How Bitcoin Mining Works

by Sandip Das from
How Bitcoin Mining Works

As Bitcoin is becoming increasingly popular, there is a rising interest among investors in how Bitcoin mining works. In simple words, Bitcoin mining is a core activity associated with the validation of Bitcoin transactions. It creates new Bitcoins and releases them into circulation. It also offers lucrative rewards to miners (someone who mines BTC).

So, if you are thinking about how to start Bitcoin mining, this guide to mine BTC is the perfect post for you. In this Bitcoin mining guide, we are going to discuss everything you need to know about Bitcoin mining.

1. What is Bitcoin Mining?

Bitcoin mining is a complex process through which Bitcoin transactions are validated and new Bitcoins are created. When we hear the term mining, the first thing we are likely to think about is minerals like iron ore, copper, or even gold. We generally don't associate mining with currencies or payment systems. Mining US dollars or euros sounds pretty odd.

So, how is mining associated with digital currencies like Bitcoins? The short answer is that the way digital currencies work is fundamentally different from the working of fiat currencies like the dollar. You can find basic information on what Bitcoin is and how it works in our article dedicated to this topic and below, we are going to take a short detour to first understand how blockchain works before delving deep into BTC mining.

Cryptocurrencies exist within blockchains. A blockchain is a distributed ledger on which all participants can record and validate transactions. In blockchains, transaction data is recorded in blocks which are then chronologically connected to each other. Since there is no single authority to check the blocks and validate the transactions, this work is done by participants through a voting process called consensus mechanism. Mining is associated with the Proof-of-Work (PoW) consensus mechanism, which is also the most common consensus protocol.

Since Bitcoin runs on PoW, it involves mining. Bitcoin mining is the process through which participants in the Bitcoin blockchain validate Bitcoin transactions and complete the blocks. Each time a new block is created, the miner gets a certain amount of Bitcoin as a reward. The current reward for mining 1 block is 6.25 BTC

2. How Does Bitcoin Mining Work?

You must be thinking about why to mine Bitcoin in the first place or how crypto mining works. This guide on how cryptocurrency mining works gives you an overview of the mining process. The primary reason behind Bitcoin mining is to have a foolproof system for validating Bitcoin transactions. Without proper validation, the information recorded on the Bitcoin blockchain will have no credibility.

The process of validating transactions is pretty complex, so for those who are not familiar with crypto, we would rather recommend our guide including crypto trading strategies for beginners. In case of Bitcoin mining, one needs to solve complex mathematical puzzles (which are done by computers) to validate transactions. So, when we say someone is mining Bitcoin, what we essentially mean is that someone is solving complex math problems to validate Bitcoin transactions. Leaving the technical details out, solving mathematical puzzles in mining involves guessing a 64-digit hexadecimal number to complete blocks. You need the best computers of the day to do that! All the participating computers race to guess this number. Whichever one guesses it first gets a chance to complete the next block.

Solving these mathematical puzzles needs sophisticated computer systems (which can easily cost over $10k). So, why would someone spend so much to validate a transaction? Let’s look at the other part of the puzzle, which is the mining rewards.

When you validate transactions, you get block rewards. Currently, Bitcoin’s block reward is 6.25 BTC. So, when you participate in Bitcoin mining and complete 1 block, you get 6.25 BTC as a reward for your efforts and investment in computing power. Its current market value is about $220,000 (October 2023). Sounds pretty cool right? Wait - there is more to it than meets the eye.

2.1 Increasing complexity and Bitcoin halving

As more and more miners enter the Bitcoin mining business and more computing power is deployed, the puzzles get more complex to solve. Satoshi Nakamoto designed Bitcoin in such a way that the time required to create a block stays roughly 10 minutes. This helps in stabilizing BTC’s supply while maintaining its security.

The total supply of Bitcoin is fixed at 21 million BTC. So, the block reward is cut in half after every 210,000 blocks (which takes roughly 4 years). This event is called Bitcoin halving. When BTC was first created, the block rewards were 50 BTC, which then fell to 25 BTC, 12.5 BTC, and finally to 6.25 BTC with subsequent halving events. The next Bitcoin halving event is expected in 2024.

Bitcoin halving is going to ensure that when all the 21 million Bitcoins have been mined, there is no incentive to mine more BTC. The block rewards at this point will fall to zero. So, why will someone still validate transactions as it’s essential for the BTC blockchain to continue? The answer is that the validators will earn transaction fees.

3. Purposes of Bitcoin Mining

Once you learn what Bitcoin is, how to buy Bitcoin and how Bicoin mining works, let's find out what is the aim of this process. Bitcoin mining serves a number of purposes:

  • It ensures that the BTC network is secure and all transactions are properly validated.
  • Mining eliminates the problem of double spending by bad actors in the network.
  • Bitcoin mining helps maintain the BTC blockchain.
  • BTC mining creates new BTC into circulation in a controlled way.

As you can see there are a few functions of BTC mining. But you may ask yourself what's in it for me. We provide the answer to this question in the next paragraph.

4. Why Mine Bitcoin?

The main reason you would like to mine Bitcoin is to get the mining rewards. As we just discussed, currently you get to earn 6.25 BTC for completing 1 block, which you can later spend in one of the best Bitcoin and crypto casinos we recommend in our article. Therefore, Bitcoin mining can be a lucrative source of income provided that you have the technical know-how and all the resources in place.

Also, it’s mostly a passive income as you can automate the Bitcoin mining process using advanced software. You can mine BTC as a solo miner or even participate in a mining pool where many miners put their computing resources together for higher winning chances. Let’s look at how you can start to mine Bitcoin.

5. How to Start Bitcoin Mining

After getting Bitcoin mining explained, let’s look at how to mine Bitcoin. You need 3 things to start bitcoin mining - Bitcoin mining hardware, Bitcoin mining software, and a Bitcoin wallet.

5.1 Bitcoin Mining Hardware

Initially, Bitcoin mining was quite easy and could be done using a normal computer. However, with the increasing complexity of the mathematical puzzles, you need advanced hardware like graphics processing units (GPUs) with advanced graphic cards, field programmable gate arrays (FPGAs), or application-specific integrated circuits (ASICs). They are pretty expensive and their costs can easily reach $15k to $20k

5.2 Bitcoin Mining Software

Once you have the necessary hardware, you need to install Bitcoin mining software to start mining. It’s important to pick the right BTC mining software to get efficient results. Some of the best Bitcoin mining software in 2023 are CGMiner, Cudo Miner, and NiceHash Miner.

There are also advanced Bitcoin mining apps that allow you to participate in Bitcoin mining pools. A Bitcoin mining pool is basically a collective platform for Bitcoin miners who combine their computing resources to mine Bitcoin.

5.3 Bitcoin Wallet

Lastly, you need a Bitcoin wallet to safely store the BTC that you receive a mining reward. Read our complete crypto wallet guide for beginners for some cool tips on how to pick the best Bitcoin wallet.

6. Tips and Strategies for Bitcoin Mining

While Bitcoin mining can be a great source of regular passive income, you need to apply the right strategies to maximize your profits. Here are some general strategies and tips you must remember:

  • Participate in a Bitcoin mining pool for more convenient mining and to generate a steady income.
  • Choose the right hardware and software for optimized performance.
  • Use advanced automation tools to save time and resources.
  • Use an effective Bitcoin mining calculator to have an idea of the expected profitability from mining.

If that sounds like too much fuss for you, instead of mining, you can trade on one of the top crypto exchanges, which we enumerate in our article.

7. Bitcoin Mining Issues

The primary issue behind Bitcoin mining is the high initial costs. You need to invest significantly to get the required computer resources in place and start mining. ASICs required in BTC mining can cost tens of thousands of dollars. Secondly, Bitcoin mining also involves significant running costs because of high energy needs. Taken together, it can cost between $10-15,000 to mine a single BTC.

Because of energy-intensive Bitcoin mining, the Bitcoin network requires around 127 terawatt-hours (TWh) a year. This is higher than the energy needs of the entire country of Argentina. This is why Bitcoin mining is often criticized for its humongous energy needs.

Thirdly, you need sufficient technical knowledge to run a Bitcoin mining facility and mine Bitcoins profitably. Moreover, as the difficulty and complexity of Bitcoin mining increase, it’s going to become more resource-intensive.

8. Is Bitcoin Mining Profitable?

It’s common for investors to ask Does Bitcoin mining actually make money?. The profitability of Bitcoin mining depends on several factors including initial investment, energy costs, other operational costs, and the current market price of BTC.

The energy cost of running a Bitcoin mining facility can vary depending on where you are located. You can use a Bitcoin mining profitability calculator to have a fair idea of your expected mining profits based on current market dynamics or try different strategies to earn money thanks to cryptocrrencies, for example by using AI in crypto trading.

9. Bitcoin Mining FAQs

9.1 ✅ Is Bitcoin mining legal?

Bitcoin mining is a fundamental aspect of the Bitcoin blockchain. Bitcoin transactions like mining are legal in most developed countries like the US and UK. However, the high energy needs of Bitcoin mining are often a matter of criticism in many countries. China is one of the major economies in which Bitcoin transactions are not legal.

9.2 🕝 How long does it take to mine one Bitcoin and how many Bitcoins you can mine in a day?

It depends on the type of hardware and software you are using. Bitcoin mining is an all-or-nothing game. It can take anywhere between 10 minutes to a couple of months to mine a single Bitcoin. It all depends on how fast your computers can solve mathematical puzzles in an extensive competition against other miners.

9.3 ❓ What do you need to mine Bitcoins?

You need Bitcoin mining hardware and software to start Bitcoin mining. Also, you need a Bitcoin wallet to safely store your Bitcoins.

9.4 ✔️ Is Bitcoin mining safe?

Bitcoin mining is completely safe. In fact, Bitcoin mining is conducted to secure the Bitcoin network by validating transactions. Such validation makes the Bitcoin network trustworthy. Miners receive rewards for validating Bitcoin transactions and completing blocks as they keep the network secure. In this guide on how Bitcoin mining works, we explained the essential aspects of Bitcoin mining and mining rewards.

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