With a market cap of $543.9 billion USD, Bitcoin has become the strongest cryptocurrency on the internet. Over time, Bitcoin has gained a massive community of users, miners, and developers.
Today, Bitcoin miners from across the world earn 25-30 million USD every day. As appealing as it sounds, mining Bitcoin is not easy and requires massive computing power. If you are seeking to start your mining journey, this blog is for you. We will understand Bitcoin mining, how it works, its security threats, and whether it’s profitable or not. If that sounds exciting, let’s get going.
Mining is the process of verifying Bitcoin transactions by spending computational resources to solve complicated cryptographic equations. Upon mining a Bitcoin successfully, the miner receives a certain amount of Bitcoins as a reward.
Bitcoin mining accomplishes three goals at once: it verifies all Bitcoin transactions, issues more currency, and incentivizes mining. To mine Bitcoins, you will need high-performing hardware that can solve intricate mathematical problems and process large amounts of data.
Approximately 1,449-kilowatt hours (kWh) of energy is consumed to mine a single Bitcoin. To put things into perspective, that’s the same amount of energy a US household consumes in 13 years. In one of the most crypto-friendly countries, Switzerland, the cost of mining a Bitcoin is $27,083.
Bitcoin mining is strenuous, expensive, and not highly rewarding. Moreover, the price of Bitcoin is highly volatile. For instance, the cost of one Bitcoin in 2020 was just $4,107, which hit an all-time high of $68,790 in November 2021. As of April 2023, it is approximately $28,560. Despite its low rewards and high volatility, Bitcoin mining is still very popular among tech enthusiasts. Let’s understand why users mine Bitcoins.
Mining helps Bitcoin remain decentralized for everyone. Unlike banks and other financial institutions, there is no one entity controlling Bitcoin or its transactions. Instead, all the users keep their own copies of transactions. Through mining, users come to a consensus about the accuracy of shared records. It enables users to transact securely — knowing that their transactions will be verified by all the Bitcoin miners across the globe.
Bitcoin mining also prevents double-spending — a term used to describe the act of spending the same Bitcoin twice. This can be achieved by sending a transaction to one recipient and then quickly sending the same transaction to another recipient before the first transaction has been confirmed. By relying on miners to validate and confirm transactions, Bitcoin ensures that double spending is virtually impossible.
Apart from this, there are many reasons why someone might be interested in mining bitcoins. The most common reason is the opportunity to earn money by receiving newly generated bitcoins as a reward. Some people may also mine bitcoins as a hobby or for the challenge it presents.
Bitcoin miners are just like telephone operators. They use their machines to listen to transactions broadcasted across the Bitcoin network and create a list of valid transactions.
When you send or receive Bitcoins, you are essentially broadcasting your transaction in the Bitcoin network. Each Bitcoin node (a computer that runs Bitcoin software and is connected to the Bitcoin network) validates and propagates the transaction until it reaches every node in the network.
Each Bitcoin user is assigned a public address and a matching private key. Only the holder of the keys can digitally sign a new transaction request. Hundreds and thousands of new transaction requests are generated every day.
All the unverified Bitcoin transactions are bundled together in a “block”. When all the blocks are put together in order — they create the blockchain. Each block carries transaction details like where a Bitcoin is coming from and where it’s going.
Every block must be verified before its being added to the blockchain. This is done by mining nodes that work to verify each block by solving complex mathematical functions. All the miners compete with each other to guess a complex 64-digit number, often referred to as a hash. For this, miners use specialized computers that can process large amounts of data in a fraction of a second.
Upon successful verification, a block is added to the Bitcoin network. New blocks are added to the blockchain every 10 minutes. Miners play an important role in syncing the latest data with the distributed Bitcoin ledger.
Bitcoin mining consumes a lot of resources. Its cost depends on many factors. Let’s look at Bitcoin mining costs:
Bitcoin mining operations run 24×7 and consume a lot of power. It can significantly increase your electricity bill. According to an estimate by Digieconomist, one Bitcoin transaction can take up to 769.48 kWh of electricity. That’s equivalent to 26.37 days of power consumption in a US household.
Considering the average cost of electricity in the US, which is 23 cents per kilowatt-hour, one Bitcoin transaction can cost you $176.98. That’s not all. Bitcoin mining machines generate a lot of heat. Thus, you will also need an adequate cooling system to ensure your operations continue running smoothly. While air conditioners may not cost you a lot of energy, but they can be an expensive upfront investment.
While Bitcoin mining can be done using desktop and gaming computers, the returns on it will be very limited. If you want to be highly profitable, you will need an Application-Specific Integrated Circuit (ASIC) miner. These devices are designed for mining digital currencies. Each machine can mine a specific currency. Meaning, a Bitcoin ASIC can only mine Bitcoins.
Bitcoin miners start from $138 and can go up to $17,999.99 or more. Suppose you want to run a highly profitable Bitcoin mining operation. In that case, you may need several high-end mining machines and a sophisticated setup that runs optimally without any downtime or disruption.
Latency is more important than network speed and bandwidth in Bitcoin mining. Latency is the speed at which data can be transmitted from A to B and back to A. The data packs (mining jobs) sent back and forth are only a few bytes. However, they must be transmitted quickly, and any delay in the network may result in a stale share.
Thus, you need a robust network infrastructure to handle Bitcoin mining operations. Considering the average monthly internet cost of $100, building a low-latency network can cost you approximately $1200 per year or more, depending on the resources you consume.
If we account for the cost of everything, the average cost of mining a Bitcoin is $35,404 across 198 countries. That’s a bit more than the price of one Bitcoin, which is $28,560 as of April 2023.
Mining is a strenuous process that takes a lot of resources. Thus, miners are rewarded for validating every block. In 2009, the reward for mining a block was 50 Bitcoins. However, this reward is halved after every 210,000 blocks or approximately every four years. As of now, miners receive 6.25 Bitcoins for every block they mine.
The next halving may occur in April or May 2024 — by then, the rewards will be reduced to 3.125 bitcoin per block.
Bitcoin halving timeline:
|Year||Bitcoin Mining Reward|
|2024||3.12 BTC (Estimated)|
Considering the current Bitcoin price (approximately $29,000) and the reward for mining (6.25 BTC per block) — a miner can earn up to $181,250 today. The amount may vary along with the fluctuations in Bitcoin prices and the reward of mining.
If you want an estimate of your crypto-mining profitability, there are many crypto-mining calculators available on the internet.
Back in April 2013, Bitcoin mining difficulty was 10.07M which has increased to 48.71T as of 2023. Bitcoin difficulty estimates the number of hashes that must be generated to solve the next Bitcoin block.
What this means is that Bitcoin mining profitability has gotten narrower with time. The upfront hardware investments, electricity consumption, and network expenses generally cost higher than the Bitcoin mining rewards.
Miners are attracted due to the price hikes of Bitcoin. As the price of Bitcoin rises, miners’ margins increase, too. This attracts even more miners — which increases the difficulty of minting new blocks — eventually bringing down the profitability of mining.
There are several machines for mining Bitcoins — each with different hashing power and block rewards. The kind of machine you use determines your mining methodology. Here are some of the most popular mining types:
In 2009, when Bitcoin was first introduced, Central Processing Units (CPUs) were used for mining Bitcoins. Back then, they worked well as there were very few miners, and Bitcoin was at its early stage. However, CPU mining has become obsolete today as it’s extremely slow, with an average hash rate of 0.7MH/sec.
As the popularity of Bitcoin increased, users started using Graphical Processing Units (GPUs) for mining. At the time, GPUs were mostly used for gaming and video editing. However, they turned out to be more efficient than CPUs. The first-ever Bitcoin mining software for GPU was released in 2010. While GPUs were affordable, they were soon replaced by Application-Specific Integrated Circuits (ASIC) in 2015.
Application-Specific Integrated Circuit (ASIC) is one of the most powerful hardware specifically designed for mining cryptocurrency. They are 200 times more powerful and 100,000 times faster than GPUs or CPUs. Profits earned through ASICs can range from a few dollars a month to a few thousand. However, they are generally very expensive, with prices ranging from $2,000 to $15,000.
Popularly known as Field-Programmable Gate Array — FPGA is better than GPU and ASIC miners in terms of speed and cost efficiency. Unlike ASIC miners, FPGA machines are not limited to mining a specific cryptocurrency. They offer miners the flexibility to change currencies as and when needed. FPGA machines are ideal choices for enthusiasts who want to start mining without investing in a high-end set-up that can cost a fortune.
If you don’t want to invest heavily in hardware, you can use cloud services for mining Bitcoins. Some of the popular cloud mining services include NiceHash, ECOS, and HappyMiner. While it may sound compelling, you should verify the cloud mining company, as there are a lot of scams. Companies may impose charges on your account for resources you have never utilized.
Bitcoin mining is legal in most countries, including the US, Canada, Russia, and the UK. However, Bitcoin trading may be subjected to local government laws and tax regulations. If you’re in the US, here’s a comprehensive guide for filing taxes on your crypto investments.
Countries where Bitcoin mining is illegal:
Most miners are concerned that they won’t be able to make a return on their investments. Mining starts with ASIC machines, which are not cheap. When you add the recurring costs of electricity and other network expenses — your initial investment amount may be much higher than the monthly profits.
While it is possible to make profits eventually on your investment, the fluctuating Bitcoin price makes mining earnings unpredictable. Meaning, whenever Bitcoin price drops, your earnings will also take a hit and vice versa. Additionally, the increase in mining difficulty may also affect your profit margins.
Moreover, Bitcoin mining can result in a disaster if you are not careful enough. Bitcoin mining machines release a lot of heat, and if you don’t have adequate cooling systems in place, your operation center may be vulnerable to a fire hazard. In 2019, a fire farm in China caught fire, destroying millions of dollars worth of equipment.
Last but not least, Bitcoin mining is also vulnerable to cryptojacking — a cyber attack where hackers gain access to your hardware resources to run their Bitcoin mining operations. This can be done by planting malicious software or an app on your computer. The software continuously runs on your computer and consumes massive amounts of computing power and electricity to mine Bitcoins. Then, they are sent to the hacker’s wallet. To learn more about cryptojacking, how it works, and how to detect and prevent it, refer to our full guide on cryptojacking.
If you are considering to start mining Bitcoin, you should know it might take a few years to convert it into a profitable business. You can test the waters with your personal computer or by signing up with a cloud mining service provider before investing in any high-end mining rig.
Bitcoin mining can be even more profitable if you can get access to low-cost electricity, preferably a solar system or wind energy. As mining technology improves, machines may consume less energy, produce less noise, and need less space. If you’re already running a mining business or seeking to start one, now might be a good time to get started.