This is because they have low hash power which is distinctly related to crypto mining revenue.
In simple words, the relation between crypto mining revenue and hash rate is pretty simple: the more the hash rate, the more you will have the chance to earn from crypto mining.
This is because an increased hash rate will increase your opportunities to verify more transactions and get rewarded for authenticating a new block before it is added to the blockchain.
Typically measured in TH/s, with every unit of hash rate added, it will increase your computing power.
In short, the hash rate is the most significant factor that will influence every aspect of your crypto mining efforts and determine its profitability.
Therefore, apart from focusing on creating a perfect crypto mining strategy with respect to the cost involved, you should always focus on the hash rate or computing power to get high returns and try to keep it reasonably high to have an edge while competing with other crypto miners.
Whether it is Bitcoin or crypto, the basic idea is the same.
Therefore, for your better understanding, everything here in this article will be discussed with respect to Bitcoin.
This will make you more knowledgeable about crypto mining so that you can plan your moves accordingly and increase your chances of success.
Remember, there are lots of miners out there and you will have to beat them all to get the reward.
How is Crypto Mining Revenue Related to the Hash Rate?
Ideally, there are several factors that will determine how much you can earn from crypto mining.
However, two of the main ones that you need to focus on are:
- The price of the coin you wish to mine and
- The total hash rate of the network.
The required hash rate for mining crypto coins keeps on increasing every day.
This is because more and more miners take part in it and therefore more computational power is needed to verify a transaction.
When it comes to the Bitcoin network, the hash rate requirement is growing at a rate of about 0.45% per day.
This means that even if you use a mining hardware of 50 TH/s power, the total share of the network will keep on falling every day with respect to the total hash rate of the network.
Just a couple of years back machines with a capacity ranging between 60 TH/s to 100 TH/s were produced.
This was, in fact, a minuscule of the total hash rate of the network considering the fact that there are millions of them being used all over the world to verify a new block and win the rewards.
This means that your revenue from crypto mining will keep on falling over time.
For example, two years back you could have earned 10 cents every day with 1 TH/s of hash power which means that an M20S running at 68 TH/s will produce about $6 a day. This is before you pay your electricity bills, mind you.
Remember, in crypto mining every cent counts and this fact makes it a margin game.
Therefore, you may ask what your chances are to mine a new block with a machine with 60 TH/s or so on the Bitcoin network if its hash power is well over 100 TH/s. Well, it is very, very, low!
Typically, if you use an M20S and let it run on its own it may take about 16 years to mine just a single block of Bitcoin!
Therefore, you will need a much more expensive machine to generate a lot more hash power to mine profitably but that will also mean waiting for a long time.
This is where the mining pools come in.
Ideally, profitability in crypto mining largely depends on several other factors as well apart from the hash power of the machine used for mining.
More often than not, these factors are out of your control.
One such factor is the price of the coin you are mining. If the price of the coin is reasonably high then it will help you to minimize some of the losses you may incur while mining.
However, crypto prices are known to be extremely volatile and therefore you should be very careful of it while calculating your mining profitability.
Well, for that you will need to consider the diverse and ever-changing dynamics for a better understanding before you invest your hard-earned money into it.
Most importantly, you will have to play all your cards right – that is given and unchanging.
Here are a few factors that you should ponder upon before you invest in your crypto mining hardware.
Initial investment is an important factor to consider because just any mining hardware will not produce the results you want.
You will need it to be extremely efficient, and that means a lot of money! The cost will vary depending on the type of mining hardware you choose.
You must also consider the return on your investment as well as the timeline before you make your investment.
There may be a few machines which may not pay off well or in a reasonably short time.
For this, you will have to consider additional factors such as the transaction fees and block rewards.
Typically, the block time of Bitcoin is about 10 minutes. Initially, the reward for verifying a Bitcoin block was 50 coins but after every four years when roughly 210,000 blocks are produced, this reward is halved.
The initial reward may seem quite high but when you consider the price of it, which was quite low than the price today, the reward was much less.
However, over time, the value of Bitcoin increased significantly and therefore the halving aspect did not affect much in terms of mining rewards.
And, when the coins will not be mined anymore, you can still make profits from mining in terms of transaction fees paid to you as an incentive for mining and validating the network.
This transaction volume will continue to rise on the network and therefore your profitability will remain more or less the same.
Therefore, with all this said, you should never let the hash power of your mining hardware down to affect your profitability adversely.
Hash Rate as a Factor for Profitability
The hash rate of your computer will play a significant role in determining the amount of revenue you can earn from crypto mining.
More the hash power, the more secure the network will be and will enhance your chance to win more coins as rewards for your efforts.
In terms of security, hash rate ensures that one who wants to attack the network will need to have at least 51% of the total hash power of the network.
This is a very expensive affair since there are millions of computers running simultaneously all over the world to mine crypto with the miners producing more than 100 quintillion hashes per second.
This eventually prevents such attacks from being made by anyone and everyone, making the network secure on the whole.
From a different perspective, the more the hash power of a network, the more machines will mine coins which will eventually raise the mining difficulty.
There is also another unique way to look into the matter.
It is that the hash rate will also determine how healthy the network is.
Since there are millions of computers running all over the world for mining crypto coins and operated by different people, it will be very hard to shut down a network completely.
Therefore, you can see very clearly that the hash rate plays an important role in all the aspects of mining crypto.
This indicates that the overall hash rate should be very high at all times.
Now, you may ask, what hashing actually means.
Assuming that you have the basic concept of crypto mining and how the process works, here it is explained for you.
The chances of finding the right hash to win a reward by verifying a new block of transaction is pretty low.
However, the modern crypto mining machines come with a lot of power to make trillions of guesses in a second.
Each of these guesses is called a hash and the amount of such guesses that a machine can make is called its hash rate.
This hash rate concept is not restricted to Bitcoin only but is applicable to other crypto coins as well.
However, there are different mining algorithms for different crypto coins.
This means that the chances of a mining hardware to guess the right hash and the target for writing the block on to the blockchain network to get rewarded are also different from one type of crypto coin to another.
Still, you can compare two hash rates of two different crypto coins.
When you do so, you will find that the hash rate or computing power of the Bitcoin network is a lot more in comparison to that of the other crypto coins put together.
It is for this reason, Bitcoin is supposed to be probably the most secure and stable network making it quite impossible for the other crypto coins to beat it.
The hash rate is based on the algorithm. For example, the algorithm of Bitcoin is called SHA 256.
In terms of hash rate it refers to the number of times this SHA-256 algorithm is performed and this is defined as hashes per second.
There are different hash rate units used as standard such as:
- Kilo Hash or KH/s that represents thousands of hashes per second
- Mega Hash or MH/s that represents millions of hashes per second
- Giga Hash or GH/s that represents billions of hashes per second
- Terra hash or TH/s that represents trillions of hashes per second and
- Peta Hash or PH/s that represents quadrillions of hashes per second.
Out of all these hash rates, the most commonly used and listed unit of hash rate is TH/s.
Estimating Total Hash Rate
Now, it comes to estimating the total hash rate of the network. Typically, finding the total hash rate of a network accurately happens to be a tricky job.
This is because, whether it is Bitcoin or any other crypto, the computers engaged in the mining process do not need to identify them to contribute their hash power to the network.
All these machines keep on hashing locally and then communicate it to the network usually through a pool when they discover and verify the last block.
Another potential issue with the hash rate charts is that these are usually reverse engineered.
This is usually done by comparing the network difficulty and the block generating frequency.
The periodic variations typically exist because the block frequencies tend to vary significantly and quite frequently but the network difficulty tends to remain constant.
It is for this reason the hash rate of a network is best expressed as a Moving Average.
This is done by calculating the estimated hash rate of the network on a daily basis.
For this, the number of blocks that are actually discovered for a specific period of time, say for the past 20 hours, are compared with the number of blocks that are expected to be discovered for the same time and at the same speed.
This speed, as you may know, is one block every 10 minutes.
This is not as easy as it seems because the calculation involves the mining difficulty of the network and not simply dividing the number of blocks by time.
This mining difficulty ensures that the time gap of 10 minutes is maintained and blocks are not produced at random at a great speed which may result in non-verified inclusion of blocks.
This will affect the hash rate in the end.
In fact, it is this aspect that makes it quite difficult for the miners to find a target.
Typically, when the hash rate increases, the mining difficulty of a network also increases along with it.
This means that the result that you get eventually may not be accurate entirely.
Your hash rate chart may look pretty strange that way if you are unable to average things out properly.
And, if you do not present it as a Moving Average it will create a lot of confusion.
Relating with Mining Pools and Security
As said earlier, your chances of earning a reward for mining get reduced if the hash rate of the blockchain network increases.
This is even more severely affected if you are mining solo.
Most miners today usually join a mining pool to better their chance of winning because these mining pools typically take the luck factor out of mining and add to the computational power.
You will be typically rewarded for your and according to your hash rate.
In short, your reward, albeit in small amounts, will be guaranteed irrespective of your luck.
Therefore, once again the hash rate becomes an important factor for determining your crypto mining revenue.
Most importantly, the higher hash rate will keep the network decentralized as well as nicely protected from any kind of external attacks.
Relating with Block Difficulty
Block difficulty, or mining difficulty, or simply difficulty is a setting of the network or a measure that indicates the amount of effort a miner needs to put in to find a new block and verify it before adding on to the blockchain by Proof of Work.
This Proof or Work on the network simply refers to a piece of data or a number, to be more precise.
When the difficulty of finding this number falls below the preset difficulty target it is automatically and continually altered by the network protocol.
The miners need to continue hashing the header of the block to find or generate this number by competing with other miners within the network to be the first one to come out with a result.
The miners need to follow this hashing process repeatedly until the algorithm produces the desired output and within the predetermined difficulty target to win the reward.
In the process, the miners burn up computational power, and a lot of it, because the Proof of Work consumes a lot of power for it.
As said earlier, in crypto mining, the first miner who is able to create an only one of its kind transaction, called a coin-base transaction, is rewarded with a fixed amount of newly minted coins or transaction fees, as the case may be.
In order to find the Proof of Work by hashing, the miners typically transform the string of characters, called the input, into a much shorter value of fixed length or key, called the output, which typically corresponds to the original string.
Now, here is the trick. Ideally, if you input the same thing into the same hashing algorithm the output will always be the same.
Therefore, you will need to make very small changes in the input which will change the entire output.
Here the block header stays the same and the random number, which is called the nonce, is the variable.
The changes in the nonce or the ‘number used only once’ is run through the SHA 256 cryptographic algorithm to find the right hash that meets the predetermined difficulty target.
This needs to be done repeatedly, and quickly, to find the right output and win the reward or else you may put in all your effort and even find the right output and end up earning nothing.
If you are using an ASIC or Application Specific Integrated Circuit mining hardware you will have an increased hash rate to make hundreds of thousands of calculated guesses per second and increase your chances to win the reward for your efforts.
Once again, the entire process to find and validate a new block transaction typically takes about 10 minutes on the Bitcoin network.
In this aspect, self-adjusting or moving mining difficulty targets is an important factor and there are several reasons to say so apart from the security aspect of the network.
One of the main reasons is that it ensures the neutrality of the blockchain network because no single miner can control, manipulate, or influence the working process of the protocol.
It also ensures that the protocol operates smoothly and the time gap of 10 minutes is maintained between two consecutive blocks that are added to the blockchain.
This time interval is commonly referred to as the Block Time. This Block Time may not be 10 minutes all the time but it is necessarily close to it always.
The mining difficulty also matters for other aspects apart from maintaining the block time and the security of the network protocol.
It has got some significant monetary implications as well.
If the miners generate the coins at a rapid pace it will in turn result in a higher inflation rate.
This will not make the coins scarce any more, which is essential for a digital asset.
The mining difficulty is changed after evaluating a set of 2106 blocks which takes about two weeks’ time to generate.
If the time gap is more than 10 minutes, the difficulty level of the network is reduced automatically and if it is less than that, the difficulty target is increased.
With respect to hash power, if the cumulative hash power increases in the network the mining difficulty level will be increased to make things higher for the miners to find the Proof of Work and get the reward.
And, on the other hand, if the cumulative hash power falls then the mining difficulty level will also drop automatically to make it easier for the miners to verify the new blocks and keep the interval between the previous and the consecutive blocks to less than 10 minutes.
Well, this block time of 10 minutes is with respect to Bitcoin only.
It is important to be informed that not all crypto coins have the same block time.
For example, the Ether and Litecoin crypto are designed to be produced at an average block time of 20 seconds and 2.5 minutes respectively.
Now you may be wondering how exactly the blockchain network comes to know whether the block time is longer or shorter.
This will need a proper oracle to keep a track of the innumerable Block Times.
Well, the network typically refers to the timestamps of each block generated and left by the miners.
And, the miners usually cannot lie on these timestamps because there are specific rules of the respective protocols that prevent them from doing so.
Now, coming back to hash power, when the mining difficulty is increased the miners will need to use more hash power to make things easier for them. Otherwise, it will affect their profitability.
However, this does not mean that when the mining difficulty is reduced, a profit from crypto mining is guaranteed.
There are lots of instances when the miners failed to cover even their operational costs in spite of the mining difficulty being reduced and having to stop mining.
This, however, did not widen the opportunity of the miners who stayed on to earn greater profit margins for a long time.
This is because the low barriers of entry and high margins keep crypto mining always very competitive, attracting new miners to it consistently.
This eventually makes this a self-alleviating ecosystem which is all because of the moving difficulty targets that creates a chain reaction.
This is how it works:
- Higher margins means more miners being involved
- More miners means increase in the mining difficulty level
- Higher mining difficulty results in lower margins
- Lower margins causes greater sell pressure for the miners who are inefficient or unsuccessful
- This selling pressure eventually lowers the price of the coins further and
- The reduced prices of the coins increase its supply while the demand for it remains the same.
If you are wondering whether or not the mining difficulty level can be exceptionally high or what could be the maximum level of it, then here is a piece of good news.
Typically, getting to the maximum mining difficulty is not possible virtually.
This is because it would be ridiculous to have a huge number, such as 2^224, as the mining difficulty because it would literally mean that you will need ALL the energy available in this entire UNIVERSE to mine just one single block!
Therefore, expect the mining difficulty level to stay within the possible limits and start mining crypto. Just make sure you have adequate hash power.
Relating with Electrical Cost and Taxes
Finally, you should consider two other major factors to determine your mining difficulty and their relation with the hash rate of your mining hardware.
Electricity cost is one of the major concerns of the miners and they have to foot huge bills every month to keep their systems running 24/7.
The higher the monthly bill, the lower will be your profits and vice versa. Therefore, electricity cost will impact the most on your crypto mining profitability.
Mind you, the concern of the environmentalists regarding this matter is not discussed here!
Typically, the SHA 256 mining algorithm of the Bitcoin network uses the Proof of Work consensus protocol to validate a transaction made on the network.
This usually has a pretty high hash rate to power consumption ratio for any type of mining equipment.
However, an ASIC mining machine will have a somewhat lower ratio as compared to the GPU miners.
This is because these machines are typically designed for crypto mining purposes and come with a high hash rate or computational power.
Therefore, these mining machines will be much more efficient in validating a block and the reward value will be much more than the cost of electricity.
Therefore, even if you mine in a region where electricity is cheap, it is always feasible, productive and prudent to invest in an ASIC mining hardware irrespective of its higher cost, simply due to its higher hash power.
This will ensure that you do not end up paying for the high electricity bills without your investment showing and any good or reasonable returns.
On the other hand, as for the taxes, you may wonder how exactly the hash rate of your mining machine is related to it.
Well, the taxes you pay on your crypto mining income is something that you cannot avoid even though a lot of people ignore or forget it and end up finding themselves in a soup.
The amount of tax you pay will determine your crypto mining profitability.
The higher is the tax amount the lower will be the profit from crypto mining and vice versa.
This factor makes the margins for the crypto miners even tighter.
You will surely not want to pay taxes while earning a paltry amount from crypto mining.
And, the only way in which you can enhance your profit making chances in crypto mining is by increasing the hash rate of your mining machine.
The best approach is to use an ASIC mining machine once again.
Therefore, make sure that you take the tax factor into consideration while calculating your crypto mining profitability to find the exact amount you earned from the process.
Crypto mining is a very competitive way to generate some passive income but is not very difficult if you play all your cards right.
Using a proper hardware with a high hash rate is essential to make profits by far, just as the article suggests.