The Blockchain performs two important functions for Bitcoin. The first is that the Blockchain records all transactions that occur in the network, allowing transactions to occur anonymously. Additionally, the Blockchain is he mechanism through which the creation of new Bitcoin’s is tracked.
Bitcoin miners create Bitcoin by performing complex mathematical problems. When Bitcoin was still in its infancy, these types of calculations were simple enough that they could be performed on a typical desktop computer. As the Blockchain network grew, the transactions have become more and more complex, requiring stronger and stronger computers to perform the necessary mathematical work to generate new coins. As the price of Bitcoin has increased, the reward for mining new coins has grown. This has led to an arm’s race amongst miners to build faster and more powerful computers to increase the return on their mining operation. These specially built graphic cards cost thousands and thousands of dollars per machine.
As miner’s complete chunks of work for the blockchain, called “blocks,” they are rewarded with a set amount of whatever coin they are mining. Miners are rewarded with coins when they complete a block, which means the rate of coins generated by a miner is not precise on a day to day basis. If a miner knows how much hashing power they are putting into their work, it is possible for them to generate a consistent rate of coin generate on a day to day basis.
The profitability of the mining operation thus depends on three variables. First, there is the amount of hashing power the machine generates, which gives you your expected daily coin return. Second, there is the cost of electricity, which determines how much you are spending per day to continue mining. Finally, there is the dollar value of the coins generated by the mining machines. The daily coin output, multiplied by the cash value of the coin, minus electricity and amortized mining machine costs, gives the expected daily return on each machine.
Mining machines are not only expensive and increasingly difficult to operate, but they also much more electricity then your average desktop computer to perform their difficult calculations. This means that electricity costs are a very important consideration for coin miners. Miners increasingly pool their resources, like we do, and operate in places with the lowest possible electrical costs to increase profitability.