What is Bitcoin Mining? How does Bitcoin Mining work? The full guide
What is Bitcoin mining? Is Bitcoin mining profitable?
Bitcoin mining is an interactive way to secure the Bitcoin network and also (hopefully) earn a small profit. The reason why only a small profit may be available is that, like any other large industry, Bitcoin mining is dominated by professional players. It can be difficult to make much money on a small scale.
That being said, Bitcoin mining is still a fantastic way to learn about Bitcoin, give back to the cryptocurrency community and earn some BTC on the side. In this article, we’ll cover everything you need to know about mining including why it’s important, when it started and who the major players are.
Before You Mine or Use Bitcoin
Before mining or using Bitcoin (BTC), make sure to set up a wallet where you can send your Bitcoin to! You don't want to send your BTC to an online exchange since they're notorious for getting hacked or otherwise losing user funds.
The Exodus Bitcoin wallet is a community favorite thanks to:
- Supporting over 100 crypto assets
- Focusing on premium design and ease of use
- Being the only wallet to support desktop, mobile, and hardware wallet (Trezor) integration
- Allowing you to exchange your Bitcoin for other cryptos right from your wallet - without creating an account!
- Giving you the ability to sync your wallet between desktop and mobile
- Having 24/7, fast human support if you ever need help
What is Bitcoin Mining: Bitcoin Mining Meaning
In a sentence: Bitcoin mining is the process by which specialized computers secure the Bitcoin network in return for a payment in BTC.
Here’s the longer explanation:
When we talk about Bitcoin mining what we’re referring to is the extensive network of specialized computers that are used to secure the Bitcoin network. Here are a few key fundamentals of this network.
- There are about 1 million ASICs (specialized computers) that mine Bitcoin. These are spread all over the world.
- The ASICs do complex math to help secure Bitcoin, and in return, are given a block reward. A block reward is equal to 6.25 BTC as of May 2020.
- To “attack” or “hack” the Bitcoin network, a perpetrator would need to control a majority of the hardware being used to secure Bitcoin. As this hardware costs billions of dollars, it would be complicated to acquire it all and then hack Bitcoin.
What is the Point of Bitcoin Mining?
The point of Bitcoin mining is security. Every network needs security and Bitcoin is no different. One of Bitcoin’s key components is its scarceness. There are only so many Bitcoin (21 million) and no matter how high the price goes, more cannot be created.
This fundamental scarcity is similar to what makes gold so useful as a currency. No matter how high the price goes, it’s difficult to mine more gold. This supply inelasticity is part of what makes gold valuable.
Back to Bitcoin mining, the process of securing the Bitcoin network is known as Proof of Work (POW). POW is one of Satoshi’s most game-changing inventions and it is what allows Bitcoin to be provably scarce. Bitcoin mining is what ensures that more Bitcoin cannot be created or “copied.”
This leads to an interesting point, Bitcoin was the first digital asset in the world that couldn’t be copied. When you think back, DVDs, Xbox games, top-secret government files, every digital “thing” prior to Bitcoin could be copied, but not BTC. That’s thanks to Bitcoin’s network of miners.
When did Bitcoin Mining Start?
For as long as there has been Bitcoin, there has been Bitcoin mining. It started with Satoshi Nakamoto (the mysterious person or group who created Bitcoin) and a select few others mining Bitcoin on their laptops. All of that mining was productive and Satoshi accumulated some 1 million coins before he/she/they disappeared.
The Satoshi coins have not moved in about a decade and it is generally believed that the only way any person could ever prove themselves to be Satoshi is by moving some of these early coins.
We mention all of this just to illustrate the point that mining started with Satoshi and it has been going on since the first block of Bitcoin. Without miners, Bitcoin cannot exist.
How Much Bitcoin Mining Per Day?
Bitcoin mining is a big business. It’s not always profitable and bear markets are especially tough on miners. However, when mining is profitable it can be quite profitable. Let’s do some basic math assuming that Bitcoin is selling for $10,000.
There is a new block on the Bitcoin network every 10 minutes. That’s six blocks in an hour, twenty-four hours in a day so approximately 144 blocks per day (there can be small variations in how often blocks are produced). Since the May 2020 Bitcoin halvening the block reward has been 6.25 BTC.
6.25 BTC per block X $10,000 BTC price X 144 blocks per day = $9,000,000 per day that’s paid out to miners. Or, $3.3 billion per year. That’s the Bitcoin security budget, not too shabby.
Now imagine that Bitcoin goes up to $100,000. In that case Bitcoin mining becomes a $33 billion annual industry!
Who is Mining Bitcoin?
A majority of Bitcoin mining today is done by large operations (mining farms). These mining farms tend to have thousands or tens of thousands of ASIC computers running simultaneously.
Although Bitcoin mining can be lucrative, there’s a lot of competition so you need to have quite a few miners in order to make a good profit (also, by buying miners in bulk, the larger mining operations can get healthy discounts).
Many of the largest Bitcoin mining operations are based in China (thanks to cheap hydropower electricity), although this is slowly changing.
In the coming years, Bitcoin mining is expected to decentralize throughout the world, especially to areas with cool temperatures and cheap electricity.
Bitcoin Mining Hardware
An ASIC (Application-Specific Integrated Circuit) is the cornerstone of Bitcoin mining. It’s a rectangular computer about the size of a narrow shoebox that’s loud and hot and designed exclusively to perform the complex math that’s used to secure the Bitcoin network.
What is a good hashrate for Bitcoin mining?
There is no good hashrate for Bitcoin mining, the way there is a good temperature for hanging out at the beach. The Bitcoin network's total hashrate changes over time and in the long term is always going up.
So trying to determine how good an ASIC is based on its hashrate is only useful when you take into account the total network's hashrate (e.g. if the total hashrate rises, your share of the total hashrate decreases, making it harder for you to mine new blocks).
In terms of mining profitability, the best time to mine is after a difficulty adjustment downwards (as can be seen on this graph around March). When this happens, you can mine more efficiently until the hashrate rises again. You can keep track of the Bitcoin hashrate here.
Bitcoin Miner Software
If you’re just getting started with mining you might want to consider using a program to manage your mining operation. Hive OS, for example, is a good option. Hive OS has a centralized dashboard so that you can keep track of all your miners in one place.
You can choose which coins you want to mine (Bitcoin miners can mine BTC, BCH, BSV, LTC, and others), track electricity usage and update the ASIC firmware.
Hive OS isn’t quite as customizable as some of the other programs on the market but what it lacks in customization it makes up for with usability. There are many other programs on the market as well.
Bitcoin Mining Pool
A Bitcoin mining pool is a collection of Bitcoin miners working together. All of the miners pool their ASIC computing power and then split the proceeds.
What ends up happening is that no matter which particular ASIC in a mining pool “wins” the block reward, the reward is split evenly among everyone in the mining pool (minus a service fee, typically 1 to 2%).
There are a few advantages to contributing to a mining pool rather than mining on your own:
- A small Bitcoin mining operation can earn a steady profit in proportion to the hashrate that they contribute to the mining pool. If a small mining operation were to mine on their own they might go a month, six months, even a year without once winning a block reward and getting the Bitcoin.
- For larger Bitcoin mining operations a mining pool can cut down on the volatility of Bitcoin mining. Bitcoin mining is already an incredibly cyclical industry (thanks to the volatility of Bitcoin’s price) and anything that can be done to reduce that volatility is a good thing.
You can check out the largest mining pools here.
What is a Bitcoin Mining Farm?
A Bitcoin mining farm is a large collection of ASICs being used to mine Bitcoin. Essentially, a mining farm looks a lot like a data center, except that instead of servers there are Bitcoin mining rigs.
The largest Bitcoin mining farms are truly spectacular to behold in their sheer size. The number of Bitcoin mining farms spread across the planet are why some people say that Bitcoin has the largest network in the world.
As mentioned, Bitcoin mining farms tend to be built in areas with cheap electricity and/or cool temperatures.
What is Cloud Mining Bitcoin?
Cloud mining happens when a company sets up a Bitcoin mining farm and then rents out the hashpower. Cloud mining allows an organization or person to mine Bitcoin on demand without having to set up their own farm.
As cloud mining is typically not the most cost effective way to acquire Bitcoin. As such, it’s fairly uncommon for people to engage in it, although there are some advantages.
- There may be tax advantages in certain jurisdictions, to acquiring Bitcoin from mining instead of purchasing it.
- Newly mined Bitcoin is “clean.” When you get new Bitcoin you can be sure that it’s never been involved in a hack, used on the black market, etc. This is especially important for institutional investors who will pay a premium to get Bitcoin straight from a miner.
Bitcoin Mining App
Hive OS has a mobile app for Android (iOS App coming soon) that offers the same functionality as their dashboard. You can turn your ASIC miners on and off, update the firmware, switch mining pools, etc.
Bitcoin Mining Free
There is no way to mine Bitcoin “for free.” That would be akin to saying you can mine gold for free. Even under the best circumstances, you still have to buy a shovel and some prospecting gear.
Perhaps when people say that you can mine Bitcoin for free what they mean is that you can use your computer to mine BTC. Well… The problem is that mining Bitcoin will push your computer to its limits and keep it there.
Computers used for mining wear out and break. Also, even if your computer lasts five years you’re unlikely to ever earn enough mining to even pay for the cost of a new one, let alone become financially independent.
If someone says that you can mine Bitcoin for free it’s most likely a scam.
Why does Bitcoin Mining Use so Much Energy?
Bitcoin uses a lot of energy because ASICs are always running near their threshold. For example, your laptop probably is only using 25 to 50% of its computing power at any given time, less when it’s idle. On the other hand, ASICs are designed to run near their peak limits 24/7, which requires tremendous energy.
ASICs also generate heat so they must be cooled. If mining in a hot climate, that means air conditioning. Even in a snowy climate, hundreds of fans may be needed to circulate in the cold air from outside to cool down a mining farm.
There have been articles claiming that Bitcoin mining uses as much energy as the entire country of Denmark. It’s hard to determine if these claims are accurate, but even if they are, they don’t tell the full story.
Bitcoin mining is predominately powered by renewable energy, which isn’t as bad for the environment as fossil fuels. This is especially the case in China, where Bitcoin mining uses hydropower energy that would otherwise go underutilized.
One of the most exciting developments in Bitcoin mining is the introduction of portable mining. In the fracking industry, one of the largest problems is that wells produce an excess of natural gas.
Since it’s too expensive to build pipelines to transport this gas, it’s common for drilling companies to “flare” the gas, which is just a fancy word for burning it off into the atmosphere. There is a legal limit to how much gas can be flared and once this limit is reached the well must shut down. A portable Bitcoin mining rig can solve this problem.
A portable Bitcoin mining rig contains a bunch of ASICs and a generator, built into an old shipping container. The generator uses the excess natural gas to generate electricity which in turn powers the ASICs.
Using this technology petroleum companies can avoid flaring and they can also earn a profit on a product that they were otherwise releasing into the atmosphere.
As of yet portable Bitcoin mining has yet to catch on in a big way but hopefully it will in the coming years. For those who would like to learn more about it, there is an excellent TFTC podcast covering this topic.
Is Bitcoin Mining Worth it?
Yes and no. Bitcoin mining is a cutthroat business and it’s unlikely that any small-time miner without millions of dollars’ worth of equipment will ever get rich off it. If money is the only factor then it’s probably better to just buy Bitcoin and HODL it into the next bull market.
However, Bitcoin mining can be worth it as a hobby. It can be rewarding to contribute to network security, to hold coins that you’ve mined yourself and to learn more about the nuts and bolts of Bitcoin.
It also helps if you live somewhere with cheap electricity (college dorms where electricity is a fixed cost have become popular for crypto mining).
If you’d like to learn more about whether mining Bitcoin is worth it, we’ve written another article that dives deeper into this subject: is Bitcoin mining worth it?
When does Bitcoin Mining End?
This is where Bitcoin gets really interesting: it has a predictable supply curve all the way through the next century. Bitcoin’s monetary policy is the total opposite of our current banking system controlled by the Federal Reserve and other countries’ central banks, where traders and investors make and lose millions betting on what central banks will do with the money supply.
What Bitcoin does is cut its inflation rate in half every four years. We’ve most recently experienced this in May 2020 with the Bitcoin block reward going from 12.5 BTC per block to 6.25 Bitcoin per block. This halving will continue until the block reward stops altogether around 2140.
At this point, the hope is that the transaction fees on the Bitcoin network would be high enough that miners would continue to mine and Bitcoin remains secure. How expensive would fees have to be for this model to be viable?
Frankly, nobody knows. $50 per transaction? $500? It’s anybody’s guess and unless some great new medical advancements are made it’s unlikely many of us will be around for that day.
For now, Bitcoin mining is alive and well and we owe a debt of gratitude to Bitcoin miners for keeping the network secure and allowing us to experience a new form of money.
This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.