Mining profitability sounds too good! Where is the catch? (2017 edition)

Question

Given the staggering increase in BTC value over the last few months (nearly 600% in 12 months), I am kicking myself for not getting into the game earlier. I've been lurking around this for years but have been too risk-averse to dive in, and I haven't been paying attention lately. Now, looking into matters again, I am bound to ask: Where is the catch?

(This has been asked before, but the information is outdated.)

A cost/income calculation with present-day numbers (Aug'17) tells me that a dedicated mining device would pay for itself in 86 days and would generate in excess of $2500 per year. That sounds like free money!

• If this is really true, then why isn't the whole world up in arms about this new gold rush? Or is it true, and most people are just living under a rock?
• If this is true, then why not rush out and buy as many miners as I can afford? Or is it wiser to just buy a bunch of coins instead?

I've tried to take into account current values of:

• best hash rate (14Th/s)
• difficulty (860,221,984,436) as well as the expected increase
• block reward (12, halving to 6 expected in the year 2020)
• BTC exchange rate (currently 4162 USD per 1 BTC)
• purchase cost of miner ($1288)
• cost of miner's power consumption.

Using various online calculators (coinish, blockchained) I arrive at 16.35 USD/day or 2597.50 USD/year when taking difficulty and power cost into account. This still sounds like free money; what's the catch?

^{(edit: Due to a typo my initial calculation was one order of magnitude too high. These values are now corrected.)}

Answer 1

There are many catches.

First of all, the difficulty will adjust and change as new hash power is added. That will then cause profitability to decrease. When new hash power is added to the network, the difficulty adjusts upwards to compensate for that so that blocks continue to be found at a 10 minute interval on average. This means that more work (i.e. more hash rate) is required to mine blocks and thus, given a fixed hash rate, profitability will decrease.

Also, the block reward halves every 4 or so years. That will also effect profitability.

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Besides the technicalities of mining, there are also other forces in play that effect profitability. Mining hardware is kind of difficult to acquire; either you have to have millions of dollars to buy something from BitFury or buy equipment from Bitmain which can often be out of stock and unavailable.

Lastly, the price of Bitcoin has a significant effect on profitability. Only recently has Bitcoin's price been high enough to be profitable to mine in the United States (or in many other First World countries). The price of Bitcoin remains highly volatile, so investing a lot of money into mining equipment is extremely risky; the price could drop quickly within a few weeks and make mining very unprofitable.

Answer 2

Andrew Chow has mentioned the most important issues. Here are a few others:

• ASIC miners typically don't include power supplies. That adds another few hundred USD to the cost.

• Miners are often rushed to market to keep up with the pace of mining, and may not receive adequate reliability testing. They may fail before they become obsolete, and you may not have much information on the expected failure rate. There may or may not be a warranty, assuming the vendor is even still in business by that time, and anyway you are out of mining action until your replacement arrives. If not then you have to pay to replace it, or give up.

• Your 14 TH/s miner draws about 1200 W of power. For typical house wiring in the US, you can draw about 1800 W from one circuit before your 15A fuses blow. So you can only run a couple of these in your home before you are going to have to have expensive rewiring done, or else rent datacenter space.

• Cooling can be a significant cost. 1200 W is a lot of heat, and you have to extract it from the room somehow.

• It takes you time to set up and maintain the machine, and your time has value. If you have a lot of them, you'll have to hire a sysadmin.

This post is community wiki, so others are free to add more issues.

Answer 3

Being risk averse is a natural response for the human mind. It is designed to keep you safe.

If everybody (I mean everybody) jumped on in it would not be long before the difficulty adjustment made it marginally profitable at best.

Risk aversion keeps many from doing this and in the meanwhile, those that are are making profits. As more people move past risk-aversion the price has to climb incrementally for everyone including new miners to just keep making the same profit.

More miners (presumably, but it does not necessarily follow) also means more people selling Bitcoin (to pay for overheads, since not that many overheads can yet be paid in Bitcoin), placing increased downward price pressure on the market.

As it is, the status-quo seems to be for the market to climb steadily apart from countries making Bitcoin illegal in their jurisdiction making it seem like a good idea, which it is, mostly, if you can afford to risk the losses.