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What is Bitcoin Mining and Is It Profitable?

In short, Bitcoin mining is a computer working to verify transactions on the Bitcoin network, hash them into a block and search for and try and work out mathematic algorithm that ensures the block is added to the blockchain.

There are millions of mining hardware machines, and they all have the same Bitcoin Core protocol downloaded, and they all work together to verify transactions and secure the network. The software is free and anybody can mine Bitcoin if they invest in the right hardware.

What's Bitcoin?

Bitcoin is a decentralized layer of trust: an open ledger with every single transaction validated and immutable once added to the blockchain.

To confuse things a little, there are actually no such things as bitcoins. It’s just a term used to help us quantify the value of data associated with a private address.

A private address is a a string of letters and numbers that you need to access the value added to that account. And every time a transaction is sent to or from that address the miners are the ones who do the work.

The decentralized aspect of Bitcoin is a large part of Bitcoin’s security. A decentralized network is a distributed network that works together to validate every transaction in the network, and it’s the miners and nodes who do that work.

This is opposed to centralized databases that make up payment networks and even the Internet, today. Think of PayPal. If you send a transaction through the PayPal network, the company provides the security and sends the transaction. That’s fine but you pay for that in a much lesser secure system, and in a centralized entity controlling your wealth.

How Do Miners Do The Work for Bitcoin?

Hundreds of thousands of miners and nodes work together to verify transactions, and because they are distributed around the world and are all storing the data on every device, there is no central point of control or failure.

The decentralized nature of Bitcoin needs a proof-of-work (PoW) system to help make it worthwhile for people wishing to use their computing power and electricity to help secure the system.

The Mining Process Explained

The mining process is the hardware device looking for any transaction that’s been broadcast to the Bitcoin network. The miner will pick up the transactions, and run it through the hash function SHA-256 twice and add them to the latest block.

The block is then sent to the nodes, who need to to reach consensus that they’re all legitimate transactions, and then send the block back to the mining network. The miners then compete with each other to solve a cryptographic algorithm.

The thousands of distributed mining software all frantically race each other to be the first one to solve the equation and get to add the block to the blockchain. The winning miner will receive the block reward, which is 12.5 BTC for now.

This reward is halved every 210,000 blocks, which is roughly every four years. The next Bitcoin halving is set to take place in May 2020, where the reward will be cut to 6.25 for every block. Four years later the reward will be halved again, and this will continue until the last fraction of a Bitcoin is mined in sometime around 2140.

The more miners that mine the higher the hashrate will go, which will speed up the process of adding new blocks to the chain. This could be a risk to the security for the network so to nullify this threat the difficulty is automatically readjusted every 2016 blocks, which is roughly every two weeks.

Is Mining Bitcoin Profitable?

Mining Bitcoin isn’t always profitable, and it depends on a few factors – the price of Bitcoin being the biggest factor. Obviously the higher the price the more profitable it will be, and at today’s prices after the crash nobody is making a $ profit mining BTC.

The cost of electricity is another huge factor, and it varies in different parts of the world. So the cost in your locality is something you need to consider if you’re thinking of getting into mining.

Also, be aware that large companies are spending hundreds of millions of dollars setting up huge mining farms next to power grids, and are striking up deals to get cheaper electricity.

Bitcoin mining hardware is also another factor to consider. It is very expensive, and there are hardware machines, such as application-specific integrated circuit

(ASIC) hardware machines that are built just to mine BTC.

The difference with normal RAM computing is that it processes various tasks, whereas ASICs computing is application specific, which means they’re designed only for mining BTC. Other forms of mining are cheaper, but their hashrate is less and they simply cannot compete with ASICs mining hardware. That said, GPU mining can still be profitable if the price is high enough and you join a mining pool.

Like all hardware, the ASICs mining rigs are also updated every couple of years, and so the expensive rigs that you buy today will be inferior in a couple of years. They will still be able to mine and compete, but to a lesser degree.

Round Up

Bitcoin Mining profitability depends on a few things, and is quite technical for the novice. That said, it is very rewarding on a personal level because you know you are really working to secure the most trusted and open network ever created.

Bitcoin isn’t run by any single entity but can be owned by everybody. Anybody can take part in the network and everybody can do his or her bit for the network.

Mining isn’t profitable right now, but if you’re in a position where you don’t have to sell your block reward to pay for the electricity, you can hodl and make profit when the price of BTC goes back up. After all, the companies spending millions on mining farms don't expect negative returns forever, do they?

Author: Tommy Limpitlaw