Make money with Crypto-mining: Opportunities, Risks, Alternatives

Crypto-currencies, especially Bitcoin, have been experiencing a boom for some years now. From the alternative means of payment, virtual money has become a popular speculative asset over the past five years.

The equivalent in “real” currency has risen sometimes exorbitantly, as well as the desire of many willing to invest to participate in the hype. After all, attract considerable profits even in short periods.

On closer inspection, it is not that easy to get your own piece of the crypto-cake.

Crypto-Mining: The Easy Way to Wealth?

In theory, the concept of mining sounds quite simple: You get a computer with sufficient computing power, to the necessary software and from this point you can (theoretically) watch how the so-called mining rig enters the money. What sounds like a possibility with which even absolute amateur technicians can land a big hit turns out to be quite complex.

This is partly because the underlying blockchain technology is already based on complexity. In order to be able to carry out transactions with them, highly complex cryptographic algorithms have to be resolved. This, too, can be taken over in theory by commercially available computers. In fact, there are even smartphone apps in circulation that exploit the computing power of telephones to dig up bitcoins or other cryptocurrencies without the owners’ knowledge.

The biggest problem, however, is the nature of the technology itself – it’s designed to increase the complexity of the algorithms to be solved as the number of transactions increases. Therefore, anyone who really wants to earn money under these conditions will not be able to avoid a few investments. To make matters worse, that Bitcoin&Co. belong to the type of investment, in which the return of investment depends on a variety of variables.

The different ways – Proof of Work and Proof of Stake – to get to the coveted Bitcoins, do not change that much. The factors that influence price development and hence revenue remain the same.

First and foremost, the limited amount of available bitcoins, which has pushed up prices due to the dramatic increase in demand. Ultimately, the impact of this simple supply-and-demand principle is also responsible for the ongoing run on virtual currencies.

Because investors are speculating on a further increase in Bitcoin prices, which could quickly pay for the invested sums. Nevertheless, the only question left is whether this is really that easy.

Crypto-Mining: The Requirements

The basic prerequisite for being able to start digging for cryptocurrencies is the understanding of the relationships. Broken down to a very simple calculation, it is as follows: First and foremost, it is about converting electricity into money.

As the introductory section has already shown, this is a much simplified and condensed representation of what actually happens during mining.

Basically, it is the same: The resolution of the algorithms requires immense computing power, for which in turn a large amount of electricity is needed. In order to earn money successfully under these conditions, the following factors must be taken into account:

  • a high megahash or gigahash performance per second
  • lowest possible electricity costs
  • the lowest possible power consumption per megahertz or gigahash – or just per generated bitcoin

So it all comes down to a simple cost-benefit calculation, where spending on electricity is the most important factor. Of course, one can argue that financial success is always at the discretion of the miner anyway.

But even for those who would be satisfied with minimal returns, at some point in the future, the time comes when mining will no longer cover the costs.

In addition, there is the necessary investment in hardware, since a standard computer at the present time could barely even bring the computing power that it actually needed.

The hardware

ASICs

Profit maximization only works by maximizing the computing power when mining. This is a hardware issue that should be as well tuned to solving the algorithms. The “simplest” solution is so-called ASIC special chips, which stands for Application Specific Integrated Circuit . Translated, this means that this type of chip has an application-specific integrated circuit. As a result, its function is defined after production and can not be changed afterwards.

For the mining but that is irrelevant, because the adjustment ultimately ensures that the ASICs a much more efficient and faster way of working is possible than to solve the same tasks by software. Because the chips can actually be made to fit the needs of the users, they seem ideal for bitcoin mining. However, tailor-made production is associated with high investment costs for development – which could be offset by lower production costs.

However, if only capital is available for a small number of units, an investment may not be worthwhile. Especially against the background that the development time is significantly longer than with other components.

Under certain circumstances, once developed and produced chips are no longer sufficient to meet the demands of the increasingly complex algorithms to the fullest satisfaction, if they can then be installed in the existing mining rigs.

Graphics Cards

Another way to generate enough computing power with your rig is to use powerful graphics cards. Instead of creating detailed, realistic computer game worlds, especially graphics cards from AMD can be used to mine bitcoins. However, they can not match the performance of the special chips, which is why the further hardware is increasingly being designed to integrate more than one graphics card into the system.

On a motherboard, however, this is again not feasible, since the necessary slots are missing. In order to be able to access three or more graphics cards at the same time, however, PCIe x1 adapters and corresponding cables are used instead, in order to nevertheless realize the connection.

This, however, again results in another problem, since not only the motherboards, but also the housing are not designed for such a number of graphics cards. If you want to connect between six and eight graphics cards with the motherboard, in principle only an open mounting frame remains as a viable alternative.

Of course, it is also smaller, different manufacturers have recognized the trend and supply those interested in a sense, the finished special hardware in the house. It starts in the size of a USB stick, but can also be larger and thus more powerful if desired. As a potential miner, this saves you from having to collect and build the required components.

This may prove difficult anyway, as it is repeatedly reported that such an excessive demand for certain graphics cards indicates that the market situation is between supply shortages and sell-offs. Currently, the market for video cards looks more like a bit of relaxation. The reason for this, however, is once again an ASIC developed for mining, with which the harvesting of Ethereum is now also possible.

Secondary market for hardware

Due to demand, prices have risen sharply, especially for graphics cards, making it even more difficult for private users to build a cost-efficient mining rig. Alternatively, however, it is possible to purchase such rigs – also from own construction – directly. In line with the prices for cryptocurrencies, the prices for such computers have increased, which is why it has become a lucrative business to sell mining rigs through various sales portals.

It is cheaper for the end user by no means, the prices are clearly in the four-digit range. The quick introduction to mining costs so and in the end it is always questionable whether this sum can be amortized within a reasonable period. After all, the investment in higher computing power also means higher follow-up costs for electricity.

The market for newcomers who do not want to rely on their own hardware knowledge seems to exist anyway. After all, work is currently underway to find new algorithms that will make mining with standard hardware again more efficient.

Software, Pools and Clients

Unlike the software, the demands on the software are comparatively low. Nevertheless, you get important tasks, such as monitoring the entire mining process, which includes not only the achieved hashrates and the mining speeds, but also the fan and temperature control of the computer. Otherwise, the software is needed to:

  • to connect the miner to the blockchain (this applies to those who want to dig for themselves)
  • connect to the mining pool (this is for anyone who prefers to work in partnership with others)

Wallets – digital purses

In addition, the appropriate software for creating a so-called wallet must be installed (Note: There is also a synonymous use of wallets and clients.) In some cases, the wallet management is just one of the features that is part of the functionality of a client – such as Bitcoin Core or BitcoinQT, which is the first Bitcoin client ever).

The eWallets serve as a virtual wallet in which the collected (or purchased, gifted) Bitcoins or other crypto currency units are deposited. Although this is not quite true, in fact the wallets only store the digital keys in order to be able to access the bitcoins at all. The keys are available in two variants, the public is intended for the receipt of bitcoins, the private one can be used for payments.

The wallets themselves have several options, including:

  • Desktop Wallets
  • Browser Wallets
  • Hardware Wallets
  • Mobile Apps

The different eWallets each make more or less sense under different conditions. So the question is exactly what should be done with the wallets. In order to transfer Bitcoin amounts quickly and from anywhere, an app for the smartphone is certainly the most sensible option. Hardware wallets that are not connected to the Internet at all (not permanently) are more suitable for back-ups.

Apart from the nature of the use is of course an individually to be clarified question, what is expected of a wallet – in addition to anonymity, usability or speed, above all, safety is an important aspect. Last but not least, this concerns the possibility of being able to locally manage and store the private key, in particular. In fact, this is not possible with all providers, some rely instead on storing the keys on external servers.

The mining pool

As the prospects of big gains for so-called standalone miners have worsened for various reasons (one of which is the much-cited difficulty of blockchain, that is, the complexity of the algorithm), many miners find it easier to join one of the numerous mining pools to join.

Your own computational capacity is pooled with that of other miners, increasing the overall chances of generating more units in the crypto-currency of choice.

The merit is then divided among the miners involved, which is usually done evenly after the performance for finding a block in the chain. For the calculation of the proportional reward, however, there are different procedures. Basically, investing in a mining pool does not require much more than signing up for the favored pool.

However, the expectations should not be raised too high: A significant contribution to the total mining can only afford sufficiently large pools, which means that the proportion will still be smaller depending on the contributed computing power. Conversely, with smaller pools, it is unlikely that the total retreats will reach the same level as larger pools.

Alternative cloud mining?

Theoretically, it’s even easier, without the use of your own hardware: In cloud mining, the computing capacity of a corresponding provider in the cloud rented or possibly even bought. The computing power (in hashes per second, usually in the increments Kilo, Mega, Tera or Peta hash) is contractually guaranteed, the duration is usually one year.

Profit sharing is percentage, so higher profits are achieved with higher hash values. Accordingly, the costs (that is, first the one-time payment for the contract), depending on the rented computing power, more or less quickly be retracted.

Taxes and other costs for cloud mining

But that also depends on further costs (more on the mining costs in general, see below), which still apply. Not uncommon, for example, so-called maintenance fees, ie maintenance fees, with which the providers pay their expenses for the maintenance of the system, the electricity and the staff.

In addition, from a tax point of view, it is completely irrelevant whether the mining was carried out locally and personally or whether the necessary computing power was “borrowed” from someone – “digital mining” is subject to taxation , just like any other type of business Minings (see also below).

In addition, when choosing the provider to pay attention to whether this can be judged as serious. The principle is basically very simple: The provider creates the necessary equipment and provides the computing power it has against payment. In order to be able to achieve such a computing power, normal mining farms are required under normal conditions.

Risks due to dubious providers

However, this is not mandatory for the business model as such. There is a danger that a provider without his own mining hardware sitting up, who earns his money in the context of a pyramid scheme. New customer contributions are used to pay the profits of existing customers. A steady flow of such new customers (which are usually lured with significantly lower contract terms) will ensure maintenance of the system, at least for a period of time. However, new bitcoins or units of other currencies are not produced at all.

Otherwise, the (serious) cloud mining the same difficulties, as with all other variants also: There is no guarantee that the investment can really be obtained in the contract period. Since the rented computing power does not change, but the requirements are already there, there is the possibility that the contract will become unprofitable even before the end of the term. For such cases, some contracts therefore contain additional clauses, which then even suspend the contract. The invested money must then be recorded as a loss.

Crypto-mining: the costs

However, what should not be neglected: pool operators charge a fee to participate in community mining. This is usually deducted from the distributed reward, but is nevertheless a cost that can depress the ultimate return. Similarly, the fees for online wallets.

Spending on the equipment

Of course, and that has already been mentioned often enough, these are not the decisive costs. The biggest items are and remain the hardware and the power. The expenses for a mining rig can perhaps be argued with the reference to the break-even-point, ie the time when those costs were earned by mining. From this point, the amortization is then completed and all future income could be recorded as profits.

The problems with the break-even-point

However, this calculation works only under certain conditions, primarily the retracted with the existing computing power profits over the entire amortization period remain at a steady level. However, such an approach is quite optimistic for a variety of reasons:

  • In view of the sometimes rapid price development, as was the case with Bitcoin, for example, a uniform development can not be assumed.
  • Even if there were no drop in price, there is still the problem of increasing difficulty, which places even higher demands on the computing power.

But more computing power also means higher electricity costs. The fall anyway high enough, because the mining is worthwhile only with continuous operation of the mine at all. Anyone who does not have an extremely low electricity tariff will have to make the biggest losses at this point.

Taxes for mining

In addition, the virtual currency must be taxed in real terms : The profits made fall namely, the European Court of Justice (ECJ) has decided, under the income tax. However, the collection of taxes is not quite problematic. Regulatory regulation of cryptocurrencies does not yet exist (which makes it so attractive to miners and investors), collecting tax offices is difficult – especially when the transactions are conducted through foreign trading venues.

Nevertheless, according to the ECJ ruling, there are some aspects to consider when dealing with cryptocurrencies:

  • The profits are tax-free if they have been held for a period of one year. Otherwise, they fall under the respective income tax rate, including solidarity surcharge and church tax.
  • Unlike stock or bonds, therefore, the flat rate tax is not applied.
  • Moreover, it makes a significant difference in taxation whether the mining was only occasionally operated on a private basis or on a commercial basis – which would theoretically be fulfilled at the moment when hardware was purchased specifically for the purpose of the mining.

All in all, one of the difficulties in tax treatment is that taxation takes effect in a wide variety of situations. For example, when Bitcoin is paid in a shop or restaurant or the virtual currency is exchanged for real euros – because that’s what counts as a sale. Anyone who wants to be on safe ground under tax law is well advised to carefully document all his transactions plus price-sensitive data at all times.

Conclusion: High earnings prospects with even higher risks

Despite all the possibilities offered by blockchain technology, crypto-mining is still accompanied by many imponderables. The mining, if it is not operated with great effort, is therefore the same at the end of a bet – several even, if you want to be precise:

  • For example, the miner bets that the scrapped cryptocurrency will at least maintain its value, if not increase it.
  • He also bets on the fact that he can consistently generate profits at a consistent level with the introduced computing power.
  • Finally, he bets that the profits made are above the running costs (especially for electricity).

As the recent past has shown, these factors, starting with the value of a cryptocurrency, are by no means constant for a limited commodity with growing recovery requirements. In the long term, at least for mining to a manageable extent hardly the profits that many investors and newcomers hope.