Mining is an industrial business with thin margins, and the calculation is more like running a data centre than like an investment.
The revenue side
Revenue equals share of network hash rate multiplied by block rewards plus fees.
Which means revenue per unit of hardware falls as total network hash rate rises.
Adding capacity industry-wide reduces everyone's share proportionally.
The cost side
Electricity dominates operating cost, with cooling, hosting, maintenance and staff following.
Which is why the business locates where power is cheapest.
Power price differences of a fraction of a cent per kilowatt hour determine profitability at scale.
Hardware depreciation
Equipment becomes uncompetitive as newer generations arrive.
Which produces effective lifespans measured in a few years regardless of physical condition.
Depreciation is frequently the largest cost after power and is easy to underweight.
Difficulty adjustment
The protocol maintains a constant block rate, so revenue per hash falls as competition increases.
Which means a profitability calculation based on current difficulty is optimistic if the network is growing.
Halvings
Scheduled reductions in issuance cut revenue immediately.
Which forces the least efficient capacity offline until difficulty adjusts downward.
This cycle has been observed at each reduction event.
Curtailment and grid interaction
Operations that can shut down quickly can sell that flexibility to grid operators.
Which has become a meaningful revenue source in some markets.
It also makes the load useful to grids managing intermittent generation, which is a genuine and contested argument.
Heat
All the electricity becomes heat, and capturing it has value in some settings.
Which has produced installations heating greenhouses, swimming pools and buildings.
The economics depend on having a heat demand co-located with cheap power.
Cloud mining
Contracts selling hash rate without hardware.
Which has a long history of fraud and of contracts structured so that the operator cannot lose.
Where the operator could profitably mine themselves, the question of why they are selling the opportunity is worth asking.
This is description of an industry and is not investment advice.
Hosting arrangements
Many operators place hardware in third-party facilities under hosting contracts.
Which shifts power procurement and operations to the facility.
Contract terms regarding power price adjustments and curtailment have been the subject of substantial disputes.
Financing
Equipment purchases have been financed against the hardware or against future production.
Which amplifies outcomes in both directions.
Several publicly listed operators experienced severe distress when prices fell against leveraged positions.
Pool selection
Payout schemes differ in how variance and fees are allocated between pool and miner.
Which matters more for smaller operations where variance is significant.
Some schemes pay for submitted work regardless of blocks found, transferring variance to the pool for a fee.
Regulatory exposure
Some jurisdictions have restricted or banned the activity, and others have offered incentives.
Which makes location a strategic decision beyond power price.
Grid connection approvals have become a constraint in several markets.
Assessing an operation
Power cost, hardware efficiency, hosting terms, financing structure and hedging.
These determine outcomes far more than headline hash rate figures.
Hedging
Operators can sell future production forward or use options to stabilise revenue.
Which is standard practice in commodity industries and is unevenly adopted here.
Operations that hedged have survived downturns that destroyed unhedged competitors.
Efficiency metrics
Energy per unit of computation is the comparable figure across hardware generations.
Which determines the electricity price at which a machine becomes unprofitable.
Every machine has such a shutdown price, and it is calculable from published specifications.
Secondary hardware market
Used equipment prices track profitability closely.
Which means hardware is cheapest exactly when operating it is least attractive.
Buying into that market requires a view on future conditions rather than current ones.
Environmental accounting
Energy mix varies enormously by location, so consumption figures alone do not determine emissions.
Which is why estimates of the industry's footprint differ so widely between studies.
Methodology differences over the assumed generation mix account for most of the divergence.
The realistic assessment
This is a capital-intensive commodity business with thin margins and cyclical distress.
Small-scale operation
Home mining is generally uneconomic at retail electricity prices for major networks.
Which is a straightforward calculation from machine efficiency and local rates.
Where heat is genuinely useful, the effective cost changes, and this is the main case where it works.
Closing
The business rewards the lowest cost of power and the discipline to shut down when margins invert.
Public operators
Listed mining companies publish operational data including hash rate, power costs and holdings.
Which makes the industry's economics unusually observable.
Their filings are a better source on the business than most commentary about it.
Cycle behaviour
Capacity is added at the top of cycles and distressed at the bottom, which is the standard commodity pattern.
The businesses that persist through cycles are generally the ones with the cheapest power and the willingness to switch off, which is a less exciting description than the industry usually receives.