How Bitcoin Mining Works

What is Bitcoin? Bitcoin is a decentralized currency and has no direct relationship with real-world FIAT money. It is not controlled by any authority, centralized entity or government but people are able to use Bitcoins to buy real-world things. It might not be as widely accepted as we would want it to be but this trend is changing at a rapid pace, especially in the iGaming sector. 

To make Bitcoin transactions processable, individuals called miners go up against each other to solve complex mathematical problems. The miner who solves the problem first adds a block to the blockchain and receives compensation for a job well done. The reward for this accomplishment is currently 6.25 Bitcoins, a staggering $232303.75 in FIAT, and not only do they get this for their efforts, mining is how new Bitcoins are introduced and put into circulation. 

Bitcoin Mining Explained

The mining process starts with the blockchain. 

Blockchain

• The blockchain is a decentralized ledger that records all transactions on a network. 
• A block is a set of approved transactions that are tied together to make a chain. 
• Block + Chain = Blockchain

Now, a miner’s main goal is to add a block to the blockchain. To do this, the miner needs to solve complex mathematical problems. This process requires excessive electrical power and computational knowledge but results in an enormous reward of 6.25 Bitcoins. 

To avoid concerns of inflation, the reward rate for adding a block to the blockchain is halved every 210 000 blocks. This relates to roughly every four years and is algorithmically enforced to ensure predictability in the rate of which new Bitcoins are being introduced into the existing supply. 

Bitcoin mining – taken literally

Can Anyone Mine Bitcoin?

Every 14 days the difficulty required to mine one block is adjusted. In this time period an average number of 2016 blocks are mined with the overarching goal being 1 Bitcoin to every 10 minutes. 

Now.

Bitcoin has been around since 2009 and with the difficulty rate of mining being adjusted every two weeks, it is safe to say that it has become extremely hard to mine which is why powerful and intensive hardware is required to be successful in doing this. 

To find success in the modern Bitcoin mining environment, your home PC won’t cut it. You will need specialized mining hardware called ASIC’s (application specific integrated circuits) that can amount to more than $10 000. Surprisingly this is not the biggest expense however. The ASIC’s require monumental amounts of power, the price of which can exceed the cost of the hardware very rapidly.

This is why Bitcoin miners met with Elon Musk recently and agreed to form a council for a “greener” Bitcoin. You will also need Bitcoin mining software but this isn’t that expensive as you can actually get really good, reliable software for free these days. 

So, if you want to know whether Bitcoin mining is a profitable venture, you need to consider all the expenses involved: software, electricity and hardware. You will also need to take the value of Bitcoin into consideration (which usually fluctuates) and also the fact that you might be eligible for taxes on your Bitcoin mining earnings. 

Bitcoin mining hardware

Interesting fact:  Bitcoin changes the difficulty of mining if the average time to mine a block falls under 10 minutes. When this happens the difficulty will increase to eliminate any concerns of fluctuation. 

Is Bitcoin Mining Profitable?

By now you already know that the reward of one block is 6.25 Bitcoin ($232061.88) and that a block is mined every 10 minutes, on average. This means that Bitcoin generates over $232061.88 every 10 minutes so it appears to be really profitable, right? If this sounds too good to be true, it’s because it is, well kind of. 

To put the electricity cost in perspective you need to understand that a single ASIC consumes as much electrical power as 500 000 Playstation 3 devices. Yes, you read it right, that’s half a million Playstation 3 devices and this is why it doesn’t make any sense to operate such an operation from home. 

Even if you pay industrial rates in most parts of the US at an average rate of 4.55 cents per Kilowatt hour, it simply will not be profitable. Fortunately there are other options if you don’t have direct access to cheap electricity.

Bitcoin mining

Mining Pools

As they say, many hands make light work, and this is the idea behind Bitcoin Mining Pools. This is when miners pool together all their resources to make it more profitable and then split all the rewards. 

It might take longer to see a return on your money with one analysis finding that it will take more or less 1200 days to receive 1 Bitcoin but it is a start and this obviously depends on how big your part of the pool is. 

You also need to understand that mining is almost like a contest and that the prize is awarded to whomever solves the puzzle first. There are individuals and companies that have done this for many years and if you want to go up against these big boys it is better to combine the computational power of many miners. 

Mining pools

There are many types of mining pools available and the one you choose will depend on many factors. Do you join the largest one to up your chances of rewards? It doesn’t really work that way. Let me explain. 

• Multi vs Single Bitcoin Pools

The difference between a single and a multi crypto pool is that a single crypto pool will focus on one currency, like Bitcoin for example, whereas a multi pool will jump around, mining a variety of coins. In a multi pool, factors such as the hash rate and the exchange rate between coins are considered to evaluate which coin is more profitable at that specific given time. 

• Cloud vs Local Mining

The safest option is most probably cloud-based pooling. This requires no mining equipment but you do need to pay for an online mining contract that is interlinked into the mining pool. The biggest perk is obviously that your capital outlay is minimized but it also means that you will need to pay for your mining capacity from your potential mining profits. 

• Pool Payouts

Again, there are several ways a pool can pay out. Most often a pool will pay out using a proportional method, meaning that you will get your share of the reward once a block is successfully mined and added to the chain. 

Some operators work on a different model that pays on every ‘share’ that has been successfully submitted. This ‘share’ relates to a piece of the mathematical problem that has been solved. So basically they break down the puzzle to many pieces (smaller mathematical problems) and you get paid for how many pieces you solved. This is not always a profitable or viable option for operators because they will end up paying out shares without the whole puzzle being solved. 

Decentralized network

Bitcoin Mining Pros and Cons

The blockchain has made it possible, for the first time ever, to interact on a decentralized network that is ruled by its users. It has also bestowed the brilliant concept of Bitcoin mining upon us but there are always pros and cons to every situation. We are all optimists here at Bitcoin Casino Kings so let’s start with the pros. 

Bitcoin Mining Pros

• There is money to be made!

Money is always a motivating factor for many reasons and mining Bitcoin has massive potential to earn you a serious amount of cash. It is important to note however that this is not a given and it is most certainly not for everyone. There are many factors and loads of expenses that need to be weighed up before you jump right into the mining process. 

• Bitcoin mining is becoming more affordable

With pools and cloud mining, it has become more affordable for people to get on the mining band-wagon. Your return might not be as high but you will be able to get your foot in the door without having to spend a significant amount of money. 

It is also important to note that fewer miners means less hash power and this means Bitcoin automatically adjusts the difficulty of the proof of work (the mathematical puzzle). Back in 2018 Bitcoin mining dropped by 15% after a large number of miners quit. This was the biggest drop since 2011 (18%) so it might be a good idea to keep up to date with Bitcoin news. Statistics like these will count in your favour. 

• The hardware keeps its value rather well

Cloud mining pools are becoming increasingly popular simply because you can ‘’hire’’ hardware in data centres across the globe but if you don’t want to make use of these services, you will be happy to know that mining hardware retains its value pretty well. If you decide to sell, you will get a tidy sum of money so it’s not all lost in vain. 

• You help Bitcoin grow

If it wasn’t for miners, the value of Bitcoin would drop in an instant. In fact, miners are those responsible for making crypto more mainstream, accepted and trustworthy due to its rise in value. 

Bitcoin mining pros and cons

Bitcoin Mining Cons

Mining is not all fun and games. If it was, we would all be sitting in the pound seats. There are in fact quite a number cons you need to be aware of.

• It is so darn complex!

The glossary and wording in itself is already so intricate and even people with a sound knowledge of how blockchains work will find mining quite difficult in the early days. At the very least you will need a Bitcoin wallet, mining software, need to be part of a mining pool, a crypto exchange account, a mining rig that is customized (PC), a GPU or ASIC and expensive cooling equipment. Getting started can be quite complex and you will need to do a lot of homework and need to accept that you will make plenty of mistakes at first. 

• It is not very eco friendly

Mining consumes more electricity than the whole of Argentina annually and has begun to feel the heat from ecologists in recent years. It is a catch 22 situation because if it increases in value, there will be more miners but this will seriously affect the environment. There are however talks of forming a Bitcoin Mining Council that will focus on making mining more sustainable. And, we will have to wait and see how this pans out but where there’s a will, there is usually a way, especially in the crypto world. 

• The hardware is costly

You will need to spend a significant amount of money on hardware if you want to be successful at Bitcoin mining. This is worth an entire article and beyond the scope of this one but if you want to read about this in depth, have a look at the cost and what Bitcoin wiki has to say on this topic.

• Scammers are for real

Unfortunately there are a lot of scamsters in the mining space that will take your subscription fee and your mined coins, leaving you with little or nothing to show for it. If you want to start cloud mining, you need to do research to make sure that you use a well-established cloud mining company that has a reputable reputation. 

• Accept that you can lose money

Yes, there is a lot of money to be made and we are huge crypto believers but we are brutally honest as well. Long term success in mining is really not a given and crypto prices are extremely volatile. If it goes up, you will make big bucks but be prepared to also lose the big bucks if the market doesn’t count in your favor. 

Final thoughts

Mining Bitcoin can be a complex and expensive process that requires specialized hardware and significant investment. For beginners, it is important to research and understand the costs and risks associated with mining before investing in hardware. Joining a mining pool and keeping up-to-date with the latest developments in Bitcoin mining technology can also help to improve your chances of success. Overall, Bitcoin mining can be a profitable and rewarding endeavor, but it requires patience, dedication, and a willingness to learn and adapt to changing conditions.

If you have any comments or questions, please write your thoughts below.