Bitcoin can be mined, just like we do with natural resources. Mining has a magnetic appeal for many investors interested in cryptocurrency because miners are rewarded for their work with cryptocurrency tokens. In a more technical sense, cryptocurrency mining is a transactional process that involves the use of computers and cryptographic processes to solve complex functions and record data to a blockchain.
When someone sends Bitcoin anywhere, it is called a transaction. Regular transactions made in-store or online are documented by banks, point-of-sale systems and physical receipts but Bitcoin miners achieve the same thing by clumping transactions together in “blocks” and adding them to a public record called the “blockchain.” Nodes then maintain records of those blocks so that they can be verified in the future.
When Bitcoin miners add a new block of transactions to the blockchain, part of their job is to make sure that those transactions are accurate. In particular, Bitcoin miners make sure that Bitcoin is not being duplicated which is a major problem when it comes to printed currencies as counterfeiting is always an issue.
How does Bitcoin mining work?
Mining performs two functions; it is a way by which new Bitcoins are entered into circulation and it is a critical component in maintaining and developing the blockchain ledger.
To understand how most cryptocurrency mining works in a more technical sense, you first need to understand the technologies and processes behind it. This includes understanding what blockchain is and how it works.
Traditional cryptocurrencies such as Bitcoin use a decentralized ledger known as a blockchain. A blockchain is a series of chained data blocks that contain key pieces of data, including cryptographic hashes. These blocks, which are integral to a blockchain, are groups of data transactions that get added to the end of the ledger. This process helps to add a layer of transparency to the transactions.
All mining starts with the blockchain. A group of approved transactions is called a “block.” These blocks are tied together to create a “chain,” hence the term “blockchain.”
In the Bitcoin network, a miner’s goal is to add individual blocks to the blockchain by solving sophisticated mathematical problems. This requires enormous computational and electrical power.
While many miners compete to add each block, the miner who solves the problem will add the block, along with its approved transactions, to the blockchain.
The miner who is successful in solving the problem adds a block to Bitcoin’s blockchain and receives a reward of 6.25 bitcoins. As of the time of writing this article, a single bitcoin is worth more than $32,000. This means every successful miner receives approximately $200,000 worth of Bitcoin. Very good returns for verifying a “bunch of complex math problems” isn’t it?
Due to the inherent difficulty in mining Bitcoins, there are several requirements when it comes to the actual mining process.
How to start mining Bitcoins
Bitcoin is designed to adjust the difficulty required to mine one block every 14 days (or every 2,016 blocks mined). The overarching goal is to maintain the time required to mine one bitcoin to 10 minutes. Since Bitcoin has been around since 2009, its mining difficulty is currently extremely high, which is why resource-intensive, powerful hardware is required to mine it.
This means your iCore 7, 16GB ram computer will not be able to mine Bitcoin as regular household computers will not see any success in the modern Bitcoin mining ecosystem.
In Nigeria, the first and most important piece of equipment needed to mine Bitcoin is specialized mining hardware called application-specific integrated circuits (ASICs). A new ASIC device can cost anywhere from $500 to $10,000. But the price of mining hardware is only a fraction of the expense involved. ASICs consume tremendous amounts of electricity, the cost of which may quickly exceed the cost of the device using it depending on the cost of electricity in your country or region.
You’ll also need to choose Bitcoin mining software to join the Bitcoin network but this isn’t nearly as expensive as hardware. There are even mining software for free online but it’s best to get a more reliable software that will cost between $100 to $3,000.
Another very key cost is the cost of a standby, industry generator to power the mining rig in case of power failure which is a common occurrence in Nigeria. This will cost between ₦10 million to ₦20 million, depending on what works best to power the mining rig.
The cost of electricity for Bitcoin Mining
This is the most important cost to consider and it is the major determining factor as to whether or not to venture into the mining business. According to The Digiconomist’s Bitcoin Energy Consumption Index, one Bitcoin transaction is estimated to take 1,544 kWh to complete or the equivalent of approximately 53 days of power for the average US household.
In Nigeria, according to an inquiry made by Nairametrics from an Ikeja Electric staff, a Class A tariff that provides 20 hours of electricity a day would cost ₦57.10 per kilowatt. If these two facts are taken into account, the total cost of electricity to mine a Bitcoin in Nigeria would amount to approximately ₦88,000.
Other ancillary costs like renting a building, getting a support staff to monitor the rig, stable internet connection and maintenance in case of faulty hardware will also be taken into consideration.
Is Bitcoin mining profitable?
To determine the profitability of Bitcoin mining, 3 major expenses must be considered which are the hardware, software, and electricity. The current value of Bitcoin will also be considered especially because the market is very volatile. Tax in Nigeria which is currently at 30% must also be taken into account.
The mining rig, software, generator and other ancillary cost shows how capital intensive mining can be. These costs are enough to think twice about the mining business and another cost which may seem insignificant but very vital is internet speed. Mining is like a competition between different miners who want to earn a commission on mining the block. Without good enough internet speed, the rigs and software become useless and good internet speed in Nigeria is hard to come by.
Olumide Adesina, a market analyst gave his take on mining stating that “First is the environmental concerns surrounding bitcoin mining. The carbon emission from Bitcoin mining affects the environment negatively. Bitcoin produces more carbon emission than a leading America airline company, American Airline, that has more than 200 million passengers a year.
In Nigeria, we do not have a stable power supply that could make the business somewhat viable. Bitcoin mining is known to be an energy-intensive endeavour which Nigeria is not ready for.”
To mine a Bitcoin worth $32,000 as of today will not yield so much return on investment. Especially when considering other costs like rent and human capital needed to monitor the machines.
As an individual, it will not be cost-effective to get into the mining business and on a large scale with a significant level of capital investment, to mine a Bitcoin worth $32,000 may not yield so much return on investment either.
When considering costs like rent and human capital needed to monitor the machines, the issues surrounding power supply and the difficulty in getting strong internet connectivity to power the mining process, it is hard to see how mining can be profitable in Nigeria.
Nigeria’s regulatory climate is also an important consideration being itself, nearly as volatile as the cryptocurrency market. Nigeria recently banned banks from processing any cryptocurrency-related transaction and this may not change anytime soon. Although the country has not said anything about Bitcoin mining and has not set any regulation against it, regulators may frown at the business if it eventually kicks off.