Bitcoin mining explained

Often times people who are new to crypto, hear others talking about “mining,” and wonder if they too can mine Bitcoin in order to accumulate the highly priced asset.  One of the problems is that much of the information available is either outdated or comes from geographic locations that still have cheap power sources.  For most, mining Bitcoin would cost more than they would ever hope to make.

So what is Bitcoin mining?

Simply put, it is a way in which new Bitcoins are generated by computers able to solve complicated puzzles. When Bitcoin started out, mining was a way in which the coins were distributed to the public.  Those that wanted Bitcoin could use their personal computers to run the Bitcoin software which helped secure the network and reward the miners with free Bitcoins.

In the early days, Bitcoin was close to worthless and mining was done as a hobby.  As the price of Bitcoin increased, mining turned into a business and the increased competition for available Bitcoins made mining a more and more difficult activity.   Only a handful of new Bitcoins is available to miners every day and the growing competition forced a situation where existing miners began engineering computers that would give them the edge. As more and more miners entered the field, it became harder and harder to actually earn any Bitcoin.  The amount of available Bitcoin does not increase because the amount of miners increases. Bitcoin mining is not a lottery system, it is a race and is with any race, the slowest may never, ever win.

Asics and mining rigs

As people began engineering machines built for computational speed, others had to upgrade their machines or give up.  These machines became highly specialized, powersuckers that are able to run power bills into the 1000’s.  In order to mine Bitcoin today, one must invest the money to buy these highly specialized machines which cost $1000’s to buy.  In order to figure out if it is worth it, you may use one of the available mining calculators which calculates average Bitcoin earnings against the power cost in your area.

Most mining is done is areas which have lower power rates or are setup next to places with excess power reserves by making a deal with the owners.  Majority of mining is setup in giant warehouses and are handled by companies who specialize in Bitcoin mining and run thousands of machines.  The days of people mining Bitcoin on a laptop in their bedroom are long gone.  A single specialized miner may never even earn any Bitcoin even after running the machine 24/7 for years.

If power is not an issue, there may be other things to consider such as the below story from Bloomberg today regarding someone’s  Antminer s5 Bitcoin Miner ( a miner with a profitability of -$76 monthly)

According to the Bloomberg story…. Authorities believe they have found the culprit that was causing static for T-Mobile US Inc. customers in southern Brooklyn: an energy-sucking, interference-spewing cryptocurrency miner tucked away in a home.

Agents for the Federal Communications Commission used direction-finding devices to locate the offending equipment in a home… they sent a notice to a resident telling him to shut off his Antminer s5 Bitcoin Miner, or risk fines and seizure of the device.

“The device was generating spurious emissions on frequencies assigned to T-Mobile’s broadband network and causing harmful interference,” David Dombrowski of the FCC’s enforcement bureau, said in the notice. “Are you still actively using the device?”

The chances of a single miner ever earning any Bitcoin is actually close to zero.

What’s a mining pool?

Since the chances of a solo Bitcoin miner ever making any Bitcoin is slim to none, those running miners have created Bitcoin mining pools.  A pool is a collection of miners that are pooling their hashpower together in hopes that one of them may get lucky in which case they share the rewards.  While it sounds like a great idea, it still may not be profitable in any way.

Mining pools charge a fee and then divide up the Bitcoin rewards based on hash power supplied.  If you are providing a drop in the hash rate bucket, when the pool gets awarded bitcoin, your share of that Bitcoin would be that same drop you are providing which may equal out to cents and still not cover the power costs.  Most people mining prefer to use a mining pool as it at least generates some ROI, rather than solo mining which may never generate anything.

For a better explanation of how Bitcoin mining works, see Bitcoin Lecture #8 – Mining Puzzles