How You Could Lose Out While Mining Cryptocoins

Watch out for the risks of cryptocurrency mining

Mining for coins can be dicey. Victor Habbick Visions/Science Photo Library/Getty Images

There is a lot at risk when you mine for cryptocoins. Rewards can certainly be big in the long-run, but it's a good idea to think of cryptocurrency mining as investing in the stock market before 1929, when the government did not insure banks and investors lost millions of dollars. Cryptocoin is regulated by any government; that's the point of digital currency. Here's what to know before you mine for coins.

The 5 Biggest Risks of Cryptocurrency Mining

  1. Losing your digital wallet of coins: You can lose your wallet either by forgetting your password, which locks you out or by physically losing the wallet when your hard drive breaks or your online wallet provider goes out of business.
  2. Dishonest mining pool organizers: If you join a mining pool that is run by dishonest administrators, they could skim coins from your earnings or take your earnings altogether and close shop. 
  3. Electricity costs could make your mining unprofitable: For most mining computers, a cost of 14 cents/kilowatt hour is the most you want to pay for your mining hobby. Above 14 cents, mining currencies such as Bitcoin, Litecoin, Peercoin, and Feathercoin are not worth the investment. Similarly, if you invest more than a several hundred dollars in mining hardware, at a rate of two dollars profit per day (and assuming there is no leap in coin value), it could take two years for you to pay off your hardware investment.
  4. Black Hat Hackers: It is possible that a talented hacker can break into your mining pool and empty the users' wallets, including yours. 
  5. The cryptocurrency you choose could drop in value instead of ​grow. Just like gold or any other commodity, there is a chance that the market value of your cryptocoins will fall, and you will be sitting on top of a pile of pennies instead of a pile of dollars. 

How Do I Reduce These Coin Mining Risks?

While no moneymaking venture is ever risk-free, you can certainly reduce your cryptocoin mining risks. Here are a few suggestions for managing your coin mining vulnerabilities:

  • The best prevention against being hacked is a combination of hardware and personal habit. Put your coin wallet database on a detachable hard drive or a USB stick that you detach from your computer and network when you're not using it. Then, transfer your coins from your online storage into your detachable wallet so they do not accumulate online.
  • Follow a personal habit of backing up your wallet every two days, keep your password written down in a safe place, and keep a personal wallet on your home computer to lower the risk of losing your wallet.
  • Find a reputable mining pool where the members are active in a forum and keep each other honest by keeping constant eyes on the pool operations. 
  • Some electricity providers allow you to lock in your per-kilowatt-hour fee for a year or two. If you can do so at 14 cents or less per kilowatt hour, then do it. 10 cents per kwh and less is excellent, not just for mining but for your own benefit as a consumer.