Bitcoin was the first digital currency that allowed anyone to exchange money directly between two people without the involvement of a middleman. It is based on the blockchain — a distributed digital ledger. You can easily transfer BTC to another person in any corner of the world. You have probably heard that Bitcoin is created through mining, but how does it work?
How are Bitcoins mined?
Bitcoins are released into circulation in the process called mining. Bitcoin mining is an energy-intensive process that uses advanced computing power to create a secure cryptographic system. The mining process is required to generate new coins, track ownership of assets and facilitate transactions.
Mining Bitcoins is done with complex hardware. To maintain the Bitcoin database, known as the blockchain, all Bitcoin miners must solve a complicated mathematical puzzle. The computer that solves the problem first receives the next block of BTC.
Bitcoin uses a consensus algorithm in which participants prove that the work they have submitted allows miners to add new transactions to the blockchain. This consensus algorithm is called Proof of Work because the first miner to solve a complex equation gets the right to process the latest block of Bitcoin transactions. People mining Bitcoin compete to be the first to verify transactions and earn rewards. Therefore, crypto miners must first invest in computer equipment and need access to cheap electricity.
So when you send a bitcoin transaction, miners compete to complete complex algorithms called hashes. A miner’s hash rate is the speed at which its computer configuration can solve the mathematical equations needed to add a new block to a blockchain. After a miner successfully verifies a new block, it is distributed to all other miners and devices with a complete copy of the blockchain.
Bitcoin mining hardware performs a cryptographic hashing function on a block header to generate a candidate block. It then sends the generated candidate block to the node’s memory pool (mempool) for confirmation. A block contains a breakdown of data, such as a block header that summarizes the data in the block, a reference to an existing block and a nonce, an integer between 0 and 4,294,967,296.
The miner compares the resulting hash to the current target. The computer automatically changes a number when this target is reached and tries again. The target is adjusted every 2016 block to maintain the Bitcoin supply and demand balance. Miners perform such checks many thousands of times per second.
If the result of a lucky miner is lower than the current target hash, the block is sent to the network. Each node verifies that the block header matches the target and, if confirmed, adds the new block to the blockchain. When a miner creates a proof-of-work for a candidate block, the transaction associated with the proof-of-work is called a “Coinbase transaction.” This transaction is the first in each block. It distributes the block subsidy and collects the cumulative fees of all block transactions. Since the Coinbase transaction creates a new bitcoin, it is valid without any input.
Rewards incentivize participation and help keep the network running smoothly. To obtain cryptocurrency, miners must have high computing power. The mining code determines the rate at which rewards are issued. This ensures that a miner gains a block every 10 minutes so that he cannot exploit the system and network. With the growth of the miner’s network, it becomes harder to earn cryptocurrency.
To reverse transactions on the blockchain would require 51% of the entire network’s computing power. This ensures that any attack would be difficult and pointless, as an attacker would need to own more mining hardware than anyone else.
Types of Bitcoin Mining
Mining cryptocurrencies requires computers with special software that solves complicated, cryptographic mathematical equations. Different methods for mining cryptocurrencies require different amounts of time. From a technical point of view, mining can be divided into three types:
- CPU mining or processor-based mining
In the early days of technology, most miners chose CPU because it was a fast and inexpensive way to make money. Today, however, many people find CPU mining impractical because the computers used for this method are too slow and too expensive to make even a tiny profit.
In the early days of the technology, a simple CPU chip on a home computer could be used to mine cryptocurrencies like Bitcoin. However, as technology has advanced, CPUs have become impractical for mining most cryptocurrencies due to the increasing level of difficulty.
- GPU mining or video cards-based mining
GPU mining is another way to mine cryptocurrencies. It requires powerful, efficient graphics cards (GPUs) located under a mining rig. Furthermore, GPU mining requires a motherboard and a cooling system for the rig.
- ASIC-based mining or special equipment that works with specific algorithms
ASIC miners are another method for mining cryptocurrencies. They are specifically designed for mining cryptocurrencies but produce fewer cryptocurrency units than GPUs. However, since they are expensive, they quickly become useless as mining difficulty increases.
Depending on the method, mining is divided into three types:
- Individual mining or solo mining
Solo mining can be highly beneficial to miners of relatively new cryptocurrencies.
This is an independent form of mining cryptocurrencies that does not rely on participation in a pool. In this case, you keep all the coins you mine and the transaction fees a just reward for your efforts. Mining performance is essential for solo miners, as high hash rates are required to ensure computational complexity.
- Collective mining in pools
A pool is a network of miners who contribute their resources to discover new blocks.
When miners join a mining pool, they pool their computing resources to have a better chance of finding and mining blocks on a blockchain. If a mining pool is successful, rewards are distributed to the participants in proportion to the resources each miner has contributed. This type of mining has increased in response to the growing complexity of popular cryptocurrencies.
- Cloud mining
Cloud mining allows individual miners to leverage the power of large companies and dedicated crypto mining facilities. Unlike the previous two mining methods, you can rent computing power from a service that does its own mining on an industrial scale. In this case, you no longer need to build and maintain your mining farm.
It is possible to enter cloud mining without a large investment. You just have to pay for someone else’s power while you have the coins mined. Crypto miners can locate free and paid cloud mining rigs online and rent a mining rig for a certain period. This is ideal for those who are not interested in any technical details of mining rigs.
How much do miners earn?
Bitcoin mining rewards are reduced by half every four years. This is referred to as “bitcoin halving.” Originally, the reward for processing Bitcoin transactions was 50 BTC per block. The last “halving” event occurred in May 2020, when the reward was declined to 6.25 BTC.
On February 22, 2021, the bitcoin price was $43,000 per BTC. That means you would have earned $268,750 (6.25 x 43,000) if you were lucky enough to solve a block on your own. Not a bad incentive to solve the complex hash problem described above, you might think.
The market price has tended to closely match the reduction in new coins put into circulation throughout history. This decreasing inflation rate has increased scarcity, and the price has historically risen with it. So even though the rewards for bitcoin mining have been cut in half, the growth in the asset price has led to an overall increase.
Is Bitcoin mining worth It?
Mining Bitcoin can be considered a passive source of income to some extent, as it does not require a lot of effort.
First, it is important to take into account the difficulty level of the cryptocurrency you want to mine to determine if it is even profitable to operate. The profit in mining pools depends on the hash rate and the rental price. If you follow the price of cryptocurrencies more frequently, you can increase the profitability and switch to more promising coins in time.
Not only do the miners have the potential not to turn a profit, but managing high-power devices comes with risks as well. Proper ventilation for cooling, airflow, and preventing overheating is one of the most critical aspects of setting up any mining rig. Overheated parts in a computer system can be quickly damaged by operating at too high temperatures. Your miners will quickly overheat and burn out components without proper airflow and ventilation.
Furthermore, mining Bitcoin requires the intense use of electricity. So you should be aware of your electrical system’s limits, as exceeding those limits could lead to frequent outages or electrical fires. Consult an expert to determine whether your system is suitable for mining.
So regardless of whether a prospective miner chooses a CPU, GPU, or ASIC miner or avoids purchasing hardware altogether and opts for cloud mining, the most important factors to consider are the miner’s hash rate, power consumption, and overall cost. Please note that Bitcoin is a speculative asset with no intrinsic value. What you make on your investment depends on selling it to someone else for a higher price — and that price may not be high enough for you to turn a profit.
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