Basic Bitcoin mining maths
Some have heard about huge Bitcoin (BTC) mining farms, where cheap power is needed and the loud sound of computers calculating at super high speeds means ear defenders are needed and hot countries cannot host competitively because of the heat generated from the machines.
But not that many average investors have dug into the maths of the esoteric task of mining Bitcoin. This short piece will explain why Bitcoin mining is growing and how it works.
At the top level the blockchain on which Bitcoin is based requires computers to validate the transaction messages that are broadcast. Think of this as supervisors checking that you really held the money you have spent in any transaction. But there is no central supervisor, anybody can be a supervisor, so how do we trust one supervisor over another? Two things are required: firstly, a system to weed out the fake supervisors, the scammers, imposters and cheats and secondly the network will want to verify the supervisors’ work once completed.
The supervisors who spend the most amount of energy in validating the network’s transactions are the ones who will be rewarded with new Bitcoin for their work once verified.
They have essentially demonstrated a commitment to the network’s security and validity by investing capital, work and energy. It is therefore in their best interest to have the network secure and accurate so that they may be rewarded.
Let’s dig into the maths of this mining reward system. All of this is totally available from a number of different websites and it is transparent and easy to calculate, so please search the internet for other and better explanations and descriptions than this. There are plenty.
We start with a look at the miner’s reward. For the next few years every completed block rewards the successful miner with 6.25 Bitcoin plus a fee for transaction processing. (This transaction fee varies in percentage terms depending on how busy the network is.) A block is created approximately every 10 minutes. So in 24 hours there are about 900 Bitcoin newly created every day. That is about $26m at current $29,0000 BTC price levels.
Naturally this big daily prize results in competition. Now we are going to get into the realm here of some big and small numbers. Only really for the world of computers. Currently the total power of the computers on the network is roughly 151 Exa hash per second. What is that? I know, right? Think of a ‘hash’ as being a calculation, and the latest machines can complete about 100 Tera Hash per second (TH/s). In real number terms a fast machine is completing some 100 trillion calculations per second. Or 100,000,000,000,000 calculations per second.
The Bitcoin network is completing some 140 quintillion calculations per second. Or 140,000,000,000,000,000,000. If all the machines were hashing at 100 Th/s then this would imply some 1.4m+ computers on the network working to win the block reward.
To follow this through, if the reward were split evenly, every day, across all the hashing power (which is where mining pools come in) the reward could be described in Bitcoin per Tera Hash (TH/S), 900 divided by 140 Quintillion, or in TH 0.000007071428571 Bitcoin per day.
Making USD and sense out of this is relatively straight forward. Assuming you have a 100 TH/s machine you will be rewarded with some 0.0007071428571 or about $20.12 per day with BTC at current prices of about $29,000. (Assuming a 10% transaction fee reward added to the mining reward).
The electricity costs to run such a machine could be in the region of $6 per day. The cost of the machine in the region of $3,500.
In summary over the course of one year, providing the network, computing power and BTC price don’t change, you would spend some $5,700 and make $7,300.
$ per day $20.36
Revenue pa $7,431.78
Electricity cost day $6.14
Cost of machine $3,500.00
Electricity cost pa $2,242.56
Total cost $5,742.56
Profit $1,689.22
Percentage on capex 48.26%
You can see from this table that mining is currently profitable. However, there are many risks, from equipment theft, to escalating power prices, soggy Bitcoin prices, government taxation and interference, increasing computer competition, failing equipment or cowboy operators. Mining has become more industrialised as Bitcoin has won mainstream adoption.
We can examine at least readily examine the effects of a Bitcoin price move. Ultimately, with mining you sacrifice flexibility for price cushioning and a leverage effect on price appreciation. Two scenarios to consider; Bitcoin drops or rises in price:
In the case of a drop to $18,000 the BTC buyer at current prices will lose some $1284 on a $3,500 purchase. Whereas the BTC miner with the same amount spent and running for a year would lose $535.
The profits if the BTC price were to rise to $45,000 for the purchaser of BTC would be $2,038 and for the BTC miner over a year would be $6,432.
Mining has a positive leverage effect on profits and cushions from a price fall, but requires time. In this scenario I have used 365 days but in reality the latest machines should still be hashing profitably for at least 730 days or more.
If you are interested in taking the idea of mining further and seriously please get in touch via https://www.nextblockcapital.com/, otherwise I hope this was useful. All comments and feedback welcome. Happy New Year.
