Bitcoin Mining Basics

Bitcoin mining is the process of adding new transaction records to the blockchain. It also results in creation of new Bitcoins in the system. It involves solving complex computational problems using computers (mining rig is the colloquial term). People who do mining are called miners and a group of miners who mutually agreed to divide the rewards of mining among themselves, form a mining pool.

Australian Bitcoin miner, Andrew Geyl, has conducted detailed research to compile Bitcoin mining statistics such as a number of miners, earnings trend of miners, transaction fee trends, and so on. In his research blog, Neighbourhood Pool Watch, Andrew estimates there are more than 10,000 Bitcoin miners currently. He calculates the number by using a miner hash rate distribution provided by some miner pools. Then he scales up the results to reflect the general trends.

So, what makes Bitcoin mining so attractive? And, will it be worthwhile to invest time, money, and energy in Bitcoin mining, going forward? This blog will dissect the variables you should consider before you jump onto the mining bandwagon.

First, a bit about the process of Bitcoin Mining

So, what is this Bitcoin mining? Millions of Bitcoin transactions (buying, selling, transfer, etc.) take place every second. But not all of them are legitimate. While some users might try spending Bitcoins that are already spent (double-spending), some might be over-spending their wallet balance. Since there is no bank or treasury to monitor cryptocurrency transactions, how can the system be made secure? This is the job performed by miners.

Without going into the technical intricacies of mining process, let us just state that Bitcoin mining is a labor-intensive and hard job. It is purposefully designed to control the number of new blocks added to the network and the number of new Bitcoins generated. In return for their hard work, miners get transaction fee plus a subsidy of new coins.

How to calculate mining profitability?

Use free profitability calculators that latest Bitcoin price. Just punch in your power consumption expenses and hash rate and you will get a chart with your expected earnings and recoup time. It will look something like this:

Is Bitcoin mining worth it?

Bitcoin mining might seem like an easy way to make money, and it was in the early days when the number of miners was less and mining costs were lower. But now, mining is typically done in large warehouses with hundreds of miners contributing their hash powers. Small time miners just can’t beat the competition. Joining flourishing mining pools might seem to be the answer. But it comes at an additional pool cost, about 1%. Smaller pools might offer free admission, but they seldom catch any blocks.

Moreover, Bitcoin rewards are halved every four years. They started with 50, halved to 25 in 2012, halved again to 12.5 in 2016 and will get chopped to half in 2020. Plus, the difficulty metric seems to get harder day by day. Remember, Bitcoins can’t exceed the magic number of 21 billion.

Plus, there is no regulating body that controls the number of new miners that can join the network. The unlimited army of miners (some with super computers) competing for a limited number of blocks is a sure recipe for disaster.

And you just can’t ignore the mounting operational costs- electricity bills, internet bills, maintenance cost of rigs, etc. Setting up a basic rig can cost anywhere between $3000 and $10,000. You might have to buy graphic cards that cost about $700 apiece. More sophisticated equipment would be needed for mining for longer period.

The only silver lining to this dark cloud could be Bitcoin value appreciation. But the coin is known to be volatile, so you won’t like to place your eggs in that basket!

Aspiring miners can try mining Litecoins, z-cash or monero. These coins have poor exchange rates but can be converted into BTC. Of course, that again involves paying exchanges a transaction fee on each conversion.

It’s a Wrap…

Bitcoin mining asks for basic investments but promises no definite rewards. So, it’s somewhat a gamble. Consider your options wisely and pick what is best for you. Happy mining!