Risks of Cryptocurrency Mining, Limitations, and Possible Problems

Cryptocurrency mining has long evolved from a hobby pursued by a small bunch of enthusiasts into a full-fledged business where billions of dollars circulate. At the peak of cryptocurrency prices in October-November 2021, miners earned a record combined monthly income of $1.7 billion. However, their income dropped to just $0.5 billion by September 2022.

As in any business, there are certain risks of cryptocurrency mining that both newcomers and experienced miners must navigate. Simply put, the mining business model can be boiled down to [profit = operating revenue - expenses], where revenue depends on your chosen cryptocurrency and its market price. On the other hand, expenses include equipment costs, rent, employee wages, electricity, taxes, and more. Each of these factors carries its own set of risks.

The cost of the coins you mine can significantly drop and remain low for an extended period, leading to a substantial loss of revenue. Over time, even the most durable mining equipment breaks down and becomes outdated, losing efficiency and competitiveness compared to newer models on the market.

Mining Issues

Miners face various risks of crypto mining. Some of these are relevant to business in general, while others are specific to the cryptocurrency mining industry.

Mining revenue is directly tied to the cost of the cryptocurrency they mine — a factor they cannot influence. While mining equipment can be switched to mine different digital coins, and online calculators can estimate the profitability of various cryptocurrencies, there’s no guarantee that this will give you a good ROI.

Using graphics cards opens up a wider range of possibilities. You can use them to mine various cryptocurrencies operating on different hashing algorithms. In contrast, ASIC miners are designed to function within a specific hashing algorithm, which makes the list of cryptocurrencies to mine much more limited.

A smart mining strategy involves accumulating the mined cryptocurrency when its market price is low and selling it when the price rises. For this strategy to work, you need additional free resources to cover ongoing expenses like rent, electricity, and labor costs. Proper financial planning helps determine whether it's worth starting to mine and if the process will be profitable.

Private miners who mine cryptocurrencies at home often face technical challenges. These can include issues related to equipment overheating, noise, and the risk of power overvoltage.

Mining Farm Issues

A mining farm is a network of multiple mining devices working together to mine cryptocurrencies. A farm like this can consist of just a few devices or scale up to dozens or hundreds of pieces of equipment.

Miners who operate large-scale mining farms—let’s call them industrial miners—face a broader range of mining risks. These risks of mining include:

• Fluctuations in cryptocurrency prices
• Equipment obsolescence
• Facility rental
• Electricity rate
• Sanction risks
• Tax risks
• Regulatory initiatives of government authorities

Risks of Mining Farms

Apart from the issues mentioned, you’re also likely to face specific risks of mining farms. Knowing them is vital to earn the maximum profit in the long run and avoid unnecessary losses. We have outlined the most popular of them further in our article.

The Cost of Cryptocurrency

Cryptocurrency is a volatile asset. Its value can fluctuate significantly, offering miners the chance to earn substantial profits when prices rise or pushing them to the brink of bankruptcy when prices fall.

Miners have no way to influence this parameter. To level this risk, you need to have financial resilience that allows you to survive periods of low cryptocurrency prices.

Equipment

Mining equipment is continually evolving, leading to increased performance. Graphics cards, computers, and other devices used by miners for cryptocurrency mining lose their value and efficiency over time as the market offers increasingly powerful and efficient models.

Investments in mining equipment are mainly recouped through the sale of mined coins. When cryptocurrency prices are high, the mining equipment ROI can be provided for 9 months or more.

Since March 2022, mining equipment prices dropped five times over six months, while the value of most cryptocurrencies has significantly decreased. Considering this information, mining has become unprofitable. It’s worth noting that you might face the risk of your investments in mining equipment losing value.

Rent

As a rule, mining farms aren’t set up in residential premises. They are housed in specialized facilities, which can either be a separate non-residential space for an individual miner or a mining hotel where equipment from multiple miners is accommodated.

As with any other business, a landlord may terminate a lease early or announce a rent increase. Alternatively, despite declining rental rates for similar properties, they might refuse to lower the rent. These risks can be leveled by drafting a well-structured lease agreement.

Keep in mind that it’s more challenging to monitor mining farms located on rented premises. They are quickly exposed to risks such as theft, damage, and inefficiency, for example, due to lack of proper ventilation.

Electricity

Although the equipment used for mining at home consumes electricity at residential rates, which are lower than commercial rates, placing a large number of mining devices in residential premises leads to increased power consumption. This can result in risks like power overloads, short circuits, and fires.

The equipment of mining farms located in non-residential premises is billed at commercial electricity rates, which are higher than residential rates. This increases production costs for mined cryptocurrencies, posing significant challenges for miners and risks for investors.

Regulatory authorities are actively discussing cryptocurrency mining regulations. If a mining law is enacted, it may include specific standards for electricity pricing that significantly exceed current rates. This could call the potential to earn substantial profits from mining into question.

Sanctions

Due to sanctions, European and American cloud mining services stopped working with users from Russia.

This affected the availability of cryptocurrency mining devices. Industrial miners are facing shortages of the necessary equipment and materials. It’s also worth mentioning that usual logistics connections are being disrupted. Some cryptocurrency platforms have stopped accepting coins mined in Russia, which made it difficult to mine Bitcoin, Ethereum, and other altcoins.

If direct sanctions are imposed against companies engaged in mining in the country, they risk having their cryptocurrencies blocked on exchange wallets. This would make it impossible to mine Bitcoin and other altcoins and get fiat money.

Taxes

There’s no clear-cut tax laws and regulations in most countries, however, governments worldwide are catching up, so before you launch your farm, make sure you check how it would be taxed in your region.

To reduce their tax burden, miners operating with significant computing power are currently advised to register as sole proprietors. This allows them to pay taxes under one of the existing taxation systems available to sole proprietors.

It's worth noting that the tax base often doesn’t include the coins mined, just the ones converted into fiat currency.

Both beginner and experienced miners have the opportunity to flexibly optimize their tax expenses under the current legal frameworks. However, if new laws regulating mining is passed, it could introduce different taxation principles for the industry.

Mining Fraud

Special attention should be given to the various types of fraud associated with mining. One common scam involves the purchase of mining equipment. Scammers often trick potential buyers into paying upfront for equipment that is never delivered. Alternatively, buyers might receive counterfeit devices with reduced specifications instead of the promised hardware, leading to losses of thousands of dollars.

Fraud is also widespread in cloud mining, where users purchase computing power from a mining pool without owning the hardware. Many of these cloud mining services do not actually have the computing resources they claim to offer. Instead, they operate as Ponzi schemes, paying out mining rewards to participants using funds from new users renting hash power. Eventually, these schemes collapse and disappear with their clients' money, causing users worldwide to lose millions in hard-earned funds.

Risks and Downsides of Mining

Mining is an activity influenced by numerous variables and exposed to various risks of cryptocurrency mining. Miners compute hashes within the blockchain network, assuming many risks, while their earnings depend on receiving rewards and cryptocurrency market fluctuations.

EMCD pool is a solution that brings together the combined efforts of multiple miners to mine crypto with daily payouts and fair commissions.

The main risks associated with mining at home (private mining) are:

• Decreased price of mined crypto
• Fire safety risks
• Claims from energy suppliers (in case of high electricity consumption)
• Fraud

The main risks associated with commercial-scale mining (industrial mining) are:

• Cryptocurrency price decline
• Obsolescence and depreciation of mining equipment
• Risks associated with renting premises
• Electricity tariffs and supply
• Sanctions on the supply of mining equipment and the sale of mined cryptocurrencies
• Tax risks
• Lack of regulation and governmental transparency
• Fraud

F.A.Q.

Which crypto assets cannot be mined?

Cryptocurrencies that operate on the Proof-of-Stake (PoS) algorithm are not designed for mining. For instance, altcoins like Polkadot, Cardano, Solana, Polygon, and Avalanche (Avax) fall into this category. Instead of mining, these digital assets use staking to validate transactions and secure the network.

What are the legal risks of cryptocurrency mining?

A miner who fails to register their activity may face criminal charges for illegal entrepreneurial activities and tax evasion.

Should I start mining?

Despite the expensive equipment and potential risks, cryptocurrency mining remains a highly profitable activity.

Where should I not cut costs in mining?

Future earnings from cryptocurrency mining are directly linked to the computing power of your equipment. Therefore, it's essential to prioritize investing in high-performance devices where cutting costs is simply not an option.