Mining is the process by which cryptocurrencies like Bitcoin confirm new transactions and add them to the existing historical - blockchain - record through new blocks. The process is energy intensive, so in return for the work they do, miners are rewarded with newly issued cryptocurrency. So how easy it to earn from mining crypto?
Bitcoin mining is the process that creates new bitcoin, adding them to the total supply, which has a fixed limit of 21 million, expected to be reached in the year 2140.
The first block - aka Genesis block - was mined on January, 3rd 2009, and since then at approximately 10 minute intervals, a new block has been added to the network.
The miner who publishes a block to the network receives a reward, which currently stands at 6.25 BTC. Given the high value of bitcoin, it’s no surprise that competition to become the miner who discovers the next block and claims the reward, is so intense.
To earn the right to broadcast the next block to the network and confirm the transactions contained within it, miners must use their computational power to solve a complex mathematical problem.
This is why Bitcoin is known as a Proof of Work (PoW) cryptocurrency: because miners must prove that they have completed the computational work required to calculate the correct solution.
While the calculation itself is meaningless, the work required to arrive there is not: it proves that the miner hasn’t cheated, and ensures that no single entity can discover all of the blocks and keep all the bitcoin rewards to themselves.
Think of it like a lottery where adding more computer power is like buying more tickets. Your chances of winning - finding the correct solution - increase, but so does your outlay, in terms of electricity. To be a profitable miner, the rewards earned from successfully mined blocks, must be greater than the cost of energy consumed in the process.
Miners also earn the transaction fees associated with the blocks they attempt to add to the blockchain, but those are of negligible value compared to 6.5 BTC reward.
The current reward for mining a new block on Bitcoin's blockchain. As of March 2021, one BTC is worth over $50,000
The BTC that is awarded to the miner who confirms each new block is also known as the “coinbase reward” – a term which was later claimed by the cryptocurrency exchange of the same name.
In the early days, Bitcoin could be mined using the GPU in an ordinary home computer. Today, miners must use specialist hardware known as application-specific integrated circuits, or ASICs. These are computer processors that have been optimised to solve the maths problem that is at the heart of bitcoin mining.
Solo mining – i.e. attempting to find new Bitcoin blocks using GPUs or ASICs that you control – is no longer profitable. Even with multiple ASICs linked together, you could toil away for weeks, months or longer and fail to discover a new block. In the meantime, you would be running up an expensive electricity bill, since these devices are power-hungry.
To solve this problem, and make mining more accessible to as many people as possible, bitcoiners have created mining pools. This entails a group of miners combining their hashpower (their collective computer processing power) to search for a new block together.
If any miner in the pool succeeds in this quest, the coinbase reward will be shared with all pool members proportionately to their hashpower.
For example, if you provide 5% of the hash power to the pool and the pool discovers a new block, you will receive 5% of the reward which (excluding pool fees) would amount to 0.3125 BTC.
It sounds like easy money, but if it was that easy, everyone would be doing it! The truth is that it is extremely hard to profit from cryptocurrency mining.
Once you factor in your hardware and electricity costs, any rewards you may earn from the pool can be consumed by overheads. That’s why most of the world’s bitcoin mining centres are situated close to renewable energy sources in regions where electricity is cheap and plentiful.
Unless you happen to own your own hydro electric dam or have a bank of solar panels, you will struggle to profitably mine bitcoin. That’s not to say it can’t be done by drawing power from the national grid, but you’ll certainly need to optimise your setup to ensure your ASICs are running as efficiently as possible.
Professional miners overclock their machines, to run them at performance levels above the manufacturer’s recommended settings. This should only be attempted by experienced miners, since care must be taken not to overheat the miners in the process, as solving one problem then creates another - the need to cool your mining operation, using up even more energy.
If you are determined to mine cryptocurrency, you’ll need to find the right location in which to set up a rig (cool, well vented, and well insulated or isolated to prevent noise complaints), and choose the right ASIC for your needs and budget. With that done, and your mining gear on its way, it’ll be time to consider which mining pool to join.
Choosing a mining pool comes down to some simple logic: the larger the size of the pool, in terms of hashpower, the more regularly they’ll find blocks. This will ensure a consistent stream of revenue.
However, due to the small portion of the hashpower you will supply to the pool, your share of the coinbase rewards will be miniscule. Joining a smaller pool will give you a larger share of the rewards, but payouts will be less frequent because the pool will discover less blocks.
There are also some more technical considerations that will guide your decision. If you are taking the DIY approach will require a fast internet connection with low latency in pinging the pool to share data.
Any delay in receiving data can waste precious time in searching for a solution to the next block. You ideally want a ping of under 200ms and as close to zero as possible.
Different pools charge different fees, so this will also need to be taken into account. You’ll also want to check the payout frequency; some pools will only pay out on scheduled dates, or once a minimum amount of BTC has been accrued in your wallet.
Pools that custody the miners’ rewards until they are distributed also incur a risk, since you are relying on them not to get hacked or hold onto funds. You may prefer to pick a pool that pays out directly into your own wallet.
Your last consideration should be the opportunity cost of investing in a mining pool. Can you get a similar or better rate of return on your investment elsewhere, when adjusted for the risk involved?
A better approach might be to use a service that hosts a mining rig for you. You pay for the machine and the electricity but everything else is taken care of. You can see your ROI via a dashboard and even work out a breakeven point. Here is an example from Compass Mining.
Summarising the process for using a Bitcoin Mining Hosting Service (referencing the tweet above).
Although we’ve focused on Bitcoin so far, there are in fact hundreds of cryptocurrencies that use a Proof of Work consensus mechanism and are thus mineable.
Comparison sites such as WhatToMine allow you to determine the most profitable coin to use based on your hashpower, ASIC type, and other factors such as network difficulty and market price.
Bitcoin is the most valuable cryptocurrency and therefore the most desirable, which is why its hashrate is multiples higher than that of any other PoW crypto. It may be the case that you’ll discover more blocks, and thus earn more rewards, from mining an alternative cryptocurrency such as Monero, Bitcoin Cash, or Ethereum Classic.
Because the profitability of each PoW coin can change, you’re not bound to mining any one cryptocurrency: with experience, you can learn to switch from one to another to maximise your revenue.
As with any other investment you are looking for upside. If the cryptocurrency is undervalued, or just getting established, you can be earning mining rewards of an asset that may greatly appreciate. So your first step is to do Fundamental Analysis.
If you’re a tech geek who loves getting hands-on and learning more about how things work, cryptocurrency mining can be rewarding. Setting up your own bitcoin mining rig will teach you more about crypto than hundreds of hours of tutorials and textbooks could.
From a knowledge perspective, then, mining could be worth a look. If you’re simply looking to earn a passive income from mining, and not attracted by the technical challenge, you are likely to struggle.
In addition to requiring frequent monitoring and maintenance, mining is barely profitable for the average user, which is why the practice has largely been commoditised by professional companies that can leverage economies of scale.
If you’re unsure whether mining would be profitable, use an online comparison tool that will allow you to enter your electricity cost and proposed hardware. This will give you an idea of the sort of profits you could make. Only then will you be able to decide if trying to earn crypto from mining is right for you..
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