What Is Bitcoin Mining and How Does It Work?

What Is Bitcoin Mining and How Does It Work?

Bitcoin mining is the process of putting new bitcoins into circulation; it’s also how the network confirms new transactions, and it’s an important part of the blockchain ledger’s upkeep and development. “Mining” is done with high-tech hardware that solves a very difficult computational arithmetic problem. The next block of bitcoins is granted to the first computer to solve the challenge, and the process repeats itself.

Cryptocurrency mining is time-consuming, expensive, and only seldom profitable. Mining, on the other hand, has a magnetic appeal for many cryptocurrency investors because miners are paid with crypto tokens for their efforts. This could be because, like California gold prospectors in 1849, entrepreneurs perceive mining as a gift from above. Why not do that if you are technologically inclined?

However, before you put your time and money into mining, read this explanation to discover if it’s right for you. We’ll concentrate on Bitcoin (we’ll use “Bitcoin” to refer to the network or cryptocurrency as a concept throughout, and “bitcoin” to refer to an amount of individual tokens).

Important Points to Remember

  • You may earn cryptocurrency without having to put any money down by mining.
  • Bitcoin miners are paid in Bitcoin for completing “blocks” of validated transactions and adding them to the blockchain.
  • The miner who discovers a solution to a complex hashing challenge first receives a reward, and the likelihood that a participant will be the one to discover the solution is proportional to their share of the network’s total mining power.
  • To set up a mining setup, you’ll need a GPU (graphics processing unit) or an ASIC (application-specific integrated circuit).
  • A New Gold Rush has Begun

The idea of getting compensated with Bitcoin is a major draw for many miners. To be clear, you do not need to be a miner to hold bitcoin tokens. You can buy cryptocurrencies with fiat currency, trade them on an exchange like Bitstamp with another cryptocurrency (for example, Ethereum or NEO to buy Bitcoin), or earn them by shopping, writing blog posts on platforms that pay users in cryptocurrency, or even setting up interest-earning crypto accounts.

Steemit is an example of a crypto blog platform, which is similar to Medium but allows users to reward bloggers with STEEM, a proprietary cryptocurrency.

STEEM can then be exchanged for Bitcoin elsewhere.

Miners receive a Bitcoin reward as an incentive to help with the primary goal of mining, which is to validate and monitor Bitcoin transactions to ensure their legitimacy. Bitcoin is a “decentralized” cryptocurrency, meaning it is not regulated by a central authority such as a single bank or government, because these responsibilities are distributed among many users throughout the world.

Using Mining to Avoid Double Spending

Auditor miners are compensated for their efforts. They are in charge of ensuring that Bitcoin transactions are legitimate. Satoshi Nakamoto, the founder of Bitcoin, devised this standard to keep Bitcoin users honest. Miners help to prevent the “double-spending problem” by confirming transactions.

A scenario in which a Bitcoin owner spends the same bitcoin twice is known as double spending. This isn’t an issue with actual currency: once you hand someone a $20 bill to buy a bottle of vodka, you no longer have it, therefore there’s no risk you’ll use it to buy lottery tickets next door. While counterfeit cash is a possibility, it is not the same as spending the same dollar twice. “There is a possibility that the holder could make a clone of the digital token and give it to a merchant or another party while retaining the original,” according to the investingclue glossary.

Let’s pretend you have one genuine $20 bill and one counterfeit $20 bill. If you tried to spend both the actual and phony bills, someone who took the time to look at the serial numbers on both of them would notice that they were the same, indicating that one of them was fake. A Bitcoin miner works in a similar way, checking transactions to ensure that users have not attempted to spend the same bitcoin twice. This isn’t a great analogy, as we’ll discuss further down.

A single bitcoin block can only hold 1 megabyte of transaction data. Satoshi Nakamoto imposed the 1 MB limit, which has sparked debate since some miners feel the block size should be expanded to include more data, which would allow the bitcoin network to process and validate transactions more quickly.

“So, despite all of my mining efforts, I might not earn any bitcoin in return?”

Yes, you are accurate. To earn bitcoins, you must be the first miner to solve a numerical puzzle with the correct answer, or the closest answer. Proof of work is another name for this procedure (PoW).

“What exactly do you mean when you say ‘the correct answer to a numeric problem’?”

The good news is that no advanced mathematics or computing is required. You might have heard that miners solve tough mathematical problems—this is correct, but not because the arithmetic is difficult in and of itself. They’re attempting to be the first miner to generate a 64-digit hexadecimal number (a “hash”) that is either less than or equal to the goal hash. It’s essentially a guessing game.

The bad news: It’s all a question of guesswork or chance, but with billions of possible estimates for each of these situations, it’s a lot of effort. And as more miners join the mining network, the number of possible solutions grows (known as the mining difficulty). Miners require a lot of computational power to solve an issue initially. You’ll need a high “hash rate” to mine successfully, which is measured in gigahashes per second (GH/s) and terahashes per second (TH/s).

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Cryptocompare provides a useful calculator for estimating how much bitcoin you could mine with your mining rig’s hash rate. Similar tools can be found on other websites.

Bitcoin mining and circulation

Mining has another important purpose besides filling miners’ pockets and supporting the Bitcoin ecosystem: it is the only way to release fresh bitcoin into circulation. To put it another way, miners are essentially “minting” currency. In September 2021, for example, there were approximately 18.82 million bitcoins in circulation, out of a total of 21 million.

Aside from the coins generated via the genesis block (the first block, which was created by Satoshi Nakamoto), miners were responsible for the creation of every single bitcoin. Bitcoin as a network would continue to exist and be useful in the absence of miners, but no new bitcoin would ever be created. However, because the rate at which bitcoins are “mined” decreases over time, the final bitcoin will not be circulated until around 2140. This isn’t to say that transactions won’t be confirmed. To maintain the integrity of Bitcoin’s network, miners will continue to validate transactions and will be compensated for their efforts.

Aside from the short-term Bitcoin return, coin mining can provide you “vote” power when improvements to the Bitcoin network protocol are suggested. This is referred to as a BIP (Bitcoin Improvement Protocol). In other words, miners have some sway over decision-making on issues like forking.

How Much Does a Miner Make?

Every four years, the rewards for Bitcoin mining are cut in half. One block of bitcoin was worth 50 BTC when it was initially mined in 2009. This was reduced to 25 BTC in 2012. By 2016, it had been cut in half again, at 12.5 BTC. The prize was reduced again on May 11, 2020, to 6.25 BTC.

In September 2021, the price of Bitcoin was at $45,000 per bitcoin, so finishing a block would have netted you $281,250 (6.25 x 45,000). It may not appear to be a bad incentive to solve the complicated hash problem described above.

You can check the Bitcoin Clock, which updates this information in real-time, to keep track of when these halvings will occur. Interestingly, the market price of Bitcoin has tended to correlate closely with the reduction of new coins entering circulation over its history. Because of the decreased inflation rate, scarcity has grown, and prices have risen in response.

If you want to know how many blocks have been mined so far, various websites, including Blockchain.info, will provide you with that information in real time.

To mine bitcoins, you’ll need the following items.

Individuals may have been able to compete for blocks with a standard at-home personal computer early on in Bitcoin’s development, but this is no longer the case. This is because the difficulty of mining Bitcoin fluctuates over time.

The Bitcoin network strives to produce one block every 10 minutes or so to ensure the blockchain’s smooth operation and ability to process and validate transactions. However, if one million mining rigs compete to solve the hash problem, they will most likely find a solution faster than if ten mining rigs work on the same problem. As a result, every 2,016 blocks, or roughly every two weeks, Bitcoin evaluates and adjusts the difficulty of mining.

When additional processing power is pooled to mine bitcoins, the difficulty level of mining rises in order to maintain a consistent rate of block production. The complexity level decreases as computational power decreases. A personal computer mining for bitcoin will very definitely find nothing at today’s network size.

All of this means that miners must now invest in sophisticated computer equipment such as a GPU (graphics processing unit) or, more realistically, an application-specific integrated circuit in order to mine competitively (ASIC). These can cost anywhere from $500 to tens of thousands of dollars. Individual graphics cards (GPUs) are purchased by some miners, particularly Ethereum miners, as a low-cost approach to put together mining operations.

A comparison

Let’s say I tell three friends I’m thinking of a number between one and one hundred, and I jot it down on a sheet of paper and enclose it in an envelope. My pals don’t have to guess the precise number; all they have to do is be the first to guess any number that is less than or equal to the one I’m considering. There is no limit to the number of guesses they can get.

Let’s pretend I’m considering the number 19. They lose if Friend A predicts 21, because 21>19. Because 16 19 and 12 19 are both acceptable solutions, if Friend B guesses 16 and Friend C guesses 12, they’ve both theoretically arrived at viable answers. Even though Friend B’s answer was closer to the aim of 19, there is no “bonus credit” for him. Consider the following scenario: I ask three people to guess what number I’m thinking of, but I’m not thinking of a number between 1 and 100. Rather, I’m pondering a 64-digit hexadecimal number and asking millions of would-be miners. You can see how difficult it will be to guess the correct answer.

The analogy falls apart if B and C both respond at the same time.

Simultaneous replies are common in Bitcoin, but there can only be one winning answer at the end of the day. When many simultaneous answers are equal to or fewer than the target number, the Bitcoin network will choose which miner to honor based on a simple majority—51 percent.

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Typically, the miner who has completed the most labor, or who has verified the most transactions, is the winner. After that, the losing block is referred to as a “orphan block.” The term “orphan block” refers to a block that has not been added to the blockchain. Miners that have solved the hash problem but haven’t confirmed the most transactions aren’t paid in bitcoin.

What Does It Mean to Have a “64-Digit Hexadecimal Number”?

Here’s an example of a number like this:

0000000000000000057fcc708cf0130d95e27c5819203e9f967ac56e4df598ee

The above number has 64 digits. So far, it’s been really simple to comprehend. As you may have seen, that number includes both numbers and letters from the alphabet. What is the reason for this?

Let’s unpack the term “hexadecimal” to see what these letters are doing in the middle of numbers.

The decimal system has base factors of 100 (for example, 1 percent = 0.01). As a result, each digit in a multi-digit number has 100 possible values, ranging from zero to ninety-nine. The decimal system is simplified to base 10, or zero through nine, in computing.

“Hexadecimal,” on the other hand, refers to the base 16 system, as “hex” comes from the Greek word for six and “deca” comes from the Greek word for ten.

Each digit in the hexadecimal system has 16 possible values. However, our numerical system only provides ten different methods to express numbers (zero through nine). That is why you must insert letters, namely letters a, b, c, d, e, and f.

You don’t need to calculate the total worth of that 64-digit number if you’re mining Bitcoin (the hash). You don’t need to calculate a hash’s total value, I repeat.

So, what exactly are “64-digit hexadecimal integers” and how do they relate to Bitcoin mining?

Remember the analogy of writing the number 19 on a sheet of paper and sealing it in an envelope? The target hash is the metaphorical undisclosed number in the envelope in Bitcoin mining parlance.

Miners are guessing at the target hash using those massive processors and dozens of cooling fans. Miners make these assumptions by creating as many “nonces” as they can as quickly as they can. The key to generating these 64-bit hexadecimal numbers I keep talking about is a nonce, which stands for “number only used once.” A nonce in Bitcoin mining is 32 bits long, much smaller than the hash, which is 256 bits long. The first miner to generate a hash that is less than or equal to the target hash is credited with completing the block and receives 6.25 BTC as a reward.

You could theoretically achieve the same result by rolling a 16-sided dice 64 times to get random numbers, but why would you want to?

The image below, derived from the website Blockchain.info, may assist you in putting all of this information together quickly. You’re looking at a summary of what happened during the mining of block #490163. 731511405 was the nonce that created the “winning” hash. On top, the target hash is displayed. The term “Relayed by Antpool” refers to the fact that AntPool, one of the most successful mining pools, completed this particular block (more about mining pools below).

As you can see, they confirmed 1768 transactions for this block, which is a significant contribution to the Bitcoin community. Go to this page and scroll down to the header “Transactions” if you really want to see all 1768 transactions for this block.

What method do I use to guess the target hash?

A string of leading zeroes appears at the start of every target hash. There is no minimum aim, however the Bitcoin Protocol has set a maximum target. There is no target that can be higher than this:

00000000ffff0000000000000000000000000000000000000000000000000000

For a bitcoin miner, the winning hash is one with at least the minimum number of leading zeroes set by the mining difficulty.

Here are some samples of randomized hashes, as well as the criteria for determining whether they will lead to miner success:

This is a list of made-up hashes.

You’ll need a fast mining setup or, more realistically, join a mining pool, which is a group of currency miners who pool their computing power and split the produced Bitcoin. Mining pools are similar to Powerball clubs, in which participants buy lottery tickets in bulk and agree to split the proceeds. Pools mine a disproportionately large number of blocks compared to individual miners.

To put it another way, it’s purely a numbers game.

You can’t create a prediction based on prior target hashes or guess the pattern. The chances of discovering the winning value for a single hash are one in tens of trillions at today’s difficulty levels. Even with a super-powerful mining gear, you don’t stand a chance if you’re working alone.

Miners must not just consider the expenses of the expensive equipment required to solve a hash problem. They must also consider how much electricity mining rigs consume in order to generate massive amounts of nonces in quest of the solution. As of this writing, Bitcoin mining is largely unprofitable for most individual miners. Cryptocompare has a handy calculator where you can plug in statistics like your hash speed and electricity expenses to get an approximation of the costs and advantages.

 

What Are Coin Mining Pools and How Do They Work?

The miner who discovers a solution to the problem first receives mining incentives, and the probability that a participant will be the first to discover the solution is proportional to their share of the total mining power on the network.

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Participants with a small percentage of the mining power have an extremely slim possibility of independently uncovering the next block.

For example, a mining device costing a couple of thousand dollars would represent less than 0.001% of the network’s total mining power.

With such a small possibility of discovering the next block, it could take a long time for that miner to find one, and as the difficulty increases, things become even more tough.

The miner’s investment may never be recouped.

Mining pools are the solution to this problem.

Third-party mining pools manage and coordinate groups of miners.

Miners can earn a regular flow of bitcoin from the day they activate their miners by working together in a pool and distributing the payments among all participants.

Blockchain.info has statistics on a few of the mining pools.

“I’ve crunched the numbers. Don’t bother with mining. Is there a less time-consuming approach to make money with cryptocurrencies?”

As previously said, the simplest way to obtain Bitcoin is to purchase it on one of the numerous exchanges. You can also use the “pickaxe strategy” as an alternative. This is based on the old adage that during the 1849 California gold rush, the sensible investment was to make mining pickaxes rather than pan for gold.

Invest in the firms that make those pickaxes, to put it another way. A company that develops Bitcoin mining equipment would be the pickaxe equivalent in the cryptocurrency world. Instead, you may look at companies that manufacture ASICs or GPUs, for example.

Mining’s Drawbacks

The hazards associated with mining are frequently financial and regulatory in nature. As previously said, Bitcoin mining, and mining in general, entails a financial risk because one could invest hundreds or thousands of dollars in mining equipment only to see no return on their investment. However, by joining mining pools, this danger can be reduced. If you’re thinking of mining but reside in an area where it’s illegal, you should think twice. It’s also a good idea to look into your country’s bitcoin regulations and sentiment before purchasing mining equipment.

Another potential issue associated with the growing popularity of Bitcoin mining (and other proof-of-work systems) is the increased energy consumption of the computer systems that operate the mining algorithms. While the efficiency of ASIC processors has grown tremendously, the network’s growth is exceeding technological improvement. As a result, there are concerns regarding Bitcoin mining’s environmental impact and carbon footprint.

There are, however, efforts to alleviate this negative externality by utilizing carbon offset certificates and finding cleaner and greener energy sources for mining operations (such as geothermal or solar). Another strategy is to switch to less energy-intensive consensus mechanisms such as proof-of-stake (PoS), which Ethereum has adopted. However, PoS has its own set of drawbacks and inefficiencies, including incentivizing hoarding rather than using coins and the risk of centralization of consensus control.

Why is bitcoin “mining” named that?

Mining is used as a metaphor for introducing new bitcoins into the system since it necessitates (computational) effort in the same way as gold or silver mining necessitates (physical) effort. Of course, the tokens discovered by miners are imaginary and live only in the Bitcoin blockchain’s digital ledger.

Why is it necessary to mine bitcoins?

Due to the fact that they are all digital records, there is a possibility of copying, counterfeiting, or spending the same coin twice. Mining solves these issues by making attempting to accomplish one of these things or otherwise “hack” the network exceedingly expensive and resource-intensive. Indeed, joining the network as a miner is significantly more cost-effective than attempting to destabilize it.

What exactly do you mean when you say mining confirms transactions?

Mining is important for confirming and validating new transactions on the Bitcoin blockchain, in addition to introducing additional BTC into circulation. This is significant since there is no central authority judging which transactions are genuine and which are not, such as a bank, court, government, or anything else. Instead, the mining process uses proof-of-work to achieve decentralized consensus (PoW).

Why does mining consume so much power?

Anyone may run a mining application from their PC or laptop in the early days of Bitcoin. The difficulty of the mining algorithm increased as the network grew larger and more people became interested in mining. This is because Bitcoin’s algorithm aims to generate a new block every ten minutes on average. With more miners, the odds of someone solving the proper hash faster increase, hence the difficulty is increased to reclaim the 10-minute target. Consider what happens if tens of thousands, if not millions, more people join the network. That’s a lot of energy-hungry new devices.

Is Bitcoin Mining a Legitimate Business?

The legality of Bitcoin mining is totally dependent on your location. The notion of Bitcoin may pose a threat to fiat currency dominance and government control of financial markets. As a result, Bitcoin is entirely banned in several jurisdictions.

Bitcoin mining and ownership are allowed in a growing number of jurisdictions. Algeria, Egypt, Morocco, Bolivia, Ecuador, Nepal, and Pakistan were among the countries where it was outlawed, according to a 2018 report. Overall, Bitcoin mining and use are legal in most parts of the world.

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