Bitcoin mining is the foundational process that introduced the world to cryptocurrency. It began with Bitcoin itself.
On January 3, 2009, Bitcoin's creator, Satoshi Nakamoto, mined the first block—known as the Genesis Block—and received the network's automatic reward of 50 bitcoins. This marked the birth of the first cryptocurrency.
The mechanism is straightforward: miners use computing power to solve complex mathematical problems associated with blocks on the Bitcoin network. The first to solve a block earns the right to record transactions and receives the bitcoin reward, thus becoming a "miner."
Since the introduction of ASIC miners in 2013, mining has evolved into a full-fledged industry. Although relatively young, this sector has already experienced two dramatic boom-and-bust cycles. Miners have endured significant volatility, learning hard lessons, and are now witnessing another major bull market.
As of March 12, the price of Bitcoin exceeded $58,000, nearing its previous all-time high. Within just one year, Bitcoin's value increased thirteenfold from its low on March 12, 2020. Many industry insiders believe this is only the beginning, anticipating further growth based on previous market cycles.
While the era of easy riches may be over, mining remains a viable investment asset. This perspective is reinforced by the recent entry of large institutions and corporations into the space. Despite ongoing skepticism, it's undeniable that cryptocurrency mining is rapidly scaling, occasionally generating new wealth stories.
The Shift in Mining Participation
Mining has been described as a "hunger games" style competition that occurs every ten minutes. Miners worldwide participate, and the prize is bitcoin.
The mining algorithm itself is simple—essentially a number-guessing game—so there's little room for improvement. Winning requires hardware that can execute the algorithm the most times per second. Additionally, the more hardware you have, the greater your chances. Thus, the history of Bitcoin mining is largely a history of hardware evolution.
In the early days, individuals used standard computer CPUs for mining. By 2010, miners discovered that AMD's GPU chips could accelerate the process, leading to the development of multi-GPU mining rigs. By late 2011, FPGA miners emerged, offering significant efficiency gains and the first mining pools, like Eligius.
Today, ASIC miners represent the fourth generation of hardware. These devices sacrifice flexibility for sheer number-crunching power, offering a quantum leap in efficiency.
By 2014, individual miners had largely been pushed out by large-scale mining pools and industrial farms. The top mining pools had already consolidated significant control, achieving a high degree of centralization while maintaining network security. This period saw the rise of prominent industry names and figures, such as Antpool, F2Pool, BTC.TOP, and BTCC, along with entrepreneurs like Jihan Wu and Jiang Zhuo'er.
Jiang Zhuo'er, founder of BTC.TOP, recalls entering the space in late 2013. With a background in computing, he discovered Bitcoin while seeking solutions for cross-border payments during a major market peak. Skeptical of the bubble, he avoided trading and instead built two GPU miners at home, gradually expanding his operations.
He notes that while Bitcoin's value soared 100-fold in the previous cycle, few investors actually realized those gains. The challenge lies in holding through volatility; most sellers cashed out after modest gains. Mining, however, encourages longer-term participation. Miners are less likely to sell their "golden goose"—the mining hardware—and often continue through entire market cycles.
But Jiang emphasizes that mining's barriers to entry are now significantly higher. Home mining is largely impractical due to electricity costs. Industrial-scale operations in regions with cheap power, like Xinjiang, dominate. A single miner in Xinjiang might pay $5 in electricity to earn $10 in bitcoin, while a home miner would pay $10 for the same return, eliminating profitability.
For example, during the 2018 bull market, the Antminer S9—a once-popular model—cost over $10,000. Mining profitably required hundreds of units running continuously. Today, the difficulty is even greater.
Large mining farms now consume tens of thousands of kilowatt-hours, hosting thousands of machines. These facilities often offer hosting services, but small-scale miners with only a few machines are typically turned away. The market is dominated by large players, a trend accelerated by public companies like Nine Cities aggressively acquiring mining hardware. 👉 Explore more strategies for large-scale mining operations
Jiang also highlights Bitcoin's four-year halving events, which reduce new supply and create cyclical markets. The current cycle has seen more stability, with fewer major corrections, largely due to institutional investors like Tesla, MicroStrategy, and Meitu entering the space. These players treat Bitcoin as a long-term commodity reserve, reducing volatility and squeezing out smaller, speculative traders.
In Jiang's view, mining is becoming a large-scale industrial operation, similar to traditional mining. While small players may persist, the future belongs to major integrated operators.
The Business of Mining Farms
China remains the center of Bitcoin mining, accounting for over 50% of the global hash rate, followed by the United States at around 14%. This dominance stems from rapid industrialization and the proliferation of mining farms.
Panda Miner, a major player in GPU mining equipment, currently operates eight online farms with another under construction. Co-founder Yang Xiao describes mining farms as essential infrastructure—similar to traditional data centers but with lower construction standards.
The business model is straightforward: mine with owned equipment or host machines for others, profiting from electricity price differentials. This model remains robust across market cycles, except during extreme events like the March 12, 2020 crash ("312"), when Bitcoin plummeted from $8,000 to $3,800 in hours.
However, operating a farm involves significant challenges, particularly in site selection and securing stable, affordable electricity. The biggest expense isn't hardware but power. Farms must be located in regions with low electricity costs, primarily in China's southwest and northwest.
Yang notes that finding optimal sites requires expertise. His team constantly scouts global locations, evaluating and upgrading facilities. Natural disasters, like mudslides in Sichuan during the rainy season, pose additional risks.
Regulatory uncertainty also looms. In February, Inner Mongolia announced plans to shut down all mining operations, prompting some farms to relocate. But policies vary; Sichuan and Xinjiang have been more welcoming, with Sichuan even establishing special zones to absorb excess hydropower.
Mining farms are increasingly scaling and professionalizing, often partnering with external capital. Panda Miner's ratio of external to owned capital is already 7:3 and may rise further. Global expansion is also underway, with Central Asia and North America seen as promising regions.
According to Bitdeer COO Ye Jiejie, Bitcoin mining consumes significant energy but can utilize otherwise wasted electricity, providing jobs and tax revenue in underdeveloped areas. The industry isn't yet saturated, but new entrants face challenges due to severe hardware shortages.
Mining Hardware Manufacturers: Cash Flow Challenges
A visit to Shenzhen's Huaqiangbei electronics market—once a global hub for mining hardware—reveals a quieter scene today. While a few stores remain, many have closed or shifted online.
Despite subdued storefront activity, manufacturers report overwhelming demand. Current mining focuses on Bitcoin (using ASICs) and Ethereum (using GPUs). The hardware market resembles traditional manufacturing but with unique pricing dynamics.
Miners are investment assets, not consumer goods. Pricing is based on projected payback periods: around 10-12 months for Bitcoin ASICs and 4-6 months for Ethereum GPUs. As coin prices rise, so do miner prices, with components suppliers and manufacturers capturing most of the premium.
But volatility creates cash flow challenges. Canaan Creative, a publicly traded miner manufacturer, reported a 75.7% year-on-year revenue decline in Q3 2020, highlighting the industry's cyclicality.
Yang Xiao notes two countermeasures: careful production and sales planning to avoid overexposure, and using financial derivatives like loans and options for hedging.
This cycle has been particularly profitable for hardware makers. Jiang Zhuo'er believes 2021 may see miner profitability outpace Bitcoin's price gains. Global chip shortages have constrained hash rate growth, meaning each unit of computing power earns more bitcoin. Newer models like the Antminer S19 have quadrupled in price, while older machines saw even larger gains due to their higher electricity cost share.
Cloud Mining: Access for Retail Investors?
Soaring coin prices have sparked renewed interest in mining, but high barriers prevent most individuals from participating. Cloud mining platforms offer a solution by letting users rent hash power without owning hardware.
Over 50 platforms now offer these services, with some promising annual returns up to 100% at recent prices. Cloud mining simplifies entry—no equipment purchases, maintenance, or setup required.
However, risks include Bitcoin's price volatility and platform reliability. Ye Jiejie advises users to sell mined bitcoin immediately to manage price risk and carefully evaluate providers based on scale, transparency, and sustainability.
Jiang Zhuo'er warns that cloud mining resembles investment products and may face regulatory challenges. While legitimate operations exist, some platforms might be Ponzi schemes. Potential investors should proceed with caution.
Financial Derivatives: Hedging or Gambling?
Financial derivatives, including futures, options, and leveraged products, add complexity to the ecosystem. CME Group launched Bitcoin futures options in 2020, further integrating cryptocurrencies into traditional finance.
Miners use these tools for risk management. For example, Jiang describes leveraging owned miners to borrow funds for additional hardware. Although banks don't accept crypto collateral, specialized platforms offer loans at 8-15% annual interest—a cost easily outweighed by bull market gains.
But derivatives also enable speculation, leading to significant losses. Yang Xiao stresses the importance of understanding these instruments and using them for hedging rather than gambling. He calls for continued development of the derivatives market alongside regulation and investor education.
An Unpredictable Experiment
Bitcoin represents a grand socioeconomic experiment. Its decentralized nature makes control by any single entity increasingly difficult as the network grows.
Yang Xiao acknowledges the uncertainty—whether Bitcoin will continue thriving or eventually face a catastrophic black swan event. This very uncertainty is part of its appeal.
When asked about worst-case scenarios, Yang admits that early adopters like himself are often too optimistic to offer objective answers. Many in the industry are "believers," reluctant to sell their holdings for fear of missing future gains.
Indeed, the outcome of this experiment remains unknown. But in an era of intense competition, cryptocurrency mining has created immense wealth—and devastating losses. The decision to participate ultimately depends on one's appetite for risk and belief in Bitcoin's future.
Frequently Asked Questions
What is Bitcoin mining?
Bitcoin mining is the process of validating transactions and securing the network by solving complex mathematical problems. Miners compete to add new blocks to the blockchain and earn bitcoin rewards.
How has mining changed over time?
Mining has evolved from individuals using home computers to large-scale industrial operations. Hardware has progressed from CPUs and GPUs to specialized ASICs, while rising costs and difficulty have concentrated power among major players.
Can individuals still profit from mining?
Solo mining is rarely profitable today due to high hardware and electricity costs. Cloud mining offers an alternative but carries risks. Most individual investors now prefer buying bitcoin directly rather than mining.
What are the biggest risks in mining?
Key risks include Bitcoin's price volatility, regulatory changes, hardware obsolescence, and operational challenges like securing cheap electricity. Financial derivatives can hedge some risks but require expertise.
How do mining pools work?
Mining pools combine hash power from multiple participants to increase the chances of earning rewards. Earnings are distributed based on contributed computing power, providing more consistent income than solo mining.
Why is China a dominant force in mining?
China offers low electricity costs, especially in hydropower-rich regions like Sichuan. Early industrialization and access to manufacturing also contributed to its leadership, though other regions are gaining share.