Bitcoin Mining – The Industry Securing your Monetary Future

Introduction - Why the world needs Bitcoin

Bitcoin mining is the most efficient way to store energy. It transforms electricity into calculations and archives the output of these calculations in a way that is fungible, valuable and durable. This report will explain the technology and how you can profit from it.

Bitcoin has a current market capitalisation of $800bn, more than Visa and Disney combined. Investors trust Bitcoin with their wealth because of the level of security its blockchain provides. Bitcoin has not had a single second of outage since 2013 and it is economically impossible to mount a meaningful attack against it. A mature and globally distributed mining industry is making sure of that and gets rewarded handsomely for its efforts.

There are miners everywhere and recent events have shown that temporary countrywide outages, or abrupt government bans, affecting large portions of the mining capacity, have not caused Bitcoin to blink so much as an eye.

This report will explain what mining really is and how it works. It will then outline why it is crucial for a decentralised and censorship-resistant blockchain. Finally, we will introduce the business side of mining and how you can participate.

It all boils down to cryptography…

Cryptography basics - Public-key cryptography

Bitcoin's pivotal achievement was the elimination of central authorities and trusted middlemen for financial transactions. When Alice sends Bob one Bitcoin, no central authority has to keep the books straight. Instead, the Bitcoin protocol is designed in a way that makes fraud painfully expensive, or impossible. In order for that to happen a couple of things are needed:

  • Alice needs to know Bob’s account number, called Bob’s address
  • She needs to be able to send funds in a way that only Bob can receive
  • It has to be impossible for Alice to send the same funds to Bob and Richard, known as a double spend
  • The transaction has to be stored in a way that is tamper-proof for the indefinite future

Public-key cryptography takes care of the first two requirements, while mining makes sure the other two boxes are ticked.

With public-key cryptography, a user can send the public portion of their key to others over unencrypted networks. Others can use this public key to encrypt a message that only the recipient can decrypt with their private key.

Public keys solve the problem of how to exchange keys while others are listening. In symmetric cryptography, participants need a trusted channel. Otherwise, everyone who gets wind of the key can decrypt any further messages.

A user can also sign a message with his private key. Signing means that the content of the message is condensed into something called a hash, which is then encrypted with the private key. Other users can verify the signature with the public key. This way, Bob knows that a message signed by Alice can only be from Alice. After exchanging their public keys, Alice and Bob now have a way to prove each other's identity, without trusted intermediaries.

Bitcoin uses the SHA256 algorithm for hashing messages. Hashing algorithms have two important characteristics:

  1. A small change in the underlying data leads to wildly different hashes.
  2. Hashing algorithms are usually unidirectional. A hash cannot be reverse computed to reveal the underlying data. Only if the data is available can its integrity be checked by re-hashing it and comparing the output.

Thankfully, this is all we need to know about cryptography to continue with our exploration of what mining is.

What is a block and how do they chain?

The word blockchain has already been used a lot in this report, but let us make sure we fully understand what it actually is. We need to define:

  1. What a block is
  2. How a chain of blocks is formed and maintained

A Bitcoin block is a packet of data with a maximum size of one megabyte. Each Bitcoin block consists of a header and a number of transactions. The header consists of a timestamp, the Merkle root of all transactions in the block, the hash of the previous block’s header, as well as a nonce.

Some further clarification: The Merkle root is a clever cryptographic representation of all the transactions in the block. It makes it very efficient to check whether a transaction is included in a given block. The Bitcoin blockchain is stored on more than 14,500 computers worldwide, called nodes. Each node can elect whether to store all the transactions, or just the block headers, which require much less disk space. Thanks to the Merkle roots, even these lightweight nodes can check if a transaction is included in a block or not.

Another important part of the header is the inclusion of the previous block’s hashed header. A tamper-proof representation of the previous block is included in the current block, forming a secure link between one block and the block before, aka a block-chain!

Transactions are selected by miners from a pool of candidates called the mempool. Users include a small amount on top of their transaction value as fees for miners and miners pick the best paying transactions first.

For miners, the most important part of the header is the nonce, which is a number they can freely choose. Miners have to produce a hash of the block header that satisfies the current difficulty criteria. Bitcoin difficulty governs how many leading zeros the produced hash needs to have.

Remember that hashing is unidirectional, so miners cannot work backward from the desired output. Instead, they try quadrillions of different nonces until they find one that results in a satisfactory output, the golden nonce. Nonces are 32-bit numbers, meaning there are 4.29 billion different nonces a miner can try.

Bitcoin mining - HashCash and Proof of Work

The first Bitcoin miner, who finds a golden nonce, can submit his version of the next block to the network. If it is valid and doesn’t contain any errors or fraudulent transactions, the miner receives a reward of 6,25 BTC via a coinbase transaction. This has nothing to do with the popular crypto exchange. Instead, new Bitcoins are created and credited to the address of the miner submitting the block.

Bitcoin mining is called Proof of Work (PoW) because miners have to compute the block’s hash with quadrillions of different nonces until one has enough leading zeros. This puzzle is set to such a difficulty, that all the miners in the network are only able to find a solution every ten minutes on average, Bitcoin’s block time. When new miners join the network, the block time shortens until the protocol adjusts the difficulty to maintain the average frequency of one block every ten minutes.

In January 2022, all the miners in the world combined can compute 177 quintillion hashes per second. Now you might recall that there are just 4.29 billion different possibilities for the nonce. With 177 quintillion hashes, all these numbers could be tried out 40 billion times per second. Why is it that one block is only found every ten minutes on average? The reason is that all the possible nonces cannot always produce a satisfactory block hash. Currently, a hash has to have 19 leading zeroes and these hashes are exceedingly rare. So, in addition to the nonce, miners try small variations of the timestamp, until they arrive at a hash with that many zeroes at the start. So they try all 4.29 billion variations of the nonce with trillions of slightly different timestamps. As you can see, the name Proof of Work is deserved.

Here’s an example from the Bitcoin blockchain. Block 718,296, which was mined on 12 January 2022 at 12:20 CET by ViaBTC. It contains 188 transactions. You can see all the leading zeroes in the hash and you can also see the Merkle root of the block's transactions. The Merkle root has the same length and format as the block hash, because both are the result of the SHA256 algorithm.

Bitcoin mining - HashCash and Proof of Work

A found block nets the lucky miner a reward of 6.25 BTC at the moment. When Satoshi started the network in 2009, the block reward was much higher than that and stood at 50 BTC. This reward is halved every 210,000 blocks, which corresponds to 4 years. This way, fewer and fewer additional Bitcoins will come into existence until the last fraction of a coin will be mined in 2140.

Bitcoin’s current inflation rate is just 1.7%, and the next halving will occur in early 2024. Since halvings slash the inflation rate in half, Bitcoin’s price jumps in the months after a halving because miners have fewer new coins to sell. Supply is reduced and prices adjust accordingly, which means that miners still profit handsomely from their operation, even after a halving. In the chart below, halvings are marked with dotted grey lines in late 2012, mid-2016 and mid-2020.

As you can see, halving had no negative effect on the available hash rate. No miners went bankrupt as a result.The big dip in hash rate in June 2021 is the effect of China banning Bitcoin miners.

Another interesting chart is the issuance of new Bitcoin, where halvings are most visible. The large fluctuations in issuance on the left side of the graph are caused by relatively large changes in mining capacity. The graph smoothes out once the mining industry had matured and it became economically unfeasible to add significant hash power at once.

As we will explain in more detail, the amount of hashing power matters to Bitcoin. The protocol instructs nodes to accept the longest possible blockchain as truth, because this is the chain most of the miners agree to and on which more blocks are produced than others, given the same difficulty.

Bitcoin’s technological approach to mining was pioneered by HashCash and modified to its current state by Satoshi Nakamoto. HashCash laid out the concepts of PoW and is used to limit email spam, according to its Wikipedia entry.

51% Attacks

Bitcoin’s consensus is voted on by miners allocating their hashing power. Bitcoin nodes look for the longest blockchain with the greatest difficulty levels as a source of truth. 51% or more of the mining power allows a - theoretical - attacker to calculate a longer chain than the other 49%, simply by force of being able to try more hashes per second.

The damages that would result from such an attack would be catastrophic to the network. All transactions could be rewritten to whatever outcome an attacker deemed appropriate. It’s like a hacker logging into the mainframes of your bank and having control over all the accounts there.

However, the economic resources needed to orchestrate such an attack are not feasible. Bitcoin’s current hashrate is 177 quintillion hashes. The most powerful mining hardware, the Antminer S19XP, can perform 140 trillion hashes. An attacker would therefore need to purchase 1,264,287 such machines for $11,620 each.

Then, the attacker would need to compute his version of the bitcoin blockchain in private, until they could arrive at a longer chain that would then be accepted by nodes worldwide. The theoretical attacker would then have to stay ahead in mining blocks.

Due to the incredible hashing power of the Bitcoin network and the miners’ incentives to keep the network healthy, a 51% attack on Bitcoin is only a theoretical possibility.

Hash rate and network synchronisation

Hash rate is the average estimated number of hashes per second produced by the miners in the network. In simple terms, it is the measure of the computational power of miners. In June this year, Chinese Miners were forced to shut down all operations. Hash rate significantly dropped as a result. From the photo below we can see, that China was responsible for 43.98% of the hash rate in May of 2021.

In the following photo, we can see how that portion completely left China and was dispersed around the world. A large portion of it went to the United States.

Some ended up next door in Kazakhstan, which is a major energy producer. However, Chinese miners recently found themselves in the middle of major unrest, as a massive protest caused by rising gas prices led to the internet being shut off for over 36 hours. Unstable internet connections and the government expressing discontent with the current mining activity, leads us to expect the 18.1% of the global hash rate currently in Kazakhstan to leave in the coming months.

Bitcoin Mining-Friendly Countries

After China banned bitcoin mining, some countries have proven to be refuges for miners. We identified a couple of key factors of mining-friendly countries:

  • Favourable regulation
  • Reliable Internet
  • Reliable and/or cheap electricity
  • Favourable climatic conditions

Climate conditions and favourable regulations are key for Bitcoin miners. The energy and capital needed to cool mining equipment are substantial and strategically positioning yourself in cold climates can offset a substantial amount of the energy costs needed to run a Bitcoin mining farm.

United States - Regulation is a growing concern countrywide, with some States, like Texas or Wyoming, having more welcoming jurisdictions. Wyoming, for example, has very cheap electricity costs and favourable climate conditions. It is no surprise that many miners have chosen to set up shop in this northern state.

Switzerland - Switzerland has one of the most favourable cryptocurrency regulations in the world, which is why it is home to various crypto projects including The cost of commercial electricity in Switzerland is high, but with lightning-fast internet speeds and a favourable climate, year-round, Switzerland is home to some top mining companies.

Iceland - Due to its favourable climate and its hydroelectric and geothermal energy plants, Iceland is a top pick for crypto miners. The average annual temperature of 1.75 degrees Celsius is one of the best in the world to cool mining equipment. This is why it is the home of Genesis Mining, one of the largest Bitcoin miners in the world.

Canada - Canada has a stable government and a favourable regulatory environment for crypto, and Bitcoin specifically. The first spot Bitcoin ETF was launched in Canada. With an average annual temperature of -5.35 degrees Celsius, it comes as no surprise that The Great White North is now home to some miners fleeing China .

Estonia- A country that is also top of the list of the cryptocurrency friendliest countries. Estonia has attracted technology companies across the world due to its favourable regulatory conditions and tax benefits. With cool temperatures year-round, this country is another great home for miners.

Venezuela - Political unrest and hyperinflation have made this country turn towards cryptocurrency and Bitcoin, in particular. Venezuela is known for its subsidised electricity.

Bitcoin mining energy usage

The most advanced Bitcoin mining machines currently consume three kW of electricity. Tens of thousands of these miners are hosted in modern mining facilities. Economies of scale reduce the cost of administration and maintenance per miner and mean smaller energy prices.

A survey by the Bitcoin Mining Council (BMC) estimates that mining consumes 188 TWh per year. More than the energy usage of Syria, but less than that of Azerbaijan. As a country, Bitcoin mining would be the 72nd energy consumer in the world.

When comparing electricity consumption alone, Bitcoin mining would be 22nd worldwide, being above Thailand (185 TWh), but below Turkey (251 TWh). Mining consumes considerably more electricity than Austria (66 TWh, 8.9m population) and the Netherlands (110 TWh, 17.5m population). (Source: EIA)

How much of that electricity is renewable? And how much pollution does it generate?

A poll by the BMC found that 65.9% of its members use a mix of renewable electricity. Renewable electricity sources are among the cheapest available. Hydropower costs as little as $0.01 per kWh, followed by wind and solar. Only natural gas turbines can compete.

The cost to produce a kWh of wind and solar energy has considerably decreased in the last decade and is expected to continue to do so for the foreseeable future. But wind and solar sources produce electricity intermittently, so that a Bitcoin mining facility needs backups in the form of generators or access to the power grid. How this gap is filled is precisely where most of the pollution from mining is produced and where the biggest opportunity for further reduction can be found.

Using expensive coal or gas power is economic suicide for miners, who are unique energy buyers, and can use sources no other application can tap into.

On the Bakken Oil Field in Montana, Crusoe Energy Systems employs what they call “digital flare mitigation”. Instead of burning methane gas that escapes from drill holes, Crusoe produces electricity for 40 Bitcoin mining containers on site. None of this energy could be used otherwise. The cost of connecting the oil field to the nearest landlines could never be recouped.

Mining industry overview

Bitcoin mining is largely run by various mining pools across the world. Because of the large costs needed to verify a block, miners are forced to work together in a process known as pool mining to have a chance to find a golden nonce. Below, we can see the top 10 Bitcoin miners across the world ranked by hashrate percentage.

Before China banned bitcoin mining AntPool and F2Pool were consistently on the top of the hashrate share. The screenshot below shows how the hashrate was distributed a year ago.

As you can see from the screenshot above, Antpool used to own 14.84% of Bitcoin’s hash rate.

To set up pool rewards, it is as simple as downloading the pool’s software and connecting your Bitcoin address to begin receiving mining rewards. Mining pools charge a small fee or commission for bringing together the mining power necessary to verify the block. F2Pool for example charges 2.5% on rewards made from crypto mining.

Bitcoin mining as an investment

So how can you profit from Bitcoin mining? This chapter will discuss:

  • Hobbyist mining
  • Hosted mining
  • Cloud mining
  • Investing in mining companies

We will try to find the juiciest opportunities where you can get the best returns.

Hobbyist mining

With enough spare cash, anyone can buy an Antminer from Bitmain, watch a few YouTube videos and start mining. The good thing about this approach is that the intrepid investor will learn a lot about Bitcoin mining. One of the first revelations is that at current hashrates a single Antminer will only find a block every 22 years on average. A popular shortcut to this exercise in extreme patience is joining a mining pool. Pools distribute mining work to all the participants and share the results according to hash power. At the beginning of 2022, the biggest mining pools are, Antpool and SlushPool. The latter was the inventor of pooling technology and is among the top three.

A steadfast hobbyist will come to another star realisation these days. That is, that mining isn’t profitable for hobbyists anymore. Scaled operations like Poolin or Foundry do have huge advantages that allow them to thrive. One is the lower cost of purchasing hardware via enormous bulk deals. Another is the ability to negotiate cutting edge energy prices with suppliers.

One look at a Bitcoin mining profitability calculator reveals the profits from mining on a single machine, at household electricity prices of $0,15 per kWH, to be close to $7 per day. It would take three and a half years for the investment to be even recouped, and increases in ASIC speed and general hash rate will likely mean that that point will never come. Assuming no radical changes in hash rate, their ROI for the first year would be 28.6%. Since mining hardware ages fast, this is unlikely to offset the loss in value of the mining hardware alone. As long as a miner is paying for his electricity, he’s plain out of luck.

As a result, some mining companies offer users hosted mining, which is an arrangement where users buy miners and have them hosted in the same facilities for a fee.

Investing in mining companies

Miner revenue per billion hashes per second (TH/s) is a measure for mining profitability. Miners are currently less profitable than in the second half of 2021, because Bitcoin’s price is falling and more mining capacity is added. Nevertheless, investing in publicly traded mining companies like $MARA is more profitable than HODLing BTC. One dollar invested in $MARA, two years ago, is worth $33 in January 2022, whereas it would be worth $3.4 if it had been held in Bitcoins.

There’s little reason to believe this trend will continue in the long run, however. Miners’ profits, in terms of Bitcoin per TH/s, are steadily declining thanks to advances in mining technology and increasing operational prowess, as can be seen in the chart below. Warning the y-axis is logarithmic, we can see a very swift exponential decay here. We expect profit from holding mining company stock to be less lucrative than holding Bitcoin in the long run.


Bitcoin mining has evolved. It has gone from running as a background process on the computers of a couple of die-hard cypherpunks to its current state, to warehouses that are filled with specialised Bitcoin mining hardware that employ cutting edge chip fabrication technology.

Mining is now big business. It’s very visible and some see it as a threat. Its energy usage is the aspect that is most criticised, but we have shown that Bitcoin mining can use energy no one else can and that it is a driver for the adoption of renewable sources.

Bitcoin mining technology and the operational skill of mining companies keeps evolving at a rapid pace at the same time that miners have been forced to relocate for various social and political reasons. As countries continue to regulate bitcoin mining, we can expect some countries to become the predominant mining hubs.

Even though China banned mining and Russia threatened to follow suit, we have seen that the Bitcoin network cannot be stopped by acts of oppression. Miners are mobile and energy is abundant. As long as there is a global telecommunications network that allows Bitcoin transactions to pass, Bitcoin will continue to thrive.

As global inflation spins out of control, the need for a truly decentralised, stable currency has never been greater. Bitcoin is the future of a new monetary system and miners will keep that network running and secure.

Nothing in this article constitutes professional and/or financial advice. The content is provided exclusively for informational and/or educational purposes. Nothing is to be construed as an offer or a recommendation to buy or sell any type of asset. Seek independent professional advice in regards to financial, tax, legal and other matters.

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