Bitcoin Mining Explained
How can you mine something that isn’t tangible? Is a common question that people new to the space can’t seem to grasp. And to explain Bitcoin mining will take more than an article, but it’s always a good place to start.
Mining Bitcoin is the process of adding transactions to Bitcoin’s public ledger, and it’s carried out by computers that are spread around the world.
The computers, known as mining devices or Mining rigs, work together to add transactions to individual blocks on the Bitcoin blockchain. And once a block is ready to be added to the blockchain the mining devices all compete against each other to find and add the new block to the blockchain.
Anybody can get involved in mining BTC, it just takes a bit of investment, and a bit of understanding of how it works.
A bit of trial and error and a few explanatory articles or videos and anyone can learn to mine Bitcoin. However, if this is your first introduction to mining, allow me to explain the Bitcoin mining basics for you.
ELI5 Bitcoin Mining
Mining is the process of using computing power to process transactions, and secure the Bitcoin network.
A miner is usually referred to the person or company that mines, but technically, it’s a specialized piece of hardware computing device that has the Bitcoin protocol downloaded onto it.
The mining software listens for transactions that have been sent by users to the network and the mining device adds it to the block after checking that the sender has enough bitcoins.
Miners do this work because they can earn transaction fees paid by users for faster transaction processing. And miners also get a chance of winning the newly minted bitcoins that are created with every new block.
A Deeper Look Into Mining Bitcoin
It used to be possible to mine Bitcoin with a laptop, but now you really need an application specific integrated circuit (ASIC) device.
It is possible to mine BTC with a GPU rig, but an ASICs mining rig is much more powerful and will ensure you get the most BTC in return for your processing power.
The process of Bitcoin mining uses a proof of work algorithm. It’s a system that requires some work from a miner in the shape of a computer processing the data, while using a fair amount of electricity to complete this proof of work.
There are millions of mining devices carrying out this proof of work, and it has a low probability of success. Therefore, a lot of trial and error is required by every mining device for a valid proof of work to be generated.
Bitcoin’s Proof of Work Explained
Miners work together to pick up transactions that are broadcast to the network by someone wanting to send some BTC.
Each miner will verify that any person wanting to send a transaction has enough BTC in that address, and once a miner is satisfied the transaction will be added to the block.
Each block can contain a maximum of 1MB of data, and these blocks are sent to nodes, who have to be in a majority of consensus that all transactions are valid.
Then the block is sent back to miners who have to then compete against each other to be the first to find the target hash and win the 6.25 BTC block reward.
The harder a mining rig works (the faster it processes information), the more chance it has of winning the block reward.
It’s common knowledge that mining rigs are working out complex mathematical equations, but this technically isn’t correct. The miners are actually trying to guess the target hash, which is made up of a 64-bit hexadecimal number.
Miners continuously run their machines, which when competing for the block reward are randomly generating as many nonces as possible, as quickly as possible.
A nonce is short for ‘number only used once,’ and the nonce is the key to generating these 64-bit hexadecimal numbers.
The first miner whose nonce generates a hash that is less than or equal to the target hash will be the one who ‘finds’ the block’ and wins the block reward.
All the hard work done by the millions of mining devices is basically trial and error, and only one device will get to add the block and win the reward.
It uses a lot of electricity, but this proof of work ensures that every single Bitcoin minted has been worked for.
Miners also help to secure the network, because the more miners hashing gives the Bitcoin network a higher hashrate.
And the higher the Bitcoin hashrate the more powerful the network. At the last count Bitcoin’s hashrate was 114 quintillion hashes per second (EH/s).
Just for some context, the most powerful supercomputer, Summit, which is the size of two tennis courts, can process 148 quadrillion hashes per second.
How Do I Maximize My Chances of Winning The Block Reward?
Of all the mining devices that compete for the block reward, only one wins it, so the chances of winning it aren’t on your side.
Get a Powerful Bitcoin Mining Rig
Buy the best and most powerful ASICs mining rig. At the moment this is the Antminer S19 Pro, which has a hashrate of 110 terrahashes per second (TH/s).
Compare this to its closest competitor, the MicroBT M30S, which has a hashrate of 90 TH/s, and the S19 Pro give you about a 20% more Bitcoin hashrate and so a better chance of finding the block.
But your chances of winning the block reward even with a few S19s are slim.
Remember there are millions of mining devices competing against you, and there are mining farms with thousands of them all aiming for the same thing: newly minted Bitcoin.
Join a Mining Pool to Maximize Profits
The best way a solo miner can earn BTC is to join a mining pool. Basically, a mining pool is a group miners who combine their Bitcoin hashpower to work together to find the block, and they split the winning BTC among them.
There are many different mining pools out there, but finding the best mining pool isn’t as black and white as it might sound.
They all charge something, and some even have hidden fees and different payout methods. So, researching a few is always a good idea to discover which mining pool works best for you.
The average fees are about 2%, but they all offer different ways to suit. Basically, you’ll be paid for your share of the combined Bitcoin hashrate, but some mining pools benefit those with more powerful rigs.
Explain Bitcoin Mining: Other Things To Consider
Taking out the cost of your mining rigs, and the mining pool fees, Bitcoin mining profitability comes down to two things: value of Bitcoin and cost of electricity.
Electricity costs vary throughout the world, so bitcoin mining profitability can depend on where you live.
For example, the cost of electricity in Germany is about $0.35 KW/h, whereas in Russia it’s $0.06 KW/h, and in Sichuan, China the cost of electricity is around $0.04.
And there’s never an exact science of the cost of mining a bitcoin because the difficulty of the mathematical equation adjusts every two weeks, and this affects the amount of electricity needed to mint each BTC.
However, on average miners in Sichuan have a breakeven cost of about $8,206. This is one of the cheapest locations for electricity and the reason why many mining farms are located there.
But the global average cost of electricity brings the cost for mining a bitcoin to about $12,500, meaning it isn’t profitable at the moment for most of the world, at the moment.
But many miners are still mining at a loss because they expect the Bitcoin price to rise.
Bitcoin Mining Explained
Bitcoin mining is technical and takes some knowledge, especially if you’re wanting to build your own GPU mining rig.
But it’s easier to get started with an ASICs mining rig, and once you download the software connect with a mining pool, you’re pretty much good to go.
Mining isn’t all about profits to everyone, however. Some do it for the interest, and some do it to help secure the network.
But most people get into mining to make a profit, and at the moment, it’s not profitable for most of the world. That said, millions of devices are still mining Bitcoin.
They’re being paid in BTC, and those that can cover the cost of electricity, care not about the BTC to USD value today. They are mining because they believe the future Bitcoin price will far exceed the cost of mining today.
Bitcoin mining is a burgeoning industry, and whether you’re a multi-million-dollar set up, or you’re doing it solo, anybody can start mining.