Who doesn’t want to have their own money printing press, right? Well, with cryptocurrency mining, you can.
Recently, the cryptocurrency community has seen an explosion in mining interest, and although I obviously wasn’t present at the time, I can only imagine this is how society looked during the California gold rush.
However, before you too jump on the Litecoin mining wagon, you need to understand whether mining will make financial sense.
No, it’s not as easy as looking at the cost of hardware, power, and current exchange rates; you need to understand the factors that affect profitability, and you need to guess or predict a number of factors that will affect your profitability.
For the purposes of this Litecoin Mining Profitability guide, I’m using Litecoin as the examples. Bitcoin and other currencies are similar, but there are coin-specific considerations that would make a comprehensive article very complex. To get an idea, though, feel free to imagine that references to LTC also apply to Bitcoins, PPCoins, or any other cryptocurrency you consider mining.
To start off, let’s look at the factors you need to predict, and the questions you need to ask.
Litecoin Mining Profitability Questions
Before you begin, let me just implore you not to take lightly on any investment. Check out the other articles on this site for more information about the dangers of investing. If investing seems like a gold mine, you are probably not looking at it correctly because it is a massively complex domain.
The same applies for these questions. If you do not carefully consider the questions, chances are you’ll end up with a lot of pans and very little gold, to continue the gold rush metaphor.
Also, nobody knows the answer to these questions, and that includes you.
Will the price of LTC in US Dollars go up or down?
This is a key question that can drive you mad, but the answer may affect your decision differently than what may seem intuitive.
To answer this question, you need to predict not just what the price will be two weeks from now, or a month from now, or even six months from now, but what it will be at every single time during the lifespan of your mining operation. With the current volatility in the exchange rates, the uncertainty about the future of cryptocurrencies, and the current size of the market, this is extremely difficult to predict.
Note: Volatility means the degree to which prices fluctuate. A high volatility means prices go up and down rapidly.
The reason is simple, really. If you buy mining equipment today, you are effectively locking your current money into US Dollars or whatever fiat currency you have, provided, of course, that you pay for the equipment in a fiat currency. Thus, if the price of Litecoins rises and remains high, your fiat-denominated hardware will actually drop in relative value. Let me explain.
Let’s say you buy $2,000 worth of mining equipment today and the price of LTC rises 200% and remains there for a long time. If you had instead purchased LTC for your $1,000 dollars, you would have yielded 200% profit by buying LTC rather than buying mining equipment.
In fact, if you believe the price will go up, you should instead buy LTC for your money. If the price rises 10%, 50%, or 500%, you’d get 10%, 50%, or 500% more mining equipment by holding LTC and selling it later rather than holding fiat-denominated hardware.
By buying mining equipment, you are actually betting the price of your cryptocurrency will go down.
How many others will start mining?
Another key component in understanding mining profitability is how many others are mining in the world. The rate at which new LTC or other cryptocurrencies are minted is closely tied to the total computing power dedicated to mining that currency in the whole world.
This factor is measured in difficulty. The difficulty goes up if more computing power mine coins and conversely go down if fewer people mine coins or switch to other currencies.
This question is more complicated than it seems. If more people join, the profitability of mining goes down and thus fewer people will see that it is profitable. However, if more people join that also means more interest in the coin, making the coin more scarce and thus the coin price in fiat currency may go up.
Conversely, if nobody sees any value in mining, the number of coins each miner gets increases, but the value of each coin in fiat currency may do down.
This is a finely balanced scale that can quickly change the profitability of mining in one direction or the other. At times, the difficulty has risen 50% in a week (reducing profitability in coins by the same percentage) and this seriously affect the overall profitability of mining.
On average, though, and given a long enough time frame, this balance will remain balanced, even if the total number of miners go up during that time frame. If the overall market for cryptocurrencies go up, meaning more people use them, the overall value in US dollars or other fiat currencies go up, more merchants accept payment in LTC, and so on, then the profitability of mining will go up. Conversely, if interest goes down over time, profitability also goes down.
By investing in mining equipment, you are betting that the difficulty/interest balance remains steady over time and that interest will go up.
How long do I have to make back my investments?
For the previous question, I mentioned a ‘time frame’ but didn’t specify that further. You need to decide what time frame you use to measure your profitability. This is where you need to understand far more about investing than most geeks do and also where you gamble the most that your calculations are right.
For example, you may want to say that you invest $1,000 in equipment, will mine for 10 months, and want to have a return-on-investment (meaning what you get back per dollar or other currency spent) of 5% each month for a total of 50% return on investment.
Let’s also say that you think the equipment you buy will have 50% of its new price value after those 10 months. I’m using these numbers because they are somewhat easy to understand and doesn’t require too many calculators at work. However, this is a massive profitability, as any investment advisor will tell you. Getting the equivalent of 60% ROI in a year on average is beyond the capability of any traditional investment instrument. At the time of this writing, NASDAQ has risen 7.41% over the past 12 months.
Note: Keep in mind that the equipment you buy will have value after that time so you shouldn’t write it off completely.
To decide, then, whether you will reach your goal, you first need to consider both the fiat-denominated price of a coin as discussed in the first question, remembering that investing means you bet the price will go down or at least remain the same, and what everyone else in the world will do, remembering that if profitability is high more people will join thus reducing profitability.
Then you need to calculate what rate your mining operation will produce coins. There are a number of calculators that will help you to tell you what the current rate of coin production will be (And Dustcoin seems to give reasonable numbers), but again, remember that price may change rapidly in either direction which both affects the difficulty but also the profitability of your equipment.
Let’s say you predict your mining operation produces a net of 50 LTC per month on average for the 10 months, for a total of 500 LTC. Keep in mind that you must consider the price of electricity too.
This means that each LTC must be valued at least $1 for you to have a 50% return on investment by the end of 10 months. You can sell your mining equipment for $500 and pocket another $1000 from mining.
By investing in mining equipment, you are betting you can beat NASDAQ by 700%, even for a modest return.
What could I be doing instead?
Mining isn’t a casual pastime, that you can set up once and leave to generate money forever. You need to monitor your equipment, keep track of the current difficulty, put up money up front for the electricity (or complicate the calculation considerably by paying the electricity from your earnings, thus introducing currency volatility to your electricity bills too), and you may need to fix issues with the equipment or the software configuration.
You also need to learn all of this, you need to build your rig, you need to tune it to a profitable point, and all of this takes time, time you could otherwise have spent flipping burgers for $5 per hour at the very worst.
You will need to put down a considerable amount of hours to get a stable mining operation going and you need to continuously monitor the operation. Over time, you may have a more stable operation, but keep in mind that the importance of a stable mining operation is dependent on the difficulty of producing coins. The higher the difficulty, the less important a day of downtime becomes (because coin production is lower) but conversely, the lower the difficulty, the more important uptime and tweaking becomes.
Let’s say you spend 10 hours a month on doing mining plus a weekend of 15 hours to get everything up and running. If you go down to the local burger joint or to a car wash stand, you could probably land a minimum wage job at $5. This means that you effectively lose $50 per month plus $65 for the initial building, from your mining operation. Over 10 months, you have actually lost $65 on your mining operation if you use the numbers from the previous question as a guide.
And that’s just for a minimum wage job. If you take an hour off your high-paying job as a doctor, you’ll probably have lost your entire month’s salary just there.
Your life also has value, even if you don’t have a job or don’t want to flip burgers or do other minimum wage jobs. For $5 per hour, you are sacrificing time with your family, your kids, friends, or other things that may be valuable to you.
Are you sure you don’t want to spend that time on something else?
By investing, you are valuing your lost time less than the profits you may make, if everything goes according to plan.
Great, This Seems Very Profitable!
“Great,” you think, “I’ve done my calculations, the price now is over $2, so this is a dead simple equation! I’ll be rich by the end of this month!”
Not so fast, grasshopper. First of all, if I have not given you a sufficient impression that the equation is incredibly complex by now, either I’m a very bad writer or you simply haven’t understood all the factors.
Do you think you’re the only one thinking this? If this is really that simple, that putting up $1,000 now would get you a 50% return in 10 months, what will that do to mining interest? Oh, suddenly question two comes into mind; everyone will do it and the difficulty will skyrocket, reducing your coin generation rate to far less than 50 LTC per month.
“Well,” you think again, “that would be countered by the increased interest which will drive the price per LTC up so I’ll be rich anyway!”
Again, cool down. Remember that if the price at any point during those 10 months were to rise 50% over your predicted value after those 10 months, question one comes along and lets you know that you would be better off just buy the LTC today rather than spend it on mining equipment. Do you think the price, at any point over the next 10 months will be 50% higher than it is now? If so, mining doesn’t make sense.
“No worries,” you think, “we’re in a bubble now so interest will go down just like the prices, and then I can just sell my generated coins when they go up in value again a couple of years from now!”
Yes, well, question one still pops that idea, because if the price will eventually go up, again, you’re better off just holding on to your LTC and sell when you have made the profit you expect.
“Ah,” you think, “I can still mine with the equipment for two years instead and have far more coins to sell then!”
Sure, that may work, but keep in mind, the value of your mining equipment also goes down during that time, and the remainder value will be much lower. Also, in a year, new equipment and advanced in technology may have rendered your current equipment far less efficient than it is today. AMD may come out with their HD8XXX-series causing a rise in difficulty and your equipment production rate will change considerably.
“Not a problem,” you think, “I already have some equipment that has practically zero value, and I can mine without taking the hardware cost into consideration”
You still invest in mining, even if you don’t buy new equipment. Question four comes into mind, because you spend time you could otherwise have used for making money doing something else.
If you have older equipment, keep in mind that the rate at which older equipment can generate coins is far lower than the most modern equipment. The cost of electricity is relatively higher due to lower efficiency, so your rate of generation compared to cost may be far lower than you think initially.
If you have more modern equipment, well, why not sell that, buy some Litecoins or Bitcoins, and then wait for the price to rise?
Should I Stay or Should I Go?
Here’s the bottom line: If you think you know the answer to whether mining is profitable, you are likely wrong, either because you’re gambling like everyone else or you don’t consider all the factors. The profitability of investing in mining, even if you have some or all of the equipment, is a hugely complex topic, with so many variables that nobody can predict whether it will make sense.
However, you may not want to consider the profitability merely as an investment.
Mining is a great way to learn about cryptocurrencies, hardware, over-clocking, and all the other things you need to learn to make your mining operation efficient.
Further, it is great fun, at least it is to me! I love learning, but I also love challenging myself, spending time figuring out the exact ratios of a specific configuration to tweak the last hash out of a card, seeing how different people build their machines, and of course, being part of the community.
From an investment perspective, mining is very close to gambling, but even if the profitability may not be as great as you think, you can do it as a learning exercise and as something that’s fun and engaging.
What would you do? What factors do you consider most important? Let me know in the comments