It is the same thing as diversification in portfolio management – or where holding ten stocks is better than holding 1.
If there are a thousand tickets and you hold one of those tickets the probability of you winning the lottery is one in a thousand, but if you hold 100 of the tickets then your chances are one in ten – so you can expect to win the lottery every 10 drawings. With your one ticket, you would expect to win every 1000 lottery drawings.
However, if you can’t afford 100 tickets you can join together with another 99 individuals and form a syndicate and split the reward every time you win. This will mean your cash inflow would be less but more often and so the volatility of returns is lower.
The same thing is true for Bitcoin and crypto currency mining. If you have a 1TH machine and the Bitcoin Network total hashpower is 1 PetaHash then you have a 1 in 1000 chance of solving the block every ten minutes. You might not even solve it for longer periods, but by joining together with other miners in a pool you can form a syndicate and work in concert to split the returns in relation to what percentage of hashpower you contribute to the pool. So if you have 10 TH of a 100 TH mining pool and you win the block reward of 25 Bitcoins – you would receive 10% or 2.5 BTC.
With mining, it is important to understand the different types of blocks that come with it because of the effect it can have on your expected income. This article provides a comprehensive insight into orphan, uncle & genesis blocks.
Mining pools are a good way of smoothing your returns but they do cost – usually 1-2% of your winnings. Instead of hooking up your Bitcoin miner that you have bought – you can outsource it further by buying a mining contract that gives you rights to a certain amount of hash power for a certain period of time. This is called cloud mining.
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