Is Bitcoin mining profitable? Well, it can make you some extra cryptocurrency or fiat money on the side, although it’s also necessary to understand that mining plays a role in helping to keep the blockchain secure and properly maintained. For many novices in the field of Bitcoin mining, the entire practice may seem very difficult to take on. That's because the afficionados of the cryptocurrency realm have developed some language and strange mathematical formulas that remind others of “new math,” which is not exactly a positive.
On the other hand, with the information provided in this article, you may be shocked at how easy it can be to understand the basics of how Bitcoin mining works. The purpose of this article is to give everyone who reads it a reasonable understanding of how the process of Bitcoin mining works, what it does, and how it serves functions of both security and maintenance. In the process of providing this education, however, we also provide the following disclaimer, however: this article should not be seen as a recommendation to trade in cryptocurrency, and it is not an endorsement of any service, any provider, or any deal or other type of offering.
Why do so many people mine Bitcoin?
Once a person has all the needed materials, mining Bitcoin seems pretty easy, even though it isn’t. In fact, the most difficult aspect of this process is learning how to make Bitcoin mining profitable. For instance, there are only four real steps involved with Bitcoin mining, including getting the right hardware and the most efficient Bitcoin mining software. After that, you should select a mining pool and join it. Then, you can establish your mining activities.
On its own, it can be said, and many often do say, that the act of hashing trillions of inputs serves no good purpose. However, when it comes to Bitcoin, the most important things to consider are how much effort, time, and money you must spend before you get paid. It's possible to hash inputs efficiently with certain types of specialized optimization equipment and software, but there really are no shortcuts. In a way, that's good, since it's impossible to cheat while mining Bitcoin, and it's also a good thing because it's impossible to find a winning hash without going through the process the right way.
That is one reason it’s said that the simple act of Bitcoin mining manages to keep the network itself secure. Mining ends up being a resource that is both tangible and secure because counterfeiting or cheating are essentially impossible. That means Bitcoin can easily transmit over the network and enhance the Bitcoin blockchain without an added fear of fraud. It also means Bitcoin’s reputation is enhanced because everyone can count on its reliability. As of the middle of last year, each block mined successfully earns the miner 6.25 Bitcoin, which has a market value of nearly US $59,000.
How Bitcoin miners stay competitive
There are now millions of miners competing for a piece of the cryptocurrency pie, which is one reason why so many of them join their hash rates together in mining pools. Doing so provides them with a better chance of winning blocks more frequently. When anyone in a particular pool wins, everyone in the pool shares the profit equally, based on the hashrate they contributed to the pool.
To remain competitive in the face of others who wish to get rich with Bitcoin mining, many miners tend to join their hashrate together when they become members of mining pools. Joining a pool absolutely increases their chance of winning blocks more frequently. Like state above, when each member of the mining pool wins, they share the profits in an amount based on their level of hashrate they contribute to the overall pool. Of course, each and every mining pool is different, and they all have different profit-sharing arrangements, just as they have different terms and conditions when they join.
As of now, all Bitcoin transactions are processed as part of a blockchain. The blockchain works very much as the name implies; it’s a chain of blocks, with each new block being added immediately adjacent to the last block added. As the chain is compiled, each additional Bitcoin transaction is packed into the very next block, and so on.
On average, each new block is created about every ten to twelve minutes, which means about five blocks are created every hour. So far, nearly 680,000 blocks have been created throughout the history of Bitcoin, and every single block has been created by a Bitcoin miner, which means each miner is rewarded with brand-new Bitcoin. While that reward has been decreasing recently, Bitcoin miners also get to keep all relevant transaction fees generated by the blocks they control. Of course, only a single miner can create a block. That means everyone involved in Bitcoin mining is in a veritable race to see who can create the next block and earn the next reward.
How Bitcoin mining establishes and supports cryptocurrency value
A Bitcoin miner creates new blocks when they manage to solve a math-based challenge. By repeating the same numbers and letters and applying the same math formula to different inputs, they create a suitable combination, which is called the Secure Hashing Algorithm 256, or SHA-256
The way it works is, you give it an input, and the software will convert it into a long string of numbers and letters called a hash. As an example, when a Bitcoin miner employs a very basic online tool to input the word “bitcoin” and then run it through the SHA-256 formula, they get the following hash:
This process works quite well because the same input will always produce the same output. You can try hashing the term “bitcoin” with online tools, and you’ll get the same result each time. Likewise, the only way to get the same hash is with the same input. There is about zero chance that two random inputs could possibly produce the same hash. And best of all, there is virtually no way to reverse-engineer a SHA-256 hash to find a back door and discover what the input was.
Overall, Bitcoin miners are always running a wide variety of inputs through SHA-256. These inputs represent information from every previously created block, in addition to Information that miners add to each input to make sure they don't repeat the same “wrong” result over and over. After all, the point is to get a different result each time and to luck into the correct one.
As of this past April, Bitcoin miners have run nearly 166 quintillion, a trillion trillion, inputs per second through SHA-256, primarily because all Bitcoin miners are searching for a winning hash. When a miner finds a winning hash, it means they found a solution to a math problem. When they do, they’ve managed to mine a block for the chain.
Every successful Bitcoin miner will announce their successful mining of a new block to all other miners. After that, all other miners will change their inputs and begin looking for the next winning hash, which is primarily defined by how many zeros appear at the start of it.
Currently, a winning hash will begin with at least 18 zeros. As one can guess, the odds of hashing something and randomly beginning with 18 or 19 zeros is extremely low, which is kind of the point. As noted above, Bitcoin miners have thus far “hashed” more than a quintillion, a trillion trillion, inputs every second. That makes it imperative that each miner prevent blocks from being created too easily and quickly. And with more hashing being done, the less likely someone is to find a winning block, thus making blocks in the chain more potentially valuable. At the same time, when there is less hashing happening, it becomes marginally easier to find a winner, which can have a negative effect on the value of the Bitcoin.
That is the key reason why the Bitcoin network adjusts itself every two weeks, to adjust and maintain the chain. By constantly revising the blockchain, they ensure that new blocks are found just every ten minutes, on average, which serves to protect the value and the viability of the Bitcoin. This technique of mining, in which a miner uses many inputs to search for a correct output, is called Proof of Work (PoW). Many cryptocurrencies use PoW mining, and it uses similar hashing principles as SHA-256.
What does the Bitcoin network do to maintain its value?
The common mining term, “block time” refers to the average frequency of block discovery. When it comes to the history of Bitcoin, the cryptocurrency’s leadership set the block time at 10 minutes because it seemed to be the best possible timing. If the block time was too fast, new Bitcoin would be created too quickly which could lead to high inflation. Of course, if it was created too slowly, then Bitcoin transactions could slow down and be less predictable, which means paying miners might be too slow. There is no reason for block time to be exactly 10 minutes, except that the leadership decided that rate was neither too fast or too slow. They also decided that the 10-minute rate properly worked with Bitcoin’s intended inflation rate.
The speediest block times while mining any cryptocurrency are just a few seconds, although permissioned blockchains can be even faster. There is no fixed lower limit on block time because it depends on the state of the network and the miners. If, however, you go too low, you start encountering more security issues, and other unexpected problems.
Bitcoin has chosen to use SHA-256 because it’s a convenient, tried, and tested algorithm and because it suited Bitcoin’s needs when it was first created. Many other cryptocurrencies still use SHA-256, but many other proof of work coins have now gone on to employ other algorithms they feel are safer. Bitcoin also uses halving, which refers to the time when Bitcoin chooses to reduce its block reward by 50%. When Bitcoin mining is unprofitable for any miner, that miner will eventually have to stop mining. If enough miners stop mining, the mining difficulty will drop, which will make mining more profitable for everyone else. By determining that, Bitcoin is likely to always be profitable for someone. There could be lean times following significant Bitcoin price drops. There may even be times when Bitcoin mining is temporarily profitable for no one, but the network will then usually reduce mining difficulty to compensate for that.
All Bitcoin hashing is estimated, which is clear because at Bitcoin, like most other cryptocurrencies, there is no central administrative department or other entity that receives all Bitcoin mining hashes. They estimate the average delay between winning blocks and combines them with the current level of difficulty in mining Bitcoin. As a result, charts of Bitcoin hashrates tend to look rather spiky, which generally must be smoothed out to gain a clearer view of the actual hashrates. Therefore, it is not necessary to have the exact numbers to be an effective Bitcoin miner.
Why does Bitcoin mining use so much electricity?
There are only two real reasons why Bitcoin mining uses so much energy to function. The first is that using SHA-256 to hash quintillions of inputs per second simply uses a lot of energy. The other reason is due to the competitive nature of Bitcoin’s mining economy.
The fact of the matter is, to be a commercially successful miner, it's necessary to hash as many inputs as possible whenever profitable, and that simply means consuming as much energy as possible. At any given time, Bitcoin’s high level of energy consumption is a natural response to its price growth over the years. If Bitcoin prices keep increasing, its energy consumption will keep growing just as quickly.
Likewise, it is not possible to find a low-energy version of proof of work mining. And that is true, regardless of the hashing algorithm or the mining technology that is used. It is also true even when a miner purchases mining systems that are purported to be energy efficient. In part because electricity usage is the primary cost when it comes to Bitcoin mining, it can be helpful to understand the reality that those algorithms claiming to save energy use the same amount, but they claim more profitable success. Unfortunately, the truth is, there is no additional profit, so the hashing provides little to no financial benefit to any miner in particular.
So, bottom line: how profitable is Bitcoin mining?
There is always a question as to whether Bitcoin mining is profitable to anyone. There is no question that its profitability is based on the situation, but for most miners, the answer is a resounding “no.” There are many costs related to Bitcoin mining, including the continually rising network hashrates, as well as the cost of the acquisition of the hardware and software used, in addition to the electricity consumed in the process.
In other words, to make Bitcoin mine profitable, you will need the capital to make it so. You will have to be able to set up a rather large low-cost mining operation, with the latest equipment, and it’s also necessary to be able to access cheap electricity and simultaneously benefit from economies of scale.
Those are the basics, however. To maintain the profitability of Bitcoin mining, it is also necessary to maintain Bitcoin prices. Because the startup costs are relatively high, and because the profitability of a Bitcoin mining operation depends greatly on a seemingly constant future Bitcoin price increases, it would be unwise to expect profitability at every turn. That is why so many cryptocurrency experts recommend buying Bitcoin through an exchange instead of attempting to mine it. In Canada, there is already 15 crypto trading platforms. There are more internationally.
What to look for while moving forward with Bitcoin mining
There are and will likely always be questions about the survival of Bitcoin and most other cryptocurrencies. Among the most pronounced question could very well be whether Bitcoin's practice of halving can possibly endanger the currency's long-term survival. In fact, many experts have suggested that the halving practice could become a serious problem after several decades to a half-century. Even now, the block reward is little more than a small fraction of the value of Bitcoin in a block. For the most part, that is because of the halvings.
The reality is, based on the network’s current form and function, the numbers simply do not add up, especially with regard for the long term. There is no realistic way to expect transaction fees to replace miner block revenue without said transaction fees surging much higher than is realistic. Not only that, but it will also be necessary to combine that with massively higher transaction volumes coming along as well.
Since Bitcoin transaction fees are set at market rates, based on supply and demand, that circumstance is quite unlikely. According to the experts, if the blockchain manages to develop surplus capacity, transaction fees will trend lower, but if there is no surplus to be found, transaction fees will keep rising until the network becomes too expensive for practical use. Therefore, even the experts say, without major changes to the Bitcoin network, it will be impossible for transaction fees to replace block rewards, regardless of what its founders envisioned.
The Lightning Network is a relatively new scaling solution for Bitcoin. Located off the blockchain, it’s a system of payment channels. Many experts suggest that it is unlikely the Lightning Network will ever work or see major use, at least in its present form. It could absorb some of the transaction fees that miners use to sustain themselves in the face of reduced block rewards.