Is Crypto Mining Dead?

Is crypto mining still a good play?

To understand if crypto mining is still effective in 2022, we need to first dissect how it works, then, peer into possible legal ramifications in the future.

Proof-of-work blockchains require miners to confirm new blocks. Mining is carried out by allowing computers to solve complex mathematical problems, where each node competes with other nodes. The fastest computer, or node, to solve the problem, gets rewarded by receiving cryptocurrency.

Bitcoin and Ethereum have been known as the largest crypto networks to support mining. Yet, as of September 15th, Ethereum miners are no longer participating in block mining as the network has been officially updated to a proof-of-stake consensus model.

Crypto mining can be a good play, depending on your current financial situation. For most though, the probability of becoming profitable, especially with Bitcoin, is quite low.

Thinking about mining bitcoin?

Today, it is practically impossible to run an independent Bitcoin mining operation, as competition is so steep it requires warehouses full of computers in order to keep up.

Independent traders looking to mine bitcoin can join a mining pool, which is a network of miners that are geographically separated, yet are working together to compete with the largest mining farms in the world.

The entry costs associated with joining a mining pool should always be factored into your decision on whether or not it makes sense financially. Most mining pools charge fees to participate, which could be anywhere from 0-4% depending on the pool. The size of your mining pool affects the payout, as the larger the pool is, the smaller the rewards become (in general).

The cost of the mining equipment and electricity costs should also be considered when determining profitability. It is important to also do your own research on each mining pool, as there is no guarantee your mining pool will actually distribute your rewards when desired, if at all.

While Bitcoin is not the only proof-of-work cryptocurrency, the demand for other proof-of-work chains, such as Ethereum Classic or Bitcoin Cash, are largely speculative and likely profitable mainly during an “alt-season” bull run.

Many of the generation 1 cryptocurrencies may not perform as well as past years since the markets have matured and the demand has been interrupted by smart contract, Layer 1 chains such as Ethereum, Solana and Cardano.

Mining Bitcoin, or any proof-of-work cryptocurrency, may become illegal in the United States. Per White House sources, the US Congress may introduce legislation to formally ban mining:

Staking – An alternative to mining

While mining isn’t officially dead, staking opportunities are much easier and cheaper to participate in. Staking is an alternative to Proof of Work that requires significantly less electricity. It allows users to lock their assets for a set time in order to help validate blockchain transactions.

By locking your assets and participating in block validation, you can earn passive interest on your crypto assets. Anyone on Coinbase can immediately earn 4-6% staking rewards on their Algorand without having to lift a finger.

With other blockchains, like Solana or Binance Smart Chain, users can transfer their funds to delegated staking pools and earn interest without purchasing any hardware.

With staking, you must consider the price volatility of the given asset. When locking your assets to a protocol or to a delegator, you are unable to make a quick withdraw and instead need to wait til after the “cool down” period. This period could last 1-3 weeks depending on the blockchain.

Consider what the purpose is of using this particular coin/token and what will cause further demand for it? Two coins can do the exact same thing, however, the coin with more adoption and use cases will generate higher demand, and thus, potentially higher price action.

Staking can also generate profits within hours as long as the asset price has not decreased. Most centralized exchanges offer a variety of staking opportunities, giving most users a safe and accessible entry point.

It is important to always do your own research and learn about the staking rewards of each asset. For instance, in 2021, Coinbase did not offer ADA rewards for staking. But, if you were to withdraw your ADA to a separate wallet, you could manually join a staking pool and earn 6% rewards.

Conclusion

Smart contract layer 1 and layer 2 blockchains are a big part of the future. In order to participate in DeFi or NFTs, you need the help of smart contracts. Many of the largest altcoins such as Ethereum, Solana, and Cardano have something in common: Staking.

While the allure of earning crypto passively using mining is intriguing, it is important to understand the fundamental technology and to hedge your investments on growing ecosystems as opposed to shrinking ones (Ethereum Classic, Bitcoin Cash).

There may not be a day where people are using Ethereum Classic to buy products at the Bodega, while projects like Solana are actively working on an Apple Pay-compatible, Solana Pay.

When considering which asset you are looking to stake/mine, do your own research and consider every coin’s future adoption and use case.

Mining/staking FAQs

Is Crypto Mining Dead?

No, the largest crypto by market cap, Bitcoin, still utilizes mining to run the proof-of-work consensus protocol. Not to mention, other coins such as Litecoin and Monero, among others, use mining to maintain their networks.

How do I get started with mining?

In order to mine bitcoin, you must be willing to purchase 10s of thousands of dollars worth of ASIC mining rigs, or find a reputable mining pool to join.

How can I get started with staking?

You can stake your assets directly on major exchanges such as Binance, Coinbase, or Kraken. Also, there are dozens of DeFi apps and node validator opportunities in the crypto space.

How long will it take to be profitable with staking?

Depending on price action, staking can be profitable within hours.