How Does Bitcoin Mining Work and Why Is It Expensive?

The cryptocurrency industry is not only profitable for traders and investors. Cryptographic miners can also make healthy profits while contributing to the market, blockchain security, and network integrity, especially those who extract Bitcoin. But what exactly is the Bitcoin mining process and why is it so expensive to be a Bitcoin miner?

What is Bitcoin Mining?

The main goal of mining any cryptocurrency is to put new coins into circulation and increase supply. Many cryptocurrencies can be mined, and the mining industry has grown exponentially in recent years, with people looking to make money from home.

As Bitcoin uses the working test mechanism (PoW), the mining process is crucial to verifying transactions in your blockchain. So how does it all work?

When a miner joins the Bitcoin network, they become what is known as a “node.” These nodes are responsible for the circulation of coins and the verification of transactions. The Bitcoin network currently has tens of thousands of active nodes, with more added daily.

How does Bitcoin mining work?

Bitcoin mining requires solving very complex mathematical equations. These equations are cryptographic, with an alphanumeric string, known as a target hash, that holds the key to solving each problem. A destination hash starts with a string of zeros and then is followed by random letters and numbers, for example, 00000000000000006FCAq …

Miners must use certain types of hardware to solve these equations efficiently. A human cannot do it alone. Although Bitcoin mining may previously be carried out with simpler and less expensive hardware such as the CPU of your computer or laptop, now miners must use ASIC miners to keep up with the competition. We will discuss the cost of this type of hardware a little later.

Multiple guesses about the target hash of an equation can be thrown every second using an ASIC miner. These estimate numbers, or hashes, must be equal to or less than the target hash for a miner to receive the next block of transactions. When a miner receives a block and verifies it, the rest of the network must confirm that it has done so correctly. Once this is done, the block can be added to the general ledger.

This puzzle-solving process offers new Bitcoins that are put into circulation while raising the security and transparency levels of the Bitcoin blockchain. But this verification process has caused a lot of latency in the Bitcoin network, as there is now a transaction delay that is giving way to longer transaction times.

What are the rewards of Bitcoin mining?

It’s important to keep in mind that miners don’t do all of this for the goodness of their hearts. Bitcoin mining has a very tempting incentive. Each time a miner solves an equation and receives a block to verify, he receives a Bitcoin mining reward. The current reward for extracting a block is 6.25 BTC, which is currently almost $ 200,000 (give or take a few thousand with currency price fluctuations). So it’s safe to say that Bitcoin mining can be an incredibly lucrative business.

Miners also receive some voting power when they become a node within the Bitcoin network, which allows them to comment on decisions and developments that are made. Miners with more hash power have more influence in the voting process.

But Bitcoin mining is by no means easy or cheap. Also, many expensive items related to Bitcoin mining can make it inaccessible to some. So let’s discuss them.

Why is Bitcoin mining so expensive?

As mentioned earlier, the Bitcoin mining industry is now very competitive. People know how profitable it is, which has caused flocks of new miners to join the network in hopes of getting that big block reward. Unfortunately, the more nodes there are, the harder it will be for any miner to guess the correct hash and receive the next block to verify.

In addition, it is becoming increasingly difficult to extract Bitcoin because fewer and fewer currencies are available to mine as the week, month, and years go by. Bitcoin has a supply limit of 21 million BTC, and around 90% has already been extracted.

There are currently less than two million Bitcoin left to extract, so miners have to work harder to solve cryptographic equations and get the next block. It can take years for a node to receive just one block for mine, so the whole thing is certainly a waiting game.

Due to increasing competition and declining supply, each miner has to put more computing power into the mining process. Extracting a single block or coin is very energy consuming and therefore expensive, as each miner has to cover their light bills. But how much energy is needed to mine?

It all depends on the ASIC miner you are using. A wide range of ASIC miners is available in the market today, with big names like Bitmain and WhatsMiner offering different models at different prices. But ASIC miners are by no means cheap. Prices can range from hundreds to tens of thousands, depending on the make, model, and condition of the ASIC in question. So there is a high initial cost that comes with Bitcoin mining.

How much does it cost to extract a Bitcoin?

In terms of power usage, let’s consider a popular type of ASIC miner to get an idea of ​​how much you will spend on computing power to extract Bitcoin. Take the Antminer S17 Pro. This ASIC miner has a fairly average price of about $ 7,000, with a lifetime mining energy cost of about $ 14,700 to extract just one Bitcoin (at a rate of 5.5 ¢ / kWh), which means it will cost you more of $ 21,000 in total using this. private miner.

Measure this against the current reward of almost $ 200,000 and it is clear that you will reap benefits. But mining is a very long and sometimes frustrating process, so you’re likely to spend thousands of dollars on hardware and maintenance long before you can extract a single coin or block.

Many people choose to join mining pools to create a more stable income without using so much electricity. Mining clusters require members to donate some of their computing power to the pool, contributing to the mining process. The more computing power (or hash) the group has, the greater the chance of solving an equation and extracting a block. When a block is drawn, the reward is divided among the members (often proportional to the amount of power provided).

There’s one last problem here that miners have to deal with, and that’s half the reward. Bitcoin mining rewards are halved every four years to limit the number of coins in circulation each year. The first halving took place in November 2012, and the next one is expected to take place in 2024. This will take the available reward from 6.25 BTC to 3.125 BTC.

Depending on how the price of Bitcoin changes, this could mean that miners end up receiving much less each time they successfully extract, so their profits can end up being negative in relation to cost.

Bitcoin mining is crucial, but expensive

Bitcoin mining is an integral part of the Bitcoin network, which allows the circulation of new currencies and the verification of transactions while rewarding us for their work. But becoming a successful Bitcoin miner is expensive, time consuming, and risky. And as unearned coins become increasingly rare while rewards are periodically halved, there is no doubt that it is becoming increasingly difficult to make a healthy profit with Bitcoin mining.

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