Mining Economics

Module 4 of Bitcoin Deep Dive

What Is Bitcoin Mining?

Mining is the process of:

1. Collecting pending transactions
2. Assembling them into a block
3. Finding a valid proof-of-work hash
4. Broadcasting the block
5. Earning the block reward + fees

Miners are the backbone of Bitcoin's security model.

The Mining Process

Step-by-Step

1. Collect transactions from mempool
2. Verify each transaction is valid
3. Assemble block header:
   - Previous block hash
   - Merkle root of transactions
   - Timestamp
   - Difficulty target
   - Nonce (starts at 0)
4. Hash the header: SHA256(SHA256(header))
5. Is hash < target?
   - No: Increment nonce, try again
   - Yes: Broadcast block, collect reward!

The Numbers

• Hashrate: ~400 EH/s (400 quintillion hashes/second globally)
• Block time target: 10 minutes
• Attempts per block: ~10^21 (sextillion)
• Energy consumed: ~100 TWh/year

Block Rewards

The Subsidy

New bitcoins are created with each block:

Halving: Every 210,000 blocks (~4 years), subsidy cuts in half.

Transaction Fees

In addition to subsidy, miners collect all transaction fees in their block.

Fee = Sum of inputs - Sum of outputs

Typical block revenue (2024):
  Subsidy: 3.125 BTC (~$150,000)
  Fees: 0.1-1 BTC (~$5,000-50,000)
  Total: ~$150,000-200,000 per block

The Long-Term Transition

As subsidy shrinks, fees must replace it:

Now:    |████████████████░░| ~95% subsidy, 5% fees
2030:   |████████████░░░░░░| ~85% subsidy, 15% fees
2040:   |████████░░░░░░░░░░| ~50% subsidy, 50% fees
2100+:  |░░░░░░░░░░░░░░░░░░| 0% subsidy, 100% fees

Can fees alone secure the network? Open question.

Mining Hardware Evolution

The Arms Race

What Is an ASIC?

Application-Specific Integrated Circuit — chip designed ONLY for SHA256 hashing.

Advantages:

• 10,000x more efficient than CPUs
• Optimized for one algorithm

Disadvantages:

• Expensive ($2,000-15,000 per unit)
• Only useful for Bitcoin mining
• Rapid obsolescence (new gen every 1-2 years)

Current Leading Miners

Mining Economics 101

Revenue

Daily Revenue = (Your Hashrate / Network Hashrate) × Daily Block Rewards

Example:
  Your hashrate: 100 TH/s
  Network: 500 EH/s = 500,000,000 TH/s
  Daily blocks: 144
  Reward per block: 3.125 BTC

  Daily revenue = (100 / 500,000,000) × 144 × 3.125
                = 0.00009 BTC/day
                = ~$4.50/day at $50k/BTC

Costs

Breakeven Analysis

Breakeven electricity price = BTC price × (Daily BTC / Daily kWh)

Example:
  Daily BTC: 0.00009
  Daily kWh: 84 (3,500W × 24h)
  BTC price: $50,000

  Breakeven = $50,000 × (0.00009 / 84)
            = $0.054/kWh

If your electricity < $0.054/kWh, you're profitable.

Mining Pools

Why Pools Exist

Solo mining has high variance:

With 100 TH/s, expected time to find a block:
  Network: 500 EH/s
  Your share: 0.00002%
  Expected blocks/year: ~0.01
  Average wait: ~100 years!

Pools combine hashrate and share rewards proportionally.

Major Pools (2024)

Pool Payout Schemes

Difficulty Adjustment

The Algorithm

Every 2,016 blocks (~2 weeks):

New Difficulty = Old Difficulty × (Actual Time / Target Time)

Target Time = 2,016 × 10 minutes = 20,160 minutes

If blocks came too fast: Difficulty increases
If blocks came too slow: Difficulty decreases

Why It Matters

• Maintains 10-minute average regardless of hashrate
• Adjusts to hardware improvements and price changes
• Limits adjustment to 4x per period (up or down)

Historical Trend

2009: Difficulty 1
2013: Difficulty ~10 million
2017: Difficulty ~1 trillion
2024: Difficulty ~80 trillion

Difficulty has only gone down during major miner capitulations.

Geographic Distribution

Where Miners Operate

Miners seek cheap electricity:

The China Ban (2021)

Before May 2021: ~65% of hashrate in China After: Hashrate redistributed globally

Result: More geographically decentralized network.

Environmental Debate

The Criticism

• ~100 TWh/year (0.5% of global electricity)
• Carbon footprint of a small country
• "Wasteful" computation

The Defense

1. Security has a cost: Banking system uses more energy
2. Renewable incentives: Miners seek stranded/cheap energy
3. Grid stabilization: Flexible load helps balance grids
4. Methane mitigation: Flared gas → mining

Current Energy Mix

Estimates vary, but approximately:

• 50-60% renewable/nuclear
• 40-50% fossil fuels

The Future of Mining

Challenges

1. Halving pressure: Revenue cuts every 4 years
2. Fee dependency: Must replace subsidy
3. Hardware costs: Constant reinvestment
4. Regulatory risk: Environmental concerns

Opportunities

1. Stranded energy: Monetize otherwise wasted power
2. Heat recovery: Use waste heat for heating
3. Grid services: Demand response programs
4. Vertical integration: Own generation + mining

Key Takeaways

1. Mining secures Bitcoin through proof-of-work
2. Revenue = subsidy + fees (subsidy dominates today)
3. ASIC arms race makes mining highly competitive
4. Pools reduce variance for individual miners
5. Difficulty adjusts to maintain 10-minute blocks
6. Economics are tight — electricity cost is key

Questions to Consider

1. Is Bitcoin's energy use justified?
2. Can fees alone secure the network long-term?
3. Does pool concentration threaten decentralization?
4. What happens to security as subsidy approaches zero?