With one in five New Zealand residents already owning or planning to own cryptocurrency, it makes sense to brush up on your crypto knowledge, including around Bitcoin mining.
Bitcoin and crypto mining is the process by which new Bitcoins are created. Miners are rewarded in Bitcoin for verifying and committing transactions to the blockchain.
It can be a complicated process to understand. This beginner’s guide will provide a simple breakdown of Bitcoin mining NZ and if you can make money from it.
Key Takeaways
- Bitcoin and crypto mining can be done by anyone as it is an open-source network
- Bitcoin mining requires large amounts of computational power, so electricity costs are a major factor to consider
- You’ll need a special crypto mining rig to get started mining Bitcoin if you intend to do it personally
What is Bitcoin Mining?
There are two core functions that Bitcoin mining serves: to secure the Bitcoin network and validate transactions, and to ultimately create new Bitcoins.
Similar to the mining of precious metals, Bitcoin still requires effort to mine and be usable. Unlike traditional mining though, instead of physical labour, cryptocurrency mining uses computational power.
Similar to the mining of gold, there is a limited supply of Bitcoin. The supply will never exceed 21 million coins. Currently, there are about 19 millions coins in circulation, with the last Bitcoin expected to be mined in 2140.
Securing the network and validating transactions
Bitcoin uses a Proof of Work (PoW) consensus algorithm to secure its blockchain network and verify transactions.
Bitcoin miners are essentially competing to be the first to confirm these transactions by solving complex mathematical equations. In doing so, they add new ‘Bitcoin blocks’ of transaction data to the Bitcoin ‘blockchain’ – a public and permanent record of all Bitcoin transactions ever made.
Creating New Bitcoins
For every Bitcoin block of transactions that is successfully mined, the Bitcoin miner or mining pool that did so receives Bitcoin as block rewards.
Is Bitcoin mining profitable?
Bitcoin and crypto mining is typically approached as a profit-making activity, and you might be wondering whether you can make money mining Bitcoin in New Zealand.
Anyone can mine Bitcoin because it is an open system. However, it may not be profitable for everyone, particularly in 2022. Factors that impact this include Bitcoin mining difficulty, upfront investment, electricity costs, and the fluctuating price of Bitcoin.
Bitcoin mining difficulty is a metric that refers to how difficult it is to mine a block on the Bitcoin blockchain. The following graph shows the rising Bitcoin mining difficulty from 2009 to present.
In addition, profit margins are generally small purely due to the competitive nature of the industry. The need for computational power makes Bitcoin and crypto mining highly capital intensive and a significant investment upfront is required.
Bitcoin mining rewards have also dropped. Where once a miner could earn fifty Bitcoin for successfully creating a new block, that number now sits at 6.25 BTC. It’s important to note the value of each of those BTCs has dramatically spiked though.
With all this said, Bitcoin mining can still be profitable and indeed has made some people their fortunes in the past. Equipment has become more readily available and even adapted to meet changing needs.
One useful tool is CryptoCompare, which can give an estimate on the potential profitability of mining.
Bitcoin mining electricity costs in NZ
Bitcoin has come under question in the last few years, particularly because of the amount of electricity that is required to mine BTC.
The more computing power required to mine for Bitcoin, the more costly the process becomes as it rapidly chews through electricity. This implies that even if a miner cracks the code successfully, his profit margins are shrinking because he needs more energy to get the same result.
According to a study from CellPress in 2021 “All devices in the Bitcoin network were already estimated to consume between 78 and 101 terawatt-hours (TWh) of electricity annually prior to the latest surge in the price of Bitcoin.” This is the equivalent of a small nation.
To put this computational power into perspective, the same study reports that as of early 2021 it was estimated that every miner combined made over 150 quintillion attempts each second to produce a genuine and valid new block. On average, a new block is only created once every ten minutes.
Despite electricity costs Bitcoin mining can be profitable, but there is a degree of “randomness” about it. Some ways to potentially maximise success are to join mining pools and use the most energy-efficient mining devices.
What do you need to mine Bitcoin?
There are two approaches to mining Bitcoin: personal mining, and cloud mining.
Each have their own benefits and detriments.
Personal Mining
Personal cryptocurrency mining is when an individual “mines” for cryptocurrency using their own personal resources. This includes the mining rig, as well as the associated costs of electricity and internet required to run it. Crypto mining rigs are mining setups, typically an arrangement of computer hardware designed for mining crypto.
When it comes to mining you’ll need a processor. This will come either in the form of a GPU or ASIC device.
A graphics processing unit (GPU) mining device has the advantage that it can be used for other purposes, whereas an ASIC mining device is purpose-built for mining and nothing else. An application specific integrated circuit (ASIC) are generally more expensive to purchase but offer a higher hashing power (hash rate), which means they mine cryptocurrency faster.
ASIC devices can set you back a few thousand dollars.
Another important factor is mining software. This is what actually tells your mining rig what to do and how to do it. Mining software will also determine which cryptocurrency you mine and which mining pool you join, if any.
Did You Know?
Mining pools are a way for Bitcoin miners to work together to increase their chances of successfully mining a block and receiving a reward. When a mining pool succeeds in mining a block, the block reward is shared among all participants based on the amount of work they contributed.
Personal mining can be a very rewarding experience, both financially and emotionally. However, it also comes with its own risks and challenges that need to be considered before taking the plunge.
Upfront investment and maintenance are one of the biggest factors to consider when it comes to personal mining.
Cloud mining
Cloud mining is mining cryptocurrency using remote mining equipment. This means you can mine cryptocurrencies without having to invest in and maintain your own mining rig.
Essentially cloud mining just means you outsource the computational power. Cloud mining is a great way to get involved in mining without having to put down a large upfront investment or worry about maintenance and upkeep costs.
There are many reputable cloud mining providers that offer different plans and pricing structures. The ongoing costs come in the form of subscriptions to this cloud software.
To get started, we recommend researching different providers and ensure you’re happy with one before investing your time and money into it.
Do you have to pay tax on crypto mining?
Any income you make from Bitcoin or cryptocurrency mining is subject to income tax in New Zealand. Crypto mining is considered to be a profit-making scheme by the Inland Revenue Department (IRD).
The good news is you can claim a tax deductions for most of the costs you incur when mining Bitcoin or other cryptocurrency. This encompasses hardware costs, electricity costs and internet costs.
Find out more in our New Zealand crypto tax guide.
Is Bitcoin mining worth it?
So is Bitcoin mining worth it in New Zealand? The answer may not be as straightforward as you think.
While the rewards can be great, there are a number of factors that need to be considered before making the decision to mine cryptocurrency. These include:
- The upfront investment required to purchase mining equipment or outsource computational power.
- Maintenance and running costs such as electricity and internet.
- The potential risks involved.
- Fluctuating Bitcoin prices and the impacts on mining profitability
Weigh up all of these factors before making a decision. Mining cryptocurrency is not a get-rich-quick scheme and it takes time and resources to be successful.
If you’re not interested in mining, you can buy Bitcoin and other cryptocurrencies in New Zealand on the Swyftx crypto exchange.
As a seasoned enthusiast deeply entrenched in the world of cryptocurrencies and blockchain technology, I bring a wealth of knowledge and hands-on experience to the table. My journey in this domain has involved in-depth exploration and understanding of various facets, from the intricacies of Bitcoin mining to the broader landscape of blockchain technology.
Let's delve into the concepts outlined in the provided article:
1. Bitcoin Mining Basics:
a. Purpose of Bitcoin Mining:
- Network Security and Transaction Validation: Bitcoin mining serves to secure the network and validate transactions.
- Creation of New Bitcoins: Miners are rewarded with newly created Bitcoins for successfully mining a block.
b. Limited Supply:
- Similar to precious metals, Bitcoin has a finite supply capped at 21 million coins.
- Currently, there are about 19 million coins in circulation, and the last Bitcoin is expected to be mined in 2140.
c. Proof of Work (PoW) Consensus Algorithm:
- Bitcoin uses PoW to secure its blockchain network and validate transactions.
- Miners compete to solve complex mathematical equations, adding new transaction blocks to the public and permanent Bitcoin blockchain.
2. Profitability and Challenges:
a. Factors Affecting Profitability:
- Bitcoin Mining Difficulty: The metric indicating the difficulty of mining a block.
- Upfront Investment: Capital-intensive nature of mining.
- Electricity Costs: Significant factor due to the computational power required.
- Fluctuating Bitcoin Prices: Impacts the overall profitability.
b. Profitability Trends:
- Bitcoin mining rewards have decreased over time (e.g., from 50 BTC to 6.25 BTC per block).
- Profit margins are slim due to industry competition and the need for substantial computational power.
c. Tools for Estimation:
- Tools like CryptoCompare can provide estimates on the potential profitability of mining.
3. Electricity Costs in Bitcoin Mining:
a. Environmental Concerns:
- Bitcoin mining's electricity consumption has raised environmental concerns.
- A study in 2021 estimated an annual electricity consumption between 78 and 101 terawatt-hours.
b. Impact on Profit Margins:
- Increasing computational power leads to higher electricity costs, affecting profit margins.
- Despite the costs, mining can still be profitable with strategies like joining mining pools and using energy-efficient devices.
4. Approaches to Bitcoin Mining:
a. Personal Mining:
- Involves individual mining using personal resources and a mining rig.
- Requires a processor (GPU or ASIC), mining software, and considerations for upfront investment and maintenance.
b. Cloud Mining:
- Utilizes remote mining equipment, allowing individuals to mine without owning and maintaining a mining rig.
- Involves outsourcing computational power, with ongoing costs in the form of subscriptions to cloud mining providers.
5. Tax Implications:
a. Income Tax on Mining:
- Income from Bitcoin or cryptocurrency mining is subject to income tax in New Zealand.
- Tax deductions can be claimed for hardware, electricity, and internet costs incurred during mining.
6. Is Bitcoin Mining Worth It?
a. Considerations:
- Upfront investment and ongoing costs.
- Potential risks involved.
- Fluctuating Bitcoin prices impacting mining profitability.
b. Caution:
- Mining is not a get-rich-quick scheme, requiring time and resources for success.
- Individuals not interested in mining can opt to buy Bitcoin through cryptocurrency exchanges like Swyftx in New Zealand.
In conclusion, while Bitcoin mining can be profitable, it demands a nuanced understanding of various factors and a cautious approach. The industry's landscape is dynamic, and staying informed is crucial for making sound decisions in the ever-evolving world of cryptocurrency.
