How Bitcoin Mining Works
Bitcoin is mined in blocks, rather than in a consistent stream. Roughly every ten minutes, a block is produced by a miner, earning that miner new bitcoin. Mining is a random—or stochastic—process, more akin to a lottery than a construction project in that past work does not bring a miner any closer to mining a block.
The amount of bitcoin earned by a miner for a single block can vary. Currently, every block produces 6.25 new bitcoin, called the . This subsidy will fall by half every four years. In addition, miners collect fees from every transaction included in their block. Today, fee revenue is volatile, but it forms a small portion of the total block reward.
Mining’s random nature, the halving, and the variance in transaction fees make revenue from Bitcoin mining unpredictable for smaller miners over a short period of time; blocks are difficult to find but extremely lucrative.
Mining Pools
In order to smooth out revenue and reduce uncertainty, many mining operations, especially smaller ones, join mining pools. These pools aggregate the compute power, called , of many mining operations and distribute the rewards they earn from blocks to their members. Mining pools are analogous to a lottery pool: every member contributes, and every member receives rewards proportional to their contributions.
How Long Does It Take to Mine One Bitcoin?
There are several factors that determine the revenue of a Bitcoin mining operation and the time it will take to mine a single bitcoin. These factors can provide meaningful estimates for the revenue of a mining operation in bitcoin terms, but given the volatility of bitcoin prices, energy prices, and Bitcoin’s difficulty, all calculations are dynamic and probabilistic.
Hash Rate
The most important factor in determining a mining operation’s revenue in a given time frame is the amount of hash rate dedicated to the operation. The best way to win a lottery is to buy as many tickets as possible; the same is true for bitcoin mining.
Special computers called are built solely to mine bitcoin with extreme efficiency and speed. The more ASICs a miner can deploy, the more lottery tickets they will accumulate, and the higher the chance that they will eventually create a block.
Bitcoin’s Difficulty Adjustment
The Bitcoin network has a mechanism for ensuring that no matter how much hash rate is produced by all miners, one new block is only created on average every ten minutes. This mechanism is called the difficulty adjustment.
The difficulty adjustment renders absolute hash rate less significant to an operation’s revenue than the miner’s share of hash rate relative to the entire network. If a mining operation has 10% of the network hash rate, they will mine an average of 10% of all blocks. Since blocks are produced at a constant, if probabilistic, rate, it is possible to calculate the operation’s expected revenue over a period of time.
Bitcoin’s Price
The calculation above determines the revenue of a given mining operation in bitcoin terms. However, most miners pay their costs—salaries, rent, and energy cost such as the U.S. dollar or the Chinese Yuan. Therefore, the price of bitcoin matters a great deal to miners.
When the price of bitcoin drops, some miners no longer find it profitable to mine. When they stop producing hash rate, the difficulty decreases, and remaining miners have an easier time finding blocks because they comprise a greater portion of the total hash rate.
Conversely, when the price rises, more miners join the network, driving the difficulty up. Every existing miner will see their share of total hash rate decline, leading to a decline in their expected revenue as denominated in bitcoin. However, since the price of bitcoin is rising, their revenue denominated in fiat could still rise.
Bitcoin Mining Profitability
The above calculations estimated Bitcoin mining revenue. However, Bitcoin mining involves heavy costs, often yielding thin profit margins.
The marginal cost of gold mining tends to stay near the price of gold...I think the case will be the same for Bitcoin.
– Satoshi Nakamoto explaining how the cost of mining will mirror the price of Bitcoin
Due to Bitcoin’s difficulty adjustment, the marginal cost of mining one bitcoin will forever approach the value of one bitcoin. This means that, if the price of bitcoin is at $50,000, the price of mining one bitcoin will tend towards $50,000. For many individuals, the costs will greatly exceed $50,000, making it unprofitable to mine.
Notice: River Financial does not provide investment, financial, tax, or legal advice. The information provided is general and illustrative in nature and therefore is not intended to provide, and should not be relied on for, tax advice. We encourage you to consult the appropriate tax professional to understand your personal tax circumstances.