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With the recent Bitcoin halving event you may find yourself wondering what Bitcoin mining is and why it is important.

The Bitcoin network currently secures in excess of $1.3Trillion USD (April 2024) of value and the expenditure of electrical energy by Bitcoin miners is what ensures the security of the network. Bitcoin mining is establishing itself as a disruptive business opportunity at the intersection of technology, energy, and infrastructure.

Bitcoin mining is a relatively new sector which has experienced massive growth in the last four years in particular, including a 4x increase in the total power of the network as well as the increasing deployment of dedicated facilities all over the world.

This article aims to provide a high-level introduction to what Bitcoin mining is, the current state of the Bitcoin mining space, and what the opportunities are for people interested in working or investing in Bitcoin mining.

However this article is not financial or investing advice and should be considered only as a general starting point for doing your own research.

What Is Bitcoin Mining?

At its core Bitcoin is a decentralised digital currency and distributed ledger. Without a centralised authority to validate entries there needs to be a way to prevent double-spending and ensure all participants agree on the true state of the ledger and who owns what Bitcoin.

This is where proof-of-work mining comes in. Miners use specialised computing hardware called ASICs to repetitively perform quintillions of simple computations per second, aggressively guessing solutions to a cryptographic hashing puzzle through brute force trial-and-error in a competitive fashion.

By contributing immense computing power to try and solve these cryptographic puzzles first, miners provide the computational work that secures the Bitcoin network and processes transactions. The miner that solves the puzzle first is rewarded as per the network protocol with newly minted Bitcoins and transaction fees. Often many individual miners pool their resources together in order to improve their chances of being rewarded, subsequently splitting this reward based on their share of the effort in the mining pool.

Rockdale Facility, Building G (Immersion-Cooled) – Rockdale, Texas: Photo courtesy of RIOT.

Proof-of-work makes it extremely costly for any bad actor to try and manipulate the Bitcoin ledger, as they would need to control the majority of the network's mining power for an extended period of time. This is financially infeasible. The huge amount of energy expended mining is Bitcoin's security model - ensuring trust and verification in a decentralised manner without a central authority. The amount of computing resources dedicated to the Bitcoin network is proportional to its security.

Bitcoin Blocks

In the Bitcoin network a block is a list of Bitcoin transactions that have been validated and added to the blockchain ledger. Each new block is cryptographically linked to the previous one, forming an immutable chain of transaction records (blockchain) secured by mining power. New Bitcoin transactions are processed into blocks approximately every 10 minutes. Anyone wanting to transact Bitcoin will broadcast their transactions which are picked up by the miners to form a block template which is the list of transactions to be included in the next block.

Bitcoin Block Subsidy

The block subsidy, also called the block reward, is given to the successful miner or mining pool each time a block is found. On April 20th, 2024, the block subsidy was programmatically halved to 3.15 Bitcoins, a process that takes place every 4 years (every 210,000 blocks) until all 21 million Bitcoins are released into supply (the original subsidy in 2009 was 50 Bitcoin, halving again in 2012 and 2016, 2020, and 2024).

The four-year halving of the block subsidy is a crucial event for the Bitcoin mining ecosystem. Each halving significantly impacts miners' profitability, driving innovation in hardware and energy efficiency to maintain margins.

The Bitcoin halving has two major impacts:

Underscores Bitcoin’s transparent monetary supply: The halving helps regulate the distribution of Bitcoins entering circulation over time. By releasing Bitcoins into supply over a period of many years it has given the Bitcoin network a chance to gain financial value and bootstrap the security of the network. This measured, predictable issuance schedule gives Bitcoin its qualities of scarcity and resistance to arbitrary inflation, making it an attractive store of value and investment asset.

Price appreciation and a gradual shift in network security funding: The halving cuts miners' block subsidy in half. Historically the halving of new Bitcoin supply has been followed by significant price appreciation which has driven adoption and fiat value increase. At the same the reduction in subsidy shifts network security from being funded by the block subsidy to being more and more funded by transaction fees.

Source: https://wiki.Bitcoinsv.io/index.php/Block_subsidy

Bitcoin Transaction Fees

There is a limited amount of space in each block and thus a transaction fee market exists. On average a block can handle around 2,000 to 3,000 transactions, depending on the complexity of each transaction. Users pay a transaction fee to have a transaction included in a block. These transaction fees are paid out in each block to the miner who found the block.

This amount can fluctuate, during times of low activity fees can be in the range of 3-5% of the total block rewards.

See Bitcoin Fee in Reward historical chart.

If a particular transaction’s fee is not high enough it may not be included in the immediate next block but may still make it into a later block. Transactions with very low fees however may never be mined into a block and instead will remain indefinitely in the pool of outstanding transactions unless the sender or recipient decides to bump the fees higher.

Miners may also be paid “out of band” by other payment methods to include specific transactions directly in their block template without an on-chain transaction fee.

Detailed tools for exploring fees and Bitcoin blocks can be found at mempool.space

Difficulty Adjustment

Approximately every 2 weeks (every 2016 blocks mined) the Bitcoin difficulty is programmatically adjusted by the network. As new machines come online blocks may tend to be found quicker than the 10-minute average. The difficulty adjustment tunes the difficulty of computing the correct cryptographic hash up or down to keep the average as close to 10 minutes as possible.

Difficulty adjustment on mempool.space.

Mining Hardware

Mining Hardware history

The Bitcoin mining industry has witnessed a relentless pace of hardware innovation driven by the ever-increasing competition for computational power and efficiency. Mining originally started on CPUs before people started using GPUs and FPGAs which were generally more efficient than CPUs for massively parallel computation (mining). Finally the industry has settled on Application-Specific Integrated Circuits, A.K.A; ASICs. As the name implies, ASICs are specialised devices that can only be used for a single purpose, such as mining a specific hashing algorithm.

This constant hardware arms race has resulted in frequent upgrade cycles, as miners strive to maintain their share of the global network’s pie. Failure to upgrade mining rigs can reduce miners' competitiveness and earnings potential.

Successful mining operations must continually evaluate and invest in the latest ASIC miners to ensure they operate at the cutting edge of chip efficiency relative to the rest of the network. This dynamic has fuelled a vibrant ecosystem of ASIC manufacturers, mining rig resellers, and ancillary services catering to the mining industry's need for computational performance.

Mining Hardware today

Two main players exist in the hardware space today: MicroBT and Bitmain. These massive Chinese companies produce the Whatsminer and Antminer lines of Bitcoin mining machines respectively.

Some of the most iconic ASIC miners of recent history have been the Bitmain Antminer S9 (2017) and S19 (2020) series, and the MicroBT Whatsminer M50 (2022) series. These are all air-cooled models with unique form factors that helped define Bitcoin mining during their time.

The Antminer S9 was easily the most popular ASIC miner of the 2017 bull run. At full power, it consumed a total of 1300W, half the power of a domestic vacuum or microwave. Its performance is measured to be around 14Th/s.

The Whatsminer M50 looked similar to the S9, but the M50 was larger, heavier, consumed 3300W, and its performance is measured around 110Th/s. Here we compare the two and can see that 5 years after the S9 was released, the industry had roughly improved on chip efficiency by 4x from when the M50 was released.

The Antminer S19 series is arguably the most popular series and form factor today 4 years after its release. Unlike the M50 and S9, the S19 has 2 intake and 2 exhaust fans, as opposed to 1 intake and 1 exhaust. The S19 consumes roughly the same power as the M50 and has similar levels of chip efficiency.

Hardware Standards & Form factor

For businesses and investors evaluating Bitcoin mining operations, it's important to understand the operational parallels between mining rigs and traditional data centre server hardware. Despite being a relatively new industry, Bitcoin mining shares several similarities with modern data centre environments:

Power and Cooling:

Like servers in data centers, Bitcoin mining rigs are high-density computing devices that require reliable access to power and robust cooling solutions to operate efficiently. Ensuring adequate power supply and effective heat dissipation is crucial for maximising mining performance and longevity.

Physical Infrastructure:

Mining rigs are frequently housed in racks or shelving units, akin to server racks in data centres, with strategically designed aisle spacing to facilitate access and maintenance. This physical layout allows for efficient organisation and scaling of mining operations.

Networking and Management:

Each individual mining rig is mapped onto a network and assigned unique identifiers, much like servers in a data center infrastructure. This enables remote monitoring, software updates, and centralised management of the mining farm.

Maintenance and Upgrades:

Regular maintenance is essential for mining rigs, just as it is for data center servers. Individual rigs may need to be swapped out or upgraded over time, necessitating hot-swapping capabilities common in data centre environments to minimise downtime.

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Gridshare’s air-cooled mining operation at Lake Monowai Hydro Scheme, New Zealand.

‍‍Cooling packages

Bitcoin mining hardware is available in a variety of form factors or packages. Some of the main ways in which these packages differ is by the way in which the ASIC chips dissipate heat.

Air Cooling

Air-cooled miners (such as the stock S9, S19, and M50) usually have an intake and exhaust fan to draw air in and over the ASIC chips which can reach boiling temperatures if they’re not adequately cooled. Because of how much power runs through these chips, the fans must move a relatively large volume of air per minute. Naturally the noise the fans make can be substantial, especially inside a large mining farm.

Immersion Cooling

Some packages are designed to be completely submerged in a non-conductive oil that absorbs and transfers heat away from the chips more efficiently than air cooling. The advantages of immersion cooling include higher chip densities/hash rates due to improved heat dissipation, as well as enhanced operational efficiency, and machine lifespan. Fluid processing hardware is important to consider when running immersion-cooled ASICs.

Hydro Cooling

Hydro-cooled mining rigs utilise water cooling blocks that circulate liquid coolant across the ASIC chips to absorb heat, similar to liquid cooling systems used for high-end gaming PCs and servers. The hot coolant is then passed through a radiator or chiller to be cooled before recirculating. Hydro cooling allows very dense chip layouts and high hash rates. Similar to immersion systems, hydro cooling improves operational efficiency, and requires additional fluid handling considerations. Hydro cooling allows for a lot less fluid to be used than immersion as machines don’t need to be immersed within a filled tank.

Overall immersion and hydro-cooled miners aim to maximise hash rate and performance per watt of energy consumed by more efficiently removing the intense heat generated during the mining process. This drives higher productivity for miners but requires more initial investment compared to basic air cooling.

Synergistic Business Opportunities

While power and internet connectivity are the primary inputs for Bitcoin mining, the process also generates valuable outputs in the form of Bitcoin rewards and waste heat. This unique combination presents opportunities for synergies and value-added services that mining businesses and investors can explore, including but not limited to:

Greenhouse gas mitigation
Accelerating Renewable Energy Revenue
Greenhouse heating
Fish farming
Residential heating
Seawater desalination
Swimming pool heating

Waste Heat Utilisation

One of the most straightforward synergies involves repurposing the significant waste heat produced by mining rigs. This heat (~70 deg C) can be harnessed for various applications like greenhouse heating, fish farming, industrial processes, or even residential heating in co-located developments. Capturing and monetising this waste heat can improve the overall efficiency and profitability of mining operations, while dramatically lowering heating costs for existing industries.

Euronews - Amid Europe’s energy crisis, this Dutch tulip farmer is swapping gas for heat from Bitcoin mining:
https://www.euronews.com/next/2022/12/14/a-Bitcoin-miner-and-tulip-grower-team-up-to-reduce-costs

Capturing Methane from Landfills

Bitcoin mining provides landfill operators an incentive to capture methane-rich landfill gas (LFG) that would otherwise vent into the atmosphere. By co-locating mining rigs and using LFG to generate electricity, operators can mitigate potent methane emissions while monetising this gas through Bitcoin mining rewards, creating an environmentally-friendly revenue stream.

NASDAQ - Bitcoin Mining Can Help Fight Methane Emissions:
https://www.nasdaq.com/articles/Bitcoin-mining-can-help-fight-methane-emissions

Accelerating Renewable Energy Revenue

Bitcoin mining can help solar and wind farms make money from unused energy before connecting to the grid or getting customers. These farms are often in remote places so the energy the assets produce may not be used while the site awaits grid connection. By setting up mining rigs there they can turn this extra energy into Bitcoin and provide a steady demand for energy. This strategy promotes both renewable energy growth and sustainable Bitcoin mining.

Load Balancing and Demand Response

Bitcoin mining can serve as a solution for load balancing and demand response, essential for stabilising energy supply and demand, particularly during fluctuating conditions such as different times of the day, seasons, and varying weather patterns. With their rapid power consumption modulation Bitcoin miners can help maintain grid stability by switching on and off quickly.

This presents an opportunity for Bitcoin businesses to collaborate with power generation companies while supporting the reliability of energy infrastructure.

Gridshare - https://www.gridshare.co/

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These synergistic opportunities highlight the versatility of Bitcoin mining and its potential to generate value beyond the primary use-case of Bitcoin rewards. By exploring and developing these synergies, mining businesses and investors can unlock new revenue streams, optimise resource utilisation, and create innovative business models that contribute to a more sustainable and efficient energy ecosystem.

As the global push towards decarbonisation and renewable energy adoption continues, mining operations that leverage these synergies may gain a competitive advantage by aligning with sustainability goals and demonstrating responsible resource management practices.

Connectivity & Installation

Bitcoin ASICs require reliable electricity supply and internet connection to begin working and are ready to go out of the box.

Once a machine is powered on, it is as simple as logging into the machine’s default control panel software and setting the machine to point to a “mining pool” of your choice to collaborate with other miners to find the next block. Usually no permission or vetting is required for this process and anyone can join.

Most of the large public mining pools allow miners to join without any approval process. They generally just require miners to create an account, configure their mining software to point to the pool's stratum servers, and start contributing hash power. However, it's always a good idea to review the pool's specific policies and terms of service before joining.

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Mining Pool Market Share:

Mining Pools that do not require prior approval to join:

Ocean - https://www.ocean.xyz/
Braiins - https://braiins.com/
Luxor - https://luxor.tech/

Larger commercial miners may also operate their own private mining pool that only they can join.

Payout schemes vary across pools. Depending on the pool chosen the pools may payout hourly, daily, or whenever a block is found.

Bitcoin miners are rewarded based on their hashrate contribution to the pool which is usually measured through regular “checks” of the hashrate of the machines. Depending on the mining pool policy there may be a falloff curve in the actual hash rate that is rewarded if a machine is turned off for part of the day etc.

Different mechanisms exist for payouts and may come in the form of Bitcoin deposited into an account with the mining pool that can be withdrawn into your own Bitcoin wallet, or otherwise rewards may be directly paid to your Bitcoin Wallet.

A Simple Single Worker Dashboard Sample with Braiins pool. Note the hashrate variability is due to the way hashrate is checked by the pool, but this tends to average out over longer periods to the specified rate of the machine.

Operational Considerations

Due to the dynamic, global, and emerging nature of the industry, there are many potential approaches to Bitcoin mining operations. There is significant opportunity in developing unique or novel business models related to the configuration of a Bitcoin mining operation and Synergistic Business Opportunities.

Questions to consider:

Whether mining for your own business or selling rackspace, or a mix of both.
Co-location options vs. running your own facility.
The price of Bitcoin and terms of your PPA.
The scale of your operation and shareholder expectations.
Intentions to hold or sell mined Bitcoin.
Integration with partner businesses vertically and horizontally.

Challenges and Risk Mitigation

There have been examples of major mining company failures / bankruptcies including CoreScientific. Considerations include hedging risks like price volatility, the increasing Bitcoin difficulty, other market dynamics, etc.

Others businesses may be looking at Bitcoin more speculatively and expect shorter-term returns, in which case the dollar value volatility can play a role in calculations.

Financial Models & Case Studies

There are many simple financial calculators that can be used to provide a rough estimate of the current spot price profitability of any given Bitcoin ASIC worker. However these models do not usually take into account the details of Bitcoin difficulty adjustments, the specifics of your PPA arrangement, demand response rebates, etc.

There are also considerations around the resale value of Bitcoin mining hardware which has historically been correlated with Bitcoin price and supply and demand.

It is important to explore what your requirements are and define your own models to work out profitability and viability.

Publicly-traded Bitcoin miners:

Riot Platforms - FY2023 Annual Update

Marathon Digital - 2024 Investor Presentation

BitFarms - Investor Information

Hashrate Index - Public US Miner Stock Index
https://data.hashrateindex.com/stock-index

Key Units & Glossary

- SHA-256: The cryptographic hash function used in Bitcoin mining to secure transactions and create new blocks.
- Block Subsidy: Also known as block reward, the number of Bitcoins given to the miner who successfully creates a new block.
- Transaction Fees: Fees paid by users to miners for including their transactions in a block.
- ASIC (Application-Specific Integrated Circuit): Specialised hardware designed solely for Bitcoin mining.
- TH/s (Terrahash per second): A unit measuring the speed of the mining hardware's hash rate, indicating the number of hashes computed per second.
- Sats (Satoshis): The smallest unit of Bitcoin, equivalent to 0.00000001 BTC.
- Difficulty: A measure indicating how difficult it is to find a hash below the target in PoW algorithms.
- Hashing: The process of converting input data into a fixed-length string of characters using a cryptographic hash function.
- Mining Pool: A group of miners who combine their computational resources to increase their chances of mining a block and share the rewards.