If you're wondering about the ROI (Return On Investment) for Litecoin mining with a shiny new R9 290 or R9 290X, there are quite a few calculators out there that will help with some rough estimates. The problem with the calculators is that they're very rough -- they assume a constant increase in difficulty and a constant price for Litecoin, neither of which are even remotely likely. They always end up at the point where Litecoin mining becomes "unprofitable", but my experience says that isn't likely to happen -- "ever" (though we need to dig into this more, which is the point of this point). Some may account for hardware upkeep and other factors, but even then you're going to need to do a bit more work to even come close to reality. So what is "reality"? That's what I'm here to talk about today.
My earlier post about paying for the hardware in a month or two was perhaps a bit overzealous -- especially if you haven't ordered the hardware yet! You see, Litecoin and Bitcoin (and pretty much all of the other cryptocurrencies) are designed to have someone find a new block of coins via mining every set interval; on Bitcoin it's every 10 minutes and on Litecoin it's every 2.5 minutes. The more people start mining, the faster blocks would be found, so they scale the difficulty to try to keep the rate more or less constant. The result is that every 2016 blocks that are found, the algorithm looks at how long it took and either scales the difficulty up, down, or keeps it the same. You can find the current difficulty and estimated next difficulty at many places, but the key thing to remember is that it's always changing.
The biggest factor affecting difficulty is the price -- if Litecoin mining becomes highly profitable, as it did during the past month, then more people will mine and difficulty will go up. At the start of November 2013, the difficulty was around 1000; now it's at nearly 2000 -- twice as difficult, or put another way your hardware is now generating half as many LTC. As an even more extreme example of what can happen, Bitcoin difficulty went from around 3.2 million at the start of 2013 to its current 707 million in eleven months -- a 221X increase in difficulty! And it's not set to slow any time soon. But for the time being, that won't happen to Litecoin. Here's why.
Bitcoin difficulty has generally followed the price such that for any set of hardware, you could expect to pay it off in around six months (accounting for electricity costs in the US or $0.10 per kWh). Early on this didn't hold, and even in the CPU mining days it wasn't quite accurate, but since 2011 that's more or less been the status quo. Pricing bubbles cause the difficulty to spike and price crashes cause it to drop -- albeit more slowly -- but the result is pretty constant. There were two major wild cards that screwed things up, however: the advent of GPU mining, followed by the dawn of Bitcoin ASICs.
Even at it's lowest point in 2011 (around $2 per BTC), my GPU mining was pretty close to the break even point, and thanks to constantly dropping difficulty (remember: it follows pricing; it does not lead) my rigs that at one point were perhaps costing a bit more than they were earning in mined coins eventually returned to profitability. Thanks to my $0.10/kWh electricity cost, I can still mine at a profitable rate (even if it's a low rate) when those with higher electrical costs have to quit. Europeans in particular pay some pretty insane rates and thus they don't tend to mine unless it's highly profitable (or if they're looking at a long-term view of the value of BTC/LTC).
So my GPUs are chugging along happily, averaging 5 BTC per day at lower difficulties, then 4, 3, 2, 1... you get the point. My daily power costs are around $10, and my mining income has usually been around $15 -- at the current price at least. Then ASICs start arriving and the early offerings could mine at 330 MHash and 5W compared to my 5870 GPUs doing 380 MHash at 300W -- or in other words, they were 50 times as efficient! The problem was that ASICs weren't readily available, so those that had them reaped massive rewards while those that didn't started trying to get ASICs as quickly as possible.
I should note that FPGAs were always more efficient than GPUs as well, but their costs were such that most people didn't jump on that train -- they're around $600 for a good FPGA (e.g. BitForce) that could mine at 800MHash with a power draw of 80W -- about eight times as efficient as a GPU, but still quite a ways behind any of the proposed ASICs at the time.
When the first generation ASICs actually started shipping, we naturally saw a massive spike in difficulty, just like what happened with the GPU spike a few years earlier. Eventually, difficulty hit the point where anything short of a good ASIC became unprofitable -- which lead to things like a single Block Erupter dropping to a low of $15 on Amazon before the BTC price jumped up to $1000+. You could have purchased 10 for $150 to get 3.3 GHash and a power draw of 50W, and 45 days ago it would have earned $25 per month or so. Today, a better bet would be a similar Block Erupter Blade that will do 10.7 GHash and draw 85W or so of power, for $600. That's actually not a bad deal if you want to grab it, as you will "earn" $200 per month right now. But difficulty for BTC is still increasing quite fast, so it will likely end up being a 5-month ROI.
Okay, I've been talking around things a lot, but let's get to some real numbers. Since difficulty follows price, the only time we will actually reach the point where GPU mining of Litecoin becomes unprofitable is when Litecoin ASICs become so prevalent that GPUs can't compete. There are companies talking about making Litecoin ASICs -- FPGAs having been ruled out due to cost and efficiency considerations -- but the Scrypt algorithm was intentionally designed to make it difficult to implement on GPUs, let alone ASICs. This is why you get 600 KHash from an HD 7950 compared to 650 MHash for SHA256 (Bitcoin) -- it's 1000 times more complex to run the Scrypt hashing algorithm. But that doesn't mean an ASIC is impossible -- just more difficult to make.
One company I've read about is claiming they'll have a Litecoin ASIC in mid-2014 that does 500KHash per chip at 20W. That's over 100X as efficient as mining with a 7950 or R9 290 GPU, though pricing hasn't been fully disclosed yet. Here's the thing: the same company was making claims about an amazing FPGA design for Litecoin before determining it wasn't cost effective, and now they're making big claims for ASICs. I was around when the first Bitcoin ASICs were being discussed, and the claims were similar. Preorders for companies like Butterfly Labs rolled in, with people investing 100BTC at a time when the coins were worth $2.50; two years later when they finally received their ASIC, BTC was worth over $100 -- if they had just "invested" the $250 in holding BTC, they would have made far more than the ASIC will ever deliver. Litecoin ASICs are going to be the same thing, so before you drop $500 or $1000 on an unproven and not yet shipping product, ask yourself: how much will 10 to 25 LTC be worth in a couple years?
With all of that out of the way, here's my final rough guess on how LTC difficulty will proceed. I've normalized LTC production to one R9 290 getting 850 KHash/sec to make things easy. Assuming you start mining today, you'll get around 0.43 LTC until the next difficulty change (every 3.5 days). At that point, we'll likely jump up 10-15% in difficulty, because with a net profit of $50 after just 3.5 days people would be silly to not mine LTC. I'd guess that rate of increase will continue for about three weeks, at which point we'll be at a difficulty of 4000 -- twice what we are now. The rate of increase will start to slow, ranging from 5-10% for the next three weeks, at which point we'll have doubled again up to ~8000 difficulty. From there, it will continue to stabilize until we end up at around 12000-15000 difficulty.
If the price increases or drops (and it will), those difficulty estimates will of course change. If we see $100 LTC I would expect the difficulty to stabilize at a much higher value -- maybe 20,000 or so. If the price drops down to $10 per LTC on the other hand, difficulty will end up closer to where we are now -- around 2,000. Basically, my guess is eventually difficulty will stabilize at a value that leads to a single R9 290 generating $3 per day in profit. At that point, the GPU pays for itself in about four months, and with a four month ROI instead of two or four weeks, people become far less likely to purchase more hardware for mining.
For those that didn't know, Litecoin difficulty has a cool feature: divide your hash rate by the difficulty to determine how many coins you mine per day. That means at a difficulty of 20,000, a single R9 290 would only generate 0.0425 LTC per day, or 1.275 LTC per month. The power cost for running a single R9 290 is going to be about $25 per month, so in order to break even in four months you need to mine $125 per month in LTC. LTC was stable at around 1000 (give or take 10% as it went up and down) from August until early November, because the price wasn't attractive enough to draw additional miners into the fray. A single 7950 was only making about $1 per day, depending on the price, so it was technically profitable but the ROI would have been almost a year for a single 7950 purchase.
We'll eventually get to that point with R9 290 and 290X, and then the early adopters will pat themselves on the back and those that came late will curse their stupidity. They might even exit Litecoin mining altogether and sell off their hardware in order to recover some of the cost. And then, a year from now when LTC is at $100 or more and the next bubble is going on, they'll think, "If only I had kept mining...." Hopefully you have the ability to stick it out until that time.