Cryptocurrency has never been more accessible for retail investors. Whether purchasing through a crypto exchange like Coinbase or Gemini or buying from a discount stockbroker like Robinhood or Webull, anyone can set up an account and purchase some Bitcoin in a matter of minutes. You might even get $10 free in BTC for signing up!
Like precious metals, Bitcoin is mined, although not from the Earth, obviously. Bitcoin is mined on the blockchain using advanced computer technology to solve sophisticated math problems. Here’s how it works.
The Importance of Mining Bitcoin
No one pulls out a shovel and pickaxe when setting off to mine some Bitcoin. Bitcoin miners aren’t miners per se — they're more like math problem solvers. In order for the blockchain to serve as a secure, decentralized ledger, cryptocurrency transactions must be validated. That’s where the miners come in.
In order to add blocks to the chain, you must solve complex math problems. Solving these problems requires a tremendous amount of computing power to attempt. Not only that but not every mining operation is successful as Bitcoins are only awarded to the miner who solves the problem first.
Why mine Bitcoin? Bitcoin miners earn newly minted BTC for providing a useful service in securing the blockchain. A successful miner doesn’t need to pay cash for crypto, which is tremendously appealing.
What is a Bitcoin Mining Pool?
Whenever the lottery jackpot reaches an extraordinarily high amount, many friends or coworkers will pool their money together to buy a lot of tickets and increase their chances of winning. Bitcoin mining pools operate in a similar fashion.
A mining pool is simply a group of people who combine their computational power in order to increase their chances of successfully mining Bitcoin. Like the lottery pool participants, Bitcoin miners agreed to split any rewards they receive for successfully adding blocks to the chain.
Where Are Mining Pools?
Bitcoin might end up as a decentralized cryptocurrency used all over the world, but the biggest mining pools heavily centralize in a potentially problematic location — China. Over 80% of all Bitcoin mining occurs in China and many mining pools require at least a basic knowledge of the Chinese language in order to navigate their websites (or get customer support). Other common locations for mining pools include the Czech Republic, Japan, and Russia — where electricity is cheap.
Hashrate and Computing Power
You might notice a long string of code attached to your Coinbase wallet and NFTs with dozens of random numbers and letters. This is your hash, or the location on the blockchain where your crypto and collectibles reside. The hash is unique and provides exact information about the nature of the transaction.
In order to create these hashes, miners need to use computer power to solve the equations. Hash rate refers to the amount of computer power a miner or mining pool has. You could mine Bitcoin from an apartment with a small computer setup, but now that rewards have been slashed and more miners are chasing fewer profits, the amount of power required to mine Bitcoin has increased exponentially. Right now, only those with highly sophisticated computer systems will be able to mine, but Bitcoin mining setups can purchase on Amazon or eBay. Factor the price of the machine into your profit margins because they're a bit pricier than your traditional laptop or smartphone.
How Does a Mining Pool Work?
Since the computer power needed to mine successfully is great, mining pools were formed in order to coordinate the efforts of miners. The mining pool works as a central hub, keeping track of each miner’s work, coins mined and blocks added to the chain. Bitcoin miners can also reap rewards through the fees users pay in order to buy and sell BTC.
Mining pools split rewards in a variety of ways. Some will split rewards down the middle, others will reward only the miner who actually solves the puzzle and completes the block and still others will reward with shares based on the amount of work each miner does. How the goods are divided up depends on the mining pool you join.
Pros and Cons of Mining Pools
| PROS | CONS |
| Bitcoin mining can be a lucrative venture if you have the equipment and proper pool. Getting BTC as a reward is a much better deal than paying for it on an exchange and mining pools provide a fixed, if small, payout on a consistent basis. | Mining Bitcoin requires a cost/benefit analysis. Mining requires expensive equipment and electricity, so there are both fixed and recurring costs involved. Successfully mining coins won’t matter if you spend more on computers and power. |
| Miners perform a necessary service by verifying transactions and adding blocks to the chain. | Bitcoin mining rewards get chopped in half roughly every four years. Originally, miners were rewarded with 50 BTC for successes; now the reward is down to 6. |
| Pooling resources distributes the work involved and maximizing chances of solving the puzzle. Different pools provide miners with different options of getting paid as well. | Mining is also an environmental concern due to the massive amounts of energy required to power the computers. The difficulty of solving the equations is directly proportional to the number of miners working, so the energy expenditures continue to rise and rise. |
Use a Bitcoin Wallet
You will need a Bitcoin wallet to reap the rewards of mining. When Bitcoin is mined successfully, the pool will need your wallet address to send your share of the haul. Check out Benzinga’s top cryptocurrency wallet options:
Best 5 Bitcoin Mining Pools
Not all Bitcoin mining pools offer the same rates, rewards and slice of the pie. You need to choose a pool that uses the type of payout system you prefer, plus one with a track record of trustworthiness. Learn our 5 top picks:
Slush Pool
The original is still the best with Slush Pool, which has been around since 2010. Based in the Czech Republic, Slush Pool has a great track record of security and customer satisfaction. A score-based method is utilized for payment, making it difficult for other users to cheat. SlushPool is considered a medium-sized pool and charges a 2% fee for every block mined.
Poolin
One of the largest mining pools in the world, Poolin mines Bitcoin, Bitcoin Cash, Bitcoin Silver, and Litecoin. The 2.5% fee is on the high side, but Poolin has a tremendous platform with lots of bells and whistles to make the experience easier for miners.
BTC.com
BTC.com offers a 1.5% fee and access to one of the largest mining communities in the world. BTC.com uses a full pay-per-share (FPPS) system, which means miners get both proportional Bitcoin rewards along with transaction fees. BTC.com also has a low payout threshold of only 0.001 BTC.
F2Pool
F2Pool has a high 2.5% fee, but it's one of the most usable Chinese mining pools for English speakers. Users can mine Bitcoin, Ethereum or Zcash. The company offers daily automatic payouts and uses a PPS system to reward the miners who mine the most coins.
Antpool
Run by Bitmain Technologies, Antpool offers 2 different types of payment systems (PPLNS, PPS). The interface and security options and how fees are paid.
Dive into the Right Pool
Receiving Bitcoin as a reward for mining offers more profit than buying and holding using cash, but you’ll need the right pool and right gear to make it work. The process of mining itself is expensive — you’ll need a mining device, computers and electricity to constantly keep it powered. If your power bills are through the roof and you aren't mining much, it can completely eat your money. Do a cost/benefit analysis when joining a Bitcoin mining operation and weigh the pros and cons of each pool.
Frequently Asked Questions
Q: Are Bitcoin mining pools worth it?
A: Yes, if you have the right equipment. Bitcoin mining setups can cost a lot, even when combining your power into a pool.
Q: Is it better to mine solo or in a pool?
A: Mining solo means not sharing any rewards, but it also means you’ll need a tremendous amount of computing power and a lot of luck. Solving an equation as a solo miner obviously offers the best returns, but the competition is fierce and solo miners without a huge farm will likely never solve a single block.
Related content: The Best Bitcoin Mining Software
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About Dan Schmidt
Dan Schmidt is a finance writer passionate about helping readers understand how assets and markets work. He has over six years of writing experience, focused on stocks. His work has been published by Vanguard, Capital One, PenFed Credit Union, MarketBeat, and Fora Financial. Dan lives in Bucks County, PA with his wife and enjoys summers at Citizens Bank Park cheering on the Phillies.