How does Bitcoin mining really work?

October 12, 2022

Mining Bitcoin is more than just the creation of Bitcoin tokens; it’s also the decentralized global system by which miners validate and secure all Bitcoin transactions — and earn Bitcoin themselves.

How does mining Bitcoin work — i.e. how does a miner actually mine Bitcoin? It goes back to the blockchain technology that Bitcoin is built on. Although the word mining implies that the reward lies in extracting a precious ore — or creating a Bitcoin — in fact miners rely on super-charged computer systems to validate blocks of digital transactions to do their crypto mining.

Once a miner has completed a certain number of calculations (1 MB) to verify a block of transactions, they may be rewarded with new Bitcoins — if they are the first to verify the block. This competitive process in turn helps to secure the system and prevent fraud. And it enables a network-wide consensus that essentially backs the validity of each Bitcoin, even without a central authority.

How Bitcoin Mining Works

Quick refresher: Unlike other traditional currencies Bitcoin isn’t overseen, issued or regulated by a central authority such as a bank. Instead, miners mint Bitcoin using blockchain — the transparent, digital public ledger that is essentially a list (or chain) of confirmed Bitcoin transactions that verifies the integrity of each transaction.

The transactions are confirmed by Bitcoin miners, who use special computer hardware to do the complex mathematical cryptography calculations required to confirm each item on the blockchain — an immense undertaking called a “proof of work” that involves literally billions of calculations.

Bitcoin miners are rewarded for this service with transaction fees and newly generated Bitcoins (and the satisfaction of knowing they are also helping to create, validate, and protect the Bitcoin universe).

Since there’s no government running Bitcoin — just a global network of computers, users, and software — how does Bitcoin mining work and generate new coins?

When a Bitcoin transaction is executed, it gets sent to miners for verification. For new transactions to be confirmed, the miners need to be included in a block along with the mathematical proof of work. The process of mining Bitcoin actually helps secure the network, and the transactions that fly across it every day. For a hacker to take control of the blockchain, to commit fraudulent charges, and to steal Bitcoin, they’d have to control over 51% of the network.

It’s an important insight into the decentralized world of mining cryptocurrency: Rewarding miners creates a competitive environment that encourages more miners to join the network. This increases the size of the network, making it harder to get more than 51% control of it, which in turn makes transactions more secure for users who are sending Bitcoins back and forth.

Is Mining Bitcoin Legal?

The question of whether Bitcoin mining is legal is still fairly complex and can vary from region to region. The short answer is that Bitcoin itself, as well as Bitcoin mining, are legal in many developed countries, including the U.S., U.K. and Japan. In general though, it’s wise to consider the use of any cryptocurrency within the context of the laws and regulations in a specific jurisdiction, as many are still in flux.

In some countries, the use of cryptocurrencies is forbidden and mining Bitcoin is illegal. In others, like China and India, the use of crypto is restricted. In Canada it’s not illegal to use cryptocurrencies, but they are not considered legal tender — which is a key distinction in how crypto is treated in the U.S. as well.

According to IRS guidelines issued in 2014, cryptocurrencies like Bitcoin are considered property, and are taxed as such. Also, if an employer compensates an employee using a cryptocurrency, the employee will get a W2 or 1099 tax form and may owe income taxes on their crypto paycheck.

Whether you’re contemplating crypto mining yourself, planning to trade crypto, or just wondering how to mine Bitcoin, it’s best to keep an eye on the news. The status of cryptocurrency mining as well as crypto’s legal standing can shift as new regulations come into play.

How Much Does a Miner Earn?

Given the speed at which technology can change and markets can shift — and new laws, policies, and trends can take hold — what miners actually earn can be tough to predict.

When miners mine Bitcoin, they compete against one another to create a hash — or 64-digit hexadecimal number — which goes into the blockchain ledger as confirmation of that Bitcoin transaction. When a computer solves the computation, that miner gets 6.25 Bitcoin — about $293,000 as of 8/31/21.

Remember, though: You have to be the first to validate a block of transactions in order to earn Bitcoin. Mining has become so competitive that some mining rigs leverage the computational muscle of thousands of high-powered computers to complete this process and ‘win’ (more on that in the next section). In short, miners have to subtract the time, effort, and considerable energy it takes to mine Bitcoin to determine their actual earnings.

Also, if you’re part of a mining pool, you would likely get only a portion of the total amount earned.

What Do I Need to Mine Bitcoins?

With the right equipment, nearly anyone can mine Bitcoin — in theory. The catch? As just discussed, Bitcoin mining has become highly competitive because of the potential rewards — and the complexity of the calculations and technology involved.

When Bitcoin was first announced in 2009, all miners needed was a sturdy PC and they could potentially get in the game. Things progressed quickly, though. In 2010, software was released that let miners mine with graphics processing units (GPUs), the technical name for a video card.

This was a major shift in Bitcoin mining because a single GPU was 100 times faster than a central processing unit (CPU), which was how most people were initially mining.

Then miners started getting fancy. They built computers specifically for mining Bitcoin, as well as other cryptocurrencies. These “crypto mining rigs” could feature motherboards, the main hub of a computer, that supported four to eight graphics cards.

If a single card was 100 times faster than a CPU, it’s easy to see how the average user looking to mine Bitcoin might be left in the dust by a high-powered crypto rig that featured anywhere from four to eight GPUs churning away at blockchain calculations.

From there, as is the case with many things tech, the hardware got better, faster, and more specialized. In 2013 the first Bitcoin ASIC miners hit the scene. ASIC stands for application-specific integrated circuit. These mining tools are built to do one thing — mine cryptocurrencies (including Bitcoin).

ASICs are an option if you’re thinking about getting into mining. While they’re more effective at processing Bitcoin transactions than their GPU and CPU predecessors, and they’re more energy efficient, they can come with some upfront costs, running anywhere from $1,000 to $3,000. And this doesn’t include the potentially high utility costs needed to maintain them (read: keep them cool enough to function).

Another option to consider may be a mining pool.

How Bitcoin Mining Pools Work

A bitcoin mining pool is a group of users who have decided to join forces to validate Bitcoin transactions (create a new block). Users who join mining pools contribute their own CPUs, GPUs, or ASICs to a network and when rewards are paid out, they all get a share.

Joining a mining pool isn’t too difficult. The first thing a user may want to have is a Bitcoin wallet. A Bitcoin wallet is a digital or physical place where you keep your Bitcoin, private keys (codes) and addresses.

There are many options when it comes to a Bitcoin wallet, from software solutions, to sites, to wallets that come in the form of hardware in secure USB sticks. A wallet makes a good first step because it’s where shares of rewards (new Bitcoins) would be sent and stored.

A next good step to joining a mining pool may be grabbing some Bitcoin mining software. Even if you’re thinking about going it alone, this software may be key to getting started.

If you are going solo, this software will try to verify transactions with just the processing power of whatever hardware (CPU, GPU, or ASIC) that you’ve got. That said, many folks agree that the computations have gotten so complex, it’s less likely that a solo miner will create a new block on their own. If you’re joining a pool, the mining software will help you connect to your pool.

Once miners have their wallets and software situation sorted, a good next step would likely be finding a mining pool they like and joining it. Many mining pools these days are located in China because of the cheaper electricity. Some of these pools are actually companies, including F2Pool, AntPool, BTCC, and BW. While these are some of the biggest pools, there are pools based in the U.S. and Europe as well.

While pools might seem appealing to miners with less computing horsepower, there may be some things to consider before joining. Pools may charge users a fee. And miners might be paid out their shares based on the level of their contribution, which could mean that miners with fancy ASICs take home more of the rewards.

Since this is Bitcoin, there’s probably another innovation around the corner.

Cloud mining is an example — an option if you don’t want to own your own mining hardware and would rather mine with someone else’s. However, cloud mining may also come with its own costs and risks that have left some members of the Bitcoin community less than impressed with this approach to mining coins.

What’s Cloud Mining?

Much like storing data or running applications in the cloud, cloud mining is the process of paying someone else to use their crypto mining hardware. This could save a miner the upfront cost of graphics card or ASIC systems. To get started, a miner would likely open an account with a cloud mining company, decide how much they want to spend, and how much they want to mine.

While cloud mining may seem like an easier way to get started with Bitcoin mining, it’s worth mentioning that there have been reports of cloud mining companies that might not be on the up and up. Miners looking to get started might consider doing a fair bit of research before deciding if cloud mining is right for them—as well as what company to go with.

Recommended: A Closer Look at Bitcoin Cloud Mining

The Risks of Crypto Mining

In addition to questions of legality, crypto mining can involve other risks — from excessive energy use, which may have environmental implications, to regulatory and security risks.

Environmental risks:

Because mining Bitcoin requires so much computer power and uses so much electricity — the hash rate of Bitcoin has been at record highs this year — the environmental impact of crypto mining has come under serious scrutiny. And last spring, when a well-known car manufacturer declined to accept cryptocurrency owing to its potential environmental toll, the issue made headlines.

What’s going on? Researchers estimate that some 80% of Bitcoin mining takes place primarily in four countries (China, Russia, Kazakhstan, Iran) — places where energy is cheap and fossil fuels like coal generate most of the country’s electricity. Thus there is a significant risk of higher carbon emissions from those networks.

Some newer altcoins (alternatives to Bitcoin) claim to be more environmentally friendly, but when you think about how to mine cryptocurrency like Bitcoin, this is a risk to consider.

Security risks:

Being part of a decentralized, global system that’s largely unregulated does come with some security risks. In some cases, using Bitcoin software could make your personal devices more vulnerable. If you’re part of a mining pool, that may help to mitigate some of the risks.

Regulatory risks:

As discussed above, the question of Bitcoin’s legality is increasingly complex and depends on a wave of cryptocurrency regulations around the world that seem to fluctuate week to week, region to region. These may include how Bitcoin is defined (e.g. as a commodity or a currency); how it can be used (e.g. for some purchases or payments but not others); how it’s taxed.

Investment risk:

The value of Bitcoin and other crypto currencies is another factor that keeps fluctuating. A decade ago, many investors placed their bets on the generally upward trajectory of crypto, but as recent swings in valuation this year have shown, that’s not something investors can count on.

Is Bitcoin Mining Right for You?

Despite some hurdles, learning how to mine Bitcoin is still an intriguing and potentially lucrative opportunity for some. With the right equipment, it’s possible to validate enough transactions to earn actual Bitcoin tokens. That said, mining Bitcoin is not the gold rush it once was. Even if you invest in some serious Bitcoin mining ASICs, mining itself keeps getting more complex and competitive.

That doesn’t mean you can’t do crypto mining, though. There are thousands of cryptocurrencies that could use help from eager miners willing to donate some processing cycles from their CPUs or GPUs, and even if you don’t hit the mother lode, you could mine for a better understanding of how cryptocurrency works. Whether or not you want to grab a metaphorical hat and mining pick is up to you.

Learn More:

How many Bitcoins are left?
How to buy Ethereum

This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.

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