What is Bitcoin Mining and is it Profitable?
Last updated: 10/16/18
If you’re heard about Bitcoin then you probably heard about Bitcoin mining as well – the concept of “creating” Bitcoins from your computer. The following post will give you a complete overview of what Bitcoin mining is and is it still profitable today.
Bitcoin mining is the process of updating the ledger of Bitcoin transactions known as the blockchain. Mining is done by running extremely powerful computers (known as ASICs) that race against other miners in an attempt to guess a specific number. The first miner to guess the number gets to update the ledger of transactions and also receives a reward of newly minted Bitcoins (currently the reward is 12.5 Bitcoins).
Today, in order to be profitable with Bitcoin mining you need to invest heavily in equipment, cooling and storage. It’s not possible to mine profitably with a PC or a GPU at home. You can calculate your profitability using a Bitcoin mining calculator.
If you want a more detailed non technical explanation about Bitcoin mining keep reading this post (there’s also a video version below). Here’s what we’ll go over:
- What is Bitcoin mining and how does it work?
- Mining difficulty
- The evolution of Bitcoin miners
- Bitcoin mining pools
- Is Bitcoin mining profitable?
- Step-by-step guide for mining at home
- Additional types of mining
- Frequently asked mining questions
Don’t like to read? Watch our video version of this guide
1. Why do we even need Bitcoin mining?
Bitcoin is a decentralized alternative to the banking system. This means that the system can operate and transfer funds from one account to the other without any central authority.
With a trusted central authority, transferring money is easy. Just tell the bank you want to remove $50 from your account and add it to someone else’s account. In this example, the bank has all the power because the bank is the only one that is allowed to update the ledger that holds the balances of everyone in the system.
But how do you create a system that has a decentralized ledger? How do you give someone the ability to update the ledger without giving them too much power—in case they become corrupt or negligent in their work?
Well, Bitcoin’s rules—also known as the Bitcoin protocol—solves this in a very creative way I like to call “Who Wants to Be a Banker?”
How Bitcoin mining works
In short, anyone who wants to participate in updating the ledger of Bitcoin transactions, known as the blockchain, can do so. All you need is to guess a random number that solves an equation generated by the system. Sounds simple, right?
Of course, this guessing is all done by your computer. The more powerful your computer is, the more guesses you can make in a second, increasing your chances of winning this game. If you manage to guess right, you earn bitcoins and get to write the “next page” of Bitcoin transactions on the blockchain.
Here’s a more detailed breakdown of the mining process:
1. Once your mining computer comes up with the right guess, your mining program determines which of the current pending transactions will be grouped together into the next block of transactions. Compiling this block represents your moment of glory, as you’ve now become a temporary banker of Bitcoin who gets to update the Bitcoin transaction ledger known as the blockchain.
2. The block you’ve created, along with your solution, is sent to the whole network so other computers can validate it. It’s a bit similar to a Rubik’s cube: The solution is very hard to achieve but very easy to validate.
3. Each computer that validates your solution updates its copy of the Bitcoin transaction ledger with the transactions that you chose to include in the block.
4. The system generates a fixed amount of bitcoins (currently 12.5) and rewards them to you as compensation for the time and energy you spent solving the math problem.
5. Additionally, you get paid any transaction fees that were attached to the transactions you inserted into the next block.
6. All the transactions in the block you’ve just entered are now confirmed by the Bitcoin network and are virtually irreversible.
Here’s a two-minute video showing the process of blocks and confirmations.
So that’s Bitcoin mining in a nutshell. It’s called mining because of the fact that this process helps “mine” new Bitcoins from the system. But if you think about it, the mining part is just a by-product of the transaction confirmation process. So the name is a bit misleading, since the main goal of mining is to maintain the ledger in a decentralized manner.
As you can imagine, since mining is based on a form of guessing, for each block, a different miner will guess the number and be granted the right to update the blockchain. Of course, the miners with more computing power will succeed more often, but due to the law of statistical probability, it’s highly unlikely that the same miner will succeed every time.
2. Mining difficulty
Now that you know what Bitcoin mining is, you might be thinking, “Cool! Free money! Where do I sign up?” Well, not so fast…
Satoshi Nakamoto, who invented Bitcoin, crafted the rules for mining in a way that the more mining power the network has, the harder it is to guess the answer to the mining math problem. So the difficulty of the mining process is actually self-adjusting to the accumulated mining power the network possesses.
If more miners join, it will get harder to solve the problem; if many of them drop off, it will get easier. This is known as mining difficulty.
Why on earth did Satoshi do this?
Well, he wanted to create a steady flow of new bitcoins into the system. In a sense, this was done to keep inflation in check. Mining difficulty is set so that, on average, a new block will be added every ten minutes (i.e., the number will be guessed every ten minutes on average).
Now, remember, this is on average. We can have two blocks being added minute after minute and then wait an hour for the next block. In the long run, this will even out to ten minutes on average.
As you can imagine, this type of self-adjusting mechanism has created a sort of “arms race” to get the most efficient and powerful miners as soon as possible.
3. The evolution of Bitcoin miners
When Bitcoin first started out, there weren’t a lot of miners out there. In fact, Satoshi, the inventor of Bitcoin, and his friend Hal Finney were a couple of the only people mining Bitcoin back at the time with their own personal computers.
Using your CPU (central processing unit—your computer’s brain and an integrated component in any computer) was enough for mining Bitcoin back in 2009, since mining difficulty was low. As Bitcoin started to catch on, people looked for more powerful mining solutions.
Gradually, people moved to GPU mining. A GPU (graphics processing unit) is a special component added to computers to carry out more complex calculations. GPUs were originally intended to allow gamers to run computer games with intense graphics requirements. Because of their architecture, they became popular in the field of cryptography, and around 2011, people also started using them to mine bitcoins. For reference, the mining power of one GPU equals that of around 30 CPUs.
Another evolution came later on with FPGA mining. FPGA is a piece of hardware that can be connected to a computer in order to run a set of calculations. They are just like GPUs but 3–100 times faster. The downside is that they’re harder to configure, which is why they weren’t as commonly used in mining as GPUs.
Finally, around 2013, a new breed of miner was introduced: the ASIC miner. ASIC stands for application specific integrated circuit, and these were pieces of hardware manufactured solely for the purpose of mining Bitcoin. Unlike GPUs, CPUs, and FPGAs, they couldn’t be used to do anything else. Their function was hardcoded into the machine.
Today, ASIC miners are the current mining standard. Some early ASIC miners even appeared in the form of a USB, but they became obsolete rather quickly. Even though they started out in 2013, the technology quickly evolved, and new, more powerful miners were coming out every six months.
After about three years of this crazy technological race, we finally reached a technological barrier, and things started to cool down a bit. Since 2016, the pace at which new miners are released has slowed considerably.
4. Bitcoin mining pools
Assuming you’re just entering the Bitcoin mining game, you’re up against some heavy competition. Even if you buy the best possible miner out there, you’re still at a huge disadvantage compared to professional Bitcoin mining farms.
That’s why mining pools came into existence. The idea is simple: miners group together to form a “pool” (i.e., combine their mining power to compete more effectively). Once the pool manages to win the competition, the reward is spread out between the pool members depending on how much mining power each of them contributed. This way, even small miners can join the mining game and have a chance of earning Bitcoin (though they get only a part of the reward).
Today there are over a dozen large pools that compete for the chance to mine Bitcoin and update the ledger.
5. Is Bitcoin mining profitable?
The short answer is “probably not”; the correct (and long) answer is “it depends on a lot of factors.”
When calculating Bitcoin mining profitability, there are a lot of things you need to take into account such as:
Hash rate: A Hash is the mathematical problem the miner’s computer needs to solve. The hash rate refers to your miner’s performance (i.e., how many guesses your computer can make per second). Hash rate can be measured in MH/s (mega hash per second), GH/s (giga hash per second), TH/s (terra hash per second), and even PH/s (peta hash per second).
Bitcoin reward per block: The number of Bitcoins generated when a miner finds the solution. This number started at 50 bitcoins back in 2009, and it’s halved every 210,000 blocks (about four years). The current number of bitcoins awarded per block is 12.5. The last block-halving occurred in July 2016, and the next one will be in 2020.
Mining difficulty: A number that represents how hard it is to mine bitcoins at any given moment considering the amount of mining power currently active in the system.
Electricity cost: How many dollars are you paying per kilowatt? You’ll need to find out your electricity rate in order to calculate profitability. This can usually be found on your monthly electricity bill. The reason this is important is that miners consume electricity, whether for powering up the miner or for cooling it down (these machines can get really hot).
Power consumption: Each miner consumes a different amount of energy. You’ll need to find out the exact power consumption of your miner before calculating profitability. This can be found easily with a quick search online or through this list. Power consumption is measured in watts.
Pool fees: If you’re mining through a mining pool (you should), then the pool will take a certain percentage of your earnings for rendering their service. Generally, this would be somewhere around 2%.
Bitcoin’s price: Since no one knows what Bitcoin’s price will be in the future, it’s hard to predict whether Bitcoin mining will be profitable. If you are planning to convert your mined bitcoins to any other currency in the future, this variable will have a significant impact on profitability.
Difficulty increase per year: This is probably the most important and elusive variable of them all. The idea is that since no one can actually predict the rate of miners joining the network, neither can anyone predict how difficult it will be to mine in six weeks, six months, or six years from now. In fact, in all the time Bitcoin has existed, its profitability has dropped only a handful of times—even at times when the price was relatively low.
The last two factors are the reason no one will ever be able to give a complete answer to the question “is Bitcoin mining profitable?”
Once you have all of these variables at hand you can insert them into a Bitcoin mining calculator (as can be seen below) and get an estimate of how many Bitcoins you will earn each month. If you can’t get a positive result on the calculator, it probably means you don’t have the right conditions for mining to be profitable.
|BTC/USD Exchange Rate|
|Pool Fees %|
|Hardware Cost (USD)|
|Power Cost (USD/kWh)|
|Duration||Calculation||Estimated Profit in USD|
Pure Earning in BTC:
Pool Fee in BTC:
Earning After Fee in BTC:
Earning in USD:
Power Cost in USD:
Earning After Power Cost in USD:
Earning After Hardware Cost in USD:
6. How to mine Bitcoins at home: A step-by-step guide
Now you know all you need to know about Bitcoin mining! Wanna know how to actually mine? Here’s a step-by-step guide:
Step 1 – Find out if mining is profitable
Before even starting out with Bitcoin mining, you need to do your due diligence. The best way to do this, as we’ve discussed, is through the use of a Bitcoin mining calculator. Bear in mind that mining costs money! If you don’t have a few thousand dollars to spare on the right miner, and if you don’t have access to cheap electricity, mining Bitcoin might not be for you.
Step 2 – Get your miner
Once you’re done with your calculations, it’s time to get your miner! Make sure to go over our Bitcoin mining hardware reviews to understand which miner is best for you, if you haven’t done it already in step 1.
Bitcoin miner comparison table
Step 3 – Get a Bitcoin wallet
You’ll need a Bitcoin wallet in which to keep your mined Bitcoins. Once you have a wallet, make sure to get your wallet address. It will be a long sequence of letters and numbers. Each wallet has a different way to get the public Bitcoin address, but most wallets are pretty straightforward about it. Notice that you’ll need your PUBLIC Bitcoin address and not your private key (which is like the secret password for your wallet).
For a complete tutorial on Bitcoin wallets, watch this video.
Step 4 – Find a mining pool
When you join a mining pool, you’ll be given smaller and easier problems to solve. All of your combined work will make the pool more likely to solve the original problem and earn the bitcoin reward and transaction fees. The profits will be spread out throughout the pool based on contribution.
Basically, you’ll make a more consistent amount of Bitcoins and will be more likely to receive a return on your investment.
When choosing which mining pool to join, make sure to ask the following questions:
- What is the reward method? (Proportional/Pay Per Share/Score Based/PPLNS—more on that here)
- What fee does the pool charge for mining and the withdrawal of funds?
- How frequently does the pool find a block (i.e., how frequently do I get rewarded)?
- How easy is it to withdraw funds?
- What kind of stats does the pool provide?
- How stable is the pool?
Once you are signed up with a pool, you’ll get a username and password for that specific pool, which you will use later on.
Step 5 – Get a mining client (aka mining program/software)
Controlling and monitoring your mining rig requires dedicated software. Depending on what mining rig you have, you’ll need to find the right software. Many mining pools have their own software, but some don’t. In case you’re not sure which mining software you need, you can find a list of Bitcoin mining software here. Also, if you want to compare different mining software, you can do it here.
Step 6 – Start mining
Connect you miner to a power outlet and fire it up. Make sure to connect it to your computer as well (usually via USB), and open up your mining software. The first thing you’ll need to do is to enter your mining pool’s address, username, and password.
Once this is configured, you will start collections shares, which represent your part of the work in finding the next block. According to the pool you’ve chosen, you’ll be paid for your share of coins—just make sure that you enter your address in the required fields when signing up to the pool.
Here’s a full video of me mining in action:
7. Other types of mining
Cloud mining: Websites that “mine for you”
Cloud mining means that you do not buy a physical mining rig but rather rent computing power from a mining company and get paid according to how much mining power you own. At first, this sounds like a really good idea, since you don’t have to go through all of the hassle of buying expensive equipment, storing it, cooling it, and monitoring it.
However, when you do the math it seems that none of these cloud mining sites are profitable. Those that do seem profitable are usually scams that don’t even own any mining equipment; they’re just elaborate Ponzi schemes that will end up running away with your money.
As a general rule of thumb, I’d suggest avoiding cloud mining altogether. If you still want to pursue this path, make sure to make the right calculations before handing over any funds.
Mining on a mobile phone
Some mobile apps claim to mine Bitcoin on your phone. While in theory, this is possible, due to the low processing power phones have compared to ASIC miners, you’ll probably end up draining your phone’s battery much faster and make a very small fraction of bitcoin in return.
The apps that allow this act as mining pools for mobile phones and distribute earnings according to how much work was done by each phone. Remember, mining is possible with any old computer—it’s just not worth the electricity wasted on it because the slower the computer, the smaller the chances are of actually getting some kind of reward.
For reference, mining was demonstrated in theory on a 55-year-old computer some time ago by IBM—and the result was of course, that it’s not worth it.
Web mining: Sites that “mine through you”
Somewhere around 2017, the concept of web mining came to life. Simply put, web mining allows website owners to “hijack,” so to speak, their visitors’ CPUs and use them to mine Bitcoin. This means that a website owner can make use of thousands of “innocent” CPUs in order to gain profits. However, since mining Bitcoins isn’t really profitable with a CPU, most of the sites that utilize web mining mine Monero instead. Up until today, over 20,000 sites have been known to utilize web mining.
The concept of web mining is very controversial. From the site’s visitor perspective, someone is using their computer without consent to mine Bitcoins. In extreme cases, this can even harm the CPU due to overheating. From the site owner’s perspective, web mining has become a new way to monetize websites without the need for the placement of annoying ads. Also, the site owner can control how much of the visitor’s CPU he wants to control in order to make sure he’s not abusing his hardware.
For more information about web mining, you can read this post.
8. Three questions I get asked a lot:
Isn’t mining a waste of electricity?
There’s been a lot of criticism regarding the energy consumption that Bitcoin mining employs worldwide. I believe this video from Andreas Antonopoulos give a different view of how Bitcoin mining is actually optimizing energy consumption around the world:
Can’t Google start mining Bitcoin and blow out the competition?
Yes it can—but it won’t do it much good. The reason is that Google’s servers aren’t fit for solving the Bitcoin mining problem in the same way that ASICs are. For reference, if Google harnesses all of its servers for the sole purpose of mining Bitcoin (and abandons all other business operations), it will account for a very small percent (less than 0.001%) of the total mining power the Bitcoin network currently has.
Isn’t Bitcoin mining centralized by the hands of a few Chinese companies?
At the moment, the answer is “yes.” But due to the fact we’ve reached a technological barrier in miner development (which originally led to the centralization of mining), it’s now possible for new companies outside of China to take more of the market share.
Here’s another great explanation by Andreas on this matter:
And finally, should I mine Bitcoin?
Now that you’ve finished this extensive read, you should be able to answer this question yourself. Keep in mind that sometimes there might be better alternatives to Bitcoin mining in order to produce a higher return on your investment. For example, depending on Bitcoin’s price, it might be more profitable to just buy Bitcoins instead of mining them. Another option would be to mine altcoins that can still be mined with GPUs, such as Ethereum, Monero, or Zcash.
If you still have any questions, feel free to leave them in the comment section below. Happy mining!
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