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01
Nov
bitcoin mining

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Bitcoin mining: The Beginner’s Guide

Bitcoin mining is calculation work performed on specially made ASIC computers. Bitcoin mining is criticized because of the energy consumption of the mining work. Bitcoin mining has been moving towards renewable energy for years. The future of Bitcoin mining looks ever greener. Bitcoin mining is profitable in many countries!

What is Bitcoin mining?

Bitcoin mining is calculation work performed on specially made ASIC computers. Bitcoin miners build the Bitcoin blockchain and use their computing power to protect the Bitcoin network from outside attacks.

Bitcoin mining is a somewhat abstract concept for beginners. Since Bitcoin is a digital currency operating on the Internet, the word mining is hard to associate with. How can digital currency be properly “mined”?

First, it is necessary to understand that Bitcoin uses a blockchain database system. This database is distributed to thousands of computers and contains all transactions sent on the Bitcoin network. Bitcoin miners maintain this blockchain. They collect the transactions sent to the network and bundle them into a new block. Bitcoin mining is, therefore, blockchain maintenance work.

Mining is needed because Bitcoin uses the Proof of Work consensus algorithm. This algorithm refers to the method by which a consensus is formed on the information stored in the blockchain. In the case of Bitcoin, it’s all about the computations done with computers. Miners solve mathematical equations and use much energy while doing this job.

A miner is a specially-made ASIC device. They are concentrated in large mining farms containing thousands of miners. Below is a picture of ASIC miners manufactured by the Chinese company Bitmain.

bitmain asic

Bitcoin mining and its energy consumption make the Bitcoin blockchain extremely secure. An attempt to change blockchain data (a 51 percent attack) would be so expensive that it would make no economic sense.

The term hash rate describes the global mining power of the Bitcoin network. It has risen higher every year. This tells us two important things:

  1. The efficiency of miners increases with new versions.
  2. New mining farms are coming to the market all the time.

When this article was written, Bitcoin’s mining power (hash rate) was about 400 TH/s. Two years ago, it was just over 100 TH/s, and four years ago, it was around 25 TH/s. This indicates huge investments in Bitcoin infrastructure!

This article will not explain how Bitcoin works in depth; instead, it will focus on mining. For more information about Bitcoin, read our comprehensive beginner’s guide to it.

Why is Bitcoin mining criticized?

Bitcoin mining is criticized because of its energy consumption. Just a couple of years ago, there was also a discussion about the concentration of mining in China, but this problem was solved by itself in the summer of 2021. At that time, China banned mining on its soil.

Critics compare Bitcoin’s energy consumption to suitable targets, such as countries. Many have surely seen a headline like “Bitcoin mining consumes more energy than the country of Norway.”

This is true, as Bitcoin indeed consumes more energy than many nations. In addition, consumption is only increasing as the network’s computing power increases yearly. Below is a graphic of Bitcoin’s hash rate growth over three years. The blue line is the hash rate, while the black line shows the Bitcoin price.

bitcoin hash rate

 

However, the criticism misses an important point. Energy consumption means completely superior safety; you have to pay for it. In addition, scale is forgotten. As a whole, Bitcoin only uses 0.1 percent of the Earth’s energy. It is, therefore, a matter of globally completely insignificant consumption.

Bitcoin mining uses only a fraction of the energy that, for example, the banking sector uses. Consumption is also clearly overshadowed by gold mining, not to mention the environmental damage caused by this process. It’s no wonder gold investors, the so-called gold bugs, never criticize Bitcoin’s energy consumption.

The critics’ thinking almost invariably goes astray at the very first step. Bitcoin is considered a completely pointless invention. If this is the basis of thinking, energy consumption is too much.

Due to the high energy consumption, Bitcoin is an uncrackable and completely superior account book regarding security. This feature allows various parties to make billions of dollars worth of investments in Bitcoin. Energy consumption is a factor that makes even governments and central banks trust Bitcoin.

Bitcoin mining and renewable energy

Bitcoin mining has been moving towards renewable energy for years. In the summer of 2021, a big step was taken when China banned Bitcoin mining on its soil. A lot of mining has been done in China with coal. This resulted in a huge transition, e.g., To the United States for using cleaner energy.

Bitcoin mining is the perfect partner for renewable energy. Extraction farms can be established outside cities and built, for example, next to hydropower plants. Bitcoin mining utilizes energy that would otherwise be completely wasted in many places.

hydro

For example, the US energy giant ExxonMobil diverts surplus gas into energy for Bitcoin mining, which would otherwise be released into the atmosphere. Neighboring Sweden’s state energy company, Vattenfall, has commented that Bitcoin mining offers an excellent buffer in energy production.

In Norway, on the other hand, Bitcoin is already mined with 100% renewable energy sources!

A separate Bitcoin Mining Council was also established in the United States in 2021, which reports on the energy use of the country’s mining farms. The latest report estimates that over 60 percent of global Bitcoin mining uses renewable energy sources.

What does the future of Bitcoin mining look like?

The future of Bitcoin mining looks ever greener. Water, solar, wind, and nuclear power are increasingly used as energy sources. It won’t be long before Bitcoin is mined entirely with renewable energy sources.

The development of cleaner energy sources is well underway, so this point of criticism will be resolved in the free market. The impetus for this comes from ESG, which is constantly growing in popularity. The abbreviation comes from the words Environmental, Social & Governance. More and more investment funds use ESG as a guideline for investing.

ESG guides institutions to invest in locations that consider energy consumption and the environment. Bitcoin mining with fossil fuels does not fit this picture. ESG is why Tesla had to distance itself from Bitcoin in the summer of 2021.

Many Bitcoin mining farms are now listed companies. To attract investors’ money, mining should be done with renewable energy, so ESG serves as a good motivation.

The image below is from Riot Blockchain’s homepage. It is one of the mining companies listed on the Nasdaq stock exchange.

riot blockchain

The Chinese mining ban in the summer of 2021 also solved another big problem. Many investors were concerned about the concentration of Bitcoin mining in one country. Potential Chinese government intervention was consistently one of the most popular FUD topics. Now, the mining farms are spread more evenly across different countries.

With China’s decision, the United States became the largest country in Bitcoin mining. Its share of the hash rate is 35.4 percent. Other large countries are Canada (9.5%), Russia (11.2%), Kazakhstan (18.1%), Ireland (4.7%) and Germany (4.5%). The figures are from August 2021. The source is research from the University of Cambridge.

Attitudes towards Bitcoin mining are slowly changing, and understanding of energy use is growing. However, there is still much to do. The EU’s Proof of Work band in March 2022 is a good example. Fortunately, the bill did not pass, but the idea sounds absurd.

We recommend Lyn Alden’s excellent article Bitcoin’s Energy Usage Isn’t a Problem. Here’s Why. It covers Bitcoin’s energy consumption in even more detail than this guide.

How to start your Bitcoin mining farm!

Bitcoin mining is profitable in many countries! Next, we will go through how to start mining practically. What must be considered, e.g., equipment, electricity consumption, or taxation? You will get all the necessary information to start mining.

Bitcoin mining equipment

Let’s start with the mining equipment. The only way to mine Bitcoin profitably is to use the previously mentioned ASIC miners. To mine with a computer processor (CPU) or graphics processing unit (GPU), you must look at other cryptocurrencies.

Mining Bitcoin with a CPU or GPU is theoretically possible. However, the computation power of CPUs and GPUs is so modest that mining would be a waste of time and electricity. The best graphics card available before the rise of ASICs (AMD 7970) produced 800 million hashes per second. The average ASIC now produces 100 trillion hashes per second.

The number of hashes produced per second is called the hash rate. It is an important benchmark of performance for miners. The best miner is a device that uses the least electricity and offers the best hash rate. We will come back to electricity consumption later.

You can find information on the electricity consumption and the hash rate on websites that sell mining equipment.

bitmain antminer

The picture shows the recently launched Bitmain Antminer S19 XP, a popular Bitcoin miner. It consumes 3010W of power and has a hash rate of 140 Th. Bitmain is the best-known manufacturer of ASICs, but there is increasing competition in the market.

It is easy to compare miners using comparison sites such as AsicMinerValue, Minerstat, CryptoCompare, and Nicehash. You can calculate the profitability of your mining equipment quickly and easily.

Bitcoin mining facilities

It is important to understand that a Bitcoin miner is unlike a regular laptop or PlayStation. A normal computer is almost silent, while ASICs make much noise. For example, the Antminer S19 XP mentioned above produces 75 decibels. By comparison, 85 decibels is usually the limit for wearing hearing protection (at 8 hours exposure) under the health and safety at work regulations.

You’ll likely buy several ASICs, which will increase the noise if they are placed in the corner of your living room. It’s important to find a suitable space for mining before making any purchases. Watch this video to see what kind of noise ASICs make.

So, where do people store their ASICs? Typical locations include garages, warehouses, outdoor buildings, and warehouses. Some companies rent storage space for mining equipment.

Another issue to consider is the heat produced by miners. It is smart to use this thermal energy, especially in winter. The heated air can be circulated to radiators or ventilation ducts. The only limit to your creativity here is your imagination.

In summer, the heat generated by the miners can become a big problem. If hot air is not effectively directed away from miners, they can overheat and shut down, which can also affect the miner’s lifetime.

Investments and taxation

Once the mining equipment and facilities have been considered, the following questions often arise: does it make sense to mine alone? Should I build a team with friends? Should a company be founded for this purpose? There is no unequivocal correct answer to these questions. It depends entirely on the situation and person.

A mining farm is a big financial investment. The Antminer S19 XP mentioned above costs over 11,000 euros. Machines are also available for less than 10,000 euros, but the most expensive ASICs cost well over 20,000 euros each. In many cases, there is also a desire to mine with more than one ASIC.

If you have the money for such an investment, mining alone is no problem. However, a team could be great if your friends want to invest and bring in their expertise. You can split the start-up costs between several people. Maybe your friend also has better technical skills to maintain the equipment? Someone else might own an empty warehouse.

Setting up a business can be smart in terms of the electricity bill. You may be able to get a business electricity contract at a lower price than a private individual could. In some cases, electricity may also be included in a lease. Sharing income and expenses with several people is easier if you run your business through a limited company.

Remember that income from mining is taxable. Tax practices vary from country to country, and anyone planning mining should familiarize themselves carefully with the tax rules before starting.

Many miners use Divly to calculate their mining income. This is a cryptocurrency tax software that is also popular with crypto traders. Koinly calculates your mining income automatically and checks the daily prices for coins. The site also offers advice and answers to common tax questions.

Calculating the profitability of mining

The profitability of Bitcoin mining can be calculated online even before the purchase of expensive equipment. Whether mining is worth it – it mainly depends on three factors:

  1. Electricity price: The better the electricity contract, the higher your earnings margin.
  2. The price of Bitcoin: The higher the Bitcoin price is, the more you earn at the creation price.
  3. Mining hardware efficiency: The newer and more powerful the miner, the more bitcoins your rig will mine.

Electricity consumption is the biggest issue for many. Especially now that electricity prices are soaring. Large mining farms can be built next to hydroelectric power stations, but a person living in a standard house cannot make such a deal. Too high electricity prices will water down the operation’s profitability, even with powerful equipment.

A rise in the price of Bitcoin can save a lot, but profitability should also be assessed at lower rates. For example, you can use the 200-week average of Bitcoin as a lower price limit. Bitcoin has historically spent only short periods below this trend line.

The profit from mining can be calculated using various online calculators. For example, minerstat.com and asicminervalue.com are good sites to compare equipment yield and power consumption.

minerstat

If electricity costs €0.1 per kWh, you will get, at best, €10.57 daily return. It’s good to remember that Bitcoin is not the only cryptocurrency using the SHA-256 mining algorithm. In addition to Peercon and DigiByte, the forks of Bitcoin (e.g., Bitcoin Cash) also use the same algorithm.

Of course, profitability is the starting point for mining. In addition, it is important to outline the return on the purchase price of the equipment. The Antminer S19 XP mentioned earlier costs over 11,000 euros, so its payback period would be about three years at a daily return of ten euros.

Setting up the Bitcoin miner

Let’s move from theory to practice. How do you start Bitcoin mining if you have the space, equipment, and cheap enough electricity? You need not only the mining equipment itself but also an internet connection. It doesn’t need to be particularly fast – stability is more important. You’ll also need some Ethernet cables to connect the miner to your modem (or router).

Next, you need a Bitcoin wallet. This means a Bitcoin address to which the mining rewards will be directed. If you know nothing about Bitcoin wallets, read our comprehensive wallet guide first. It goes through the different wallet options and their advantages.

Switching on the mining device and attaching an ethernet cable connects it to the internet and creates an IP address. You can access the miner’s settings through this IP address. Find the miner’s IP address on your network by connecting to your internet modem with a browser.

Set the device URL (mining address), wallet address, and password. The mining address is the address of the mining pool. In practice, everyone should join a mining pool because it provides you with steady daily returns.

Almost all miners have a graphical user interface that makes it easy to do configurations using a web browser. When you set up the mining and wallet addresses, the device will start mining for you.

You should log in to your device and mining pool account regularly and make sure that the device is mining!

We will not discuss the miner’s configuration in detail. If you need help, please contact a mining specialist.

Maintenance of the Bitcoin farm

Purchasing and installing the hardware is only the first step. Mining also involves maintaining equipment, buying spare parts, and, in time, replacing equipment.

First, let’s go back to the excessive heat the miners produce. Finding a sufficiently cool space so your miners won’t overheat. Too much heat can cause circuit boards to melt if you use GPU rigs. At least the ASIC miners turn off automatically.

Facilities and equipment must also be kept clean. This applies in particular to dust. Ensure that cleaning is done regularly (about every two weeks). A room that is too hot and dusty can significantly reduce the miner’s life.

What about spare parts? You can replace a fan of an ASIC miner yourself. This is also preferable if the miner starts making strange sounds. Some miners require a fan replacement every 1-2 years, but others have not needed to be replaced for many years. GPU rigs require more technical skills than ASIC miners.

The replacement interval for mining equipment is a concern to many. What is a realistic lifetime for equipment worth more than 10,000 euros? There is no unequivocal answer to this question. According to Cryptolouhimo, Bitcoin has been mined with equipment up to seven years old without any problems. Keeping the miners sufficiently cool and clean will significantly extend their lifespan.

Manufacturers are releasing more powerful miners at regular intervals. Generally, we are talking about a cycle of 1-3 years. This does not mean you need to upgrade your ASIC every few years. The profit on old equipment will only get smaller as competing miners upgrade their hardware.

At some point, the miner’s yield may drop so low that the equipment has to be replaced, even if it is technically working well. This can happen, for example, when the price of electricity rises. An extraordinary collapse in the Bitcoin price for an extended period can also throw a spanner in the works.

It is impossible to give precise estimates of the need to replace equipment. It also depends a lot on how efficient (competitive) the equipment you have already bought is.

Summary

We hope the article gives you a good understanding of Bitcoin mining and how you can set up your mining farm. It went through several things that anyone interested in mining should know. Buying mining equipment is just one step. After that, there is still a lot of work ahead.

In summary, good planning and getting consultation from mining professionals will save you a lot of time and money in the long run.

Remember that Bitcoin miners are not ordinary computers. They require particular facilities and heat management. Don’t buy an ASIC to be placed in the corner of your bedroom. Think carefully about how mining would make sense.

Building a Bitcoin mining farm is expensive. Finding more investors can be a good idea. You should be prepared to pay more than 10,000 euros for one ASIC miner. On top of that, there are electricity bills and possible rental costs, as well as spare parts and maintenance over time.

It is also important to calculate the potential return under different scenarios. What if the price of electricity rises by 50% or Bitcoin falls by 50%? Of course, mining can be done at zero return or even at a loss for a certain period. It doesn’t make sense in the long run because you would get a better result by buying bitcoins.

Antti Hyppänen

Antti Hyppänen is the founder and editor-in-chief of AboutBitcoin.io. Antti has written articles about cryptos since 2017. He follows the crypto market every day of the year and is responsible for the daily operations of AboutBitcoin. Antti is not a maximalist regarding any cryptocurrency but looks at the industry objectively. Antti’s investment profile is “buy & hold,” i.e., he does not trade or use leverage. His crypto portfolio consists of mainly Bitcoin and Ethereum. Antti also follows macroeconomic events. In addition to cryptos, his interests include gold, silver, and the US stock market.