The Bitcoin network has been running smoothly for the last 15 years, largely thanks to its strong decentralized infrastructure. At the heart of this infrastructure lie Bitcoin miners and nodes, both of which are critical to Bitcoin’s proof of work consensus mechanism.
Miners, in particular, diligently work to validate transactions and secure the network by solving complex mathematical puzzles through pure computational power. In return, selected miners are rewarded with BTC block rewards for every successful block added to the blockchain.
This process, known as Bitcoin mining, helps secure the Bitcoin network. By becoming a miner, you can actively participate in the Bitcoin network's operations while earning rewards. However, Bitcoin mining requires some technical knowledge, operational costs, and an initial investment in specialized hardware.
If you’re new to the Bitcoin mining ecosystem, this article will give you a crash course into the common terms you should know.
The Bitcoin Mining Glossary: 10 Terms You Need To Know
First, let’s understand what a hash is. A hash is a long string of hexadecimal characters unique to each Bitcoin block. Every block contains a collection of transactions, a timestamp, a reference to the previous cryptographic hash, and a nonce. Now, hashing occurs when miners repeatedly attempt to modify this nonce until it reaches that block's target difficulty. They then combine this nonce with the next block’s data to produce a valid hash.
Application-Specific Integrated Circuit or ASIC is a highly specialized hardware unit optimized to solve Bitcoin’s complex mathematical problems. Bitcoin ASIC miners are built to hash the SHA-256 algorithm, the specific cryptographic puzzle used in Bitcoin mining. ASICs are currently the preferred hardware for Bitcoin mining, ranging from $1000 to $6000 depending on their hashrates.
Hashrate is the computational power or processing speed of mining hardware such as an ASIC miner or the entire network.
For mining hardware, hash rates are the number of valid computations the hardware can perform in a second. Higher hash rates compute more nonce guesses per second, which leads to a higher probability of finding the correct one faster. Therefore, machines with higher hash rates usually yield more block rewards and are generally more expensive.
In the context of the entire Bitcoin network, hash rates refer to the total processing power across the network. A higher hashrate equals a more stable network, which is harder to hack. However, a higher hashrate also indicates highly specialized machines in the network, making it harder for newcomers to compete for block rewards.
Depending on the scale of computational power, hash rates are typically expressed in tera hashes per second (TH/s) or exahashes per second (EH/s).
Hashprice measures how much a miner can earn from a specific quantity of hashing power, denoted in USD/TH/s or USD/EH/s. The hashprice depends on the four following factors: network difficulty, block rewards, transaction fees, and ultimately, the Bitcoin price. Every successful block changes the hashprice, so it may vary over the day.
All valid yet unconfirmed transactions in a Bitcoin block get queued in a temporary storage area called the Memory pool, or “mempool”. A mempool does the job of prioritizing transactions based on fees, size, and network congestion. Miners then pick transactions from this mempool and include them in their blocks for verification. Mempools typically vary in size depending on the transaction volume and overall network activity, especially when innovations like Ordinals are in play.
Mining hardware, such as ASIC miners, requires significant electricity to function efficiently. Power draw is the amount of electrical power consumed by the mining hardware per hour, typically measured in watts (W) or kilowatts (kW). Since power draw incurs the highest maintenance expenses for miners, it is an essential factor to consider while determining the feasibility of mining operations.
Mining pool is a way for users to participate in the mining process, without needing to manage their own hardware. Operators of mining pools aggregate power across multiple miners, use their combined processing power for hashing and then, distribute rewards among the network. Joining a mining pool significantly increases the chance of successfully mining a block, but reduces the payout for individuals due to the pool fee.
Mining operations in Bitcoin have become pretty sophisticated over the past decade, leading to the rise of many mining farms. Mining farms are an extensive network of high-performance mining rigs and equipment in one location, often with easy access to energy and cooling systems. These farms are built with economies of scale in mind, optimizing for efficiency and computational power. Of course, setting up a mining farm entails significant upfront investment — but they also offer higher profitability due to the increased likelihood of block rewards.
Difficulty adjustment is a built-in system that adjusts the difficulty of Bitcoin block creation to maintain a consistent creation rate of about 10 minutes. Adjustment periods occur every two weeks or 2,016 blocks, otherwise called an “epoch”. This self-adjusting feature helps maintain the network's stability, ensuring a consistent rate of new block additions.
As a deflationary currency, the Bitcoin network is designed to reduce the number of coins it emits per block over time. Halving refers to this programmed reduction, which happens every 210,000 blocks or just about four years. The Bitcoin rewards are cut in half every halving cycle until the block reward becomes zero. Currently, the block reward is 6.25 coins per successful block, which will become 3.125 coins after the 2024 halving event.
Bitcoin halving cycles have historically raised the demand for BTC due to scarcity, but the increasing difficulty makes it much harder for miners to maintain their output levels.
The Future of Bitcoin Mining
As we approach the 2024 Bitcoin halving, miners and mining companies are strategically upgrading their equipment and mining rig operations to offset the potential impacts on profitability. Some miners are also exploring additional revenue sources to maximize their machine capabilities, like providing AI infrastructure services.
Moreover, miners seek more cost-effective alternatives as electricity costs soar in the United States and globally. Countries like Iceland and Sweden, which rely on hydro and geothermal power, have become prime destinations for mining operations.
While the impact of Bitcoin halving on miners remains to be seen, mining has picked up some interest from major players. Industry leaders like Tether and countries such as Bhutan are setting up mining rigs. Innovations like Ordinals and BRC-20 have also increased transaction fee rewards for miners by increasing network activity. Looking ahead to the halving event, the focus still remains on resilience, innovation, and adaptability.