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The economics of Bitcoin mining

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Launched in 2009, Bitcoin is the first cryptocurrency to have ever existed. It is still the most important token by market capitalization, and it is also one of the most traded coins. Both retail traders and institutional investors are looking for ways to be part of this new decentralized economy offered by Bitcoin and take advantage of an asset that is not really correlated with any traditional markets and offers the possibility of great returns.

The economics of Bitcoin mining

 

Whilst trading Bitcoin has become a popular way for investors to get involved in the crypto market, an increasing number of people are looking into mining BTC tokens to earn block rewards, especially in countries where the price of electricity is cheap.

So, what is mining exactly? Is it still profitable? Should you start mining BTC? Let’s have a look at the economics of Bitcoin mining.

What is Bitcoin mining?

Bitcoin relies on the blockchain technology to work and secure its network. To avoid double-spending issues, Bitcoin uses the proof-of-work (PoW) protocol to authenticate, validate, and add transactions to the blockchain. This process is done by solving complex mathematical calculations through a process called mining.

If you’re mining Bitcoin, you’re called a “miner”, and you participate in the process of securing the Bitcoin network by using your computational power. If you succeed in solving the complex equations before someone else does, you will be rewarded for the time and energy you spent by receiving newly released BTC tokens. It is often said that mining is the process by which Bitcoin tokens are created, but this is not entirely correct, as BTC tokens earned through mining are not created from scratch, they’re simply released or unlocked from the total amount of Bitcoin that exist (21 million).

At the time of writing, the Bitcoin block reward is 6.25 BTC. This number isn’t fixed, as it needs to reflect the token’s inflation rate and the pace at which new BTC coins enter in circulation. Every four years, the rewards received by BTC miners are reduced by 50% – this is called halving. The last Bitcoin halving happened on May 11, 2020, with the block rewards going from 12.5 BTC to 6.25 BTC, and the next one should occur in spring of 2024.

How to decide if Bitcoin mining could be profitable for you

Bitcoin mining is a great way to earn Bitcoin tokens without having to put down money to buy tokens first. However, there are a few things to take into consideration when thinking about getting into mining, as you need to be sure that it is going to be a profitable activity for you. Moreover, the latest developments in China’s crypto mining regulations, also affect the mining of Bitcoin and it’s price, as seen in last June.

While BTC mining could initially be done with personal computers, it has become increasingly complicated to do so nowadays. Today, there are many companies offering powerful hardware you can use to mine BTC, but this has a cost. Such mining machines require a lot of electricity to run, which means that your energy consumption will increase if you start mining Bitcoin tokens. That’s why mining is normally only efficient if you’re based in a country where electricity is cheap.

Another important factor to take into consideration is the difficulty of solving mathematical problems to earn the block reward. This difficulty is usually measured by the “hash rate”, which changes depending on how many miners enter the network. The algorithm of the Bitcoin network is also programmed to automatically adjust the level of mining difficulty every 2,016 blocks, to maintain the block time at around 10 minutes.

Finally, you need to take into consideration the price of Bitcoin at the time of mining, as well as its growth prospect to determine how this will impact your overall potential profitability.

Source: Plato Data Intelligence

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