Why Crypto Mining is Like the Lottery

Many people have voiced confusion about how crypto mining works and how you can determine what you should be earning by doing it. There’s been this widespread misconception that it will make you rich while doing no work, and the simple fact is that most miners won’t make a profit – in fact, the vast majority are losing money. To better understand how this all works, we’re going to be using an analogy: playing the lottery. The reason for this is that it’s essentially how crypto mining works, regardless of whether it’s Bitcoin, Litecoin, Ethereum, or any other.

Mining is Based on Hashing an Algorithm

There are many different algorithms coins use (X11, SHA-256, Scrypt, etc.), but that’s really not relevant. Your hash rate is the number of times you are hashing that specific algorithm for a result, in the hope that it meets the requirement of the coin and lets you “mine” the block. Some of these will be measured in KH/s (1,000 hashes per second), while others are in MH/s (1,000,000 hashes per second). Some also use other measurements as well, but like the algorithm itself, it’s not really relevant.

Now, what is important is knowing that a faster hash rate means you are generating more attempts at cracking the puzzle. Going from 1 KH/s to 2KH/s, for example, means you’re running through solutions twice as fast, and should get hits twice as often. But how often is this?

Let’s use a fictitious coin as an example, just so data doesn’t get confused with other coins:

• Coin name: HashieCoin
• Block time: 1 minute
• Block reward: 10 coins/block
• Coin value: $1

Now, each block that is generated will reward miners $10. So let’s say that you have 10 KH/s and someone else does, you have 10/20, or 50%. So on average, you’re going to solve 50% of the blocks. If we then throw in a third person, who has 20 KH/s of hash power, now you are getting 25% (10/40).

This is where the lottery ticket analogy comes from: the more hash power you have, the more tickets you have to try for a win. Having 50% of the hash rate does not mean you will get 1 out of every 2 blocks, but rather than it should average out to about that over time. This is especially important to understand because when mining something like BTC, for example, your hash rate is probably going to be more like 0.01% of the total hash power, meaning you’d get 1/10,000 of the blocks on average. The smaller this number gets, the bigger your potential variance.

How to Calculate Your Potential Earnings

If you want to calculate your potential earnings on your own, you can do so by looking at the block information and seeing what the overall hash rate is at. You can then take the following formula:

YourHashRate/NetworkHashRateBlockRewardCoinValue=AvgEarningPerBlock

Again, this doesn’t take into account variance.

For an easier way, you can Google for “CoinName mining profitability calculator.” This will usually give one or more sources that will automatically calculate the information for you based on your costs and hash rate.

Both of these methods require knowing your hash rate ahead of time. If you’re not sure (for example, haven’t built a new system yet), you can sometimes find that information on Google based on what others were able to achieve with theirs, though you should use it as a sort of guideline, as opposed to thinking “I’ll make at least that!”

Keep in Mind All Costs

Lastly, keep in mind that there are costs involved with any sort of mining activity. You burn much more electricity, you’re running systems on full power (meaning hardware heats up more and burns out faster), often need more cooling, and you need to account for things like downtime and your own time of keeping them up and running. Aside from just doing it as a hobby, it’s generally considered as a bad idea – after all is said and done, you’re lucky to break even, much less profit.

Written by Eric Grisholm for CrushTheStreet.com 2017-11-16