Though a majority of people have now heard of Bitcoin, and have some awareness of what Bitcoin is and how Bitcoin works, there are many mysteries that still surround the leading digital currency.
And mining could be the biggest one of all.
• How can something virtual be mined?
• Is it anything like coal mining, gold mining, or data mining?
• Is Bitcoin mining profitable?
• Is it better to mine Bitcoin or to buy it?
The concept of cryptocurrency mining is actually a lot simpler to understand than you might think, as you’ll find out if you keep reading this helpful guide we’ve put together.
What is Bitcoin mining?
A lot of people make their money not from investing directly in Bitcoin with fiat money or other cryptocurrencies, but from mining it.
This practice has seen a whole new industry emerge over the past decade or so, and it has made a number of companies extremely rich, while also serving as a decent way for individuals to make a little extra money on the side.
Though it’s usually a hobby for hackers or tech enthusiasts, it doesn’t actually require much computing expertise or knowledge about how Bitcoin works. All you need is some basic hardware that you can connect to the Bitcoin network.
Bitcoin mining doesn’t have a lot in common with the types of mining found in the physical world, but it does lead to the creation of new Bitcoins. Also, Bitcoin is often referred to as “digital gold”, and an analogy could be made between the mining of gold and the mining of Bitcoin.
The difficulty and amount of resources required to mine gold meant that it was reliably scarce, and could therefore be used as a store of value to back up national currencies. Now, just as gold reserves were once used as a guarantee to support fiat payment networks, Bitcoin mining allows the Bitcoin network to be secured with miners’ collective processing power.
How does Bitcoin mining work?
Essentially, a miner is someone who connects their computer hardware directly to the Bitcoin network, and by doing so they are helping to keep it functional and allowing Bitcoin transactions to take place.
New Bitcoins will be regularly minted as a reward, for miners who are able to meet particular criteria. These criteria are met by committing a significant amount of processing power to the Bitcoin mining network.
Earning Bitcoin for a miner is a two-step process. It involves:
Verifying a number of transactions
When you and another user carry out a transaction on the Bitcoin network, it first needs to be verified independently, by at least one miner.
A miner verifying a transaction uses their processing power to check the inputs and outputs of a transaction, to see if they match up. Basically, they’re looking back through the ledger of previous transactions to make sure that the Bitcoin sender actually has the funds to cover what they’re sending.
A miner will verify transactions until at least 1MB worth of data has been checked. This will typically mean auditing around 500 different transactions, although theoretically it could be just one transaction that involves a lot of data.
This group of transactions is known as a “block”. It’s added to the historical string of groups of transactions that have already been verified, forming part of the “blockchain”.
Solving a numeric problem
Once they’ve mined a block, a miner is in contention to earn Bitcoin.
This “mining reward” is earned by being the first on the Bitcoin mining network to solve a numeric problem. To get the newly-minted Bitcoin, they need to find a number that is less than or equal to an unknown target number.
Unlike a regular decimal number, this is a much more complicated hexadecimal number. It’s known as the “target hash”, and the process of finding a hash that’s less than or equal to it is extremely resource-intensive. The first miner to succeed will receive a set amount of Bitcoin, as laid out by the Bitcoin network protocol and agreed upon by the community.
Bitcoin mining can seem like a way to potentially make a large amount of money, for very little effort. All you have to do is connect your Bitcoin mining rig to the Bitcoin network, and let it do its thing in the background.
And many people do commit to mining Bitcoin as a practice, whether for money or just to contribute something to the Bitcoin project.
If you are wondering “is Bitcoin mining profitable?”, it’s worth considering the difficulty of the process, and the kinds of costs that are involved. To get an idea of your chances of being awarded new Bitcoins, and what kind of profitability you can expect from your Bitcoin mining operation, let’s take a look at how exactly the Bitcoin mining process works.
What is the Bitcoin Mining Algorithm?
As we mentioned above, mining Bitcoin and earning mining rewards requires miners to solve a numeric problem before anyone else on the Bitcoin mining network does. They have to find a 64-digit hexadecimal number that’s less than or equal to the target hash, which is generated by the Bitcoin mining algorithm. Hexadecimal numbers are numbers that include the digits from 0-9, like regular decimal numbers, and also letters from a-f. An example of a 64-digit hexadecimal number that might be used for the target hash is:
Finding a number that’s valid requires you to apply a “hashing function” to a “nonce” (number only used once), which is a more basic hexadecimal number. Hashing functions are often used as a way to encrypt information in cybersecurity. They’re set up so that they’re almost impossible to reverse. This is to say that, for any given hash (the result of applying the hash function), it’s extremely difficult to calculate the original number that the hash function was applied to.
That’s understandable. You don’t really need to know any of this complicated cryptography theory to know how Bitcoin works, or even to get to grips with how Bitcoin mining works. But if you take a look at the complexity of the hexadecimal number above, and bear in mind what we said about the difficulty of reversing a hash function, you can grasp the basic point: finding a target hash and earning the mining reward is extremely difficult.
There’s no way of just figuring it out, like you would with other types of numeric problem.
Instead of using any kind of computation or algorithmic process, the only way to solve the problem is by guesswork, or what’s referred to as “brute force” calculation. Basically, you just set up your computer hardware to keep guessing numbers until it finds the correct one.
What is Bitcoin Mining Difficulty?
Finding a valid target hash will always be difficult, but the exact level of difficulty changes with time. This is related to the ideal “block time” of the Bitcoin network.
One of the most important aspects of the Bitcoin network protocol is that a new block will be added to the blockchain every 10 minutes, or as close as possible. There are controversies and disagreements over this requirement, and some people believe that the network would run more effectively with a shorter “block time”, but a block time of 10 minutes is what is currently accepted by the network consensus.
To maintain a constant block time, the Bitcoin mining algorithm is set up so that it always takes a set amount of time to guess a valid hash. There’s no theoretical limit to how quickly miners can make guesses, so the “difficulty” of guessing a valid hash is what has to be altered to keep the block time the same.
As the valid hash needs to be lower than or equal to the target hash, the target hash is increased to make the difficulty lower, or decreased to make the difficulty higher.
Whether the difficulty needs to go up or down depends on how many guesses are being made in a set period of time. This is referred to as the “hashrate”. When the total Bitcoin network hashrate goes up, the Bitcoin mining difficulty is increased accordingly. When it goes down, the difficulty is decreased.
What is Bitcoin Hashrate?
To have a good chance of finding a target hash and earning the mining reward, you’ll need to make a lot of guesses. The number of possible guesses for the problem are in the trillions, and only a select few will be valid. Miners need to have as high a hash rate as possible in order to compete for the newly minted Bitcoin.
A miner’s hashrate generally depends on the speed of the processors that they’re using to run the Bitcoin mining program. It’s usually measured in either megahashes (millions of hashes) per second (MH/s), gigahashes (billions of hashes) per second (GH/s), and terahashes (trillions of hashes) per second (TH/s). The average hash rate for a specialised processing unit is around 10 GH/s. At the time of writing, the total hash rate of the entire Bitcoin network is around 170 million Exahashes per second (EH/s), which is 170 billion TH/s.
This total Bitcoin network hashrate is what determines the mining difficulty, as mentioned above.
Your chances of successfully mining Bitcoin are roughly equivalent to the proportion of the total Bitcoin network hashrate you control. As you can see from the huge figures above, the average miner has a very low chance of guessing the target hash before another miner does.
What do I need for a Bitcoin mining rig?
Technically, you can mine Bitcoin with any type of processor. All you have to do is connect to the Bitcoin mining network, and start running the software.
When the world’s first cryptocurrency was launched, and for the first few years of its existence, mining would be done just using the CPUs on personal computers.
But as the difficulty has increased over time, it’s become necessary to use specialised, dedicated equipment in order to have a chance of turning a profit with your mining operation.
The two main types of processing unit used to mine Bitcoin today are GPUs (graphical processing units) and ASICs (application-specific integrated circuits). GPUs are the graphics cards that are usually used to run advanced computer games, and they have a significantly higher processing power than regular CPUs. However, even these units are increasingly becoming obsolete. The introduction of ASICs has increased hashrates on the Bitcoin network more than ever before, and it’s now necessary to use an ASIC Bitcoin miner if you really want to make decent profits from mining Bitcoin.
What makes an ASIC Bitcoin miner so much faster and more effective at mining Bitcoin than a GPU is that it’s deliberately designed to run the Bitcoin algorithm. As suggested by their name, ASICs are built for the specific application of Bitcoin mining, and nothing else. While GPUs can offer hash rates of around 100 MH/s, the hash rate of an average ASIC is around 50 TH/s.
Is Bitcoin mining profitable?
The mining rewards for Bitcoin are set up to vary over time, and the Bitcoin mining profitability will change accordingly. When the network was first launched back in 2009, mining one block would earn you a total of 50 BTC. Obviously mining wasn’t a huge deal back then, but the Bitcoin value has skyrocketed over the past decade or so, and what would have once been worth a few dollars is now close to a couple of million.
There is a regular halving of the Bitcoin mining rewards, according to a schedule laid out in the protocol by Bitcoin’s anonymous founder Satoshi Nakamoto (who was also the first miner to receive that 50 BTC reward).
After every 210,000 blocks the mining reward will be halved. It takes roughly four years to mine this many blocks, although the total time can vary slightly. In 2012, the initial reward of 50 BTC was halved to 25 BTC. Then, in 2016, there was another halving, with miners who mine a block and find a valid hash receiving 12.5 BTC. The last halving took place in May 2020, reducing the mining reward to 6.25 BTC.
Based on a Bitcoin value of just under $60,000 at the time of writing, this means that mining a block successfully will earn a miner around $360,000. Not bad for something that requires basically no work.
However, as we explained earlier, actually being successful in mining a block is unlikely, unless you have a significant amount of the total processing power on the Bitcoin mining network. For more detailed information about how the profitability of Bitcoin mining today, take a look at this Bitcoin mining difficulty calculator.
What are the top Bitcoin mining operations?
So, in answer to the question “is Bitcoin mining profitable?”, we can say “yes”, but only for a select few with a large amount of resources to invest. Most successful miners today are actually “pools”, as opposed to individuals. Many people or businesses will pool their money to invest in mining rigs, and then receive a small share of the Bitcoin rewards in return. Although it was once possible to mine Bitcoin on your own, today’s miners are part of huge Bitcoin mining pools based in warehouses with many thousands of chips running simultaneously.
As the Bitcoin value increased over its lifetime and mining became a more lucrative enterprise, the production of mining equipment itself became big business. GPU mining started back in 2010, just a year after Bitcoin was first launched, and manufacturers such as ATI and Nvidia were soon competing to develop smaller, faster chips that could mine Bitcoin more effectively, targeting Bitcoin miners specifically. In this way, the process of mining Bitcoin drove innovation in the field of GPU manufacturing.
Then, in 2013, a Chinese computer hardware manufacturer called Canaan Creative released the first ASIC that was designed specifically for Bitcoin mining. This type of single-purpose ASIC Bitcoin miner would soon become the industry standard, and a number of other companies followed suit and eventually took over Bitcoin mining with their new dedicated mining rigs. As well as manufacturing ASICs to be sold to miners, many of these companies are also using these same mining rigs for their own Bitcoin mining operations, and making huge amounts of profit.
Bitmain: a major mining player
Although their influence has dropped off in recent years, the Bitcoin mining network was once dominated by Bitmain, a Chinese company launched in 2013. They manufactured the Antminer Bitcoin miner, one of the most powerful ASICs on the market. By 2018, Bitmain had become the world’s largest seller of ASICs, with 75% of global sales, and they were also in control of two leading mining operations. BTC.com and Antpool were large “pools”, formed by many Bitcoin miners putting their hardware resources together. Together these two Bitcoin mining pools had around 25 percent of the total hashrate on the Bitcoin network.
As you might expect for a market-leading tech company that was also likely to receive a large proportion of new Bitcoins, Bitmain saw some decent revenue over the years. At its peak, Bitmain earned around $3 billion just in the first quarter of 2018. Despite its large share of the network hashrate, most of this revenue was actually made from sales of the Antminer. Their profits from mining were close to $150 million for Q1 2018, but most of their crypto holdings came from Antimer sales that were settled in Bitcoin or other digital currencies.
Bitmain was also mired in controversy during this period, with one notable lawsuit from a LA resident claiming that the company had been mining crypto for itself with the ASICs that it sold to customers. During the abnormally long initialisation time for the chips, they were apparently configured to mine crypto on behalf of Bitmain instead of the owners. The suit is still ongoing.
Bitmain launched an IPO (initial public offering) for investors in June 2018, hoping to raise around $500 million at a valuation of $16 billion. However, this led to further controversies.
The company’s fortunes took a turn for the worse soon after the IPO was launched, and many investors demanded their money back as they believed that they’d been misled by the company’s financial records. Despite their huge revenues, profits were actually falling. This was partly a result of a huge dip in crypto prices, as they continued to keep much of their funds in Bitcoin and other tokens, including the controversial Bitcoin Cash.
This offshoot of the original Bitcoin network was itself splitting into two new blockchains around this time, and its fortunes were falling alongside those of Bitmain. The Chinese manufacturer’s products had also ceased to be the best Bitcoin mining hardware on the market, with the huge investments that went into developing new Antminers not leading to the improvement in quality that many expected.
Bitcoin mining today
The founders of Bitmain’s Bitcoin mining pool BTC.com eventually split from the company in 2019 and founded their own pool, PoolIn, which now has around 13 percent of the total hashrate. Bitmain’s leading pool, Antmain, has around 11%. The current leading pool is F2Pool, which mines roughly one in five of all blocks on the Bitcoin blockchain. All these pools are based in China, and the country as a whole has a huge share of the Bitcoin mining network. Around 65 percent of the total hashrate is based there, with the US, Russia, and Kazakhstan controlling around 7 percent each.
Iceland is another region that is often mentioned in relation to the Bitcoin mining market. It only controls 0.2% of the total share of the Bitcoin network hashrate, but this is quite significant when considering the country’s size and population of around 350,000. Miners in other countries will often rent chips that are running in Iceland, as the country’s geothermal landscape means that it has extremely cheap electricity. Data centres there account for around 1 percent of the country’s GDP, and 90 percent of these are dedicated to crypto mining.
Energy usage of the Bitcoin network
As we’ve discussed, profitable Bitcoin mining today requires a large amount of processing power. And as the network has progressed, this total amount of processing power has steadily increased. Though mining chips are steadily increasing in efficiency, all this processing power still uses a vast amount of energy.
For the figure of 170 million EH/s that we mentioned above, the annual amount of power required to produce it is around 100 TWh (terawatt-hours). This is roughly equivalent to the yearly power usage of a small country like Ireland or Denmark. Both outside and inside the crypto community, this is a huge source of controversy. Many claim that the environmental impact of mining Bitcoin is too vast for the top cryptocurrency to ever really take off as a viable alternative to fiat. Meanwhile, others counter that the established financial sectors that Bitcoin could replace also use up similar amounts of energy in their own ways.
Either way, Bitcoin is increasingly associated with a huge mining-based carbon footprint, and this could be a problem as the issue of climate change continues to dominate global politics. But as we’ll see below, mining isn’t the only possibility for a secure crypto network.
Can I mine other cryptocurrencies?
So far, we’ve been asking “is Bitcoin mining profitable”, and talking exclusively about mining the top cryptocurrency. However, there are many other digital currencies that can also be mined in a similar way.
Bitcoin uses a system that is referred to as “proof-of-work” (PoW) to secure its network. For a new block to be added to the chain, a miner has to prove that they have done some amount of “work”, which essentially means that they have committed a set amount of resources and time to verifying transactions before they’re added to the ledger. There are many other PoW tokens, all of which can be mined in a similar way to the process used by the Bitcoin mining network. The majority of leading cryptos, including Bitcoin Cash, Litecoin, and Cardano, are all based on a PoW system.
There’s also an alternative system to PoW, which is known as proof-of-stake (PoS). Instead of relying on the amount of mining resources committed as a way to test the validity of a new block of transactions, PoS relies instead upon the “stake” that a particular node has in the network. Essentially, it means that whoever has the largest amount of a particular crypto has the most control over the ledger, and no mining is involved. DASH and EOS are two examples of cryptos that are based on a PoS system. Ethereum, which is the second-largest crypto at the time of writing, is due to update its algorithm by the end of April 2021, moving from a PoW system to a PoS system.
To Mine or Not to Mine?
So, if you’re still interested in mining Bitcoin or other cryptos, your next step will be to look into what the best mining rigs are, or you could always just rent hashrate from an existing pool. Remember to take a look at the Bitcoin mining profitability calculator, which can also be used for other cryptos, and plan out your operation in as much detail as possible.
If you decide you’d rather invest in Bitcoin directly, there are a number of trading platforms online that make this easy for you, and Cryptospace is one of the best for newcomers and experienced Bitcoiners alike. Besides offering safe, rapid crypto trading, Cryptospace also offers an in-person Crypto Support Desk, where you can go to get advice and help on all manner of issues related to Bitcoin and the wider digital currency market.