Bitcoin mining dynamics is intimidating. There is advanced terminology and technology to conquer. Information can be misleading. Even seasoned miners may neglect a basic understanding of the industry. As miners ourselves we want to help. This article provides an overview of crypto-mining, with a focus on its grandfather Bitcoin (BTC).
Discover how cryptocurrency was first introduced to the world, how BTC coins are found, and what hardware is used to mine. Mining profitability, return-of-investment (ROI), pools, and geography of mines are also covered. Important terms as well as mining tips and facts have been sprinkled throughout. Enjoy!
Foundations of Crypto-Mining
Cryptocurrency mining has been around since the advent of Bitcoin. In the midst of the 2008 financial crisis an alternative idea to central banking and fiat money spawned. In January 2009 the illusive Satoshi Nakamoto released Bitcoin v0.1 Alpha on Bitcoin.org for public download (accessed via WayBack Machine). Stating:
“Bitcoin is a new electronic cash system that uses a peer-to-peer network to prevent double-spending. It’s completely decentralized with no server or trusted parties”.
Cyberpunks and libertarians cheered. Hal Finney and Satoshi mined some of the first blocks on their home computers completing the first-ever BTC transactions. The ball was rolling and there was no looking back. Hal shares his enthusiasm on Twitter:
Thereafter, the crypto-mining industry took off. Computer hashing power and network size has exponentiated for several coins. Increased machine hashing provides greater miner revenue. Networks are the cumulative hashing power of all miners of a specific coin. Larger networks stabilize the system and prevent so-called 51% attacks.
The BTC mining industry’s economic value mirrors its technological advances. In 2019, the BTC mining market reached a staggering $7 billion. This figure includes 70% mining revenue and 30% hardware sales (Statista).
How BTC Mining Works
To earn coins miners compete with each other. The BTC miner who solves a hashing puzzle the quickest wins a reward. The winner verifies a block of transactions. On average, a block is found every 10 minutes.
Mining nodes, or miners, are the dedicated computers which find the blocks to add onto the blockchain. The blockchain is the public ledger, or log, of all previous blocks of transactions. Full nodes, which communicate with the miners, are often run by mining pools. These nodes store the entire blockchain, continually updating it.
SHA-256 is the type of cryptographic hashing algorithm used by miners to find a block. Proof-of-Work, or PoW, is a consensus algorithm. PoW allows miners and nodes to agree data are correct. Mutual consensus ensures transparency and trust of the network. This process of autonomous self-regulation is known as Decentralized Ledger Technology.
Over 450 different PoW coins are now mined. However, hard- and software specs vary. For example, not all PoW coins use a SHA-256 algorithm to mine, several use Equihash.
Hardware & Software
When crypto-mining broke the scene CPUs (central processing units) and GPUs (graphic processing units) could effectively mine, run a node, and operate a wallet. Nowadays, the BTC industry has specializations. Only ASICs (application-specific integrated circuits) mine BTC, whilst servers run nodes, and exchanges or third parties offer wallets.
CPU and GPU rigs may be modifiable. For example, GPUs can mine Grin or Monero with different software installations. Whilst ASICs are not interchangeable. ASICs come complete with hardware and software. You cannot take an ASIC which mines Dash, and convert it to mine Bitcoin.
GPU and CPU crypto-miners usually operate at home with DIY mining rigs. Whereas ASICs mostly run at farms. This is because ASICs are loud, heavy, and power intensive. Mining farms are also known as data centers, or mines.
Furthermore, ASIC manufacturers release firmware updates on their websites which may improve algorithm capabilities or enhance security measures. Prompt your data center to install authorized firmware updates when available.
Beware, third party ‘hashing amplification’ software is available but may have negative consequences. Manufacturer warranties become automatically void. Overclocked machines may experience shortened lifetimes or frequent repairs.
BTC Miner Rewards
Satoshi believed profits would incentivize miners and keep them honest. Thus, the finder of a block receives a block reward and transaction fees. If two or more miners simultaneously find a block it is orphaned.
Block rewards are also the creation of new coins. Around the year 2140, all 21 million BTC will have come into existence. Whereafter, miner compensation becomes transaction fees alone.
Block rewards halve every four years or every 210,000 block intervals. In 2020, the block reward went from 12.5 to 6.25 BTC. Around 2024, it will go to 3.125 BTC. Halving continues until all coins have become mined. This allows the BTC inflation rate to be controlled. Unlike financial institutions who print fiat, and manipulate interest rates, driving up inflation.
Profitability calculators are widely available, but pay attention to the preset parameters. Earnings are variable following the volatility of coin markets and network sizes.
Electricity prices also vary per geographical location, season, and machine load. At data centers it usually works out that the more machines you own, the lower the tariff.
When purchasing machines, particularly ASICs, it is important to pay attention to efficiency. Efficiency is the watt per terahash ratio (W/TH or J/TH). The lower the ratio, the more earnings you get to keep. The higher the ratio, the more coins go towards running costs. Thus, older generation machines are cheap to buy, but earn less profit than newer ones.
Let’s do a quick example of ASIC efficiency together. Here is an older generation Antminer S9, released 2017, compared to a newer generation Antminer S19, released 2020:
As revealed, the S19 has a lower efficiency ratio of 34. It earns a healthy 38% profit margin, but costs more to buy than the S9. At the time of writing this the S9 has a high efficiency rating and makes no profit (ASICminervalue, at 6¢ power). To learn how to calculate profit margin calculations see this post.
ASIC Return of Investment
The price of ASICs correlates to a ROI of around 12 months. That is, after a year of cryptocurrency mining one could expect the machine paid off. Although, due to price volatility ROIs generally take a few months longer than projected.
GPU and CPU mining is individual. Coin values and DIY rig quality affect profitability and ROI.
BTC Mining Services
Pools are collectives of hashing power. The BTC network is so large that the probability of finding a block alone is slim. Individual mining is pointless. To maximize profits, the majority of present-day crypto miners take part in pools. Pooled hash rates provide miners with a greater probability of finding blocks.
Miners prefer contributory-based share plans. A share is the total terahash amount contributed to the pool by a miner’s workers. Workers are the ASICs, or crypto-mining machines.
Common pool payout plans are: pay-per-share (PPS), full-pay-per-share (FPPS), and pay-per-last-N-share (PPLNS). For their services, mining pools incur fees of up to 4% of a miner’s revenue.
PPS pays a set amount for contributed shares, regardless if the pool finds any blocks. Pools operating PPS do not share transaction fees with miners. Whilst PPS safeguards miners against zero earnings, it is risky for pools. If a pool running PPS finds many blocks they reap the profits. If they find very little blocks they may run into debt paying miners their usual shares.
FPPS, or PPS+, splits both block rewards and transactions fees amongst miners based on shares. When the BTC network experiences congestion, transaction charges can skyrocket. Thus, miner revenue from transaction fees can be up to 20% of profits and offset pool fees.
PPLNS is a bit more risky as it only pays clients for blocks found. Miners gain compensation for their valid shares back in time, plus transaction fees. If workers disconnect during this time window they lose rights to the next payout. Therefore, payments are no guarantee, but earnings in the long-term could be greater than with PPS.
Crypto-miners place their gear around the globe. But the majority of mines were in China until the 2021 bans. This is because hardware manufacturing and supply chains were located there. By hosting in Asia the miner cut down on lead times and import costs, quickening ROI. Other popular destinations include North America, Europe, and Russia.
Despite criticism, the Bitcoin mining industry is renewables-driven. Up to 80% of machines run on green power sources. Iceland uses only geothermal and hydro energy for crypto-mining. In China 60-90% of the power was hydro. Moreover, coal and nuclear-driven farms may use surplus electricity (Coinshares, Cambridge). Surplus energy is just that, extra electricity supplies beyond what is needed for consumption which would have otherwise been wasted.
Environmental disasters also play a role when choosing a sustainable hosting environment. Floods, earthquakes, land slides, as well as regional policies may jeopardize safety. So-called force majeure clauses free mines from obligation when such extraordinary events occur.
Local authorities can abruptly change protocol and place restrictions on mining. Increases in electricity tariffs or power outages for load reduction do happen. To best protect their assets, dedicated miners read up on local weather trends and government attitudes towards crypto-mining.
Since its emergence over a decade ago the crypto-mining industry has continued to evolve. Hardware capabilities and network hash rates have grown exponentially. New miners are always welcome, and exciting times are ahead.
Crypto-adoption is gaining firm footing. Financial institutions, like JP Morgan and PayPal are investing in Bitcoin. Therefore, signs show that BTC mining is not slowing down any time soon.
In conclusion, the dynamics of cryptocurrency mining is daunting. Profit is not an assurance. However, once understood, mining can become an exciting and fruitful pastime. Diligent research and perseverance usually pays off.
So. Let's start minting some coins!