How Bitcoin Mining Is Like a Reverse Lottery
|By Chris Coney|
My duty to you is twofold: I am both a decentralized finance investor and educator.
So, I spend half my time researching the best investing strategies in the evolving world of DeFi, and the other half sharing my DeFi knowledge with others.
In fact, I recently released the 2023 DeFi Superyield Webinar with the goal of teaching youhow I utilize opportunities in DeFi as an investor.
If you haven’t had a chance to watch yet, I strongly recommend you do.
Sometimes, though, there’s a disconnect between teaching and knowing.
After all, learning can come naturally … but it can be difficult to translate those skills into words.
That’s exactly why I’ve taken this phrase from Bob Proctor to heart: “You do not understand something unless you can explain it to someone else so that they understand it.”
Indeed, by being in the business of explaining what I’m doing in an easily digestible manner, I’ve become so much better at what I do.
Markets move mostly based on perception.
So, if investors gain enough certainty about something, they’ll invest in it. That’s why having confidence in what you’re investing in is key.
This is one of my main motivations for being a DeFi educator.
I figured the only way to grow the space was to educate investors to a level where they’re comfortable enough to get in the DeFi game.
Which leads me to one of the most common questions I’ve gotten asked by people who have little to no experience with crypto:
“How does Bitcoin (BTC, Tech/Adoption Grade “A-”) mining work?”
Crypto can be technically challenging and tough to research on your own, so I understand where this question is coming from.
I suspect people without any crypto knowledge believe mining provides an opportunity to acquire BTC without having to invest any time or energy … which is not true.
So today, we will debunk that myth and unravel the mystery of Bitcoin mining.
The Reverse Lottery You Can Influence
In a regular lottery, players buy tickets and try to guess what numbers will be drawn in the future.
When the big day arrives, the winning numbers are drawn and anyone who has a ticket with those numbers will hit the jackpot.
It’s incredibly difficult to increase your odds of winning most lotteries because the ticket price is fixed and buying even thousands of tickets only increases the chance of winning by a tiny fraction.
So, it ends up not being worth it.
However, Bitcoin’s proof-of-work mining system works like a reverse lottery you can actually win.
While most national lotteries are drawn once a week, the Bitcoin “lottery” runs once per block.
This equates to approximately once every 10 minutes.
And instead of picking numbers drawn in the future, with Bitcoin mining, the winning numbers are drawn first.
This is done secretly and autonomously by the Bitcoin network through the wonders of cryptography.
Miners can effectively pick their lottery numbers and send them to the network.
Then, the network covertly compares the winning numbers to the ones submitted and reports back if the submission is correct or incorrect.
If correct, that miner wins the prize of newly created Bitcoin.
If incorrect, they’re free to make another guess.
The Tickets Are Free
Perhaps the most surprising part of this process is you don’t have to buy a ticket to guess the winning numbers.
In the Bitcoin “lottery,” a miner can submit as many “tickets” as their computer system can generate.
And unlike a regular lottery, the winning numbers aren’t publicly announced.
Miners don’t reveal which numbers they have already tried because that would speed up the process for their competitors.
So, every miner is running their own race.
Now, since the “tickets” are free for the Bitcoin “lottery,” the players (miners) can shift their investment to their computing power.
The Bitcoin block reward is currently 6.25 BTC and is awarded to the winning miner in each 10-minute round. At the present market price, 6.25 BTC is worth about $108,000.
Because the “tickets” are free, miners are willing to invest a portion of this $108,000 for a chance to win the 6.25 BTC.
How much of it?
That’s up to each individual miner … which turns Bitcoin mining into a competitive business.
It ultimately boils down to how thin the miner is willing to let their profit margins get in order to win.
And in the Bitcoin mining world, the two main costs involved in increasing the number of guesses you can make per second are computing equipment and electricity.
Gaining a Competitive Edge
So, winning the Bitcoin mining “lottery” is essentially about buying tons of computing hardware and electricity at the lowest cost.
If you want to enter the mining game, the actions you need to take are fairly clear:
1. Negotiate the best possible deals with computer hardware manufacturers and purchase lots of equipment.
2. Locate your mining equipment somewhere that has access to the cheapest electricity in the world (e.g., next to a hydroelectric dam) and preferably somewhere cold so you can save money on cooling.
While these two steps might sound simple, it will likely cost you a pretty penny just to get started.
If you want the cream of the crop equipment, the price for just one piece of hardware — let alone the electricity needed to power it — can be astronomical.
That’s primarily why Bitcoin mining is no longer accessible or viable for the average person.
Regular lotteries have a much more level playing field because the cost of each ticket is fixed. They basically collect millions of dollars, pounds or euros and transfer those funds to a small group of winners.
On the other hand, while Bitcoin still awards its prize, the cost of entry is much higher.
Additionally, the Bitcoin “lottery” doesn’t run on money spent by miners — the value comes from the newly created coins that are a saleable asset on the open market.
It’s also possible to calculate the probability of how many times the miner will “win.”
Each Bitcoin miner has a different “cost per guess,” and this can be determined by dividing the cost of their operation by the number of guesses they can make in each 10-minute round.
The lower that cost is, the more profitable their mining operation should end up being.
But that’s all I’ve got for you today. Let me know if you have any further questions about Bitcoin mining by tweeting @WeissCrypto.
I’ll catch you here next week with another update.