Ever wondered what Bitcoin Mining is about and what miners are actually doing? Bitcoin is a digital currency and is only created through a process called mining.
What Is Bitcoin Mining? Mining is a process of utilizing computers to verify transactions on the blockchain. Miners are rewarded new Bitcoin for their efforts in making sure that all transactions are properly recorded on the public ledger.
This concept of earning digital currency may sound technical but it’s all rather simple. In this guide, we go over the process of what Bitcoin Mining is and go in depth on what miners are doing. By the end of this guide, you will have a better understanding of how Bitcoin mining works.
What Is Bitcoin Mining?
Bitcoin mining is the process of using computers from all around the world to verify transactions and distributes new Bitcoin into the blockchain. It is decentralized with no central authority in charge.
Sounds confusing doesn’t it? Keep Reading…
Much of what Bitcoin Mining is can be closely related to the mining of precious metals such as Gold. Meaning both Bitcoin and Gold get pursued by miners with the intent of earning a hefty reward.
Yet Bitcoins are of a digital form, whereas Gold is a physical asset, which is why Bitcoin gets commonly referred to as digital Gold.
Where these two industries become comparable is in the fact that both Gold and Bitcoin are considered scarce or limited in supply. Additionally, both require some form of a task to obtain them.
FUN FACT: There will only ever be 21 million Bitcoin in existence.
Unlike mining for Gold, where miners dig up piles of the earth’s ground to seek precious nuggets, Bitcoin mining involves the use of specialized computers to solve mathematical equations instead.
Additionally, in the early days of Gold mining, the first pioneers of the Gold Rush were able to mine with ease, as large deposits of gold-rich dirt were easily accessible with a pick and shovel.
The same runs true for Bitcoin mining as its early adopters of the newfound tech could easily mine 50 Bitcoin a day with nothing more than a laptop due to the math problems being easily solvable.
However, fast forward to today with both industries and the barrier to entry to be successful in mining them is much higher. Gold mining now requires the use of heavy machinery, and Bitcoin Mining demands the use of even more advanced computers called ASICs.
Now, as both Gold and Bitcoin reach for record-high prices, the race to mine them is becoming more difficult with each passing day.
For most people, this might not be the best way to obtain Bitcoin, which is why most people favor buying Bitcoin through a reputable exchange.
- Bitcoin mining is how new Bitcoins get created
- Mining Bitcoin involves computers to solve math problems
- The maximum number of Bitcoin to ever exist is 21 million
- As time passes, it becomes more difficult to mine Bitcoin
By now, you might be asking yourself is that all Bitcoin miners are doing is mining Bitcoin, and the answer is no. Everything mentioned above is only scratching the surface of Bitcoin mining.
Let’s take a look at what Bitcoin miners are actually doing to earn their mining rewards.
What Are Bitcoin Miners Actually Doing?
So now we know that new Bitcoins get created through a process called mining, but what does it entail? What are miners doing to earn Bitcoin?
Miners get incentivized to provide three main functions for the network.
- Verifying Bitcoin Transactions
- Distributing New Bitcoins
- Securing The Bitcoin Network
Distributing New Bitcoins
In traditional fiat currencies such as the US dollar, central authorities are in charge when it comes to the distribution of new money. In contrast, with Bitcoin mining, miners are left responsible for this task.
You see, instead of just printing new money whenever deemed necessary, Bitcoins protocol forces all the miners on the network to compete in solving blocks.
A new block can only be solved every 10 minutes on average.
Additionally, each block successfully mined is worth a set number of new Bitcoin.
Bitcoin’s original developer Satoshi Nakamoto enforced these rules in Bitcoin’s code so that no one could cheat the system and mine up all the Bitcoin too quickly, but why.
Well, dive deeper into that later.
Miners are much like bookkeepers, where they record and verify transactions as taken place on the blockchain.
The blockchain is a public ledger where all past Bitcoin transactions are stored. Miners are responsible for updating this ledger.
New transactions are grouped into 1MB size blocks of data by miners and wait to be confirmed by the rest of the miners on the network.
Once confirmed by the rest of the miners on the network, this block of data is then permanently stored on the blockchain, where it is no longer reversible.
Securing The Bitcoin Network
Miners also provide a great deal of security to the Bitcoin network.
As more computers participate in mining, the more secure Bitcoins blockchain becomes, and less likelihood that a hacker can add and validate corrupt data to its ledger.
An attempt of this nature is also known as a 51% attack. In this situation, an attacker would have to have control of more than 50% of the total computational power on the network.
In the event, the attacker could alter or reverse transactions, which would result in a double spend.
FUN FACT: A double spend is when someone attempts to spend Bitcoin they no longer possess or have already used in a previous purchase.
Scenarios like this are more common in smaller blockchains like Bitcoin Gold. Yet, due to the sheer size of Bitcoin’s continually growing hash rate network, it is challenging to achieve.
- Bitcoin miners create new Bitcoin by solving blocks
- Miners verify transactions by grouping them in blocks
- Miners secure the network to prevent malicious attacks
- As the network grows the more secure the blockchain becomes
So now you know a little bit more about what Bitcoin miners are doing, but you still want to understand how it works.
Let’s dive right in.
How Does Bitcoin Mining Work?
So we’ve briefly mentioned that new blocks of Bitcoin are created and added to the blockchain every ten minutes on average. Also, miners are competing to solve a block to earn new Bitcoin but also there responsible for verifying user’s transactions as well.
Let’s break down what happens in these ten minutes time periods by giving a step by step example.
Step 1) Sending And Receiving Transaction
Users of the Bitcoin network are continually sending and receiving transactions across the web.
Each transaction consists of at least two wallet addresses, which are the sender’s wallet address and the receiver’s wallet address. The wallet addresses associated with the transactions then get grouped and sent to a mempool along with any other current unconfirmed transactions currently happening the network.
Check out this link to see all the current unconfirmed transactions on the Bitcoin network that are waiting to be verified.
Step 2) Verifying Transactions
Miners then begin verifying these unconfirmed transactions by checking the current state of the blockchain to ensure the senders haven’t already spent their Bitcoin in any previous transactions.
If an entity tried sending the same Bitcoin to two receivers, the system would only validate the first transaction processed by the miners.
These transactions continue to be grouped in blocks with other unconfirmed transactions until the blocks data is 1MB in size. However, this is only part of what a miner must do to solve a block.
Step 3) Find The Nonce
Once a sufficient number of transactions have been stored in the block, the miner or mining pool can race against other miners or mining pools to be the first to find the nonce.
A nonce, in short, is a number only used once and is the key to successfully solving the block.
Each block is assigned a unique number called a target hash, which is a 64-bit hexadecimal number(see below for example). Miners must make millions if not trillions of attempts per second to find a nonce that is equal to or lower than the target hash: this is called hashing.
However, miners must also use a proof of work hash function to find a nonce that satisfies these requirements. Proof work, in short, is a way to make pieces of data costly to create yet rather trivial to verify.
Once a miner finds a nonce that satisfies the current proof of work required, it broadcasts to the rest of the miners on the network that the current block has been found.
Step 4) Confirming The Block
Once the broadcast is made, the rest of the network stops to check the work of the block. If the block is indeed hashed correctly, the process is repeated, and miners can begin working on a new block,
At this point, the current block is now added to the blockchain.
The lucky miner or pool of miners are now rewarded handsomely with Bitcoin. However, to ensure the security of the network, miners must wait until 100 new blocks are confirmed before they are paid.
How to Mine Bitcoins
By now, you might be wondering how to get started with mining Bitcoin.
First and foremost, Bitcoin mining is super competitive these days as large operations overseas with cheap electric rates in cooler climates make it extremely difficult for the average person to compete.
Again for most people, it’s far better to buy and hold Bitcoin vs. attempting to go up against the large pools.
Nonetheless, Bitcoin mining is still doable and can be profitable for those who wish to attempt this as a hobbyist miner. Here are the steps you will need to follow:
Step 1) Get a wallet.
Before you can begin setting up to mine Bitcoin, you will need a wallet to store your mined coins.
The best wallets to use are hardware wallets as they are the most secure, so be sure to check out our guide about them here.
We suggest the Nano Ledger X. If you’re going to make the investment to mine Bitcoin you should keep is as safe as you possibly can. (Ledger Affiliate link)
Step 2) Obtain Mining Hardware
In order to have a chance at competing against these more extensive mining operations with any success, you will need an ASIC miner.
These miners are specifically designed for the purpose of Bitcoin mining. Therefore it would be highly unwise to compete against these machines using your at-home computer.
However, there are some ways you still earn a marginal amount of Bitcoin by mining with a laptop or PC. Check out the guide if this is the route you wish to take.
On the other hand, be sure to check out our guide on how to set up an ASIC miner to run at your home if you’re looking to mine with ASICs.
Step #3: Choose a Mining Pool
Once you have your mining hardware selected, you will then need to choose a mining pool. Without them, you would limit your chances of earning a reward as you would be mainly solo mining.
Due to the sheer size of the network, it would be a slim chance that you would find a block on your own.
Mining pools allow you to join with other miners on the network to increase your chances of finding a block. Your rewards will be in proportion to the amount of hashrate your mining hardware provides to the pool.
Meaning if your hardware provides 1% of the pool’s total hashrate, then you will receive 1% of the total mining rewards earned when the pool finds a block.
Step #4: Acquire Bitcoin Mining Software
Most ASIC miners these days come with their own mining software built into the miner.
However, if you’re attempting to mine with an at-home computer, then you will need mining software in order to participate. Check out the list of current mining software for Windows, Linux, and mac.
Step #5: Determine if Bitcoin Mining Profitable for You?
Before you ever attempt to invest time and money, you should always calculate if Bitcoin Mining will be profitable or not.
To do this, you can use a number of different online mining calculators. These calculators pull in real-time data from the blockchain, such as mining difficulty and the price of Bitcoin.
This, in turn, allows you to compare your hardware hashrate and against your electric rate to estimate your return on investment.
Please note that many of these factors of Bitcoin mining are dynamic and often change periodically, such as price and mining difficulty. Therefore mining calculators can only provide rough estimates.
How to Mine Bitcoin iOS or Android
In late 2017 developers of mining software developed mobile apps to enable the ability to mine Bitcoin on mobile devices.
Shortly after, both apple and google play store banned these apps from being promoted in their app stores.
Much like trying to mine Bitcoin on a laptop, mobile devices are just not powerful enough to compete for mining bitcoin. In theory, you could still do it, but you will make little to none in profit for your efforts.
Nonetheless, there are some other cryptocurrencies you can mine on a laptop and mobile device.
Check out these guides:
What Is Bitcoin Mining Hardware?
Bitcoin mining these days is predominantly done with application-specific integrated circuits(ASIC) hardware. This hardware is designed explicitly for the sole purpose of mining Bitcoin.
When Bitcoin was first invented, users could mine successfully with a CPU. A year later, engaging developers discovered ways to mine Bitcoin with graphics cards, which put CPU mining to rest as far as Bitcoin mining is concerned.
Check out these guides for GPU and CPU Mining for alternative mining options:
However, it wasn’t long after GPU mining Bitcoin took over the scene that companies from china developed supercomputers called ASIC miners that are now the standard mining hardware used in today’s mining operations across the globe where the climate is colder, and electricity rates are significantly low.
Large Bitcoin mining farms like these make Bitcoin mining a very competitive industry to invest in.
What Are Bitcoin Mining Pools?
Mining pools allow miners to join forces with other miners to increase their chances of finding a block. This idea wasn’t as popular back when Bitcoin mining was finding its roots as it is today.
Back in 2009 through 2010, miners would do what is called solo mining. This meant if a miner found a block, he/she would get the full reward, which back then a block was worth 50 Bitcoin.
However, since the ongoing evolution of mining hardware and large overseas operations, mass deploying large mining farms, it’s getting harder each day to solo mine a block.
This is where mining pools come in handy as they allow miners to collectively combine their hashing power in an attempt to increase their success in finding a block. However, bear in mind that mining payouts are divided in proportion to the amount of hashpower you provide to the network.
These days several mining pools allow anyone to sign up and join.
Does Bitcoin Mining Waste Electricity?
From time to time, you may hear rumors that Bitcoin mining is unsustainable and non-eco friendly because it consumes a lot of electricity.
Although ASIC miners do consume large amounts of electricity, this is not entirely true for a few reasons.
When compared to our current financial system, Bitcoin mining consumes far less energy. The energy consumed by all the banks and ATMs is enough to make Bitcoin mining look like a drop in the bucket.
Furthermore, many large scale mining farms are beginning to source their energy from renewable sources. Combine this with the fact that mining hardware is continuously becoming more efficient, and you can quickly see that mining is far from unsustainable.
With only 21 million Bitcoin ever to be issued and more advanced mining hardware getting introduced to the network, won’t Bitcoin mining end soon?
The short answer to this question is NO, but here’s why.
Part of Bitcoin’s protocol is that new blocks can only be found every ten minutes on average, which comes out to 2016 blocks every two weeks.
Therefore, if more miners join the network and more than 2016 blocks were solved in the last two weeks, then the mining difficulty increases accordingly. Furthermore, if miners leave the network, and less than 2016 blocks are discovered, then the difficulty decreases.
Mining difficulty, in turn, ensures that a steady issuance of blocks is being created and entered into the network over time. In fact, it’s estimated that the last block of Bitcoin will be mined somewhere in the year 2140 due to the regular occurrence of the halving.
Block Reward Halving
As mentioned throughout this guide, block rewards are what miners compete for. These blocks, once recorded to the blockchain, contain the data of all past transactions.
Each block successfully mined and stored on the blockchain is currently worth 12.5 Bitcoin. Back in 2009, each block was worth 50 Bitcoin. Bitcoins network was designed this way purposefully so that the block rewards halve roughly every four years (or 210,000 blocks).
The next Bitcoin halving is expected to happen sometime in May of 2020
Despite the block rewards being cut in half every four years, mining remains profitable for advanced mining farms due to the price of Bitcoin rising, especially shortly after each halving event.
Is Bitcoin Mining Legal?
If you made it this far by now you might be wondering if all this is legal. The short answer to this question is yes for the most part Bitcoin Mining is perfectly legal. However there are some select countries that have out right banned the use of Bitcoin.
This short list of countries is constantly changing back and forth as some have decided to take a second look at adopting Bitcoin recently.
Most of the concern behind Bitcoin Mining’s legality stems from misinformation that Bitcoin Mining is a form of making counterfeit money. However that is definitely not the case in this instance as mentioned Bitcoin Mining is how new Bitcoins are created.
Is Bitcoin Mining Profitable?
As mentioned early, the first miners of Bitcoin were able to mine 50 Bitcoin a day with nothing more than a laptop. Back then the user base was small and 1300 Bitcoin was only worth a few dollars due to it being a fairly new concept.
Fast forward to today and Bitcoin is worth a whole lot more. However the requirements to mine Bitcoin profitably are very much different. These days in order to even stand a chance at mining Bitcoin requires an immense amount of computing power with ASIC miners.
For most people the cost of electricity to run the machines will be greater than the amount of money earned. Nonetheless Bitcoin mining can be profitable at certain times when the price goes way up like it did in late 2017.
However keep in mind that your operation will not be profitable until you recoup your investment on all costs associated in doing business. These costs not only include electrical costs but also hardware costs, internet and sometimes even rent for the building you’re planning on running them in.
Most of the successful mining operations you hear of have negotiated contracts with power companies or adopted renewable energy sources to lower their bottom lines. We say this to not disenchant you entirely to mining yet to inform you to make wise investment decisions.
This concludes our guide on Bitcoin Mining. If you feel this information has helped you in some way then please drop a comment below. Also if you haven’t already then make sure to sign up for our private FB group to stay informed about what’s going in the mining community.