What is Bitcoin mining and how it works?
Bitcoin mining
Bitcoin mining is the process of creating new Bitcoins by solving very complex mathematical problems that verify currency transactions. After successful bitcoin mining, the miner receives a predetermined amount of bitcoins.
Bitcoin is a cryptocurrency that has gained widespread popularity due to wild price fluctuations and a rapid increase in value since its inception in 2009.
As the price of cryptocurrencies and bitcoins has skyrocketed in recent years, the increased interest in mining is understandable.
However, for most people, the prospect of Bitcoin mining does not seem very good due to its complexity and high cost. In this section, we will cover the basic principles of bitcoin mining and the main risks to be aware of.
How does Bitcoin mine work?
Mining (blockchain mining in general) provides a secure and reliable method of ordering data using economic incentives.
Third-parties ordering transactions are decentralized and receive financial rewards for correct behavior. Bad behavior, on the other hand, leads to a loss of economic resources, at least as long as the majority remains honest.
In the case of Bitcoin mining, this is accomplished by creating a sequence of blocks that can be mathematically proven to be stacked in the correct order for a given resource consumption.
This process is based on the mathematical properties of cryptographic hashing, a method of encoding data in a standardized manner.
Hashing is a one-way cipher, which means that it’s almost impossible to decipher the input data unless every possible combination is tested until the result matches the predefined hash. So how are bitcoins mined?
Bitcoin miners sift through trillions of hashes per second until they find a hash that meets a condition called “difficulty”. Since both difficulty and hashes are very large numbers represented by bits, the condition is simply that the hashes are less than the difficulty.
The difficulty is readjusted with every bitcoin block in 2016, i.e. approximately every two weeks, to keep the block length constant.
The hash generated by the miners is used as an identifier for each particular block and consists of the data that is in the head of the block.
The most important components of the hash are the Merkle root – another aggregated hash that encapsulates the signatures of all the transactions in that block – and the unique hash of the previous block.
This means that changing the smallest component of a block would significantly change its expected hash, as well as the hash of all subsequent blocks. Nodes would immediately discard this incorrect version of the blockchain, protecting the network from tampering.
Due to the complexity requirement, the system ensures that bitcoin miners are doing the real work – spending time and energy to search through possible combinations.
This is why Bitcoin’s consensus protocol is called “proof-of-work” to distinguish it from other types of block creation mechanisms. To attack the network, attackers only need to recreate all of the network’s mining power. In the case of Bitcoin, this would cost billions of dollars.
But how long does it take to mine 1 Bitcoin? It usually takes about 10 minutes to create one BTC, but this only applies to powerful processors. The mining speed is determined by the bitcoin mining equipment used.
Why Does Bitcoin Need Mining?
If you only buy or trade Bitcoins, you may not have given much thought to how mining works. But since the users are behind BTC, it’s useful for anyone dealing with Bitcoin to have a basic understanding of the technology behind it.
Bitcoin, like many other blockchain technologies, is a decentralized system, which means that no single entity controls the network and keeps no central records of users’ balances.
Bitcoin relies on users making their own copies of historical records of transactions. Mining is the process by which users reach a consensus on the accuracy of these shared records.
Every 10 minutes or so, the network generates enough transactions to create a new “block”, a package of transactions encoded in such a way that they are unforgeable. A user who manages to add a new block to a record is rewarded for mining it.
Mining, however, is not just about finding new transactions and shipping them. If that were the case, everyone would be doing it. Mining Bitcoins requires an expensive process that involves solving complex computer puzzles to prevent fraud.
Miners’ computers run cryptographic formulas trillions of times per second, hoping to be the first to reach a value within a narrow mathematical range.
Success in this task opens the door to sending a block, and if other computers on the network believe that value matches their records, the miner is rewarded.
The idea behind this is that mining tilts the economic incentives toward the miner behaving honestly. After spending all the effort and money to mine a block, you may not want to risk losing a potential payment by, for example, entering incorrect bitcoin data into your account.
Is Bitcoin mining legal?
If you are wondering if bitcoin mining is legal, the answer is yes, given that it is recognized by various jurisdictions. For example, Enigma (based in Iceland) has opened one of the largest bitcoin mining operations in the world.
In Israel, cryptocurrency mining is considered a commercial activity and is subject to corporate tax. On the other hand, in the US, cryptocurrency miners are considered money transmitters by the Financial Crimes Enforcement Network (FinCEN), which means they may be subject to regulations governing such behavior.
Additionally, in November 2021, El Salvador’s President Nayib Bukele announced that a new coin-shaped “bitcoin city” would be built near the base of the Conchagua volcano.
Bitcoin mining in the city will be powered by geothermal energy. To start building the city, El Salvador will raise $1 billion in “bitcoin bonds” through cryptocurrency infrastructure provider Blockstream.
However, Bitcoin mining is banned in Algeria, Nepal, Russia, Bolivia, Egypt, Morocco, Ecuador, and Pakistan. To find out if bitcoin mining is legal in your country, you should always check the local regulations in that country.
How much can you make by Bitcoin mining?
We have seen that mining Bitcoins is not easy, but it is certainly possible to dream about it. Here is an example of mining Bitcoins that can help explain what you get when you earn the reward per block.
It is important to note that the reward for mining Bitcoins is about the same every 10 minutes. Your reward, if you’re lucky, depends on whether you mine the block yourself (which is unlikely) or share it with other miners in the pool.
Bitcoin pays a mining reward every time a new “block” is added to the permanent transaction register. The reward drops every few years but is currently 6.25 BTC, which was worth about $105,000 in December 2022, when the Bitcoin exchange rate was below $17,000.
In addition to this reward, bitcoin miners also earn income through transaction fees, which are automatically charged when crypto-currencies are transferred from one cryptocurrency wallet to another. Unlike block rewards, transaction fees are not fixed. They depend on the state of the network, for example, the number of transactions at any given time.
When new blocks are added to the Bitcoin blockchain, fees are temporarily reduced. This is known as Bitcoin halving, and the next halving is scheduled for 2024. On that date, the reward amount will fall to 3.125 BTC, equivalent to around $53,000.
When 21 million bitcoins are in circulation, the block reward will cease to be paid, and miners will only be remunerated by transaction fees.
But there will probably be no end in sight for blockchain rewards: current estimates suggest that this will happen around 2140.
Risks of Bitcoin mining
Volatility of the price
Bitcoin’s price has fluctuated wildly since its introduction in 2009. Since November 2021, Bitcoin has traded at less than $20,000 and at nearly $69,000. Because of this volatility, it is difficult for miners to know whether their rewards will exceed the high cost of mining.
Regulation
Very few governments have adopted cryptocurrencies like Bitcoin, and many are more likely to view them with skepticism because these currencies operate outside of any government control. There is always a risk that governments will ban the mining of Bitcoin or cryptocurrencies altogether, as China did in 2021, citing financial risks and an increase in speculative transactions.
What about electricity costs?
If you don’t have a cheap source of electricity, it’s entirely possible that your mining costs will exceed the amount of money you receive as a reward. Here’s an example of mining Bitcoins that might be relevant to the average American family.
ASICs vary in cost, efficiency, and performance, so you should do your research before you start. But as an example, a commonly used ASIC is the AntMiner S9, which was available on Amazon on Dec. 21, 2022, for a price between $600 and $700.
NiceHash, a mining platform, estimates that the AntMiner S9 could yield about 26 Bitcoins per month, based on prices as of Sept. 16. But with average prices for household electricity, you would pay about $161 to run the device.
So you will lose money even if you take into account the cost of the equipment.
However, this does not mean that mining is never profitable. These calculations can change if electricity prices go down or the value of Bitcoin goes up. If you assume that the value of Bitcoin will increase over time, you can consider your monthly losses as a long-term investment.
FAQ
How to mine Bitcoin at home?
To start mining Bitcoin at home, you need to start a Bitcoin wallet and a mining rig, install Bitcoin mining software and join a mining pool.
How long does it take to mine 1 Bitcoin?
Mining one BTC takes about 10 minutes, but this is with the perfect hardware and software, which is not always available and which few users can boast of. More often than not, most users can mine one bitcoin in 30 days.
Can you mine Bitcoin on your phone?
Bitcoin can be mined on a smartphone, either an Android device or an iPhone. Phones are computers, and any computer can be configured to calculate hashes.
A hash is a one-way transformation of data. Calculating the correct hash as requested by Bitcoin software is the “puzzle” that miners are trying to solve.
How to mine Bitcoin on Android?
The program can be downloaded from the Google Play store, and once downloaded, it will mine money while running on your phone. Bitcoin miners use one of two types of mining pools: PPLNS (pay-per-last-n-shares) or SMPPS (shared maximum pay per share).
You can join either type and switch between them at any time. Your amount is determined by how often your gadget is constantly mining bitcoins.
How to mine bitcoin on iPhone?
You can easily earn cryptocurrencies with apps on iPhone and iPad. You can find many cryptocurrency mining apps on iPhone and iPad, but not all of them are good enough.
The most popular apps are Bitdeer, CryptoTab, and ECOS. With these apps, you can turn your mobile device into a mining rig and earn cryptocurrency.
How to mine bitcoin on pc?
To mine Bitcoin on a PC, you need to follow these steps:
Start a Bitcoin wallet
In order to store the mined bitcoins, you need a place to store them, so you need to start a Bitcoin wallet.
There are several options, such as a software wallet that a user can download to their computer, or a hardware wallet, which is a physical device that can be used to store BTC offline.
Downloading mining software
The user also needs to download mining software that is compatible with the operating system of their computer.
Join a mining pool
Joining a mining pool increases the chances of receiving new BTC, as the mining pool distributes rewards to members based on the mining power they have contributed.
Setting up the mining program
You need to set up the mining program by specifying the address of your Bitcoin wallet and the address of the pool the miner has joined. You also need to set the number of streams and the intensity of mining.
Start mining
Once the user has configured the mining software, they can start mining. The software will use the processing power of the user’s computer to solve complex mathematical problems to validate Bitcoin transactions and earn new BTC.
Author: Narine Arevyan
Narine has been investing in cryptocurrencies periodically since 2018 and now writes regularly about the cryptocurrency space and payment systems based in Georgia.