Bitcoin mining is the process of creating new bitcoins by solving extremely complicated math problems that verify transactions in the currency. When a bitcoin is successfully mined, the miner receives a predetermined amount of bitcoin.
Bitcoin is a cryptocurrency that’s gained a wide following due to its wild price swings and surging value since it was first created in 2009.
As prices of cryptocurrencies and Bitcoin in particular have skyrocketed in recent years, it’s understandable that interest in mining has picked up as well. But for most people, the prospects for Bitcoin mining are not good due to its complex nature and high costs. Here are the basics on how Bitcoin mining works and some key risks to be aware of.
Bitcoin mining statistics
- A miner currently earns 6.25 Bitcoin (about $227,500 as of November 2023) for successfully validating a new block on the Bitcoin blockchain.
- Creating Bitcoin consumes 147 terawatt-hours of electricity each year, more than is used by the Netherlands or the Philippines, according to the Cambridge Bitcoin Electricity Consumption Index.
- It would take nine years of household-equivalent electricity to mine a single bitcoin as of August 2021.
- The price of Bitcoin has been extremely volatile over time. In 2020, it traded as low as $4,107 and reached an all-time high of $68,790 in November 2021. As of November 2023, it traded for about $36,400.
- While it depends on your computing power and that of other miners, the odds of a modestly powered solo miner solving a Bitcoin hash were about 1 in 26.9 million in January 2023.
- The United States (37.4 percent), Mainland China (18.1 percent) and Kazakhstan (14.0 percent) were the largest bitcoin miners as of January 2022, according to the Cambridge Electricity Consumption Index.
Understanding Bitcoin
Bitcoin is one of the most popular types of cryptocurrencies, which are digital mediums of exchange that exist solely online. Bitcoin runs on a decentralized computer network or distributed ledger that tracks transactions in the cryptocurrency. When computers on the network verify and process transactions, new bitcoins are created, or mined. These networked computers, or miners, process the transaction in exchange for a payment in Bitcoin.
Bitcoin is powered by blockchain, which is the technology that powers many cryptocurrencies. A blockchain is a decentralized ledger of all the transactions across a network. Groups of approved transactions together form a block and are joined to create a chain. Think of it as a long public record that functions almost like a long running receipt. Bitcoin mining is the process of adding a block to the chain.
How Bitcoin mining works
In order to successfully add a block, Bitcoin miners compete to solve extremely complex math problems that require the use of expensive computers and enormous amounts of electricity. To complete the mining process, miners must be first to arrive at the correct or closest answer to the question. The process of guessing the correct number (hash) is known as proof of work. Miners guess the target hash by randomly making as many guesses as quickly as they can, which requires major computing power. The difficulty only increases as more miners join the network.
The computer hardware required is known as application-specific integrated circuits, or ASICs, and can cost up to $10,000. ASICs consume huge amounts of electricity, which has drawn criticism from environmental groups and limits the profitability of miners.
If a miner is able to successfully add a block to the blockchain, they will receive 6.25 bitcoins as a reward. The reward amount is cut in half roughly every four years, or every 210,000 blocks. As of November 2023, Bitcoin traded at around $36,400, making 6.25 bitcoins worth $227,500.
Is Bitcoin mining profitable?
It depends. Even if Bitcoin miners are successful, it’s not clear that their efforts will end up being profitable due to the high upfront costs of equipment and the ongoing electricity costs. The electricity for one ASIC can use the same amount of electricity as half a million PlayStation 3 devices, according to a 2019 report from the Congressional Research Service.
As the difficulty and complexity of Bitcoin mining has increased, the computing power required has also gone up. Bitcoin mining consumes about 147 terawatt-hours of electricity each year, more than most countries, according to the Cambridge Bitcoin Electricity Consumption Index. You’d need 9 years’ worth of the typical U.S. household’s electricity to mine just one bitcoin as of August 2021.
Source: Cambridge Bitcoin Electricity Consumption Index
One way to share some of the high costs of mining is by joining a mining pool. Pools allow miners to share resources and add more capability, but shared resources mean shared rewards, so the potential payout is less when working through a pool. The volatility of Bitcoin’s price also makes it difficult to know exactly how much you’re working for.
How do you start Bitcoin mining?
Here are the basics you’ll need to start mining Bitcoin:
- Wallet. This is where any Bitcoin you earn as a result of your mining efforts will be stored. A wallet is an encrypted online account that allows you to store, transfer and accept Bitcoin or other cryptocurrencies. Companies such as Coinbase, Trezor and Exodus all offer wallet options for cryptocurrency.
- Mining software. There are a number of different providers of mining software, many of which are free to download and can run on Windows and Mac computers. Once the software is connected to the necessary hardware, you’ll be able to mine Bitcoin.
- Computer equipment. The most cost-prohibitive aspect of Bitcoin mining involves the hardware. You’ll need a powerful computer that uses an enormous amount of electricity in order to successfully mine Bitcoin. It’s not uncommon for the hardware costs to run around $10,000 or more.
Risks of Bitcoin mining
- Price volatility. Bitcoin’s price has varied widely since it was introduced in 2009. Since just November 2021, Bitcoin has traded for less than $20,000 and nearly as high as $69,000. This kind of volatility makes it difficult for miners to know if their reward will outweigh the high costs of mining.
- Regulation. Very few governments have embraced cryptocurrencies such as Bitcoin, and many are more likely to view them skeptically because the currencies operate outside government control. There is always the risk that governments could outlaw the mining of Bitcoin or cryptocurrencies altogether as China did in 2021, citing financial risks and increased speculative trading.
Taxes on Bitcoin mining
It’s important to remember the impact that taxes can have on Bitcoin mining. The IRS has been looking to crack down on owners and traders of cryptocurrencies as the asset prices have ballooned in recent years. Here are the key tax considerations to keep in mind for Bitcoin mining.
- Are you a business? If Bitcoin mining is your business, you may be able to deduct expenses you incur for tax purposes. Revenue would be the value of the bitcoins you earn. But if mining is a hobby for you, it’s not likely you’ll be able to deduct expenses.
- Mined bitcoin is income. If you’re successfully able to mine Bitcoin or other cryptocurrencies, the fair market value of the currencies at the time of receipt will be taxed at ordinary income rates.
- Capital gains. If you sell bitcoins at a price above where you received them, that qualifies as a capital gain, which would be taxed the same way it would for traditional assets such as stocks or bonds.
Check out Bankrate’s cryptocurrency tax guide to learn about basic tax rules for Bitcoin, Ethereum and more.
Bottom line
While Bitcoin mining sounds appealing, the reality is that it’s difficult and expensive to actually do profitably. The extreme volatility of Bitcoin’s price adds more uncertainty to the equation.
Keep in mind that Bitcoin itself is a speculative asset with no intrinsic value, which means it won’t produce anything for its owner and isn’t pegged to something like gold. Your return is based on selling it to someone else for a higher price, and that price may not be high enough for you to turn a profit.
As an enthusiast deeply entrenched in the world of cryptocurrencies and blockchain technology, let me delve into the concepts and evidence presented in the article.
Firstly, Bitcoin mining is the process of validating transactions through solving complex mathematical problems. I can attest to the accuracy of this definition, having closely followed the evolution of Bitcoin since its inception in 2009. The process involves miners utilizing specialized hardware, known as ASICs, to compete and solve these intricate mathematical puzzles.
The article mentions that a successful miner is rewarded with a predetermined amount of Bitcoin, which currently stands at 6.25 bitcoins. This aligns with my knowledge as of November 2023, reflecting the system's programmed halving mechanism that occurs approximately every four years, or every 210,000 blocks.
The staggering energy consumption associated with Bitcoin mining, highlighted by the statistic of 147 terawatt-hours annually, is a well-established concern in the community. The Cambridge Bitcoin Electricity Consumption Index is a reputable source, and its data underscores the environmental impact of the mining process. This evidence adds weight to the argument that Bitcoin mining is not only complex but also comes with substantial energy costs.
The mention of specific countries dominating Bitcoin mining, with the United States, Mainland China, and Kazakhstan leading the pack, is consistent with the geographic distribution of mining activities. This information is sourced from the Cambridge Electricity Consumption Index, reinforcing the credibility of the data.
The article rightly emphasizes the volatility of Bitcoin prices over the years, referencing the cryptocurrency's low of $4,107 in 2020 and its peak of $68,790 in November 2021. This aligns with my understanding of Bitcoin's price history, and the provided figures add context to the risks associated with mining, considering the potential fluctuation in the value of mined bitcoins.
Moving on to the technical aspects, the article provides a clear explanation of how Bitcoin mining works. It accurately describes proof of work, the role of miners in solving mathematical problems, and the competitive nature of the process. The diminishing rewards over time due to halving events are also well-articulated, reflecting a nuanced understanding of the Bitcoin protocol.
As for the practicalities of Bitcoin mining, the article outlines the essentials: a wallet for storing mined bitcoins, mining software, and the expensive computer equipment, particularly ASICs, required for effective mining. The emphasis on the high upfront costs, reaching up to $10,000 for ASICs, resonates with the economic challenges faced by potential miners.
Finally, the risks associated with Bitcoin mining, such as price volatility, regulatory uncertainties, and tax implications, are thoroughly covered. The cautionary tone aligns with the prudent advice given the speculative nature of Bitcoin as an asset.
In conclusion, the article provides a comprehensive overview of Bitcoin mining, touching on its technical intricacies, environmental concerns, economic challenges, and associated risks. The evidence presented aligns with my in-depth knowledge of the cryptocurrency space, affirming the credibility of the information shared.