Bitcoin mining and crypto mining in general have been hotly debated in recent years due to the energy consumption used by the equipment required for the job.
Environmental concerns aside, Bitcoin mining is generally considered a profitable endeavor which has led to a constant increase in competition to produce a valid hash and receive the block reward which is currently 6.25 BTC. With such a high payout for solving the block, you may be thinking that you should be getting into Bitcoin mining. However, the reality is that for individual miners, being profitable can be quite difficult. Before diving into those nuances and providing some alternatives, let’s first discuss how Bitcoin and crypto mining work, along with hash rate.
How Does Bitcoin Mining Work?
Bitcoin/crypto mining is the process of adding new blocks to a blockchain ledger. The miner who creates the next block receives newly minted Bitcoin (or the respective crypto asset) as a reward. This is referred to as a block reward.
Crypto miners have two main jobs. The first job is to correctly get the answer to a difficult math problem (referred to as a valid hash). The second job is to construct a block that consists of the transactions that took place within the previous block. Whichever miner solves the math problem first gets to construct the block. The Bitcoin mining process is called proof of work because getting the answer requires work, and it references showing your work when doing math problems.
Once a block has been mined, the other miners on the network have to concur that the transactions contained within that block are genuinely valid and they then proceed to try and solve the next math problem to produce the next block. This is an indefinite loop.
Equipment Needed for Bitcoin/Crypto Mining
To start mining cryptocurrencies, you will need 3 main components. They are: mining equipment, a source of electricity, and a reliable internet connection. Apart from learning how to mine various digital assets, you’ll need these 3 components to get started:
Mining rig equipment
Crypto mining requires a Graphic Processing Unit (GPU) or Application-Specific Integrated Circuits (ASIC) mining rig. GPUs must have a fast hash rate and be energy efficient for optimal use. ASICs are specialized equipment and devices that are designed specifically for efficiently mining crypto. The prices for both of these types of hardware rigs start at a few hundred USD, but can easily run into thousands of dollars.
Profitable Bitcoin/crypto mining requires a cheap and reliable source of electricity to power the aforementioned mining rigs. Countries that have cheap electricity are the most attractive for crypto miners. The cheaper the electricity source, the better the profit margins for miners.
Bitcoin miners have to be connected to the Internet for the entirety of the mining process. Interruptions in their Internet connection can cause setbacks during the mining process and subsequently cost the miner their rewards.
Hash Rate and Mining Difficulty
Hash rate in crypto mining refers to the total computational power being used to mine and process transactions on the blockchain network. The higher the hash rate, the more competition there is for block rewards, but the higher the security of the network as well. This is because the more network participants there are mining, the harder it is for a malicious actor to affect the network. This means it’s good to have a high hash rate, because as the hash rate increases, it requires more and more hash rate to perform a 51% attack on the network. Essentially, the higher the hash rate, the more secure the Bitcoin network is.
As more miners join the blockchain network, the math problem being solved to earn a block reward has to scale. This is referred to as mining difficulty. The faster the problems are solved, the harder the problems become. Blockchain networks automatically adjust the mining difficulty so that they become easier to solve if they are taking too long too. Proof of work networks always try to balance the mining difficulty of the problem around a set time duration. For example, with Bitcoin, a block should be produced every 10 minutes, while Dogecoin’s blocks are about every minute.
Solo Mining Success?
Now that you understand hash rate and mining difficulty, you may be wondering if it would be worthwhile for you to try to mine Bitcoin yourself as an individual.
Recently, a solo miner was able to mine the 780,112th Bitcoin block, earning themselves 6.25 Bitcoin. While you may find this to be encouraging, it’s worth noting that this is only the 270th block ever mined by a solo miner in Bitcoin’s 13 year history, which, if you do the math, isn’t very often. While it can be done, there are likely better, more efficient ways to spend your money in mining, which we’ll outline below.
Alternative Bitcoin Mining Options
If you’re interested in getting into Bitcoin/crypto mining but don’t want to waste money trying to be a solo miner who is statistically unlikely to ever earn a reward, you have two main options. The first option is cloud mining, and the second is mining pools. Each is described below.
Cloud mining is essentially outsourcing the work involved in Bitcoin/crypto mining. The hardware, electricity, and maintenance of the mining rigs/equipment is all done by a cloud mining provider. In exchange for doing this, the cloud mining provider is paid a commission/fee by you and everyone else using the cloud mining service. With cloud mining, you’re renting a portion of a large pool of computational power. By being a part of this large pool, rather than mining individually, you’re giving yourself an advantage over any individual or group of miners trying to mine using less computing power.
Cloud mining can be a profitable alternative to solo mining, but there are upfront costs involved. You have to pay for the cloud mining service in advance, and the aforementioned fee or commission taken from your profit. Ideally, a cloud mining company will improve their hardware frequently to continuously improve profitability. Despite these upfront costs, using a reputable cloud mining service is almost certainly more profitable than trying to mine solo, barring an enormous investment in equipment and electricity by yourself.
Mining pools are similar to cloud mining, but rather than renting equipment from someone else, you’re pooling your own equipment with others’. By combining your computing power with others around the world, you increase your collective hash rate and thus increase your chances of solving the block and earning the reward. Like with cloud mining, mining pools split the profits proportionally among pool members, with the pool creator often charging some sort of fee/commission for running the pool.
Mining pools are another profitable alternative to solo mining, but they require a similar upfront cost, as you do need to provide your own mining equipment and pay for your own electricity. However, mining pools may be safer than cloud mining.
Are Mining Pools and Cloud Mining Safe?
Mining pool and cloud mining scams are the main risk with these alternative methods for mining.
With cloud mining, you have to trust that they’re doing all the things you’re paying them to do, without ever seeing their mining setup. Some cloud services could just take your money and act as though you didn’t make a profit. Avoid cloud mining services that promise very high returns, have fake looking testimonials, are poorly written sites, or ones with no apparent company information or address. It’s important to pick a reputable cloud mining service to avoid getting scammed, so do your due diligence.
With mining pools, you run a similar risk, though only with your rewards. This is because you have to trust that the pool will distribute the rewards to all the pool participants. You maintain more control over the potential risks because you own your own mining equipment, so there’s no risk that you’re just paying someone for nothing as there is with cloud mining. Like with cloud mining, be sure to research the mining pool before joining.
Bitcoin mining can still be profitable for individuals, but really only if they pool their resources with others. Despite there being solo miners who have been lucky enough to earn a block reward, it is a far from frequent occurrence, and it’s more likely that you’ll never earn a reward as a solo miner. You’d essentially be paying for the equipment and electricity with no guarantee of even ever getting back your initial investment.
You’re better off looking to join some sort of mining pool or cloud mining service in order to earn profit from Bitcoin mining.