Bitcoin is a sovereign system of digital money commonly referred to as a cryptocurrency; It was designed to exist in electronic form, with no physical version for Bitcoin holders to possess. It effectively functions as a store of value and can also be used for the purchase of goods and services.
Bitcoin was created by Satoshi Nakamoto and was released in 2009. Nakamoto’s vision was to create a digital currency that falls out of the reach of governments and central banks. It has no direct correlation to any real-world currency, nor is it controlled by any government or centralized entity.
The supply of Bitcoin is limited to 21 million. 18,633,850 million Bitcoins have been issued already while we expect that 2,366,150 Bitcoins are left to be mined as of February 20, 2021.
Bitcoin is banked with blockchain technology, Bitcoin transactions all over the world are recorded and stored on the blockchain which also functions as a public ledger. The verification and update process for Bitcoin transactions is referred to as Bitcoin mining.
The process is independent, with miners selected at random to verify transactions over a given period. Once the verification is complete, transaction records are added to Bitcoin’s public ledger of past transactions; the transaction information is incorporated into a block, which then links to the blockchain. To process these transactions securely, entities called miners are selected to solve mathematically complex problems.
Bitcoin mining is essentially responsible for the majority of the new bitcoins generated and introduced into circulation. Miners receive Bitcoins as a reward for the verification process.
Bitcoin was a well-paid hobby for early adopters who had the chance to earn 50 BTC every 10 minutes, mining from the comfort of their homes, from 2009. The reward was reduced to 25 BTC after the first halving, which marks a drop in Bitcoin’s dwindling finite supply, in 2016. It was further reduced to 12.5 BTC upon the second halving.
Moreover, on May 11, 2020, Bitcoin mining reward halved again, third halving, to 6.25 BTC and that is the prevailing rate today. The reward will continue to halve every four years until the final bitcoin has been mined. It may interest you to know that the current value of a Bitcoin is CAD72,038.01 as of February 20, 2021.
Besides, the bitcoin miner is awarded the fees paid by users sending transactions. The fee is an incentive for the miner to include the transaction in their block. In the future, as the number of new bitcoins miners are allowed to create in each block reduces, the fees will make up the important percentage of mining income.
Requirements to Mine Bitcoin
The following equipment is required:
- Application-Specific Integrated Circuits (ASIC)
The price of ASIC hardware varies from manufacturer to manufacturer and depends largely on how low the energy use is for the machine vs the amount of computing power it produces.
The more computing power, the more bitcoin you will mine. The ASICs can cost anywhere from several hundred dollars to US$18,000. ASICs consume huge amounts of electricity, the cost of which can quickly exceed the cost of the device using the electricity.
- Bitcoin Mining Software
This software will enable the miner to join the Bitcoin network. It isn’t nearly as expensive as hardware, there are reliable software options available for free.
- Mining Pool
A mining pool is a group of cooperating miners who agree to share block rewards in proportion to their contributed mining hash power. Most miners need to mine through a mining pool, this makes mining profitability more consistent and reliable.
It’s important to choose a mining pool that is reliable, transparent, and offers the right suite of tools and services to help you optimize your mining operation. There are about 20 major mining pools and it’s important to note that most mining pools are in China. It is estimated that the distribution of mining pools across countries is: China – 81%; Czech Republic – 10%; Iceland – 2%; Japan – 2%; Georgia – 2%; Russia – 1%.
- Bitcoin wallet
When bitcoins are mined, the miner will need a place to store them, called a Bitcoin wallet. Digital wallets enable miners to store bitcoins in “the cloud” but are a common target for cybercriminals. An offline wallet stores bitcoin in a device that is disconnected from the internet, offering added security.
Electricity prices vary from country to country. Many countries also charge a lower price for industrial electricity to encourage economic growth. The lower the energy consumption the lower your monthly costs.
Each block takes roughly 10 minutes to mine. If more power and resources are dedicated to mining, and the time required to mine one block falls under 10 minutes, Bitcoin’s mining difficulty will increase to bring the average per-block mining time back to 10 minutes.
Bitcoin mining is rewarded with 6.25 bitcoins. The reward, plus transaction fees, is paid to the miner who solved the puzzle first. This process of mining repeats approximately every 10 minutes for every mining machine on the network.
The difficulty of the puzzle (Network Difficulty) adjusts every 2016 block (~14 days) to ensure that on average one machine will solve the puzzle in 10 minutes. The network difficulty is calculated by the amount of hash rate contributing to the Bitcoin network.
Mining Pool Payment Structure
Every member of a mining pool earns a share, a “share” is awarded to members of the mining pool who present a valid partial proof-of-work.
There are several ways your rewards for contributing hashing power can be calculated and payouts are done afterward. Rewards are calculated based on the following payout schemes:
- Pay Per Share (PPS)
This is the simplest payout scheme; it guarantees the miner a payout whether the pool finds the next block or not. The value of a share is determined by the amount of hashing power that is likely needed to find a block divided by the reward for finding it.
The payment is often paid from the pool’s existing balance and the amount of the payment is determined based on your number of shares. PPS payout schemes payout every block based on block rewards only.
Hence, the risk is on the mining pool operator because the payment is guaranteed. Under Pay Per Share scheme, the transaction fees from each block are kept by the pool operator. Pool members are only paid based on block rewards.
If 80 shares are likely needed to find a block and the reward is 6.25 BTC, then each share is worth 0.078125 BTC (6.25 / 80).
- Full Pay Per Share (FPPS)
Full Pay Per Share, otherwise known as “Pay Per Share +,” is the same as Pay Per Share, except that the transaction fees are also paid to the pool members on top of the block reward.
- Pay Per Last N Shares (PPLNS)
Pay Per Last N Shares is a more complicated payout that allocates more risk to pool members but also more rewards.
In Pay Per Last N Shares, pool members are only paid once a block has been found. Once a block is found, the pool looks at each miner’s share contributions for all previous blocks where the pool did not find the block, and this is called a “time window”. All the blocks in a time window are known as a “round”.
Using these numbers, the pool determines every miner’s total share contributions over the round to determine each miner’s payout. PPLNS payout schemes do not pay out every block mined.
if the pool mines through 10 blocks before finding a block, then their reward for all the hashing power the pool contributed to the network over this 10-block round is 6.25 Bitcoins, excluding transaction fees.
If a miner contributed 100 shares for each of those blocks and the total number of shares was 1000, then the miner’s payment would be .625 BTC or .104 BTC per block.
The idea behind this payout scheme is that it removes all luck and only pays members based on their contribution to actual revenue earned by the pool. This scheme also encourages members to continue mining in the pool even as the profitability of mining different coins rises comparatively. This also means disconnecting from the pool before a block is found will pay such miner nothing.
Pools that use Pay Per Last N Share may or may not include transaction fees in their reward payouts so the miner should request the information concerning the transaction fees payment before joining the pool.
Notable Mining Pools
Find the list of some recommended Bitcoin mining pools below:
Poolin is a public pool, based in China, which mines about 13% of all blocks.
F2Pool is also based in China and it mines about 19% of all blocks.
BTC.com is a public mining pool that can be joined by any miner and mines 1.5% of all blocks.
ViaBTC is a relatively new mining pool that has been around for about one year. It’s targeted at Chinese miners and mines about 8% of all blocks.
Slush Pool was the first mining pool and currently mines about 11% of all blocks. Slush is probably the best and most popular mining pool despite not being one of the largest.
BTC.top is a private Chinese mining pool and cannot be joined. It mines about 2.7% of all blocks.
Bitfury is a private pool that cannot be joined and the company is based in Georgia. Bitfury currently mines about 3.5% of all blocks. BitFury is one of the largest producers of Bitcoin mining hardware and chips. BitFury currently mines about 15% of all bitcoins.
Hashrate is a measure of a miner’s computational power. The more miners mining bitcoin and expecting a reward, the harder it becomes to solve the puzzle. The individuals or organizations with the most computing power – hashrate – will be able to mine the most bitcoin.
Bitcoin miners earn transaction fees, apart from block rewards, which Bitcoin owners have to pay when they transfer Bitcoin (BTC) to one another. Every transaction is recorded in an unchangeable blockchain that is copied to every mining machine.
The miners keep the records themselves, and they get to keep a share of the transaction fees as well.
Taxes on Bitcoin Mining Earnings
Profit on Bitcoin mining isn’t certain but paying taxes on your mining rewards is compulsory. Every miner should know the relevant tax laws for Bitcoin mining in their area or country.
It is important to use crypto tax software that helps to track every transaction variable and ensure miners are still making enough money after taxes on their earnings.
Bitcoin mining using a pool is more profitable than the case of an average home miner who will incur mining hardware and electricity that may be difficult to recoup. Profiting on your own is highly unlikely in mining.
The profitability of bitcoin mining may improve in the future when ASIC mining hardware innovation reaches the point of diminishing returns and electricity becomes more affordable.