How are the margins on bitcoin mining? Just ask this guy

If you need to steal electricity to make mining less unprofitable, profitability likely isn't on the cards.

A man in China named Xu Xinghua has been arrested and sentenced to three and a half years in jail as well as fined 100,000 yuan (about US$14,500) for stealing power to run his 50-machine bitcoin mining operation, along with three presumably fairly heavy duty electric fans for cooling.

Local news reports that his operation earned a total of 3.2 bitcoin worth 120,000 yuan, and in the process, pulled down 104,000 yuan worth of electricity.

Running the numbers

Xinghua's tenure ran from November to December 2017, right as bitcoin prices started leaping. But the value of the bitcoin mined, 104,000 yuan (US$15,000) according to local news, more closely resembles current bitcoin prices.

Except at the time of writing, 3.2 bitcoin is worth some 146,568 yuan according to Google. So the numbers being reported don't quite seem to quite add up. The piece in China's news was published yesterday, but bitcoin certainly hasn't been fluctuating enough in recent days to account for the discrepancy.

Regardless, this suggests it may have been profitable even at current bitcoin prices, and might therefore have been especially profitable at November-December 2017 bitcoin prices.

Unfortunately for Xinghua, his profit margins might not have room for paying back the electricity costs in addition to the fine, to say nothing of the jail sentence. However, the most significant cost would probably be all the equipment involved – which was also confiscated in this case.

Running from the numbers

Unfortunately for aspiring miners, the returns here might still be a far cry from the cost of the equipment put towards the operation. Judging by the fact that the operation was actually turning a profit, it's safe to assume it was using 50 bitcoin ASIC miners. GPU-based mining operations focused on bitcoin have tended to be wildly unprofitable.

Assuming Xinghua got a pretty good price on his mining gear by buying new Antminer S9s at US$1,296 each before prices rose on 31 March and before miner prices started spiking in line with bitcoin prices, the startup costs would have been well over $60,000.

Selling at peak bitcoin prices might have recouped the investment and left the miner in the black, but actually paying the electricity costs rather than yanking it out of a train line would have sent it back into unprofitability.

It doesn't help that the gear needs to be replaced fairly often. According to the news report, 5 of his 50 mining machines had reportedly broken by the time Xinghua was arrested, which represents another significant cost which would also push it towards unprofitability.

The growing bitcoin hashrate is another pain point for smaller miners. Bitcoin's hashrate has more than quintupled in the last 12 months, which translates into much smaller profits for smaller miners. Xinghua ostensibly made 3.2 bitcoin mining in November and December, but might earn only a fraction of a bitcoin by mining for two months with the same gear starting today – and that's a fraction of a bitcoin at much lower prices than they used to be.

That hashrate inflation is also why miners need to constantly expand operations and update their equipment because if they don't, they'll fall behind and get buried by the rising hashrate and falling bitcoin prices.

It's not a pretty picture for smaller miners. Panning for bit-gold might be a fun hobby, but it's not profitable for anyone except the largest operators. And even these larger outfits are working on increasingly thin margins. Every time bitcoin prices drop, there's another mining outfit exit scamming or another mining scheme going out of business.

Things will start getting really interesting if bitcoin prices drop below production costs for giants like Bitmain. It's hard to say what that exact price threshold might be, but based on estimates of $3,500 to $4,000 back in March, coupled with the ever-growing hashrate counterbalanced by increased consolidation, $5,000 might be a reasonable benchmark to eyeball.

Even the largest miners probably can't afford too many more bitcoin price drops before things get very unpleasant.

Disclosure: At the time of writing, the author holds ETH, IOTA, ICX, VET, XLM, BTC and ADA.

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