I had come across bitcoins in Forbes and again in Business week, so when they finally hit the news again this week with the mtgox hack, I decided to start mining on my rig and research bitmining.
As far as I can see, there are really only 3 factors that influence the profitability of bitmining:
1) The value of bitcoins.
2) The amount of computational power being used to bitmine.
3) The cost of electricity.
Obviously as more people start to mine and the difficulty is cranked up profitability falls. Mining only remains profitable if the value of the bitcoins earned in hard currency is greater than your electricity costs incurred.
I had a look into some of the bitmining contracts that are being sold right now, £440 a month for 1Ghash/s strikes me as exceedingly bad value for anyone purchasing it. Difficulty has only ever gone down twice in its history and each time only slightly, as bitcoining makes it more mainstream and more people mine, difficulty will climb. So with the absolute certaintly that difficulty will only go one way we need to rely on the value of the BTC to continually exceed the hikes in difficulty.
If more and more people get into bitmining we will soon see Nvidia GPU mining go the way of CPU mining in terms of profitability. We will reach a point where only very well optimised rigs are profitable at all. In fact alot of people are probably happy to mine at loss, if you are a kid and mum and dad pay your bills, what's to stop you mining what is essentially an unprofitable rig? This will further dent margins for other miners.
With the profits for mining getting ever slimmer and the cost of setting up optimised rigs still quite high, who would be willing to drop $3k on a rig that will take the better part of 6months at current difficulty to show any ROI? Especially when it's clear that every time difficulty is reviewed every 10 or so days it's only going to dent your bottom line further.
We can also assume in the times we live in that electricity costs will also only go one way and that is up, though probably a relatively slow rate, so lets take this as fixed and ignore it.
That leaves us finally with the value of the BTC, for mining to be profitable BTC has to appreciate against hard currency at a rate higher than hikes in difficulty. Give todays hike, the breakeven BTC Rate for mining, wherever it may lie, is now 1.75x higher.
I am not an economist, and I find it hard to understand what drives it's price and what underpins it's value. It is however clear that there is no link between bitcoin mining difficulty and bitcoin value, for the simple reason no matter how much computational power is thrown at it, production speed is redefined as 6 blocks an hour every 2016 blocks.
Is it worth investing in mining rigs? imho no its not, if one wants to make money out of bitcoins, which at the moment are a very volatile commodity, one should play the market.
The only other way to make money is to follow the bitcoin contractors footsteps and relieve the foolish of their money. You can't beat Guaranteed 4 month contracts that cover the cost of your hardware upfront.
I would like to also greater understand the potential profits from transaction fees, as they remain the only other area of profitablity. In pooled mining do these get distributed to the pool, or just to the pool organiser? Clearly in the case of the contractors it just goes straight into their arse pocket! Are transaction fees material currently in the world of bitcoin mining? and if so who is getting rich off the back of them?