The Economics of Mining: Calculating your cost basis and P/L

This article will give an insight into mining economics and the relevant factors that determine a miner's cost basis and mining profitability. An example calculation will illustrate how a miner can determine the mining profitability by himself/herself using known key parameters.

The game theory of cryptocurrency mining

Cryptocurrency mining is a perfect example of game theory where a dynamic equilibrium of market price and average mining cost of a coin is mostly existent. An increase of the market price results in an increase of a miner's profitability. Based on this, it can be expected that more workers will participate in the mining as they see an opportunity to make a profit. A decrease of the market price results in a decrease of a miner's profitability. Based on this, it can be expected that some miners with a high mining cost are forced out of the network because they are not profitable anymore. A temporary high discrepancy between market price and average mining cost can be assumed to be reduced by the network participants in the long-term. The higher the discrepancy is, the more likely one will mine instead of buying from the market - buying pressure on the market is reduced - and the more likely a miner will sell parts of his/her mining rewards to realize profits - selling pressure on the market is increased.

Mining profitability and its key parameters

The mining profitability describes the profit margin of a miner that is based on his/her mining costs and the market price of the mined cryptocurrency.

The relevant key parameters that make up the mining profitability are:

• market price of the cryptocurrency
• daily emission rate of the cryptocurrency
• daily transaction fee revenue
• daily energy consumption of the mining rig
• generated hashrate by the mining rig
• total hashrate of the network participants
• price of electricity used for mining
• price depreciation of the mining rig

Calculation of mining profitability based on the key parameters

Generally, the profit margin can be defined as the difference of market price and mining cost. These two parameters set up the first equation:

The mining cost per coin is defined by the daily electricity costs and the daily mining rewards, which leads to the second equation:

The daily electricity costs can be derived from the electricity rate and the rig's energy consumption. We assume that the rig is running 24 hours per day and can set up the third equation:

The daily mining reward can be derived from the daily emission rate of the cryptocurrency (block rewards), the daily transaction fee revenue, the miner's rig hashrate and the total network hashrate. A miner can plan his/her mining strategy using a hashrate history diagram and use its output for the fourth equation:

Finally, the daily profit can be derived from the profit margin and the daily mining reward of the cryptocurrency in a fifth equation. This result can then be extrapolated to estimate a weekly, monthly or yearly profit under the assumption of constant parameters:

Example calculation with selected parameters for SFX

The following table gives the selected parameters that are used for the mining profitability calculation as above. The example mining rig is powered by an AMD Ryzen 9 3900x 12-CPU which assembly and set up was displayed in a previous article by the Safex foundation - Plug and Play Safex Cash Cryptocurrency Mining. The illustrated setup has got an average hashrate of 12.5 kH/s (12,500 Hash/second) and an average energy consumption of 150 W (0.15 kW).

The following table gives the results of the mining profitability calculations. The relative mining profitability is roughly 96% based on the used parameter values. The short-term profitability can be expected to fluctuate significantly due to market price action of the cryptocurrency and unconstant total network mining effort.

At the given parameters as of today July 8, 2020 your daily SFX mining reward is worth $0.917 per day.

Comparison with mining profitability for XMR

The following tables give the relevant key parameter values and result of the mining profitability calculations for XMR with the same hardware setup. The relative mining profitability is roughly 42%.

Profitability dependence on the miner's strategy

The example calculation gives the short-term profitability for a miner who wants to realize profits regularly to cover costs or because of other reasons. However, if a miner does not plan to sell his/her mining rewards but plans to hold them long-term, his/her mining profitability may change significantly within time based on the long-term price development of the cryptocurrency. Moreover, the long-term profitability is dependent on the rig's life span or resale value after a specific time interval. If a miner plans to mine long-term, hold his/her mining rewards and resell the rig finally, then he/she can calculate his/her total profit as such: