How Does Bitcoin Mining Work?

Bitcoin mining is the process of validating bitcoin transactions and recording them in a blockchain, essentially a digital ledger. This procedure bears a resemblance to traditional mining operations related to precious metals such as gold. However, in the context of Bitcoin, it’s a computer-driven process that not only logs transactions but also creates new bitcoins as an integral part of the operation. Most of you have question in your mind, How Does Bitcoin Mining Work? , Why Bitcoin Needs Miners Why Mine Bitcoin? How Much a Miner Earns and so on

What Is Bitcoin Mining?

Bitcoin mining is a fundamental process that involves the creation of new bitcoins and plays a vital role in verifying transactions within the network, contributing to the maintenance and expansion of the blockchain ledger. This operation, commonly known as “mining,” relies on specialized hardware designed to solve intricate mathematical puzzles. The computer that successfully solves the puzzle first receives a reward in the form of the next block of bitcoins, and this process repeats.

Cryptocurrency mining is a meticulous, resource-intensive, and at times unpredictable activity. Nonetheless, it holds a strong attraction for numerous investors who are drawn to cryptocurrencies because miners receive cryptocurrency tokens as compensation for their work. Some individuals may perceive mining as an opportunity for potential financial gains, reminiscent of the gold rush experienced by California prospectors in 1849. For those with a penchant for technology, the allure of mining is even more compelling. So, why not explore this opportunity?

The incentive given to Bitcoin miners acts as a motivating factor, spurring individuals to engage in the central role of mining: authenticating and supervising Bitcoin transactions, guaranteeing their authenticity. This cooperative endeavor extends across a worldwide network of users, establishing Bitcoin as a “decentralized” cryptocurrency, signifying its autonomous operation without reliance on any central entity, such as a central bank or government, for transaction oversight.

However, prior to dedicating your time and resources to mining, it is advisable to review this informative guide to assess whether mining is in line with your personal interests and objectives.

Why Bitcoin Needs Miners

The process of blockchain “mining” symbolizes the computational tasks executed by network nodes, aimed at acquiring new tokens. Miners, in essence, serve as auditors and are rewarded for their role in validating the legitimacy of Bitcoin transactions. This concept was initially introduced by Bitcoin’s creator, Satoshi Nakamoto, with the primary objective of promoting transparency and maintaining trust among Bitcoin users.

Through transaction validation, miners assume a crucial role in mitigating the “double-spending problem.” This dilemma arises when a Bitcoin holder attempts to spend the same bitcoin twice illicitly. In the world of physical currency, such a situation is averted because once you trade a $20 bill for a product, you no longer possess it, eliminating any possibility of using that same bill for another purchase elsewhere. Although counterfeit physical currency can be produced, it doesn’t equate to the act of literally spending the same dollar twice. In contrast, with digital currency, as explained in the Investopedia dictionary, there exists a risk where the holder could replicate the digital token and send it to a merchant or another party while retaining the original.

Consider you have a legitimate $20 bill and a counterfeit copy of the same $20 note. If you were to try using both the real and fake bills for transactions, anyone examining the serial numbers on these bills would immediately identify that they possess the same number, indicating that one of them is fraudulent. What a blockchain miner does is similar in principle—they inspect transactions to confirm that users haven’t attempted to spend the same bitcoin dishonestly twice. While this analogy isn’t perfect, we will elaborate further below to provide a more detailed explanation.

Why Mine Bitcoin?

Aside from benefiting miners and supporting the Bitcoin ecosystem, mining serves another crucial role: it’s the exclusive method for introducing new cryptocurrency into circulation. In essence, miners are comparable to currency creators. As of March 2022, there were just under 19 million bitcoins in circulation out of a total of 21 million.

Every single bitcoin, with the exception of those generated by the genesis block (the very first block established by founder Satoshi Nakamoto), owes its existence to miners. In the absence of miners, the Bitcoin network would continue to exist and function, but there would be no additional bitcoin created. However, due to the diminishing rate of bitcoin “mining” over time, the final bitcoin won’t be introduced into circulation until around the year 2140. Nevertheless, this doesn’t imply that transaction verification will cease. Miners will persist in validating transactions and will receive fees for their services, ensuring the integrity of the Bitcoin network.

In order to acquire new bitcoins, you must establish yourself as the initial miner to arrive at the correct or nearest numeric solution to a specific problem, widely known as “proof of work” (PoW). Engaging in mining entails actively participating in this proof-of-work process to identify the solution to the puzzle.

The procedure doesn’t involve complex mathematical computations. While it may have been suggested that miners grapple with intricate mathematical problems, this assertion is accurate, but not because the mathematics involved is convoluted. Essentially, what miners are doing is striving to be the first to discover a 64-digit hexadecimal number, commonly referred to as a “hash,” that is either less than or equal to the target hash. In essence, it’s akin to employing educated guesses.

Hence, the core of the process essentially relies on chance. However, given the immense number of potential guesses for each of these problems, which reaches into the trillions, the undertaking becomes exceedingly laborious. Moreover, the quantity of potential solutions, often denoted as the mining difficulty level, increases as more miners join the mining network. To emerge as the first to solve a problem, miners must possess substantial computing power. Successful mining requires a high “hash rate,” measured in gigahashes per second (GH/s) and terahashes per second (TH/s).

Beyond the immediate gratification of acquiring freshly generated bitcoins, engaging as a cryptocurrency miner can also grant you a form of “voting” authority when alterations are proposed within the Bitcoin network protocol. This mechanism is known as the Bitcoin Improvement Protocol (BIP). In essence, miners hold a certain level of influence in the decision-making process regarding matters like forking. The greater your hash power, the more votes you can cast either in support of or opposition to such proposals.

How Much a Miner Earns

The Bitcoin mining rewards experience a process referred to as “halving,” which takes place roughly every four years. This concept is elaborated in the original Bitcoin whitepaper available on Bitcoin.org, titled “Bitcoin: A Peer-to-Peer Electronic Cash System.”

At the inception of Bitcoin mining in 2009, miners were granted a reward of 50 BTC for the successful mining of a block. Come 2012, this reward was halved to 25 BTC. Then, in 2016, yet another halving event occurred, leading to a reduction in the reward to 12.5 BTC. The most recent halving event unfolded on May 11, 2020, resulting in a further decrease in the reward to 6.25 BTC. This gradual reduction in mining rewards is a fundamental component of the monetary policy governing the Bitcoin network.

In March 2022, the value of Bitcoin was approximately $39,000 per unit. This equated to an earning potential of $243,750 when successfully mining a block, calculated by multiplying 6.25 BTC by the market price of $39,000. Such a substantial reward serves as a compelling incentive for engaging with the intricate hash problem mentioned earlier.

For those interested in tracking the precise timing of these halving events, the Bitcoin Clock is a valuable tool, offering real-time updates on this information. Notably, Bitcoin’s market price has historically exhibited a close correlation with the reduction in newly generated coins entering circulation. This gradual reduction in inflation has increased the cryptocurrency’s scarcity, and as a result, Bitcoin’s price has historically experienced an upward trajectory.

What You Need to Mine Bitcoins

In the early days of Bitcoin, individuals had the opportunity to engage in block mining using standard personal computers. However, this is no longer the case due to the evolving nature of Bitcoin mining difficulty.

To ensure the efficient processing and validation of transactions within the blockchain, the Bitcoin network aims to create a new block approximately every 10 minutes. Nevertheless, when there is a high level of competition, such as one million mining rigs concurrently attempting to solve the hash problem, they are likely to arrive at a solution more rapidly than when only ten mining rigs are involved in the same process. To address this challenge, Bitcoin’s design incorporates a mechanism that regularly reevaluates and adjusts the mining difficulty, typically occurring after every 2,016 blocks have been successfully mined.

When the cumulative computational capacity committed to Bitcoin mining increases, the mining difficulty level is adjusted upwards to uphold a steady pace of block generation. Conversely, if there’s a decline in computing power, the difficulty level is adjusted downwards. Given the current state of the network, the prospects of successfully mining Bitcoin using a personal computer are exceedingly slim.

Mining hardware

This underscores the importance of significant investments for miners who wish to remain competitive in the mining industry. These investments often involve acquiring robust computing equipment like graphics processing units (GPUs) or, more realistically, application-specific integrated circuits (ASICs). The costs associated with these machines can vary widely, ranging from as low as $500 to reaching into the tens of thousands of dollars. It’s worth noting that some miners, particularly those focused on Ethereum, opt for a cost-effective approach by purchasing individual graphics cards to build their mining setups.

In the current mining landscape, Bitcoin mining hardware predominantly consists of ASIC devices, specially designed for the sole purpose of mining Bitcoins. These modern ASICs significantly outperform CPUs or GPUs in terms of hashing power and energy efficiency. They continually advance in performance, with new chips being developed and deployed every few months. Consequently, contemporary miners can achieve nearly 200 terahashes per second (TH/s) while consuming only 27.5 joules per terahash in energy.

An Analogy

Consider this scenario: I share a game with three friends. I select a number between one and 100, jot it down on a piece of paper, and seal it in an envelope. Here’s the twist: my friends don’t need to guess the exact number; they simply need to be the first to guess any number that is less than or equal to the hidden number. They can make as many guesses as they want.

For example, if my chosen number is 19, and Friend A guesses 21, they lose because 21 exceeds 19. However, if Friend B guesses 16, and Friend C guesses 12, both guesses are valid since 16 and 12 are less than 19. It’s important to note that there’s no reward for Friend B’s closer proximity to the target number, 19, in this scenario.

Now, let’s magnify this game. Instead of just three friends, I invite millions of potential participants to join, and I’m thinking of a 64-digit hexadecimal number. It becomes apparent that guessing the correct answer is an immensely daunting task. In this larger-scale version, if both Friend B and Friend C simultaneously submit their guesses, the system encounters significant challenges.

In the Bitcoin context, encountering simultaneous answers is a common occurrence. However, in the end, only one answer can prevail as the winner. When multiple simultaneous answers are submitted, and they are either equal to or less than the target number, the Bitcoin network relies on a straightforward majority rule—requiring at least 51% agreement—to determine which miner’s submission to acknowledge.

Typically, the winning miner is the one who has contributed the most effort, essentially the one who has verified the highest number of transactions. Conversely, the block that doesn’t emerge as the winner in this competition is termed an “orphan block.” Orphan blocks are those that fail to secure a place on the blockchain. Miners who successfully solve the hash problem but haven’t verified the highest number of transactions do not receive Bitcoin rewards as a result.

The Mining Process

What exactly is meant by a ’64-digit hexadecimal number’?

Here is an example of such a number:

The number mentioned consists of 64 digits, and this is relatively easy to understand. However, you may have observed that this number incorporates not only numerical digits but also letters from the alphabet. So, why is that the case?

To comprehend the presence of letters alongside numbers, let’s delve into the concept of “hexadecimal.”

The decimal system utilizes a base of 100 (for example, 1% corresponds to 0.01). Consequently, each digit within a multi-digit number presents 100 potential values, spanning from zero to 99. However, in the domain of computing, the decimal system is simplified to a base 10, comprising numerical digits ranging from zero to nine.

“Hexadecimal,” conversely, denotes a base-16 system. “Hex” originates from the Greek word for six, while “deca” comes from the Greek word for ten. In the hexadecimal system, each digit encompasses 16 potential values. Contrastingly, our conventional numeric system provides only 10 ways to represent numbers, ranging from zero to nine. Consequently, letters, specifically A, B, C, D, E, and F, are introduced to bridge this numerical representation gap.

It’s essential to underscore that when engaging in Bitcoin mining, there’s no necessity to compute the entire value of the 64-digit number, referred to as the hash. To reiterate emphatically: You do not have to calculate the complete value of a hash.

How are ’64-digit hexadecimal numbers’ related to the Bitcoin mining process?

Let’s revisit the analogy involving the sealed envelope containing the number 19. In the world of Bitcoin mining, this metaphorical undisclosed number inside the envelope is known as the “target hash.”

Miners, equipped with powerful computers and arrays of cooling fans, are essentially engaged in the task of guessing this target hash. They make these guesses by rapidly and randomly generating “nonces.” A nonce, which is an abbreviation for “number only used once,” plays a pivotal role in generating the 64-digit hexadecimal numbers I mentioned earlier. In the context of Bitcoin mining, a nonce is 32 bits in size, notably smaller than the 256-bit hash.

The miner who successfully discovers a nonce that produces a hash less than or equal to the target hash is credited with completing the block and rewarded with 6.25 BTC.

In principle, achieving the same result is theoretically possible by rolling a 16-sided die 64 times to generate random numbers. However, it raises the question of why anyone would opt for such a method.

For a more comprehensive understanding of this process, take a look at the screenshot provided below, sourced from Blockchain.info. It offers a succinct overview of all the events that transpired during the mining of block No. 490163. The nonce responsible for producing the “winning” hash in this case was 731511405, with the target hash displayed at the top. Additionally, the annotation “Relayed by AntPool” signifies that this particular block was successfully mined by AntPool, which ranks among the more prominent mining pools.

How can I make an informed estimation regarding the target hash?

Each target hash begins with a sequence of leading zeros. While there exists no pre-established minimum target, the Bitcoin Protocol sets a maximum threshold. No target hash is allowed to exceed this predefined value:

A winning hash for a Bitcoin miner is defined as one that includes, at the very least, the minimum required number of leading zeroes. This requirement is established by the current mining difficulty level.

Now, let’s analyze a selection of random hashes and explore the criteria that determine whether they meet the criteria for success in mining:

To obtain such a hash value, you require access to a high-performance mining rig, or, in a more practical approach, you can participate in a mining pool. A mining pool is a collective of cryptocurrency miners who combine their computational resources and share the Bitcoin they mine. You can liken mining pools to lottery syndicates, where members purchase tickets in bulk and agree to distribute any winnings among themselves. In the domain of Bitcoin mining, a significant proportion of blocks are mined by these pools rather than by individual miners.

In essence, it’s essentially a statistical endeavor. There’s no method to predict the pattern or foresee future target hashes based on past data. Given the present level of mining difficulty, the chances of discovering the winning value for a single hash are on the order of tens of trillions to one. These odds are not favorable for solitary miners, even if they possess an exceptionally powerful mining rig.

Miners must contend not just with the costs associated with expensive equipment necessary to have a chance at solving a hash problem, but also the considerable electricity consumption required by mining rigs to generate a multitude of nonces in the quest for a solution. In summary, Bitcoin mining is largely unprofitable for the majority of individual miners at the current juncture. CryptoCompare offers a valuable calculator that allows users to input various variables such as their hash rate and electricity costs to assess the total expenses and potential profits.

What Are Mining Pools?

The miner who successfully solves the puzzle first receives the mining rewards, and the probability of a participant accomplishing this is proportional to their portion of the total mining power within the network.

Participants with a relatively small share of the mining power face a highly unlikely chance of independently discovering the next block. For instance, a mining card that can be acquired for a few thousand dollars would represent less than 0.001% of the network’s overall mining power. Given these slim odds of finding the next block, it may take a substantial amount of time before that miner achieves a breakthrough, and the increasing difficulty level compounds the challenge. In some instances, the miner might never recoup their initial investment. The remedy for this predicament lies in the concept of mining pools.

Mining pools are overseen by third-party entities and unite groups of miners. By collaborating within a pool and distributing rewards among all participants, miners can secure a consistent flow of Bitcoin rewards starting from the moment they commence their mining operations. Detailed statistics regarding various mining pools can be accessed on Blockchain.info.

A Pickaxe Strategy for Bitcoin Mining

As previously discussed, acquiring Bitcoin can be done in the conventional way, which involves purchasing it through various Bitcoin exchanges. However, there’s another strategy often referred to as the “pickaxe approach.” This strategy draws its inspiration from the historical context of the California Gold Rush of 1849. During this era, the most prudent investments weren’t in gold panning but rather in the production of the essential mining tools, such as pickaxes.

In today’s cryptocurrency landscape, this concept translates into investing in companies that manufacture the hardware and equipment required for Bitcoin mining. In this context, the modern-day equivalent of pickaxe manufacturers are businesses specializing in the creation of ASIC (Application-Specific Integrated Circuit) equipment or GPUs (Graphics Processing Units), for example.

Downsides of Mining

Mining, particularly in the context of Bitcoin, presents inherent risks that fall primarily within the realms of financial and regulatory considerations. Financial risks associated with mining activities are significant, as individuals often invest substantial amounts, ranging from hundreds to thousands of dollars, in mining equipment, only to discover that their investment may not yield the expected returns. Nonetheless, there are strategies available to mitigate these financial risks, such as participation in mining pools, which can enhance the chances of realizing a return on investment.

It is imperative to emphasize the pivotal role played by the regulatory landscape in understanding and managing the risks associated with mining. Residing in an area where mining is prohibited could lead to unwise and potentially illegal pursuit of mining activities. Before embarking on a mining venture, conducting comprehensive research into your country’s regulations and the prevailing sentiment surrounding cryptocurrencies is paramount. This knowledge of the legal framework can empower you to make informed decisions regarding your investment in mining equipment.

Furthermore, the growth of Bitcoin mining, along with other Proof-of-Work (PoW) systems, has given rise to environmental concerns. The increasing energy consumption of the computer systems engaged in mining algorithms is a pressing issue. Despite improvements in microchip efficiency, the expansion of the mining network has outpaced technological advancements, prompting concerns about the environmental impact and carbon footprint associated with Bitcoin mining and related activities.

Efforts are currently in progress to mitigate this negative impact by exploring cleaner and more environmentally sustainable energy sources for mining activities. Promising options include geothermal and solar power, which could significantly reduce the carbon footprint associated with mining operations. Additionally, there is consideration of employing carbon offset credits to help offset the environmental impact.

Another strategy aimed at reducing the energy consumption of cryptocurrencies involves adopting alternative consensus mechanisms, such as proof-of-stake (PoS). Ethereum, as an example, has already made this shift. Nevertheless, it’s crucial to recognize that PoS brings its own unique challenges and inefficiencies. These challenges encompass the potential for encouraging coin hoarding instead of active use in transactions, as well as the risk of centralization in the control of consensus.

What Is the Purpose of Bitcoin Mining?

Bitcoins exist solely in digital form, which poses a risk of duplication, counterfeiting, or attempting to spend the same coin more than once. To address these issues and safeguard the integrity of the network, Bitcoin employs a process called mining. Mining is designed to make it prohibitively costly and resource-intensive to engage in activities like duplication, counterfeiting, or network manipulation. In essence, becoming a miner within the network is a more cost-effective and legitimate approach compared to attempting to undermine it.

Ensuring Transaction Validity through Mining?

Mining serves a dual purpose beyond its primary function of introducing new BTC into circulation; it also plays a crucial role in confirming and validating transactions within the Bitcoin blockchain. This validation holds paramount importance because there is no centralized authority, such as a bank, court, or government, responsible for ascertaining the legitimacy of transactions. Instead, the mining process facilitates decentralized consensus through the proof of work (PoW) mechanism.

Why Mining Consumes Considerable Electricity

In the early stages of Bitcoin, mining was accessible to anyone with a personal computer or laptop. However, as the Bitcoin network expanded and garnered greater interest from miners, adjustments were made to the mining algorithm to accommodate the growing complexity. These adaptations became necessary because Bitcoin’s underlying code was structured to maintain an average block discovery rate of approximately 10 minutes.

As more miners became part of the network, the probability of quickly discovering the correct hash increased. Consequently, the system responded by elevating the difficulty level to uphold the 10-minute target for block generation. Now, picture a scenario where thousands or even millions of additional mining machines with substantial computational power join the network. This influx of new machines significantly amplifies the energy consumption associated with mining operations.

Is Bitcoin Mining Legal?

The permissibility of Bitcoin mining hinges upon your specific geographic location. The concept of Bitcoin challenges the dominance of traditional fiat currencies and governmental control over financial markets, leading to its outright prohibition in select regions.

Nevertheless, it is noteworthy that the ownership and mining of Bitcoin are legally permitted in the majority of countries. For instance, according to a 2018 report, Bitcoin was deemed illegal in countries such as Algeria, Egypt, Morocco, Bolivia, Ecuador, Nepal, and Pakistan. Furthermore, since 2018, several other countries, including Bangladesh, China, the Dominican Republic, North Macedonia, Qatar, and Vietnam, have enacted prohibitions on Bitcoin mining.

In spite of these restrictions, it is vital to underscore that the utilization and mining of Bitcoin remain legally permissible in numerous regions around the world.

Is Cryptocurrency Mining Harmful to Your GPU/Computer?

Cryptocurrency mining can place substantial stress on your GPU or other mining hardware due to its resource-intensive nature. In extreme cases, it can result in hardware failures, including malfunctioning GPUs or even instances where mining rigs catch fire. However, when mining operations are carefully managed, with a sufficient power supply and operating within reasonable parameters, the associated risks are typically mitigated, ensuring the safety and longevity of your hardware.

Can You Mine Bitcoin Using Your iPhone?

No, the feasibility of mining Bitcoin on an iPhone is extremely limited. Successful Bitcoin mining in the present day requires substantial computational power and a significant amount of electricity to remain competitive. Trying to run a mining operation on a mobile device, even when part of a mining pool, is highly improbable and is unlikely to generate any earnings.

The Bottom Line

Bitcoin mining holds a vital role in the validation and confirmation of new transactions within the blockchain. It acts as a safeguard against the fraudulent practice of double-spending by dishonest individuals. Moreover, it serves as the mechanism responsible for introducing new bitcoins into the system.

At its core, Bitcoin mining involves solving a complex puzzle, resulting in the creation of proof of work (PoW). This process inherently demands a significant amount of energy. However, it’s essential to emphasize that the energy expended in this process is intricately linked to the value of bitcoins and the overall stability, security, and reliability of the decentralized Bitcoin system.

Thank You!