How Bitcoin Mining Works
Bitcoin mining is the method by which new bitcoins are created. The process involves highly powered computers solving complex mathematical problems to produce new bitcoins and verifying the integrity of transactions happening in the bitcoin network. As a result, bitcoin miners get two rewards. Firstly, new bitcoins are produced as a result of mining. And secondly, miners are paid a transaction fee for helping to maintain the blockchain or the bitcoin network. The compensation is given to miners for adding every block of transactions to the blockchain. People often will use bitcointrader.ai or similar platforms to buy into the system over mining these days, but that doesn’t mean it doesn’t have its uses.
Just like in traditional financial systems, all transactions are documented by banks or the company. The same is done through the blockchain, which is a vast network that keeps a public record of all bitcoin transactions. The miners verify this and make sure it is accurate by combining multiple transactions in a “block” and releasing it into the blockchain from where it derives its name. The records are then maintained by nodes to be referenced in the future. A good analogy would be the mining of precious metals such as gold from the earth’s crust, every mined rock or ore produces a certain amount of gold that is then available for any number of uses.
The amount of bitcoin that is released with every mined block changes over time and is called the “block reward”. There can only be a finite amount of bitcoin that can be ever mined as a result of the mathematics involved, the theoretical maximum limit of bitcoin currently is 21 million. Hence the difficulty of mining each block raises every 4 years or 210,000 blocks mined. In 2009 during bitcoin’s inception, 50 bitcoins were created with each mined block. In 2013, that number was 25, in 2018 it was 12.5, and in May of 2020, it came down to 6.25. This will continue until 2140 after which miners will not be rewarded with new bitcoins, but will still be compensated with a miner’s fee to incentivize to keep the network secure and working.
Is Bitcoin Mining Profitable now?
Bitcoin was relatively easier to mine in the early years and was mostly done on normal personal computers. Since its rapid adoption, more and more people started to see the profitability of bitcoin mining. As a result, both competition and the difficulty of bitcoin mining grew to make it harder to be profitable over time. Bitcoin mining shot up the demand for computing hardware such as powerful processors and graphic cards. At times, the demand was so high that it caused a shortage of graphic cards and catapulted the price to new heights disappointing people across the world.
New hardware requirements were not the only problems when it came to bitcoin mining. Other factors such as storage space and electricity cost proved to be some significant obstacles. What was once possible on personal computers now required huge server farms dedicated solely for bitcoin mining. Some of these mining farms also shifted to cold countries in Northern Europe to conserve energy costs. Hence the upfront cost of setting up a bitcoin mining setup for the common person is too high with little returns rendering it not profitable for individuals anymore. For small businesses, it can be a calculated risk that may or may not pay off in the end. Hence the time for bitcoin mining to be lucrative and easy is long gone. A slightly safer method to make money is bitcoin investment which comes with its own sets of caveats and precautions that one needs to be mindful of. Plus, the volatile price of bitcoin impacts both bitcoin mining and bitcoin investment resulting in more uncertainty in both fields.
Because of the steep cost and competition of bitcoin mining, people have focused their attention on mining of other cryptocurrencies such as ethereum or litecoin. The process of mining them is similar to the way bitcoin is mined with few varying technical details. But since cryptocurrencies other than bitcoins aren’t as popular or widely used and there are so many of them, going on to mine them is also a calculated risk that might or might not pay off. It all depends on your resources, research, and determination towards this venture. Regardless of whether crypto mining can be profitable or not, it has long been proved over time that mining is no longer an easy path to riches.