Mining Bitcoin means mining snippets of code, called hashes, to confirm new blocks to be added to the blockchain: let’s see how.
Every 10 minutes or so, a new block is added to the Bitcoin blockchain, but to actually be added, in other words, concatenated with the previous one, it must be validated with a special code. This code is called a hash, and it is basically guessed by randomly extracting lots of hashes until the right one is found.
Bitcoin mining: how it’s done and what it’s for
This mining activity is fundamental to Bitcoin because all transactions that need to be recorded on the public blockchain must necessarily be entered into a confirmed block.
So effectively those who perform mining validate transactions, and without their work there would be no transactions validated, and therefore confirmed, on the blockchain.
Precisely because this activity is so important, the Bitcoin protocol requires that it be well remunerated.
For each new block, there are currently 6.25 BTC, or about $100,000, up for grabs, which is awarded to the miner who succeeds in confirming the block by extracting the correct hash.
This figure actually halves every 4 years or so, and the next halving will occur in the spring of 2024.
How to compete to mine Bitcoin
As can be easily understood, this is for all intents and purposes a competition, because such a prize is always and only cashed in by the first miner to find the validation hash.
Since such hashes are drawn randomly, the one who can draw the most hashes is more likely to find the right one that validates the block, and thus collect the prize.
This competition starts again every 10 minutes or so, because as soon as a block is validated, they start extracting hashes to try to validate the next one, one at a time.
It is worth adding, however, that the miner who validates a block also collects all the fees paid by the senders of the transactions entered in the block itself.
How to mine Bitcoin
Therefore, to mine Bitcoin, it is necessary to equip oneself with machines capable of mining as many hashes as possible.
Such machines are available on the market, although they are not cheap at all.
They are called ASICs, or Application Specific Integrated Circuits, and they do only one thing: they mine hashes.
In the old days, even simple computer CPUs, or at most particularly powerful graphics cards, could be used, but for several years now these tools have been uncompetitive.
Indeed, the key point is precisely competition. Those who mine using low-powered machines, such as computer CPUs or graphics cards, are only able to extract a limited number of hashes, thus greatly reducing the chances of succeeding in confirming a block.
Actually, nowadays only those who use ASICs have enough computing power to be competitive in their attempts to succeed in confirming a block and collect the prize. The others end up never collecting anything.
What are mining pools?
The problem is that there are some miners in the world who have so many synchronized ASICs, i.e., working in parallel to search for the single hash that validates a block, that it is not possible to compete with them if you have only a few machines.
For this reason, many small miners coordinate with each other by pooling the computing power of their machines, and acting as if they were one large miner, but composed of many small miners.
These organizations are called pools, and there are several of them. A single miner with a few machines cannot compete with the big miners, but the pools are large enough to do so.
This means there are two ways to mine Bitcoin.
The first is to do it yourself, investing huge amounts of money to buy many ASIC machines, at not at all cheap prices.
The second is to participate in a pool and share with other participants any prize won should you succeed in mining a few blocks.
The gains from mining activities
However, the key point is another.
This activity does indeed have costs, and in order to make money from it, the revenues must exceed those costs.
Apart from the initial cost of purchasing the machines, they consume huge amounts of electricity. Those who are forced to pay for electricity at high prices are likely to have such high costs that they cannot make a profit at all.
They make more money either from those who can pay little for electricity or from those who have free electricity available to them.
Moreover, revenues are by no means fixed, let alone guaranteed. Mining is a high-risk activity, the difficulty of which also varies over time.
Difficulty: what it is and what it is used for
To make sure that roughly one block is always being mined every 10 minutes or so, the Bitcoin protocol requires that the so-called difficulty be updated once every two weeks or so.
Difficulty is nothing more than, precisely, the degree of difficulty with which the right hash confirming a block can be found by mining them at random.
When the total computing power allocated worldwide on Bitcoin mining increases, the average time it takes to mine the right hash decreases. At that point, the difficulty increases so that the average duration of this process returns to 10 minutes.
Of course, the opposite also happens, that is, if the computing power goes down then the difficulty also goes down.
Thus, there will only ever be a new block to be mined every 10 minutes or so, no matter how much computing power is used, whether it is a lot, or whether it is a little.
Obviously, when the difficulty increases, so does the electricity consumption, and therefore the cost. In contrast, the reward remains the same, so above a certain level of cost, miners stop adding computing power. The opposite also applies, that is, if the difficulty decreases, consumption and costs also decrease.
The computing power allocated on Bitcoin mining in technical jargon is called hashrate.
The profitability of miners
No one knows exactly how much computing power is allocated overall on Bitcoin, but there are a posteriori estimates that depend on the difficulty and the average time to confirm a block, called block-time.
There are also estimates of the profitability of Bitcoin mining.
For example, lately an average of about $0.048 per Th/s of hashrate can be collected per day, if you participate in an effective pool or mine on your own with a well-optimized rig. However, the problem is the cost of electricity, which can change a lot. So anyone who wants to invest funds to buy BTC mining machines should always also contend with the cost they will be forced to pay for the electricity they consume.
There are also websites that allow people to calculate initial rough estimates by entering their own specific data, as opposed to relying on generic estimates that often differ from the actual data of individual miners.
It is worth mentioning that since Bitcoin mining earnings are in BTC, the profitability is also greatly affected by the market value of BTC, because if this goes down you actually make less money.
By now Bitcoin mining has become such a difficult business to do successfully, and a very expensive one, that in fact only professionals in the field are able to make money from it. For private citizens who have been doing it as a hobby for some time, the chances of being able to do it successfully are very limited indeed.
