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Understanding Bitcoin mining revenue

How do Bitcoin miners get paid? What can influence their profitability? Many factors affect how much miners earn for their computational power. Rewards can vary greatly and unexpectedly, which is why it’s vital to understand how mining revenue works.

The basics of Bitcoin mining

Let’s start from the beginning: Bitcoin mining is the process through which all transactions on the Bitcoin network are confirmed and permanently recorded on the blockchain. In other words, it is the process of ensuring security and the correct functioning of the network.

This method runs on a consensus algorithm known as proof-of-work, in which miners have to spend a considerable amount of computational power to generate solve these mathematical problems.

As more hashrate comes online, mining has to become more difficult to maintain the 10-minute block time. That’s why Bitcoin automatically adjusts the mining difficulty every 2016 blocks — approximately two weeks — proportionally to the network’s total hashrate.

Mining difficulty is one of the critical factors to determine miners’ revenue. Logically, the harder it is to mine a block, the less profitable mining becomes — because you would have to spend more electricity to generate a nonce.

Bitcoin mining revenue is composed of block subsidies and transaction fees.

Breaking down mining revenue

Aside from mining difficulty, Bitcoin’s architecture has two other aspects that determine the revenue a miner earns from finding a block.

Each time a miner finds a new block, they receive a block subsidy and transaction fees. To keep it simple, we will explain this topic without considering the mining pool dimension, which we will address later in the article.

Block subsidies

The first factor to consider is the block subsidy. This is a fixed amount of Bitcoin a miner receives for solving a block. Not only that, but it’s also the “new” coins that come into circulation with each block.

Block subsidies are the new bitcoin minted and paid to miners for finding a block.

An important detail to remember about block subsidies is the event we know as “halving.” Halvings happen every 210,000 blocks — roughly four years — and reduce the Bitcoin issuance by half.

The last halving took place on May 11, 2020, when new bitcoin minted decreased from 12.5 to 6.25 per block. This process will continue until approximately 2140 when the total supply of 21 million BTC is reached.

New bitcoin minted. The vertical drops every four years correspond to halvings (Source: Coin Metrics).

Transaction fees

The other determining factor for mining revenue is transaction fees. Every transaction broadcasted to the Bitcoin blockchain includes a miner fee, which is essential to the network.

Initially, Satoshi Nakamoto implemented transaction fees to prevent spam transactions that could slow down and clog the network.

Every time a user sends BTC, they have to pay the miners a fee to confirm their transaction.

Users can also set determined fee amounts to prioritize their transactions. Miners don’t confirm transactions in order of arrival. Instead, they choose the ones that include the higher fees, as they’re the most profitable.

That said, users that need their transactions confirmed immediately can choose to pay a higher fee to incentivize the miners to mine their transactions first.

You can learn more about how transactions and fees work in our mempool article linked below.

When a miner finds a block, they earn the sum of the block subsidy and all the fees from the transactions included in it.

Together, these two amounts constitute the total earnings for finding a block, known as block reward.

The mining pool factor

A cryptocurrency mining pool is a group of miners who join their hashpower to enhance their chances of successfully solving a block and earning the reward. By combining their total computing power, miners can bump up the pool’s hashrate, which increases the chance of mining a block.

We’re not going to explain mining pools in-depth in this article, but if you want to learn more, you can visit our dedicated mining pool article here or through the link below.

Essentially, mining pools reduce the miners’ variance, paying miners for generating hashes at a lower difficulty rate.

In other words, pools create lower difficulty work (in jobs) than the network’s difficulty, enabling miners to combine their work and increasing the collective’s chance of solving a block. In this scenario, block rewards are shared among all miners in the pool.

Another aspect of mining pools that affects revenue is their payment method and fees. Not all pools reward miners under the same mechanisms.

Below are some examples of payment methods:

  • Proportional payments: Payments are calculated based on a division to rounds, where a round is the time between one block found by the pool to the next. At the end of every round, the pool finds a block and receives the reward. The operator keeps a fee and payments are distributed among the miners in direct proportion to the number of shares they submitted during this round.
  • Pay-per-share: When a participant submits a share, they are rewarded correspondingly to the expected value of this share’s contribution, minus fees —regardless of the pool finding a block or not. The operator gets to keep all the rewards for solved blocks. The payment per share is thus a deterministic value known in advance.
  • Pay per last N shares (PPLNS): Similar to proportional, but instead of paying per round, pool operators distribute rewards according to a scaling factor for difficulty (N).

Bitcoin mining revenue in the long term

Although experiencing an unusual profitability epoch, the mining community has been concerned for the future. The matter is that, for the last couple of months, miners’ revenue has consisted mostly of block subsidies and not so much of fees. But what does this mean?

First of all, block subsidies will eventually end, and even if this is more than a hundred years from now, it’s only two years to the next halving. By then, block subsidies will decrease to 3.125 BTC per block.

Ideally, fees would be higher in order to incentivize miners to continue confirming transactions once that happens, so mining would still be a profitable activity.

Earning more from fees would counter-balance the halving effect and provide miners with increased rewards. One optimistic view that supports this scenario is Bitcoin adoption, most recently driven by El Salvador and its legal tender initiative and the new Twitter tipping functionality.

Another possible scenario would be the appreciation of BTC, so even if mining revenue decreases, the dollar value would at least remain the same. For that, bitcoin would have to rise precisely 100%.

Remember, halvings cut block subsidies in half, so doubling bitcoin’s current value would leave miners at break-even.

Bitcoin miners’ revenue (green) vs. total fees (red). Fees are a small part of the earnings (Source: Coin Metrics).

The worst-case scenario is that neither of those happens and mining profitability starts decreasing gradually.

Reduced revenue would lead to miners eventually abandoning the network, no longer achieving sustainability. Hashrate and difficulty would drop until the market finds a point of balance between revenue and active miners.

Nevertheless, we’re optimistic that it won’t come to that, and either the price of bitcoin or its adoption growth — hopefully both — will sustain the profitability of Bitcoin mining.

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