Why is there some volatility in mining returns?

The world is bustling with profit; the world is bustling with profit

Cryptocurrency mining is the process of confirming transactions on the blockchain by miners, which is also known as proof of workload and prevents double payments on the network (double spend) when miners confirm transactions. When sending or receiving bitcoins, it may be necessary to wait for three to six network confirmations before the bitcoins are credited. Behind all confirmed network transactions is the arithmetic power in the hands of the miner to ensure that the transaction is secure and valid.

A miner’s daily mining revenue can change rapidly with market fluctuations, and we can often see revenue rocket up in a day, or in a few days, some of the mining revenue may not even cover their electricity bill.

Why do mining revenues change?

Here are 3 factors why mining revenue is affected by network fluctuations:

Cryptocurrency prices themselves fluctuate

Fluctuations in the difficulty of the network

Cryptocurrency transaction fees fluctuate

Cryptocurrency price fluctuations

Assuming that the price of Bitcoin Ether (or other minable coins) rises, the mining revenue of miners will also rise, while if the market price falls, the revenue will also fall, of course, this is based on the network difficulty and blockchain rewards remain unchanged.

Network Difficulty Fluctuation

Contrary to the above reasons, when the network difficulty increases and the market price remains the same, the mining revenue will decrease and vice versa.

The difficulty factor is used to regulate the number of blocks that can be discovered within a certain time frame. In the case of the Bitcoin network, for example, one block can be discovered in 10 minutes, and if it is adjusted to discover a blockchain every 8 minutes, the difficulty will increase until one block can be discovered every 10 minutes.

If the network difficulty doubles, the miner’s mining revenue (revenue calculated in terms of cryptocurrency output rather than fiat currency) will be cut in half, but if the market is in a bull market and the price of the currency stays high, the miner’s fiat currency revenue will not actually decrease but may increase.

As the chart below shows, the network difficulty is gradually climbing as more and more miners join the ethereum blockchain network. Fortunately, the short-term price increase of bitcoin and ethereum in the first quarter of 2021 outpaced the increase in network difficulty.

Why is there some volatility in mining returns?

There are fluctuations in transaction fees

The mining reward consists of a fixed blockchain reward and a transaction fee reward, meaning that miners who find a block will receive a fixed block reward (6.25 BTC for the Bitcoin network and 2 ETH for the Ether network) and all transaction fees paid by blockchain users (for all ETH and ERC20 transactions).

One of the main factors for the mining revenue of the ETHASH algorithm (i.e. Ether) to jump to its peak between May 12 and 13, 2021 was the large number of transactions sent by Defi users on the Ether blockchain network at that time, and the Ether transactions required a fee that would be included in the block rewards as mining rewards.

For example, the fixed reward for Ether block #12421088 is 2 ETH, while the transaction fee is up to 8 ETH.

As the chart shows, network transaction fees spike in May 2021.

Why is there some volatility in mining returns?

In summary, a miner’s income from mining is not determined by mere block output, nor is it set in stone. When you start a mining business, you need to consider a number of factors to maximize your mining revenue while minimizing your risk. In any case, the financial incentive of mining is an important factor for miners to stay in the crypto market for a long time.

The unique economic incentive system of Bitcoin and Ether creates unique conditions for miners to survive in the long run, which is the biggest attraction of blockchain technology and the driving force behind miners’ willingness to keep investing their computing power and capital into block production.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/why-is-there-some-volatility-in-mining-returns/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

Like (0)
Donate Buy me a coffee Buy me a coffee
Previous 2021-06-02 00:17
Next 2021-06-02 00:21

Related articles