In the traditional economic system, states and governments can print tickets at will. This does not happen in Bitcoin due to two reasons:

  1. There is a limit of 21 million coins and you cannot change that amount.
  2. The number of coins released as a reward for work done is limited in the software and halved every 210.000 blocks by a process called halving.

Until the moment 21 million bitcoins are fully issued (around the year 2140) new coins are put into circulation every 10 minutes. These coins are obtained by miners in compensation for the work done. The miners in turn generate and validate the blocks that make up the large ledger that the blockchain network supposes.

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If we think of gold mining, it consists of removing land with heavy machines to obtain gold in sufficient quantity to pay the exploitation costs and obtain profit. The same thing happens in bitcoin mining, with the exception that the machinery is complex computer equipment that perform computational calculations and as compensation they get two incentives:

  • New bitcoins that are put into circulation
  • Transaction fees

El bitcoin mining process it is always the same, the miners receive a new mathematical problem every ten minutes and the quickest to solve it takes the new coins that are put into circulation. This mathematical problem is based on random calculations that aim to find the solution and thus obtain the validation of the block. Whoever deciphers this will get the reward, as long as the rest of the network members confirm that the answer is correct.

“The network times the transactions as they are hashed (do a cryptographic transformation) within a continuous chain of proof of work based on hashes. A record is being formed that cannot be modified without redoing the proof of work. The longest chain serves not only as proof of the sequence of events that occurred, but as proof that it came from the largest set of CPU power. As long as the highest CPU power is controlled by nodes that are not cooperating to attack the network, they will generate the longest chain and outcompete the attackers. "
Satoshi Nakamoto in the Bitcoin Whitepaper

Role of mining

Because cryptocurrencies are a decentralized system, we need a system that allows us to check all operations performed. It is important to avoid that someone can use the same amount of bitcoins more than once or be able to introduce counterfeit coins into the market. The mission of mining is basically to certify that nobody uses the coins twice and that nobody can introduce fake bitcoins to the market.

Thus, the miners review the transactions and gather the latest transactions created in a group called block. The set of blocks could be compared to the set of pages of a ledger (ledger) or ledger, which certifies all the movements and the balance of the users.

Cooperative of mining or pool

The more computing power you have, the easier it becomes to solve a block and therefore get a reward. It is for this reason that they were created the mining pools, to carry out joint work and thus obtain a fair reward among all members for the work done.

Joining under a pool guarantees us more possibilities to solve a block and get the reward. If we did it individually per user, we might never get a reward either out of sheer probability or because we had less computing power than the competition.

So partnering with other users who contribute mining machines ensures that we are more likely to get a reward.

The reward for the miner

Within the Bitcoin code it is established that when a block is validated, a certain amount of coins is obtained. Currently, 6,25 bitcoins are obtained for each new validated block, this due to the third bitcoin halving that took place on May 11, 2020. We must take into account that to this amount of fixed bitcoins the commissions are added for each of transactions.

Every 210.000 blocks, the amount of bitcoins given as a reward is halved, something known as halving. This implies that the value of each bitcoin has to increase in order for mining to remain profitable.

“By convention, the first transaction in the block is a special transaction that generates a new currency owned by the creator of the block. This adds an incentive for nodes to support the network, provides an initial way to distribute, and puts the coins into circulation since there is no authority to create them. This stable addition of a constant amount of new coins is analogous to gold miners who spend resources to put it into circulation. In our case, the resources are the CPU time and the electricity that are used. "
Satoshi Nakamoto in the Bitcoin Whitepaper

What do I need to mine bitcoins?

The first bitcoins were mined using the processors or CPUs of computer equipment because very few people were mining. In fact, initially only Satoshi Nakamoto was the one who mined the Bitcoin network, and other miners are believed to have joined the process soon after. But as people joined mining, the difficulty increased due to the increase in the computing power of the network, which made it very difficult to obtain a reward. This is how the leap was made to graphics cards because the GPU (graphics processor) they have more computing power than the processor.

On December 16, 2009, version 0.2 of the Bitcoin software was released, which incorporated an interesting novelty, which is that the use of several processors in the same system was allowed. That day was a before and an after.

What Bitcoin's v0.2 enabled was the development of specialized machines for computing: the ASICs. Basically, an ASIC is a specialized computer that has many processors. The computational power of each of these systems is much greater and left mining using graphics cards completely obsolete. Although an ASIC cannot serve us as a normal PC, they can perfectly execute the necessary instructions to carry out mining, in an extremely efficient way.

Difficulty and hash rate

We must understand that the more computer equipment added to the network, the more the computing capacity of the network increases. And at the same time, there is more competition to get a reward.

The difficulty is the calculation necessary to guarantee that the blocks are obtained every ten minutes. If new blocks suddenly spawned in less than 10 minutes on average during 2016 blocks, Bitcoin would automatically reset itself to increase the complexity of the problem. The opposite occurs if suddenly the average in those 2016 blocks rose by 10 minutes.

El hash rate on the other hand is the processing capacity of the Bitcoin network by each of the computers that are added. The sum of the power of all the computers on the network gives us the total hash rate on the network.

Bitcoin mining profitability

Depending on the power of the ASIC we have and the pool we are in, we will have more or less possibilities of obtaining bitcoins. Profitability depends on the value of Bitcoin, the difficulty of the network and the determining factor: the electrical cost.

The price of electricity will be the one that really determines if Bitcoin is viable or not, if we will get compensation for the work done. Large mining farms are usually installed in countries or areas where there is access to cheap electricity, especially based on renewable energy, mainly hydraulic. Unfortunately in Spain, due to the high cost of electricity, it is not feasible to mine Bitcoin.

We must not only take into account the direct electricity necessary to power the miner. We also need to cool all the heat they generate, so the electrical cost increases significantly.

We must take into account the cost of equipment acquisition and competition. What is the same: the number of machines that are operating on the network and that usually increases. This will make our mining operation together with the electrical cost may or may not be profitable.

Finally, the development of new specialized systems must be taken into account. Bitcoin mining systems are still under development and this may mean that our ASIC is obsolete at any time or, in other words, profitability is reduced.

Do you want to start enjoying the world of cryptocurrencies? Then it is time to open your Bit2Me user account. It is very easy to do and, in addition, by following this link you will get € 5 totally free on your first purchase in Bit2Me.