Bitcoin mining may seem intimidating, especially with its industry jargon. However, with a little bit of basic knowledge, this seemingly intimidating process can become much simpler.
To start, the word Bitcoin can be used to refer to 3 things:
However, the 3 are fundamentally different and it's important to distinguish these differences to understand mining.
The best way to think of each of them is the following:
Thousands of people running computers make up the Bitcoin network. Each of these computers store the entire history of transactions that have taken place on the network in a special database. This is called the Bitcoin blockchain – 2 names for these computers are Bitcoin miners or Bitcoin nodes. They are rewarded for their participation in securing the Bitcoin network and validating Bitcoin transactions. Rewards are in Bitcoin (BTC).
As the name suggests, the blockchain is a chain of blocks. Each block contains the latest set of transactions.
New blocks are created by Bitcoin miners. However, only 1 miner can create each new block. To ensure that only 1 miner creates a block, all miners must compete to solve a difficult mathematical problem. The difficulty of this problem is dynamically adjusted so that a block is created roughly (but reliably) about every 10 minutes. The miner that achieves a solution first gets to validate all transactions and create the new block. This is called proof-of-work (PoW). In return for their efforts, they are rewarded with brand new Bitcoin (BTC), plus the transaction fees from all transactions within the block. The reward is currently 6.25 Bitcoin per block.
While solo Bitcoin miners may find it difficult to profit from the venture, those that join Bitcoin mining pools are far more likely to bring in a return. However, how much a Bitcoin miner can earn depends on several variables.
To make a profit with Bitcoin mining, returns must be enough to cover the cost of electricity power, plus the initial investment for the mining equipment. To give themselves the best chance of success, Bitcoin miners focus on cheap electricity, high-efficiency hardware, and a good Bitcoin mining pool.
Another aspect to consider is the tax on the Bitcoin mined. It may not be guaranteed that a miner makes a profit, but depending on the jurisdiction, you may need to pay tax.
Finally, the price of Bitcoin will ultimately determine how profitable a Bitcoin mining venture is. As mining equipment and electricity will be purchased in fiat currency, Bitcoin must maintain a high enough price for rewards to outweigh the costs.
With increasing competition, the price for profitable Bitcoin mining equipment has increased considerably. As large mining farms drive up demand and dominate the Bitcoin mining space, mining rigs have had to become more powerful, which in turn increases the price. While some ASIC miners can start from $500, a professionally built mining rig can cost as much as $15,000. It is likely to take more than a year to recoup your initial investment.
Once a Bitcoin mining rig is in place, it then has to be powered. Ideally, the cost of electricity is low but if a Bitcoin mining rig is running every single day, costs can soon start to pile up. The cost of electricity will also vary from region to region within your respective country.
As previously discussed, to stand a chance of a return, every miner needs to mine Bitcoin through a Bitcoin mining pool. However, there is a cost to join a Bitcoin mining pool. The operator of each pool will charge a percentage for use of the network. These pool fees typically range from 0.1–2.5% and are removed from the mined Bitcoin.
The final cost to consider is the fee required when selling any Bitcoin. If a user's intention is to sell all Bitcoin that is mined, a fee will need to be paid to the cryptocurrency exchange or broker used to facilitate the transaction. These fees will vary between exchanges, and can sometimes be minimal, but should still be factored into the overall cost.
Cloud mining comes with its risks due to the propensity for cloud mining operations to be scams. There have been cloud mining operations set up that accept Bitcoin as payment, and pay out investors in Bitcoin. However, some of these operations are ponzi schemes, paying out early investors with the deposits of present investors.
Be skeptical about the authenticity of the cloud mining operation if they are offering returns that seem unreasonable. It is useful to ask the following questions about the operation in the event that they are promising high returns: If they're getting such high returns, why do they need my money? Why don't they just mine the Bitcoin and keep it, rather than paying me a return for my investment?
That being said, there are safe Bitcoin cloud mining investment opportunities. Keep an eye on the returns that they are promising, as this is the best indication as to whether or not the opportunity is a scam.
Yes. The number of Bitcoins generated per block halves every 210,000 blocks, which is roughly every 4 years. The current number of BTC awarded per block is 6.25, but this will halve around the year 2024.
The amount of power needed to mine Bitcoin depends on the mining operation. The more miners in the operation, the more electricity is required to run them. Additional factors such as ventilation and cooling can drastically increase the amount of power that is required to power a mining operation.
Any computer can mine Bitcoin, including a phone. However, unless you are using an "ASIC" (Application Specific Integrated Circuit) to mine Bitcoin, it is unlikely that the computer will be profitable.
Bitcoin miners do not always make money. It depends on how much power they use, and the cost of electricity to run them. In the case of high electricity costs, miners are unlikely to make money.
Beginners can mine Bitcoin by getting their hands on second-hand mining equipment, or by simply instructing their desktop or laptop to mine. While neither case may be profitable, the experiment will give the beginner a rudimentary understanding of how mining works.
The time it takes to mine 1 Bitcoin depends on a number of factors:
Generally speaking, as time goes on, it will take longer and longer to mine 1 BTC.
The cost to mine 1 Bitcoin depends on a number of factors. The biggest contributing factor is how much a mining operation is paying for electricity. The higher the cost, the more it costs to mine 1 BTC. If the amount it costs to mine a Bitcoin exceeds the price of the Bitcoin, then the mining operation is mining Bitcoin at a loss. The other factors include the current block reward, and the amount of fees paid on each transaction in the blocks.
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