How Bitcoin Miners Make Money

Alexander Boulden

Updated January 11, 2024

Dear Reader,

Unless you’ve been living under a rock or just choosing not to pay attention to it, you know that Bitcoin is currently riding out an epic bull run.

It touched $47,000 for the first time in since 2021 this week.

If you’ve been buying into Bitcoin, good on you.

We’ve said in these pages before that it’s irresponsible not to own at least some crypto in your portfolio.

We’ve also laid out our skepticism about the industry, reaffirmed by bad actors like Sam Bankman Chicken-Fried.

But there’s no denying the staying power of crypto at this point.

Now, you might be thinking, “I don’t have $47,000 to buy Bitcoin.”

Well, for one, you can put whatever amount you want into Bitcoin; you don’t have buy an entire coin.

Second, you can buy other cheaper cryptos, like Ethereum or Litecoin, that also tend to ride the crypto wave.

Finally, you may be interested in buying Bitcoin miners.

I’m not talking about going out and buying a bunch of supercomputers that suck up the amount of electricity that a small country uses…

I’m talking about companies that do all this for you.

Companies that buy the computers, do all the work, pay for the resources, and are rewarded with Bitcoin.

You see, Bitcoin miners play a crucial role in the functionality and security of the Bitcoin network. A miner can be a single person or a company that invests significant computational power to solve complex mathematical problems and, in turn, secures the network and validates transactions.

The process through which miners earn their rewards is known as “proof of work.” It involves the computer solving these complex mathematical problems, and the first miner to successfully solve the problem gets the right to add the next block to the blockchain. This competitive process is what ensures the security and decentralization of the Bitcoin network.

The difficulty of these mathematical problems is adjusted regularly to maintain a consistent block time, ensuring that new blocks are added approximately every 10 minutes. As more miners join the network, the competition to solve these problems intensifies, making it progressively harder to mine new blocks. This difficulty adjustment is a fundamental aspect of Bitcoin’s design to maintain a stable and secure network.

Sounds great, but how exactly do Bitcoin miners make money as a business?

Well, there are three main ways…

Block Rewards

At the heart of a miner’s income is the block reward. When a miner successfully adds a new block to the blockchain, they are rewarded with a certain number of newly created bitcoins. This mechanism not only incentivizes miners to participate in the network but also introduces new bitcoins into circulation.

The concept of the block reward has evolved over the years. In the early days of Bitcoin, the block reward was set at 50 bitcoins per block. However, the system is designed to undergo a process known as the “halving” approximately every four years. During a halving event, the block reward is cut in half. This controlled supply mechanism is intended to mimic the scarcity and finite supply characteristic of precious metals like gold.

The most recent halving occurred in May 2020, reducing the block reward to 6.25 bitcoins per block. The gradual reduction in block rewards is expected to continue until the maximum supply of 21 million bitcoins is reached, emphasizing the deflationary nature of Bitcoin.

The next halving should take place in April of this year, which could put more upward pressure on the coin.

Transaction Fees

While block rewards form the foundation of mining income, transaction fees have become an increasingly important source of revenue for miners, especially as the block reward diminishes over time. When users initiate Bitcoin transactions, they have the option to include a transaction fee as an incentive for miners to prioritize their transactions.

Transaction fees serve a dual purpose. Not only do they act as an additional reward for miners, but they also help prioritize transactions by allowing users to compete for inclusion in the next block. Miners are naturally inclined to select transactions with higher fees, optimizing their revenue stream.

As the Bitcoin network matures and transaction volumes increase, transaction fees become a more significant part of a miner’s income. This shift is particularly evident during periods of network congestion when users are willing to pay higher fees to expedite their transactions.

Mining Pools

Individual miners face increasing difficulty in successfully mining blocks as the network grows. To address this challenge, many miners join mining pools — a collaborative effort where participants combine their computational power to increase the chances of successfully mining a block. When a block is mined, the rewards are distributed among the pool members based on their contributed computational power.

Mining pools provide a more consistent income stream for participants, even though it’s shared among pool members. This collaborative approach allows miners with limited resources to actively participate in the mining process, contributing to the overall security and decentralization of the Bitcoin network.

A lot of companies will also have a Bitcoin mining component — basically, if they have the money and wherewithal, they’ll make income on the side with some big computers and Nvidia GPUs.

Drawbacks, Energy Consumption, and Market Volatility

While the potential for seemingly easy profits exists in Bitcoin mining, it comes with challenges and risks. One significant concern is the environmental impact of the energy-intensive proof-of-work consensus mechanism. Bitcoin mining operations, particularly those powered by non-renewable energy sources, have faced criticism for their carbon footprint. However, there are many Bitcoin miners that utilize renewable energy, like wind, solar, and nuclear, to power their operations.

Additionally, the volatile nature of the cryptocurrency market introduces uncertainties for miners. The value of mined bitcoins and transaction fees can fluctuate, affecting the profitability of mining operations. Miners must carefully manage their operational costs, including electricity expenses and hardware investments, to remain profitable.

Following the Market

Just like with other markets, you can invest in individual companies or market-tracking ETFs.

The best ETF according to my research is the Valkyrie Bitcoin Miners ETF (NASDAQ: WGMI), which is up nearly 200% in the last year!

The growth here is astronomical.

Upcoming market catalysts for crypto and crypto miners include the launch of the fabled BlackRock Bitcoin ETF, among others, and the Bitcoin halving in April.

Good investing.

Stay frosty,

Alexander Boulden
Editor, Wealth Daily

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After Alexander’s passion for economics and investing drew him to one of the largest financial publishers in the world, where he rubbed elbows with former Chicago Board Options Exchange floor traders, Wall Street hedge fund managers, and International Monetary Fund analysts, he decided to take up the pen and guide others through this new age of investing.

Alexander is the investment director of Insider Stakeout — a weekly investment advisory service dedicated to tracking the smartest money on the planet so that his readers can achieve life-altering, market-beating returns. He also serves at the managing editor for R.I.C.H. Report, a comprehensive service that uses the highest-quality investment research and strategies that guides its members in growing their wealth on top of preserving it.

Check out his editor’s page here.

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