Cryptocurrency mining is a process where blocks are added to a blockchain, verifying transactions. It is also the process through which new Bitcoin and *some* altcoins are created.
What Is Mining?
Cryptocurrency mining is a process where blocks are added to a blockchain, verifying transactions. It is also the process through which new Bitcoin and *some* altcoins are created. Mining new Bitcoin requires miners to solve a cryptographic puzzle called the hash function. The first miner to do this successfully wins a reward called the mining reward and can add transactions into a new block on the blockchain.
How Does Bitcoin Mining Work?
Bitcoin miners need to solve a complex mathematical problem to be eligible to add a block to the blockchain. This requires enormous amounts of computing power and electricity. That is why Bitcoins are mined on mining farms, where computing power is combined to give miners a competitive advantage. Miners can successfully mine a block by correctly guessing a hash, which they can only do through brute force and computations. The hardware miners used for this purpose are Application-specific integrated circuits (ASICs). These special-purpose machines are specifically built for Bitcoin mining and need to be constantly renewed.
Once a miner has correctly guessed the hash, they receive the block reward. This block rewards halves every four years in a process that is commonly known as “halving.”
Is Bitcoin Mining Profitable?
Bitcoin mining is not profitable for retail miners that want to mine Bitcoin from their homes. The mining landscape has become too competitive, and it is too hardware-intensive for mining from home to be profitable. However, for institutional miners that can leverage economies of scale, mining can be highly profitable. Miners spend on ASICs and electricity and receive revenue from selling Bitcoin. Thus, the higher the price of BTC, the more profitable mining becomes. The lower the price of BTC, the more likely miners are to mine close to or below their break-even point.
Miner capitulation is the process when miners have to close their businesses due to low prices.
How Do You Start Bitcoin Mining?
In theory, anyone can start mining Bitcoin with the following equipment:
However, the fewer ASICs a miner has and the higher the electricity costs are, the less profitable the mining business will be.
Risks of Bitcoin Mining
Bitcoin mining can also be risky. For example, miners have enormous capital expenditures before starting a mining business due to the amount of hardware they have to acquire. This makes it only viable if a miner has a long-term competitive advantage. Furthermore, it is heavily regulated in many jurisdictions, making compliance with local laws another hoop miners have to jump through. Finally, the volatility of Bitcoin can force even well-capitalized miners into capitulation if they have to mine at a loss for too long.