Cryptocurrency mining went from egalitarian in the early-2000s to a specialist's business in the 2020s. While anyone could mine 10 or 20 Bitcoins in the early days, modern mining operations use purpose-built hardware that consumes tremendous amounts of electricity to generate a relatively small profit margin. But other tokens are more accessible.
Let's look at five factors influencing profitability, calculating profitability, and some of the most profitable coins in 2022.
Crypto mining profitability depends on several factors, including hardware and electricity costs – but these are some of the most profitable options.
What Factors Influence Profitability?
The profitability of mining a cryptocurrency depends on several factors. For example, a solar-powered miner with the latest hardware will be much more profitable than someone mining on a laptop in New York City. However, if the person in New York City is mining a new highly-valuable token with low network difficulty, they could be the one making more.
The five major factors influencing profitability include:
- Hardware – The number of hashes per second, or hash rate, significantly impacts mining profitability. Mining isn't very profitable without newer hardware, such as ASICs or GPUs.
- Electricity – Electricity is the highest cost of most cryptocurrency mining operations, meaning it dramatically influences profitability. But, of course, electricity costs vary by country and even region.
- Valuation – Cryptocurrency miners receive token rewards, so the price of the token matters a lot. If a token is sharply falling, the profitability of mining it will also significantly decrease.
- Structure – Each cryptocurrency has a different network difficulty and block reward level. Not surprisingly, higher levels of difficulty and lower block rewards hurt profitability.
- Pool Fees – Many cryptocurrency miners join forces with others in mining pools to even out their income. These pools generally charge up to 3% fees for using the pools.
You can plug these variables into a crypto mining calculator to determine the profitability of various coins. For instance, CryptoCompare takes the hash rate, power consumption, cost per KWh, and pool fee to assess your monthly profits and daily profit ratio. While these tools are a great starting point, the market is constantly changing over time.
Most Profitable Cryptocurrencies to Mine
A cryptocurrency's profitability to mine depends on your unique setup, but you can generalize and compare token profitability. After entering your hardware and electricity cost, CryptoRival uses the hardware's typical power consumption and hash rate to estimate the most profitable crypto tokens to mine at any given time.
Some of the most profitable coins on July 11, 2022, include:
Of course, these calculations depend heavily on the market price of a token. And in many cases, these market prices fluctuate heavily as speculators and miners participate in the market. For example, if a coin is highly profitable, mining activity will quickly ramp up to increase supply, and in many cases, the price will move lower in short order.
Many traders focus on more popular and established cryptocurrencies to avoid these problems. If the market is deep enough, they don't have to worry about extreme day-to-day price swings and can more reliably predict their income and profitability over time.
According to Traders of Crypto, the most profitable major cryptocurrencies to mine include:
- Ethereum – Ethereum is the second-largest cryptocurrency after Bitcoin and powers most smart contracts. While it's profitable now, the network will soon switch to a proof-of-stake algorithm that makes mining obsolete.
- Verge – Verge is a cryptocurrency that protects the anonymity of its users by obscuring their IP addresses and geolocations. Monero, ZCash, and other similar coins offer similarly high levels of mining profitability due to their growth.
- Dogecoin – Dogecoin is a famous meme coin that caught the attention of Elon Musk, making it incredibly popular. With its large fan base, the coin will likely remain popular even though it was built initially as a joke.
How to Increase Mining Profitability
Cryptocurrency mining profitability has several levers that you can use to increase profitability.
More than half of cryptocurrency miners use renewable energy, including hydroelectric, wind, solar, nuclear, geothermal, and carbon generation, with carbon offsets, according to the Bitcoin Mining Council. After accounting for the initial building costs, many of these energy sources provide low or no-cost electricity and significantly boost profitability.
At the same time, mining hardware is becoming increasingly advanced as miners move from GPUs to purpose-built ASICs. While these machines cost between $8,500 and $17,000, you can rent access to these machines in data centers for a fraction of the cost. And, of course, new hardware approaches could provide even more power down the road.
Hardware and energy are two prominent ways to increase profitability, but few organizations spend time optimizing their taxes. Generally, crypto mining tokens are subject to ordinary income tax upon receipt. But, if the price of the token increases, you may owe capital gains taxes on top of those ordinary income taxes when you sell the tokens.
A few strategies to reduce your tax burden include:
- Holding Time – Avoid selling cryptocurrency tokens for a year after acquiring them to pay the lower long-term capital gains tax rate.
- Harvest Losses – Sell any positions in the red to realize the loss in the current tax year before replacing them, if desired.
- Use Software – ZenLedger automatically aggregates your transactions, computes your capital gains or losses, and fills out the IRS forms you need each year without mistakes. You can also find opportunities to harvest tax losses and save.
Finally, switching to proof-of-stake (PoS) blockchains eliminates mining costs. Instead, you can stake your cryptocurrency to validate transactions and earn reward tokens. You may not make as much as proof-of-work (PoW) blockchains, but no upfront hardware or ongoing electricity costs are eating into your margins over time.
The Bottom Line
Cryptocurrency mining remains a popular way to make money, but it's becoming more and more competitive over time. While the most profitable cryptocurrencies depend on your hardware, electricity costs, and volatile token prices, Ethereum, privacy coins, and Dogecoin remain among miners' most profitable large tokens.
If you mine cryptocurrencies, ZenLedger can help you aggregate transactions across wallets and exchanges, compute your capital gain or loss, and accurately complete the tax forms you need.