Introduction to Bitcoin Mining
Mining a cryptocurrency is a practice popularized by the creation of the Bitcoin blockchain at the end of 2008, which makes it possible to:
- Secure blocks of data, and therefore the entire blockchain,
- Find fragments of cryptocurrency (tokens) for miners,
- Create new cryptocurrency units,
- Allow the blockchain to grow stronger.
The relation between bitcoin mining and bitcoin trading are the two parts of one system based on blockchain technology. Let’s see what the nature of this relationship is and if the mining of bitcoin can be profitable.
How does a Bitcoin miner get rewarded?
Bitcoin mining is enabled thanks to extremely powerful specialized computers, to secure the blockchain and process each of the transactions carried out on the bitcoin network.
How do they do it? By solving mathematical problems! Solving these issues allows the creation of new transaction blocks within the blockchain.
For a block to be secure, you must find a key that will “seal” the block, and open a new one. The network user who manages to find this key is rewarded with fragments of Bitcoins or any other cryptocurrency linked to the network.
The miners get rewarded with every newly virtual currency unit created and transaction fees. This process is called “proof of work”.
The euro and the dollar are traditional currencies created in central banks, while Bitcoin rewards the work of miners who help keep its blockchain secure and running smoothly.
We also talk about issuance rates to determine how many Bitcoin shards miners can expect to receive for their work.
It is the basic network algorithm that sets this issuance rate. You cannot create BTC tokens without going through the network.
What makes BTC valuable is its rarity. Bitcoin has a limited number of tokens, set at 21 million. That number will be reached by 2140, and to delay the end of Bitcoin’s creation, its issuance to miners is halved every four years or so.
So here we are speaking about the Bitcoin halving. The most recent took place on May 12, 2020, when the reward increased from 12.50 BTC per block to 6.25 BTC per block.
Influence of mining companies on bitcoin’s value
The fact that most mining companies, so-called mining farms are located in China makes many think these companies control the price of bitcoin and bitcoin trading.
Thus, saying that Bitmain, the leading maker of bitcoin mining devices controls the bitcoin market is unfounded.
Miners do have some influence, but the value of bitcoin primarily depends on the use of bitcoin technology. The more there are users of bitcoin, the less is the influence of mining companies.
Is it profitable to mine Bitcoin?
Many individuals wonder about the profitability of Bitcoin mining: how much is this type of investment worth? Would buying Bitcoin be more profitable than mining this cryptocurrency?
Bitcoin mining is free since it involves solving mathematical problems. But the cost of this activity is quite high.
It involves the cost of electricity and the purchase of specialized bitcoin mining hardware with sufficient computing power.
It will then be a matter of comparing this value to the price of Bitcoin when you want to start mining to get an idea of its profitability.
There are also companies that practice “cloud mining”. They sell computing capacity to their customers who receive in exchange the fractions of mined bitcoins, after deduction of management fees.
Be careful though, since some services are often very disappointing when it is not just outright scams. In general, even when practiced seriously, cloud mining is rarely profitable.