As Bitcoin continues to grow in popularity, more people are wondering how the process of making the cryptocurrency king actually works. How are they being generated? How does a transaction get recorded? That’s where Bitcoin mining comes into the picture. But firstly let’s look at Bitcoin itself.
What is Bitcoin?
Bitcoin is the most well-known of all cryptocurrencies and was the first one to be established, having been created in January 2009 by a pseudonym by the name of Satoshi Nakamoto. Realistically, it is still the only cryptocurrency that the average person could name.
Therefore, it is of no shock that it completely dominates the cryptocurrency market. Bitcoins, like all cryptocurrencies, aren’t physical assets themselves. Unlike fiat currencies, it is not governed by any central authority.
It is powered by blockchain technology that belongs to a decentralized network. It has been estimated that over 20 million people now own at least a portion of a Bitcoin.
It is a preconception by many that you need to possess at least a whole one when taking the plunge into the world of Bitcoin. The smallest amount of Bitcoin you can own is actually 1 Satoshi (the name of its psyendomous creator), which equates to 0.00000001 Bitcoins. There is a finite supply, which will eventually run out (it is estimated the last of the 21 million Bitcoins will be mined in 2140).
What is Bitcoin Mining?
Bitcoin mining is the process of creating new Bitcoin. Most cryptocurrencies are created through mining. The people performing the mining are called Bitcoin miners. Whenever Bitcoin is sent anywhere, the record of this transaction is added onto the blockchain, ‘blocks’ which are connected together in a public distributed ledger.
But before this happens, it needs to be verified. It is the job of miners to perform these verifications, and all miners must agree to the transaction through the proof of work (POW) consensus mechanism.
One of big draws of Bitcoin is its integrity, and the miners play an important role in maintaining this by ensuring that ‘double spending’ doesn’t occur – that is multiple transactions taking place with the same Bitcoin.
To do this, computers need to solve a mathematical problem called a hash and the first miner on the network to do so is rewarded with new Bitcoin. This is known as the block reward, which is currently 6.25 Bitcoin.
To solve a hash as part of the Bitcoin mining process is so complex, that there is only an incredibly remote (estimated) 1 in 13 trillion chance for a computer to do so. That is why specialist computers called mining rigs are these days normally used (rather than normal PCs) to solve the problem.
Both mining software and mining hardware are used in the process. Due to rising costs, miners now tend to group together to pool their resources. These are called mining pools.
How Does Bitcoin Mining Work?
Bitcoin mining nodes are interconnected to each other in a global network, which each possess a copy of the blockchain. In the absence of any central authority or intermediary, such as banks, to validate and record transactions, the job of these nodes is to verify the validity of every new transaction before it is added to the blockchain.
For this to occur, nodes on the network must align in agreement on the transaction’s validity. This is done through the application of consensus mechanisms, which are fundamental to the decentralized nature of cryptocurrencies. The consensus mechanism which Bitcoin uses is POW.
Proof of Work
POW was the first consensus mechanism to be established in blockchain, and is still used by the majority of cryptocurrencies today. Miners compete to come up with a 64 character number known as a hash in order to confirm a block of transactions onto the blockchain.
After validating a new block, a miner will receive a reward in the form of new Bitcoin being created and a transaction fee (mining fee) for every transaction processed. These mining fees act as an incentive for a miner to include a transaction in a block.
Once this happens, the transaction is then confirmed. As miners want to maximize their income, transactions with higher fees will be confirmed more quickly. Unconfirmed transactions lie in the ‘mempool’ until they are confirmed.
The hash rate is an indication of the processing power being used to mine new blocks on the blockchain. It measures how many times a miner on the Bitcoin network attempts to solve these complex puzzles every second. The higher the hash rate a miner or miners have, the more chance they have of being successful.
The hash rate is also a good indicator of the health of the Bitcoin network. The higher the hash rate, the better the security of the network, as more resources would be needed to conduct a “51-percent attack”, which is a hypothetical scenario where a group of miners take over more than half of the network’s hash rate.
If this happened, miners would be able to prevent new transactions from receiving confirmations, and reverse transactions made on the network while they were in control, meaning they could theoretically spend Bitcoins twice – ‘double spend’.
Although this may sound apocalyptic, there is no need for concern. The sheer vast scale of Bitcoin mining around the world makes such an attack incredibly unlikely, and this likelihood becomes even more remote as the hash rate of the Bitcoin network increases.
Bitcoin Mining Difficulty
Closely related to the hash rate is Bitcoin mining difficulty, which measures how difficult it is to mine a new block on the Bitcoin blockchain.
To ensure Bitcoin is created every 10 minutes into the Circulating supply is the number of cryptocurrencies or tokens that are publicly available and circulating in the crypto... of the network, mining difficulty effectively acts as a checks and balances system.
It does so through its relationship with the network hashrate. As discussed, as the hashrate increases, so does the network’s security. However, the hash rate can’t spiral out of control, because then so would the production of the blocks on the blockchain.
Therefore, whenever the hashrate increases, then so will the mining difficulty too. On the flip side, when the hashrate decreases, so will mining difficulty. The clear correlation between the Bitcoin network hash rate and mining difficulty can be seen in the graphs below.
Is Bitcoin Mining Worth it? Why are People Doing it?
The current reward for miners for solving the hash problem is 6.25 Bitcoins. This was reduced from 12.5 Bitcoins in May 2020 in the last Bitcoin halving. This amount is reduced roughly every 210,000 blocks, or 4 years. This means effectively, that after every halving, double the work has to be done to yield the same results.
Or on the flip side, miner revenue is cut in half for the same work. At the moment, mined Bitcoins still account for the majority of the earnings for the miners. However, in the future, when most of the Bitcoins have been mined, the mining fees will become the highest earner for the miners.
Undoubtedly it has today become a complicated, expensive, and time-consuming process, with no guarantee you’ll be successful. It is a far cry from Bitcoin’s infancy.
So why has it become so costly and energy-consuming, and as of today, what factors determine the question if Bitcoin mining is actually profitable?
Bitcoin Mining Equipment Costs
As Bitcoin became more popular, mining became more competitive, and as a result, the mathematical puzzles to solve the transactions on the blockchain became significantly more difficult. By 2010, an average computer, using a Central Processing Unit (CPU) wouldn’t hack it, and Graphics Processing Units (GPUs) were needed.
This in later years evolved to Field Programmable Gate Arrays (FPGAs) and then Application-Specific Integrated Circuit (ASICs).
Bitcoin mining rigs are used today instead of normal computers. They are essentially computers specially designed to do one job and one job only: to mine Bitcoin. They can start off at a modest price, but the more high-end machines can cost ten of thousands of dollars.
Bitcoin Mining Energy Costs
A report by the International Energy Agency has put the annual total energy consumption of Bitcoin as being more than some countries, as demonstrated by this chart which shows where Bitcoin would lie in terms of energy consumption if it was a country (42nd, between Switzerland and Czech Republic).
Electricity costs make it up to $6,000 to mine a Bitcoin in the United States. Therefore, most Bitcoin mining takes place in areas of the world where electricity costs are lower, such as China, where over 80% of Bitcoin mining occurs. In particular it takes place in Sichuan province – where with its abundant seasonal rainfall and hydro-electric plants, it is a major mining hub.
The high energy consumption costs of Bitcoin mining has inevitably led to some negative media coverage. A Guardian article in January 2019 proclaimed Bitcoin as being the “next big environmental fight” (after Oil) and “Bitcoin’s environmental footprint will haunt it”. It gives a caveat to Bitcoin miners that as the world moves away from oil and seeks cleaner energy, environmentalists will see Bitcoin mining as the next big enemy.
To overcome these issues, improving efficiency is the key to lowering energy consumption and as a result, costs. To these ends, the Bitcoin network is in the early stages of implementing The Lightning Network, which is being hailed by some as the answer to Bitcoin’s scalability problems. This along with the move towards green mining is being seen by some as the future of Bitcoin.
Ultimately, although it is impossible to get away from the fact that mining will always use considerable amounts of energy, the move towards green mining is definitely a positive development. Indeed, a Coin Shares report in 2019 documented that 74% of mining activity runs on renewable energy.
To combat costs, practically all Bitcoin mining these days is done by mining pools (groups of miners) rather than individuals. These mining pool networks are so large, that the chances of anybody being able to do it by themselves is pretty much zero. In theory the bigger the mining pool the more chance you have of being effective, but that would mean the rewards being split between more miners, and also the bigger mining pools normally charge higher fees. The biggest mining pools include Poolin, F2Pool, and BTC.com, which make up over a third of the Bitcoin network’s total hashrate share alone.
The volatility of Bitcoin’s price can directly affect its mining profitability. Just as there is a general correlation between mining difficulty and hash rate, correlation can be seen between mining difficulty and the price of Bitcoin too. In reality this makes sense, because if the price drops, less miners will be inclined to mine for it, and if the price rises, then miners want to get a piece of the action.
This volatility means that it’s becoming more difficult for smaller miners to maintain profits. Mining pools are huge operations often with huge margins, and they can easily swallow up any short-term losses in profitability.
For smaller miners, this just may not be possible. This useful Bitcoin mining calculator from Crypto Compare can give you an idea of what it takes to become profitable in mining Bitcoin. It takes into account hashing power, power consumption (w), cost per KWh ($), and pool fees.
Bitcoin Mining Hardware and Software
As discussed earlier, the vast majority of Bitcoin mining is now done on specialist computers called mining rigs. What are some of the most popular Bitcoin mining rigs out there today?
Having been one of the most popular mining rigs on the market since its release in 2017, Bitmain’s Antminer S9’s popularity has boiled down to the fact that it was more powerful and energy efficient than practically all of its competitors. At one point, it took up nearly 70% of the network hashrate.
However, some in the world of crypto have speculated that its era of dominance is over. This is because more powerful rigs now exist, and also the Bitcoin halving event, which has made some old mining rigs too inefficient to operate. According to leading Bitcoin mining pool F2pool, this is also the case for Antminer S9:
“Now, only when the price of the bitcoin rises to $15,000, can Antminer S9 cover the cost. In the past, even if there were a mining disaster and the price dump of the mining machine, someone would still buy S9. Most of the recipients are the owners of large mining farms. When the bitcoin price recovers, they can mine it by themselves or sell it to others to earn the difference.”
Seen as the direct successor to the Antminer S9, the Antminer S19 was released in May 2020. It is nearly 10 times more powerful than its predecessor, with a processing hashrate of between 95 and 110 trillion hashes per second (110TH/s) compared to the Antminer S19’s 13 TH/s. Labelled as ‘the future of mining’ by its manufacturers Bitmain, it looks set to dominate the mining rig market for the foreseeable future.
MicroBT Whatsminer M30S++
Looking to rival the Antminer S19 for the top mining rig throne is the MicroBT Whatsminer M30S++. Reportedly beating Antminer S19 into second place for mining profitability, (with a daily profit of $12.31 compared to the S19’s $11.37), this mining rig possesses a processing rate of 112 TH/s. Its manufacturers aren’t as well known as Bitmain, but this machine is sure to give the Antminer S19 a run for its money.
Bitcoin Mining Software
As well as mining hardware, you also need mining software to go with it. Just as with mining hardware, miners these days use specialist software. The job of this software is to essentially act as a bridge between the hardware and the blockchain, delivering the hardware’s work to the rest of the network and vice versa. Let’s have a look at some of the most popular software on the market.
Easyminer is an open source (meaning it is freely available to use) graphical user interface (GUI) based mining software available for Windows, Linux and Android. As well as Bitcoin, it can be used to mine Litecoin and other cryptocurrencies. You need ASIC mining hardware to use it. It allows you to configure the software so you can connect to mining pools, or if you’re feeling brave, to go all alone and mine solo.
Rated as the ‘best mining software for beginners’ by Bitdegree, Multiminer is also open source, and has an easy to use interface which shows novices exactly what they need to do to connect to a mining pool.
Available for Windows, Mac and Linux, it doesn’t cost anything to use. But if you’re feeling like you want to give something back, there is the option of sending 1% of your mining profits to the software developer.
You can also use it with multiple mining pools. It has remote interface capabilities, and offers fanspeed support. As well as Bitcoin, a host of other cryptocurrencies can be mined with CGMiner as well.
Other Types of Bitcoin Mining
Cloud mining is another way in which the average Joe can get involved in Bitcoin mining. Many people think mining pools and cloud mining are the same thing, but actually they are not. Mining pools involve miners who have their own mining hardware, pool together resources and then share the profits.
However, cloud mining involves renting out hardware from service providers at a set rate, who do the mining for you. This can potentially be profitable, but caution is advised. Several cloud mining companies in recent years have turned out to be ponzi schemes and scams.
Despite the fact that realistically, Bitcoin mining needs to be done on mining rigs to stand any chance of being profitable, it can actually be done on your mobile phone! Why do that? For fun!
You can download Bitcoin mining apps (but only on Android as Google Play and iOS banned them over concerns of the effects it has on devices). The amount you can make is negligible, and caution is advised for the exact reason Google Play and iOS prohibited the apps – it can drain your battery, and even lead to battery damage and overheating of your device. But at least you can say you’ve mined Bitcoin on your mobile.
The Bottom Line
As with the crypto landscape, Bitcoin mining is an ever changing phenomenon.
Long gone are the days where you could do it by yourself, the costs involved necessitate you pool together with others or take part in cloud mining. Even if you do, the costs are substantial and it’s debatable whether it’s worth it. If the endgame is to simply own Bitcoin, then the chances are it isn’t.
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