcoin. There were plenty of opportunities for potential profit when Bitcoin first began, but it’s reached a point where it’s nearly impossible to make money as a Bitcoin miner. And yet, many wide-eyed hopefuls still believe in the dream.
Bitcoin mining is engineered to prevent profitability
“Only few people actually profit from mining on average: Those that were early to get ASICs in the beginning [and] those that are early to get a new generation or product now,” Jeremie Dubois-Lacoste, co-director of the Belgian Bitcoin Association, told Inside Bitcoins.
“Right now we have a situation when decentralized mining [is] unprofitable for miners,” agreed Filip Pawczynski, chairman of the Polish Bitcoin Association.
The problem lies in the fact that Bitcoin mining is engineered to prevent profitability.
“Bitcoin is designed so that mining won’t be profitable on average. (Too profitable = more people mine and it corrects, less profitable = less people mine and it corrects too),” Dubois-Lacoste explained. But when people think of Bitcoin, they think of mining. “Additionally, and it is something I witness a lot in real life, ‘new’ people that discover bitcoin keep being attracted by mining.”
Today, there are only two groups that are likely to make money from mining: centralized-miners and hardware companies.
Mining is hot work
Centralized miners are companies like GAW Miners and massive mining farms. People buy into the pooled services offered by such companies and gain a small amount of bitcoin over time. The more they buy in, the more potential for profit.
Otherwise, it’s those massive warehouses that have hundreds, if not thousands of specialized machines mining for bitcoin that have the best chance for success. The farther off the grid they are, the cheaper the electricity, and the more profitable they can be.
One of the disadvantages to running these sprawling mining operations is that the machines require constant cooling. CloudHashing launched a bitcoin mining operation in Iceland near the Arctic Circle. By locating in such a cold area — far away from major cities — they are able to obtain cheap electricity and funnel arctic air in to keep the machines cool.
Selling the hardware
The other group with a potential to profit from bitcoin mining are companies who sell mining hardware. Dr. Nicolas T. Courtois, a senior lecturer at University College London on Cryptology believes that over $1 billion has already been spent on mining gear.
“Those that for sure have always profited are the mining-gear and the chip designers/sellers,” Dubois-Lacoste said.
And that makes sense. As mining gets more difficult, it becomes necessary to find an advantage. This results in companies investing more money in even more expensive hardware to give them an edge. That edge could be increased processing, decreased electricity usage, or a mixture of both.
The other problem is that the price of bitcoin has fallen from its high of $1124. Even more mining is required to break even—if break even is ever reached.
“So after all, we are just starting to witness what the bitcoin landscape should look like in the future. It is the past and present that will be more like outliers in the grand picture,” Dubois-Lacoste said.
Therefore, the easy money made from bitcoin mining is likely all gone. From this point forward, it’s probable that only the biggest centralized miners will profit. Perhaps everyone else should just buy their stake in bitcoin.
Photo credit: Shasta Historical Society