What is Bitcoin Mining?
Bitcoin was one of the earliest examples of digital rarity.
Its core value proposition is that there can only ever be 21 million Bitcoin in existence, and no more.
However, all 21 million tokens were not created simultaneously.
Instead, new BTC has steadily been added to circulation through a process known as mining.
Bitcoin mining involves a network of computers racing to find the solution to a complex mathematical problem.
The first computer to solve the puzzle gets a newly minted BTC.
Meanwhile, the puzzle-solving process also helps verify transactions on the network.
In this way, Bitcoin’s network is operated without the need for a central entity.
Here’s how you can get involved in this process and start mining Bitcoin yourself.
5 Steps to Start Mining Bitcoin
Despite the underlying complexity, the process of mining Bitcoin is relatively simple.
After all, the network was created to be an open and democratic platform for everyone.
That means the process of mining was designed to be as simple as possible.
Here are the five basic steps to get started.
1. Run the Numbers
Before you get started, you may need to consider all the variables of Bitcoin mining.
The process requires some hardware, some software, and ongoing energy costs.
All these costs fluctuate.
Meanwhile, the market price of Bitcoin also fluctuates.
You need to consider all your variable costs and estimate the future value of Bitcoin to figure out if your operation is likely to be profitable.
The profitability of mining Bitcoin and all the variables that determine your mining margin are discussed further below.
For now, let’s assume you can make all the numbers line up and are confident about profitability to move on to the next step.
2. Buy the Right Hardware
Initially, Bitcoin could be mined with any commercial computer or even a laptop.
However, as Bitcoin mining became more popular the industry developed specialized hardware for this process.
These specialized computers are designed specifically to crack the network’s computational puzzles as quickly and efficiently as possible.
They’re known as application-specific integrated circuit (ASIC) miners.
Reliable ASIC mining hardware ranges in cost, starting around $1,900 and going all the way up to $20,000 for higher end hardware.
In 2022, one of these expensive mining rigs is a minimum requirement for most miners to get started.
3. Install Software
Fortunately, Bitcoin mining software isn’t nearly as expensive as the hardware.
In fact, the mining software is open-source and free.
However, if you’d like to use essential tools and better features you may have to subscribe to a premium software package.
For an upfront or monthly fee, some of these commercial mining software suites can help you make your mining operation faster, more resilient, more energy-efficient, more profitable, or more secure.
You may also need to seek out software that is compatible with your mining hardware.
Picking and installing the right software is a critical step in the mining process.
4. Plan for Backups
Bitcoin mining rigs require a constant power supply to function profitably.
To maximize your returns you need to prepare for power and internet outages with backup generators and network connections.
You may also need to consider the fact that a constantly running mining rig will be incredibly hot.
Depending on your location and environment, you may need a cooling system that preserves the expensive hardware when the temperature rises too much.
5. Start Mining
Once you’ve made all the investments in hardware, software and backups, it’s time to start mining.
Depending on the software you use, you can monitor the costs of running your operation and the amount of BTC you’ve generated as rewards over time.
6. Pooling (Optional)
In its early days, Bitcoin mining was relatively easy.
With few people on the network, the power from a commercial laptop or desktop was sufficient to generate new BTC.
However, the network has expanded tremendously over the past decade.
The mining sector is much more professional and competitive now, which means entry-level hardware simply isn’t enough to win the race.
In 2022, Bitcoin mining difficulty is so high that an individual miner with a few ASIC machines might not be able to turn a profit from the operation.
This is why some miners have pooled resources together to compete with industrialized mining giants.
These Bitcoin mining pools collect computational resources from a collective of individual miners.
By applying economies of scale, these mining pools can compete with larger commercial miners and deliver steady returns for their members.
All you need is some software and a BTC wallet to connect your mining rig to these pools.
In return, you get a predictable and steady stream of mining rewards over time.
In 2022, the largest mining pools in the world are Foundry Digital and Ant Pool as per MiningPoolStats.
Crypto exchanges like Binance also offer mining pools.
Joining a pool isn’t necessary, but for most beginners, this could be the only path to a profitable mining operation.
Pros of Bitcoin Mining
The primary motive of Bitcoin mining is to generate a profit.
The network is designed to incentivize miners based on the market value of BTC.
As long as each token is worth more than the cost to generate it, mining is a lucrative venture.
In fact, when the market price of BTC skyrockets, miners can enjoy profit margins that are on par with some of the best software technology companies in the world.
Bitcoin mining is a relatively passive source of income.
Once you’ve invested in all the right hardware and kickstarted the process, it takes little upkeep and active management to keep generating profits.
You can leave your small mining rig operating around the clock in the basement for long-term passive income.
The only resources you need for a successful mining operation are access to the internet and cheap electricity.
You may also need to consider the weather to keep your mining equipment cool.
Besides that, the location doesn’t matter.
Mining can be done from anywhere and is remarkably easy to move.
This fact was highlighted last year when China banned BTC mining and the operators swiftly moved their operations to other parts of the world.
The mining process is a critical part of the crypto network.
A new BTC is generated only when a fresh block is validated and added to the chain.
In this way, miners use their computational power to confirm transactions on the network and help keep it secure.
Without miners, the network would stall and the value of the whole ecosystem would decline.
Cons of Bitcoin Mining
Miners have to deal with severe volatility on both the cost and revenue side of their business. Energy costs such as electricity and cooling needs can be volatile. Meanwhile, the difficulty level and market price of Bitcoin is quite volatile. With such fluctuations, miners need to be as efficient as possible to maximize their returns over time and avoid losses.
The mining process is extremely energy-intensive. In fact, the global mining industry consumes as much electricity as a small nation. Bitcoin’s carbon footprint and environmental impact have been a cause for concern lately.
Depreciation and Obsolescence
Technological change is another source of unpredictability. The ASIC mining hardware and industry-grade software used today could become obsolete in the near future. Mining difficulty could skyrocket beyond your control or the network’s design could be altered in a way that benefits some miners more than others. Ethereum, for instance, migrated from the Proof-of-Work to Proof-of-Stake consensus mechanism which made mining obsolete. This isn’t on the roadmap for Bitcoin, but it highlights how the future of mining technology isn’t predictable.
Is Bitcoin Mining Worth It?
Whether or not mining BTC is worth it depends on your situation.
In 2022, a solo miner with basic hardware simply can’t compete with the bigger players.
There’s a slim chance of profitability with a small operation.
Joining a pool could be more lucrative.
However, mining BTC isn’t the only way to get exposure to this asset class.
If your objective is simply to make a return on your investment, there are several alternatives you may want to consider.
Here’s a closer look at some of these alternatives.
Bitcoin Mining Alternatives
The crypto industry has matured enough to give investors plenty of alternatives to Bitcoin mining.
Some of these alternatives could be much more profitable or easier to access than the mining process.
Here’s a closer look.
Buying Bitcoin and holding it in your portfolio could be the easiest way to gain exposure.
- Direct exposure to the digital asset without any intermediaries.
- Ability to store and lend BTC anywhere with minimal fees.
- Exposure to cybersecurity risks while storing BTC.
A publicly-listed BTC fund offers the same exposure with some extra convenience and regulatory oversight.
- Easiest way to add BTC to your traditional stock portfolio.
- No need to store BTC yourself and worry about cybersecurity risks.
- Lack of custody and reliance on third-party service providers.
Industrial mining companies listed on the Toronto or New York stock exchanges offer exposure to the lucrative mining profits.
- Exposure to all the upside of capital appreciation and mining margins without the downsides of managing a complicated operation yourself.
- Exposure to stock market cycles and fundamental business risk.
Frequently Asked Questions
- How long does it take to mine 1 Bitcoin?
The amount of time it takes to mine a single unit of BTC varies. It depends on the Bitcoin hash rate, which is the amount of computational power it would take to unlock the next block of transactions on the network. This hash rate is dynamic and automatically adjusts based on the number of miners trying to simultaneously generate BTC. If there are too many miners, the rate goes up and generating a new BTC becomes harder. The opposite occurs when there are few active miners. This dynamic difficulty adjustment ensures that the supply of new BTC is constant and stable.
The current block reward is set at 6.25 BTC which is generated every 10 minutes or so.
- Is Bitcoin mining legal?
The legality of Bitcoin mining depends on your location. In Canada, you are allowed to mine cryptocurrencies freely. Even if you can’t mine Bitcoin yourself, you may be allowed to buy Bitcoin or buy shares in a Bitcoin mining firms overseas.
- How much does it cost to mine Bitcoin?
The cost to mine Bitcoin is highly variable. You need to account for the hardware costs, maintenance, rent, utility bills, cooling costs, network fees, pooling fees, and more to determine your true cost of production. For industrial miners, the production cost is roughly $34,000. However, the net cost could be higher when you consider business-related expenses. For small-scale miners and pools, the cost could be higher or more variable. Fortunately, if you use the right software, you could determine your breakeven price relatively easily.