Bitcoin has been one of the hottest topics of conversation in the investment world in recent years, with many desperate to understand what it’s all about and whether you can make money with Bitcoin. However, it’s not just about investing in the cryptocurrency – there’s also the opportunity to mine Bitcoin.
Money.com (opens in a new tab) recently published a useful article on whether Bitcoin mining is profitable and here we summarize it for you. Before we get into it, be aware that both investing in Bitcoin and mining Bitcoin have high risks, so only venture out if you are sure of what you are doing and comfortable with the risk. For more help, you can also listen to me and other prominent journalists describe the pros and cons of Bitcoin mining in last week’s episode of The Week Unwrapped podcast (opens in a new tab).
What is Bitcoin?
It is worth first establishing what Bitcoin actually is, given that it is a very complex type of currency. I’ve been in the world of personal finance journalism for almost 20 years, and I have to say it’s the most complex issue I’ve written or talked about.
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Bitcoin, like Ethereum and Dogecoin, is a type of cryptocurrency, which is digital money held in the cloud that runs on a type of technology called blockchain. According to the Economist, “a blockchain is a database consisting of a series of blocks of information that build on top of each other in an immutable chain. It stores data about transactions, and provides proof of who owns what at any given time.”
Bitcoin is a decentralized currency, meaning it is not under the control of any government or central bank.
As you may know, the value of Bitcoin can be very volatile. While one coin is worth around $30,000 at the time of writing, over the past three years or so it has fluctuated between $5,000 and $65,000. Additionally, there have been some security concerns, such as crypto hackers have stolen billions of dollars in the past. Meanwhile, recent bankruptcies in the industry has also raised questions for investors.
What is Bitcoin Mining?
In its simplest terms, Bitcoin mining is when you create new Bitcoins, although how you get there is quite complicated.
In accordance Bank rate (opens in a new tab)“Bitcoin mining is the process of creating new Bitcoins by solving extremely complicated mathematical problems that confirm transactions in the currency. When a Bitcoin is successfully mined, the miner receives a predetermined amount of Bitcoin.
Money.com goes into even more detail: “Miners compete to guess a complex 64-digit number known as a hash. To guess the hash, miners use powerful computers to generate guesses quickly. Think of it this way: each digit in the hash has 16 possibilities (the numbers 1 through 10 plus the letters A through F). So, to make a guess, you can roll a 16-sided die 64 times. That would give you a guess – the problem is that there are trillions of possible answers.
“Using tons of processing power and a whole lot of energy, the miners’ computers basically roll dying at super speeds. The miner who first arrives at the correct hash and adds a bitcoin block to the blockchain receives the reward.”
How do you set up a Bitcoin mine?
The first thing to note is that it is legal in the United States, although some other countries have placed restrictions on Bitcoin mining.
To mine Bitcoin, you need giant computers capable of processing the massive amount of data required, and it can cost you thousands of dollars to set up. The sheer amount of hardware required has led some people to join mining pools to share computing power, even if it also means sharing some profits.
A friend of mine has taken up Bitcoin mining, and when I went to his house a few weeks ago, I saw about four giant computers, each the size of an old-fashioned hi-fi system. They gave off a huge amount of heat – so much so that he installed solar panels to cover the electricity costs of mining, even though it meant he barely had to turn on the heating in the winter, he said.
Importantly, the huge energy consumption required is one reason Bitcoin mining is controversial, due to its environmental impact.
How much money can you make from Bitcoin mining?
This is where we return to the article powered by Money.com to summarize the advice.
It points out that every time a miner adds a new block of transactions to the blockchain, they earn 6.25 Bitcoin, but this will drop to 3.125 next year. It is paid into a crypto wallet.
That equates to a lot of money given that the value of Bitcoin at the time of writing was around $30,000 per coin. It might sound like easy money, but remember: you’re competing against other miners.
Let’s also remember that Bitcoin is an incredibly volatile currency, so who knows what its value will be tomorrow, let alone the distant future. There have been a few days where Bitcoin investors have woken up to gigantic falls and increases in value.
Is it profitable then? Here’s how Money.com (opens in a new tab) summarizes that answer: “The bottom line is that there is no fixed amount that bitcoin miners earn. Mining requires significant investment, and the results are unpredictable.”
As you can see, it requires a lot of investment to set up, you use a lot of energy to mine and the return is unknown. Of course, some are making huge sums of money from Bitcoin mining, but before you take the plunge, consider the risks, environmental impact, and effort involved.
