BITCOIN MINING: ITS FUNDAMENTALS AND IS IT STILL PROFITABLE?
Bitcoin System
Bitcoin was created as a decentralized alternative to the banking system. This means that the system can operate and transfer funds from one account to another without any central authority. In traditional banking systems, transferring money is easy. You just tell the bank to transfer a sum of say, $100, from your account to the other. In this case, the bank enjoys all the power since the bank was the sole updater of the ledger that holds the balances of everyone registered in the system. This is, however, not the case in the Bitcoin System. The Bitcoin mining protocol solves this problem in a very creative way.
Bitcoin Mining
Unlike the banking system, anyone can participate in the process of updating the ledger in the Bitcoin blockchain. Bitcoin mining is the process of creating new bitcoins by solving a computational puzzle. In simple words, All you need to do is guess a random number that solves a puzzle generated by the system(known as the golden nonce). The more powerful your computer, the more guesses it can make per second, thus increasing the chances of you winning the race. If you guess the right number, you are allowed to append a new block of bitcoin transactions to the blockchain thus updating the public decentralized ledger.
Mining Difficulty
Now that we know the process of bitcoin mining, we will talk about the “difficulty” in the mining network in terms of difficulty graphs. Here is one:
Satoshi Nakamoto, the creator of Bitcoins, devised the rules of Bitcoin mining in such a way that the more miners the network has, the harder it gets to solve the hash puzzle. In simple words, if more miners join, it will be harder to solve the puzzle; if many of them drop off the problem becomes easier to solve. It is clearly visible in the graph as well. Wherever this a peak in the Hash rate, the difficulty rises with it and vice versa. Satoshi did this to achieve a steady flow of currency through the network and in the long run, prevent inflation. The difficulty adjusts itself according to the mining power currently active in the network. The goal is to ensure that a new block is appended to the blockchain every 10 minutes(on average).
Mining Evolution
Initially, when bitcoin first came into existence, the only people who were mining the bitcoin network were Satoshi and some of his colleagues with their own PCs. Back then, when Nakamoto mined the genesis block, bitcoin’s difficulty was 1 and hence CPU mining was enough as the difficulty target was low.The current difficulty is 13,912,524,048,946. Clearly, a lot has changed over the last decade and bitcoin mining is no longer profitable using normal PCs.
Over the next few years, Bitcoin started to gain popularity and miners started to look for more powerful methods to mine Bitcoin. Consequently, an “arm’s race begun”.
- GPU Mining
Gradually people started to move towards GPU mining. The work that could be done by a single GPU was equivalent to that done by 30 CPU. GPUs have a lot of hardware built into them for doing video processing that can’t be utilized for mining. Also, they didn’t have the greatest cooling characteristics when you stack them against one another. All these factors combined deviated people away from GPU mining. It costs around $270 today.
2. FPGA Mining
Another evolution came later on with FPGA mining. They were pieces of hardware that could be connected to a computer to run a set of calculations. They were 3 to 100 times faster than GPUs. Using FPGAs miners were able to reach 1 gigahashes per second. However, bitcoin mining demanded FPGAs to work harder than they were designed for.
With the 2015 difficulty, it would still take around 50 years to find a new block.
People started facing difficulties configuring them as well. Also, they were too expensive when compared with GPU miners and eventually lost popularity owing to the emergence of ASIC mining. It costs around $2000 today.
3. ASIC Mining
ASIC(Application Specific Integrated Circuits) chips were developed and designed to do nothing but Bitcoin mining. Unlike GPUs, CPUs, and FPGAs, they can’t be used to do anything else. ASIC miners are the current mining standard. It has the capability to compute 2 terahash per second. The development of more efficient models of ASICs is ongoing, but the growth in efficiency has notably slowed. It now costs around $3000.
Is Bitcoin Mining still profitable?
Well, it’s not that simple. The correct answer is it depends “on a lot of factors”. When it comes to computing the cost of mining, there are a number of things you need to consider.
- Hash Rate
A hash is a mathematical problem that a miner’s computer needs to solve. Hash rate is simply the number of guesses your computer can make per second. Hash rate is measured in Mega hash(MH/s) per second or Giga hash per second(GH/s). They may even go till Tera hash(TH/s) or Peta hash per second(PH/s). Your Probability of finding the next increases as your Hash power increases.
2. Block Reward
A block reward refers to the number of bitcoins you get if you successfully mine a block of the currency. The reward halves every 210,000 blocks, or roughly every four years. Halving took place recently on 11th May 2020. The current number of Bitcoins awarded per block is 6.25 Bitcoins. Halving impacts your profitability immensely.
3. Electricity Cost
You have to be wary of your electricity rate in order to calculate the profitability. This can be easily found out through your monthly electricity bill. This is extremely pivotal because miners consume a lot of electricity. This power is utilized to keep the rigs running as well as cooling them down as these machines emit large amounts of heat. Due to this reason many mining organizations, prefer to establish rigs in naturally cooler environments like Iceland. If the price of electricity in the region where you plan to mine bitcoins is high, mining will not be profitable for you.
4. Pool Fees
If you are in a mining pool then the pool will take a percentage of your earnings for rendering their services. Also, you should consider studying the laws of your country regarding the taxation on crypto-mining to better understand your profit margins.
5. Bitcoin’s Price
Since no one knows what the price of bitcoin will be in the future, it’s hard to predict if Bitcoin mining will be profitable. If you are planning to convert your hard-earned bitcoins into some other currency in the future this variable will have a significant impact on your profitability.
6. Increase in difficulty
This is probably the most important and elusive variable among all those listed above. The argument is that since no one can predict how many miners would join the bitcoin network in the coming years, neither can anyone predict how difficult it will be to mine bitcoin at some later point in time.
The last two factors are the reasons why no one will ever be able to give a complete answer to this question. Once you have taken into account all these variables, you can plug these values into a Bitcoin mining calculator to have a rough idea of how much you will earn each month. If you can’t get a positive result in the calculator, it probably means you don’t have the right conditions for mining to be profitable for you.
Some bitcoin mining calculators are www.nicehash.com and www.minerstat.com.
Conclusion
My goal was not to completely discourage you but make you aware of the challenges you may face in mining Bitcoin. This requires a basic understanding of how Bitcoin mining actually works and I have tried to explain it in the simplest manner possible. Bitcoin mining bears many similarities to gold rushes. Historical gold rushes are brimming with accounts of youngsters hurrying off to discover fortune and definitely, a large number of them lose all that they have. A few have become super-wealthy, however, even those that do for the most part suffer loads of difficulty en route. However, if your calculations and margins are correct you are surely going to make it big in the bitcoin market.
To learn more about Bitcoin, I recommend visiting the Youtube Channel 99Bitcoins:https://99bitcoins.com.
