Bitcoin mining: How does Bitcoin mining work and is it profitable?
Mining can be a way of making some cryptocurrency on the side, but its main purpose is to maintain and secure the blockchain.
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With its industry lingo and unfamiliar math, Bitcoin mining may seem difficult. But with a little bit of basic knowledge, you'll be surprised at how quickly you can get your head around it.
By the time you finish this beginner-friendly guide, you should have a good understanding of how Bitcoin mining works and what it does.
What is Bitcoin mining?
Bitcoin transactions are processed on a blockchain. As the name suggests, this is like a chain of blocks, where the newest block is joined onto the one that came before it.
When someone sends a Bitcoin transaction, it gets packed into the next available block.
These blocks are created every 10 minutes on average. As of April 2021 there have been over 677,000 blocks in Bitcoin's history.
These blocks are created by Bitcoin miners, and every time they make one they are rewarded with some brand new Bitcoin (the reward decreased to 6.25 Bitcoin per block as of 11 May 2020), and they also get to keep all the transaction fees from all the transactions on the block.
But only one miner can make each block, so it's always a race to create the next one and earn the reward.
How are Bitcoin blocks created?
Bitcoin miners create new blocks by being the first to solve a math challenge.
The challenge is to create a suitable combination of numbers and letters by repeatedly applying the same math formula to different inputs.
The math formula is called SHA-256 (Secure Hashing Algorithm 256). The way it works is that you give it an input, and it will convert it into a long string of numbers and letters called a "hash".
For example, when we use a simple online tool to input the word "bitcoin" and run it through the SHA-256 formula, in a process called hashing, we get the following hash:
There are three very cool things about this process.
- The same input will always produce the same output. Try hashing "bitcoin" yourself with online tools, and you'll get exactly the same result as the above
- The only way of getting the same hash is with the same input. The chance of two different inputs randomly producing the same hash is almost incomprehensibly small.
- There is no current way of reverse-engineering a SHA-256 hash to find out what the input was.
Bitcoin miners constantly run different inputs through the SHA-256 algorithm. These inputs are a combination of information from every previous block, and a "nonce" which is just a number that miners add to each input to make sure they get a different result each time.
As of April 2021, all Bitcoin miners combined are running about 166 quintillion inputs per second through the SHA-256 algorithm.
All miners are in search of a winning hash. When a miner finds the winner, they've mined a block. They announce it to all the other miners, then everyone changes their inputs and starts looking for the next winning hash.
What makes a winning hash?
A winning hash is one that's under a certain amount, which is mostly defined by how many zeros are at the start of it. At the time of writing, a winning hash is one that begins with at least eighteen zeros.
For example, here's the hash of a block which was mined on 1 April 2021:
As you can imagine, the odds of hashing something, and the hash randomly beginning with nineteen zeros, is extremely low.
And that's the whole point. Bitcoin miners are hashing quintillions (trillions of trillions) of inputs every single second, so to prevent blocks from coming out too quickly, you have to make it extremely difficult to find winning blocks.
The more hashing that's being done, the harder it is to find a winning block (more zeros are required at the start of the hash). Conversely, when there's less hashing being done, it gets easier to find a winning block (fewer zeros are required at the start of the hash).
The Bitcoin network automatically performs this adjustment every two weeks, revising mining difficulty with a goal of ensuring that new blocks are found every 10 minutes on average.
This mining technique, based on hashing many inputs in search of a suitable output, is called "proof of work".
Many different cryptocurrencies use proof of work mining, and in all cases proof of work mining uses similar principles of hashing inputs, but Bitcoin is one of relatively few cryptocurrencies that use SHA-256.
How to mine Bitcoin
Mining Bitcoin is relatively easy, once you have the necessary materials. The hard part is optimising it, and making it profitable.
The steps involved are:
- Get your Bitcoin mining hardware
- Download your preferred Bitcoin mining software
- Select and join a Bitcoin mining pool
- Start mining
What's the point of Bitcoin mining?
In itself, the act of hashing trillions of inputs, in search of a specific type of hash, serves no purpose.
But in the case of Bitcoin, it's the time, money, and effort spent on this that's important. While specialised equipment can hash inputs extremely quickly, and there are ways of optimising the mining process, there's no way of "cheating", and there's no way of finding a winning hash without going through the actual process of hashing.
This is how the act of mining secures the network. It serves as a tangible resource which can't be counterfeited or cheated, but which can still be transmitted over the network.
The act of mining can then imbue the Bitcoin blockchain, and Bitcoin itself, with the same properties.
How much money do Bitcoin miners make?
As of April 2021, each block mined gives the miner 6.25 Bitcoin, valued at about US$367,237 based on a price of US$58,758 per Bitcoin at the time of writing. They also get to keep the transaction fees being sent on that block, but the value of these is always insignificant next to the main block reward.
Whichever miner hashes the most inputs per second is the most likely to find a winner first. Conversely, a miner with a low hashrate is unlikely to ever find a winner, and is basically just playing the lottery.
To remain competitive amongst so much competition, miners join their hashrate together in mining pools, giving them a higher chance of winning more frequently. When anyone in the mining pool wins, they share the profits proportionate to the amount of hashrate they contribute to the pool.
The main Bitcoin mining pools at the time of writing, along with their share of Bitcoin's total hashrate, is shown below.
Each mining pool is different, and has different terms and profit-sharing arrangements for its users.
Is Bitcoin mining profitable?
Whether Bitcoin mining is profitable depends on the situation, but for most people the answer will be no.
The cost of the electricity consumed, and constantly rising total network hashrates, ensure that the average person will lose money trying to mine Bitcoin.
To mine Bitcoin profitably, you typically need to have enough capital to set up a large low-cost mining operation that can benefit from economies of scale, and have access to cheap wholesale electricity.
And even then, mining profitability depends on Bitcoin prices holding up, and staying up to date with the latest equipment.
Because of the large startup costs, and the fact that Bitcoin mining profitability is dependent on Bitcoin prices rising in the future, it will almost always be more economical for the average person to just buy Bitcoin instead of trying to mine it.
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