Bitcoin Mining Explained
If you don’t want to read the article, the video below goes over everything covered below.
Creating New Bitcoin’s
Bitcoin mining is the process of creating new Bitcoins by solving complicated math problems, these math problems verify the transactions of Bitcoin. When a transaction is verified, the miner who verified it will be rewarded with a predetermined amount of Bitcoin. Bitcoin gained wide popularity due to its wild price swings and surge’s, it was introduced back in 2009 after the housing market crash and was thought of as a way to stop that crash happening again by using a fair decentralized currency. As the price of Bitcoin and crypto has skyrocketed in the recent years, its understandable that interest in mining has picked up as well. But for most people the prospects for mining Bitcoin are not good due to its complex nature and high cost. Bitcoin is powered by blockchain, which is the technology that powers many cryptocurrencies. A blockchain is a decentralized ledger of all the transactions across a network. Groups of approved transactions together form a block and are joined to create a chain. Think of it as a long public record that functions almost like a long running receipt. Bitcoin mining is the process of adding a block to the chain.
Adding A New Block
In order to successfully add a block, Bitcoin miners compete to solve extremely complex math problems that require the use of expensive computers and enormous amounts of electricity. To complete the mining process, miners must be first to arrive at the correct or closest answer to the question. The process of guessing the correct number (hash) is known as proof of work. Miners guess the target hash by randomly making as many guesses as quickly as they can, which requires major computing power. The difficulty only increases as more miners join the network. The computer hardware required is known as application-specific integrated circuits, or ASICs, and can cost up to $20,000. ASIC’s consume huge amounts of electricity, which has drawn criticism from environmental groups and limits the profitability of miners. If a miner is able to successfully add a block to the blockchain, they will receive 6.25 Bitcoins as a reward. The reward amount is cut in half roughly every four years, or every 210,000 blocks. As of june 2022, Bitcoin traded at around $27,000, making 6.25 Bitcoins worth nearly $170,000. As I said the reward for 1 block is halved every 4 years or so, this means that back when Bitcoin first stated you would have got 50 Bitcoin per block, it then halved to 25 Bitcoin back in 2012, then in 2016 it halved again to 12.5 Bitcoin and now we just had the most recent half in 2020 where the block reward went to 6.25. The next block halving will be in 2024 and it will reduce the block reward down to 3.125 Bitcoin per block.
Computing Power
With the block reward halving every 4 years it becomes harder to make profits on bitcoin, which leads many people to not even get into bitcoin mining because they think you can’t make profits. Well truly it depends, even if a miner is successful, it’s not clear that their efforts will end up being profitable due to the high upfront cost of equipment and electricity. The electricity for one ASIC miner will use the same amount as half a million playstation 4’s. As the difficulty increases and complexity of mining increases, the computing power required has also gone up, this has led to an explosion in the computer chip market as better chips can mine better. There are new ASIC miners being sold constantly and with each new iteration they become quicker at mining. It takes a massive amount of ASIC miners to even mine a block. This is why people join mining pools so they can put their computing power together and mine. Mining pools are great as it allows for smaller miners to at least get the chance of earning Bitcoin. There are hundreds of mining pools that miners can join. Generally you’ll want to pick the biggest mining pool because they will be mining the most blocks on the network and you’ll be getting a percentage of every block the pool mines. If they mine loads of blocks you’ll get paid more compared to other pools. The problem with all joining one pool is that it can actually affect the network. So if a mining pool has over 51% of the hashrate then they can choose to start creating their own blocks and basically the verification of blocks becomes compromised.
What You Need To Mine
Now many of you might be wondering how you actually start mining Bitcoin. Well first you need a Bitcoin wallet to send your Bitcoin to, you can download the Bitcoin wallet app from the Bitcoin website, or pretty much any other wallet will hold Bitcoin. Once you have a wallet address you need some mining equipment. This mining equipment includes ASIC miners, the correct power connectors and ethernet connectors. An ASIC miner for bitcoin will set you back a lot of money. Now because ASIC miners require a lot of power you need the correct power converter to allow for your house to run the miner. Then the last equipment needed is a good internet and ethernet connection. Basically the better your connection to a mining pool, the more shares you confirm. So it’s better to have wired internet and not use wi-fi. The last thing you need to do to start mining is choose a mining pool, as I said be careful which pool you mine to, also look for the lowest pool fees and make sure they have a lower payout threshold so that you can get regular payouts of your Bitcoin.
Risks Of Mining
There are some risks you do have to take when mining Bitcoin. The biggest risk is the price volatility of Bitcoin, the price of the coin can fluctuate up and down all the time. With there being highs of $50,000 this year to lows of $20,000. Because the price is fluctuating the profits from mining will be lower or higher depending on the price. If the price goes too low you will also find that you’re not making profits but actually losing money. So volatility makes it difficult for miners to know if their reward will outweigh the cost of mining. Next problem is the regulations that are coming in with mining. Very few governments have embraced crypto and many more are likely to view them skeptically because crypto operates outside of government control. Many governments have outlawed crypto mining such as China. Its also important to remember the impact that taxes can have on bitcoin mining. The IRS has been looking to crack down on owners and traders of crypto as the asset prices have ballooned in the recent years. So just be careful of government regulations in your country. The last disadvantage is the noise that ASIC miners make. From personal experience I know first hand how loud these miners can be. If you plan on putting one in your house then you will hear it now matter what room you go into. If you have it on you’ll hear a constant hum in your ear, there are ways to solve it such as sound proof rooms or i’ve even seen cooler boxes modified to keep the noise down. So if you’re getting into mining Bitcoin then you have to set-up a place to put the miner and have a plan to keep the noise down.
Environmental Impact
Bitcoin has also come under fire from environmentalists due to the energy used. So i’ve talked about how much power it takes to mine but i want to put that into perspective. It takes around 140,000 kilowatts to mine one Bitcoin, an average household uses 3,100 kilowatts per day. So it takes the power of 45 houses to mine one bitcoin, this is a lot of power just to mine one. The network will reward only 900 bitcoin per day, so every day it takes around 2.8 million kilowatts to mine 900 Bitcoin. Which according to the New York Times, is more power consumed than that of Finland per day. Bitcoin mining is equivalent to having another country’s electricity running constantly. An obvious way around this is renewable energy which is becoming a big thing right now, but you need a large amount of solar power to be able to keep up with the demand of these ASIC miners. Elon Musk is actually partnering with some companies to set up a fully sustainable Bitcoin mining farm, so the future looks good when we are looking for renewable sources of power.
