Bitcoin miners’ rewards can vary greatly and unexpectedly due to several factors, which is why it’s vital to understand how mining revenue works.
The basics of Bitcoin mining
Bitcoin mining is the process through which all transactions on Bitcoin are confirmed and permanently recorded on the blockchain. In other words, it is how miners provide security and ensure the correct functioning of the network.
This method runs on a consensus algorithm known as proof-of-work. It consists of miners spending a considerable amount of computational power to solve mathematical puzzles.
If you’re interested in learning about the Bitcoin mining process in detail, don’t miss our educational article: What is Bitcoin mining and how does it work?
As hashrate grows, mining has to become harder to maintain security. Making mining more demanding greatly increases the costs of trying to attack the network.
Thus, Bitcoin automatically adjusts the mining difficulty every 2,016 blocks —approximately two weeks— proportionally to the total hashrate currently working on the network. The more miners there are, the harder it is to find a block.
Mining difficulty is one of the critical factors to determine miners’ revenue. Logically, the harder it is to mine a block, the less profitable mining becomes.
Breaking down Bitcoin mining revenue
Aside from mining difficulty, Bitcoin’s architecture has two other aspects that determine the revenue a miner earns.
Each time a miner finds a new block, they receive a block subsidy and transaction fees. To keep it simple, we will explain this topic without considering the mining pool dimension. We will address that later in the article.
The first factor to consider is the block subsidy. This is a fixed amount of BTC a miner receives for solving a block. More importantly, it’s also the “new” coins that come into circulation with each block.
An important detail to remember about block subsidies are halvings. These events happen every 210,000 blocks —roughly four years— and reduce the Bitcoin issuance by half. This is how Bitcoin controls inflation.
If you want to learn more about halvings, visit our educational article: What are Bitcoin halvings?
The other determining factor for mining revenue is transaction fees. Every transaction broadcasted to the Bitcoin blockchain includes a miner fee.
Initially, Satoshi Nakamoto implemented transaction fees to prevent spam transactions that could slow down and clog the network. However, they are also a monetary incentive for miners.
When miners find a block, they earn the sum of all the transaction fees in it —additional to the block subsidy.
Miners don’t confirm transactions in order of arrival. Instead, they choose those with the highest fees for better profits. In that regard, users can set specific fee amounts to prioritize their transactions.
Thus, if users need their transactions confirmed immediately, they can pay higher fees to incentivize miners to confirm their transactions first.
To sum up, miner revenue includes both these elements:
- The block subsidy, which is a fixed amount of BTC determined by the network.
- The sum of the fees of all the transactions included in that block.
Together, these two amounts constitute the total earnings for finding a block, known as block reward.
Bitcoin mining revenue and the pool factor
Crypto mining pools are groups of miners who join their hashpower to improve their chances of finding a block. By combining their total computing power, miners can bump up their hashrate.
Essentially, mining pools reduce the miners’ variance, paying miners for finding hashes at a lower difficulty rate. Thus, miners earn more often than if they were mining solo.
Another aspect of mining pools that affects revenue is their payment method and fees. Not all pools reward miners under the same mechanisms.
Some pools pay miners for their work regardless of if the pool finds a block or not. However, when they do, the pool operator keeps the block rewards. Others only pay them after finding a block, distributing the block rewards among all miners. In this case, the pool operators charge a fee to the miners.
If you want to learn more about mining pools, check out our article: What are crypto mining pools?
In conclusion, many factors affect Bitcoin mining revenue. If you want to mine crypto, you should know how hashrate, difficulty, fees, and mining pools affect your revenue.
Understanding how mining revenue works will enable you to better calculate your profitability. As a result, you’ll be able to adapt to any unexpected situations that could affect your mining operation.
If you want to learn more useful tips to reduce costs and increase revenue, check out our articles:
- How to improve you Bitcoin mining profitability
- How to calculate your Bitcoin mining electricity costs