What is bitcoin mining and how to profit from it?

Earning an income from trading Bitcoin is hard considering all the risks involved. Mining is probably the easiest way to earn Bitcoin if you have access to a powerful computer and cheap electricity. You can make money from Bitcoin mining in 2 ways:

  1. Mine Bitcoin
  2. Use Mining activity to predict Bitcoin price

In this article, you will learn what is Bitcoin mining, and how you can make a profit with it and how you can forecast market moves by looking at mining activity.

What is Bitcoin mining?

A record of all bitcoin transactions are recorded on something called the “Blockchain”. The Blockchain is a shared public ledger on which all Bitcoin transactions are recorded.

Computers that verify and record transactions on the Blockchain are called miners. And they get paid for verifying the transactions. Since each Bitcoin transaction is encrypted and verified it is virtually impossible to counterfeit Bitcoin transactions.

Miners use special software to solve a complex cryptographical math problem which results in a verified transaction. Once enough transactions are verified, they are saved in a “block” which put together create the “Blockchain”. Currently, a new block is created approximately every 10 minutes.

How much do Bitcoin miners make?

When Bitcoin was first introduced, the computer or miner that was able to verify the block first would receive 50 BTC. The current reward is 12.5 BTC. The reward halves approximately every 4 years and the next Bitcoin Halvening happens in May 2020. After that, the reward will only be 6.25 BTC.

This provides a smart way to issue the currency and also creates an incentive for people to mine Bitcoin as well creates a hard limit on the supply of Bitcoin of 21 million BTC. The last block will be mined in 2140.

Because of the increase in demand for Bitcoin, the mining difficulty has gone up significantly. Instead of running computers for months on end hoping to get 25 BTC, people like to use mining pools which reward a small amount of Bitcoin many times a day.

Mining pools

A mining pool like Slushpool takes a small cut off the rewards but people inside the mining pool are rewarded constantly.

Bitcoin mining isn’t an easy way to earn money though, you need a powerful computer to mine bitcoin. The more computing power your computer has, the faster it can solve blocks and the more money it can make.

You can even buy mining computing power per terahash on a fixed monthly price like here.

Increasing difficulty weeds out weak miners

Another factor of Bitcoin mining is the network difficulty. Since more nodes join the mining process Bitcoin is designed to keep the fittest alive. The difficulty is a value used to show how hard it is to find a hash that will be lower than the target defined by the system. The higher the difficulty, the harder it is to solve the block, that’s why it’s not possible anymore to mine bitcoin on an old laptop.

Increased difficulty makes mining less profitable. Also, price drops make mining less profitable. More on this later.

Bitcoin is now mostly mined on asic miners. An asic miners’ sole purpose is to mine a specific digital currency. A Bitcoin ASIC miner can only mine bitcoin. Mining Bitcoin can be a good source of income if you have enough money to get Asic Miners in the first place.

Asic miners are extremely expensive, and it can take months to break even. Breaking even is hard when the difficulty is going up on each coming day.

So can I make money with mining?

Yes, mining can be a good source of income because if the Bitcoin Price goes up you are earning interest on your account. Mining can take a while to break even but it has been a good investment in the long run.

A few years ago mining was possible using a powerful gaming PC but if you do it now you will most likely be paying more for electricity and cause more wear and tear on your hardware than make money. But if you have access to cheap or free electricity, then it can be profitable and worthwhile.

But there are other lesser known coins which also allow you to use your computer for mining. Common for most coins is that you will lose money every month and you would be betting on the price to go up. Also mining is relatively slow unless you have a dedicated machine.

This is why buying Bitcoin or altcoins that you see potential in, is how most people get into crypto.

How can I predict Bitcoin price from miner activity?

Bitcoin hash rate correlates with Bitcoin price.

Hashrate is the hip term for the combined computing power on the Blockchain. Higher the hash rate, more miners are on the network.

Bitcoin hash rate vs price since 2016 on Glassnode.

Some people think Bitcoin hash rate is a leading indicator of macro trend for Bitcoin price. However, it is not as simple as that. But you can look at mining hash rate for clues of where price might be going.

On the chart above, you can see from that in late 2018 Bitcoin hash rate started going down a few days earlier than Bitcoin price. But the hash rate started climbing back up before the price started to climb to 2019 highs. This could indicate that hash rate is a leading indicator.

However, a similar thing happened earlier this year where price peaked on February 13th whereas hash rate peaked on March 6th.

Recent hash rate with 4-day average until 29th March 2020 on Blockhain.com

Above you can see a 4-day average of hash rate since October 2019. The interesting part of this chart is not which came down first, price or hash rate.

The interesting part is that when the price dipped below $4,000 on March 13th and stayed around 5k levels for some days, the hash rate average didn’t go below December 2019 levels.

This means miners have faith in Bitcoin price going up in the long run and is a bullish sign for Bitcoin on a macro trend. But on a micro trend, it could mean this is not the lowest point yet as enough miners have not experienced enough pain and weak miners have not yet been shaken out before the halving.

It doesn’t mean Bitcoin cannot go lower but it means miners have faith in Bitcoin price and are even willing to run their operations at worse prices than November and December of 2019.

Usually, big dips like these scare off the weak players in the market while strong players survive and start a new bull run.

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