In the traditional economic system, states and governments can print banknotes at will. This does not happen on Bitcoin for two reasons:
There is a limit of 21 million coins and this number cannot be changed.
The number of coins released as a reward for work done is limited in software and is halved every 210,000 blocks through a mechanism called halving.
Until the 21 million bitcoins are completely mined (in about 2140), new coins are put into circulation every 10 minutes. These coins are earned by the miners as compensation for their work. Miners in turn generate and validate the blocks that make up the large ledger of the blockchain network.
If we think of gold mining, the latter consists of digging in the earth with heavy machines to obtain gold in sufficient quantity to cover the exploitation costs and make a profit. The same happens with bitcoin mining, with the exception that the machines are complex computer equipment that perform computational calculations and as a result get two incentives:
Circulation of new bitcoins
The process of bitcoin mining is always the same: Miners receive a new math problem every ten minutes and the one who solves it the fastest gets the new coins that are put into circulation. This math problem is based on random calculations that aim to find the solution and thus get the block validation. The one who deciphers it gets the reward, provided that the rest of the network members confirm that the answer is correct.
Function of mining
Since cryptocurrencies are a decentralized system, we need a system that allows us to control all the transactions made. It is important to prevent someone from using the same amount of bitcoin more than once or from being able to introduce counterfeit coins into the market. The mission of mining is basically to ensure that no one uses the coins twice and that no one brings fake bitcoins to the market.
Therefore, miners review transactions and collect the last transactions created into a group called a block. The set of blocks could be likened to the set of pages in a large ledger or account book, which shows all the movements and balance of each user.
Cooperative Mining or Mining Pool
The greater the computing power, the easier it will be to solve a block and then get a reward. It is for this reason that mining pools were created, to achieve a collaboration and thus obtain a fair reward to be divided among all those who have taken part in the work.
Becoming part of a mining pool guarantees more chances to solve a block and collect the reward. If you did it individually, per user, you might never get a reward because of simple probability or because you have less computing power than your competitors.
So collaborating with other users using machines to mine bitcoin ensures a better chance of getting a reward.
The reward for the miner
Within the Bitcoin code, it is established that when a block is validated, you get a certain amount of coins. Currently, you get 6.25 bitcoins for each new block validated; this is because of the third halving of Bitcoin that took place on May 11, 2020. We have to keep in mind that to this fixed amount of bitcoins are added the fees for each transaction.
Every 210,000 blocks, the amount of bitcoin that is given as a reward is halved, an operation known as halving. This implies that the value of each bitcoin must increase for mining to remain profitable.
What do I need to mine bitcoin?
The first bitcoins were mined using the processors or CPUs of computer equipment because very few people were dedicated to mining. In fact, initially Satoshi Nakamoto was the only one mining on the bitcoin network, and it is believed that other miners joined shortly after. But as the number of people mining increased, so did the difficulty due to the growth in computing power of the network, making it very difficult to get a reward. This is why people switched to graphics cards because GPUs (graphics processor) have more computing power than the processor.
On December 16, 2009, version 0.2 of Bitcoin’s software was launched which incorporated an interesting novelty that allowed the use of multiple processors in the same system. This day marked a before and an after.
What enabled version 0.2 of Bitcoin was the development of specialized machines for computation: ASICs. Basically, an ASIC is a specialized computer that has many processors. The computing power of each of these systems is much higher and has made mining with graphics cards completely obsolete. Although an ASIC cannot serve as a normal PC, they can perfectly follow the instructions needed to perform mining extremely efficiently.
The difficulty and the hash rate
We need to understand that the more computing equipment that is added to the network, the more the computing power of the network increases. And, at the same time, there is more competition for rewards.
The difficulty is the computation required to ensure that blocks are obtained every ten minutes. If new blocks were suddenly generated in less than 10 minutes on average during 2016 blocks, Bitcoin would automatically readjust to increase the complexity of the problem. The opposite would occur if suddenly the average in those 2016 blocks increased by 10 minutes.
The hash rate, on the other hand, is the processing capacity of Bitcoin’s network for each of the added devices. The sum of the power of all the devices in the network results in the total hash rate in the network.
Bitcoin mining profitability
Depending on the power of the ASIC and the pool we are in, we will have more or less chance of getting bitcoin. Profitability depends on the value of bitcoin, the difficulty of the network and the determining factor: the cost of electricity.
The price of electricity is what really determines whether or not it is possible to mine bitcoin and whether or not it is possible to get paid for the work done. Large mines are usually installed in countries or areas where there is access to cheap electricity, mainly based on renewable energy, mainly hydroelectric power. Unfortunately, in Spain, due to the high cost of electricity, it is not possible to mine bitcoin.
We must not only take into account the direct electricity needed to power the miner. But also the one needed to cool all the heat that is generated; therefore the cost of electricity increases significantly.
We have to consider the cost of purchasing the device and the competition, which is equivalent to the number of machines working in the network and that tends to increase. This will make our mining operation combined with the cost of electricity more or less profitable.
Finally, the development of new specialized systems should be kept in mind. Systems for bitcoin mining are still being developed, which can mean that at any time our ASIC could become obsolete or profitability could be reduced.