Bitcoin mining has been around since the creation of bitcoin. If you aren’t familiar with what “mining” refers to, it’s the process of adding and verifying transactions on the Bitcoin’s public ledger, which is called a blockchain. Nodes, which refer to any computer that connects to the Bitcoin network, work to solve complex equations to add blocks. The unraveling of these computational math problems is referred to as the “Proof-of-Work” consensus algorithm.
Primarily, these miners use their high-powered computers to verify transactions on the blockchain. In turn, they’re rewarded in two ways: (1) newly-minted BTC and (2) the assurance that they’re keeping the payment network secure and trustworthy. The bitcoin that is created in this process is called the “block reward.” Depending on what year it is, the amount of BTC awarded to these miners varies.
Bitcoin Halving: How It Affects Mining
Initially (when bitcoin was created in 2009), the block reward was 50 BTC. However, Satoshi Nakamoto, the enigmatic “creator” of bitcoin, programmed the network so that every 210,000 blocks, the reward is cut in half. This event is called the Bitcoin Halving. The average rate of blocks being mined per hour is six—which roughly translates to a Bitcoin Halving happening approximately every four years, give or take.
The first-ever Bitcoin Halving happened in 2012. Block 210,000 rewarded its miners with 50 BTC. However, block 210,001 paid its miners with 25 BTC. The second Bitcoin Halving occurred in 2016, where block 420,001 awarded the miner with 12.5 BTC instead of the full 25 BTC block 420,000 rewarded. The third Bitcoin halving is supposed to happen around May 2020, where the reward would be halved once more to 6.25 BTC.
If you want a more specific and real-time approximation of when the next Bitcoin Halving is going to happen, there are several trackers that you can use. This pattern of halving will continue to happen until the reward is eventually reduced to 0, which is set to occur in the year 2140. When that finally happens, miners will have to start using transaction fees as incentives to continue mining.
Satoshi Nakamoto programmed the Bitcoin Halving into the network to slow the distribution of bitcoin—effectively keeping inflation in check. According to the economic law of supply and demand, if coins are created too quickly (and if there is an unlimited supply of bitcoin—which we know isn’t the case), the asset would be devalued by the sheer number of coins in circulation.
What Does This Mean for Bitcoin Mining?
With Bitcoin Halving, it can initially be alarming to see that the reward is getting smaller and smaller. However, it’s important to note that when the reward was much higher (25-50 BTC), the value of bitcoin wasn’t high enough to make people instant millionaires. When people started mining bitcoin, miners already had the needed equipment. Additionally, the competition wasn’t as fierce since most miners were using pretty much the same machinery.
However, with the development of Application-Specific Integrated Circuit (ASIC) chips, the technological gap widened. Through these chips, mining capabilities exponentially increased—effectively making previous mining equipment obsolete. These chips also increased the hash rate (the measure of a miner’s computational power) of bitcoin, making the network much healthier as a whole. Because of the broader technological gap, expenses were raised. In turn, individuals could no longer compete—especially when large bitcoin mining centers began to emerge with extremely powerful machines.
It’s at this point where people begin to question the profitability of bitcoin mining. With the upcoming Bitcoin Halving, large bitcoin mining centers, and added expenses, is Bitcoin mining still profitable? The answer is: it depends on you. The answer can be both “yes” and “no” at the same time—the only way to know is to try.
Factors to Consider When Mining Bitcoin
Before delving deep into the world of bitcoin mining, here are some factors you should take into account:
Mining can get complicated
On the blockchain, transaction validations are measured in hashes per second. The network, with the way it was designed, produces a certain number of coins per second. This means that the more active miners there are, the more difficult it is to mine. It was deliberately designed like that to make sure that the distribution of bitcoin remains static.
The competition is fierce
As mentioned earlier, the development of ASIC miners has allowed larger mining companies to enter the playing field. As a result, individuals are forced to join mining pools (and split the reward) or get stomped on by the larger mining companies.
Electricity is expensive
Although electricity costs differ depending on where you’re mining from, the high-powered computers used to solve computational math problems can often consume a lot of energy. When deciding whether or not mining is worth it, be sure to take electrical consumption into account.
As you can see, the answer to the question isn’t as simple as everyone wants it to be. In most cases, one who mines at home (against the larger mining companies) will struggle to earn a profit with the expenses of mining hardware and electricity consumption; the situation may improve if the innovation of ASIC miners reaches the point of diminishing returns. If that innovation is paired with cheap and sustainable power, average home miners may again see profitability in bitcoin mining. If you want to know where to set up a profitable mining operation, check out our post about Bitcoin mining-friendly countries.
Although bitcoin mining’s profitability may be questionable, it’s important to note that mining isn’t the only way to make a profit from bitcoin. Nowadays, thanks to peer-to-peer bitcoin marketplaces like Paxful, there are literally hundreds of ways to obtain bitcoin—you can buy BTC with PayPal, bank transfers, Skrill, credit/debit cards, and even gift cards. Through these P2P marketplaces, users can earn profits in many ways—trading, selling using lesser-used payment options, and also accepting bitcoin as payment for your business.
If you don’t end up seeing mining as profitable anymore, why not try your hand at trading?