If you’ve spent enough time reading about and even investing in Bitcoin and other cryptocurrencies, then you might be vaguely familiar with the term “mining.” 

Cryptocurrencies like Bitcoin are limited. There’s a finite number of them that will ever exist. And before they exist on the market, someone needs to mine them.

In a way, mining Bitcoin is like discovering it for the very first time. Once mined, it enters into the circulation of Bitcoin, increasing the supply of the coin.

So how does Bitcoin mining work? No, there are no physical tools like pickaxes or shovels used when mining Bitcoin. This digital currency, which lives on the internet, relies on super-fast computers to run algorithms in order to discover the next Bitcoin.

Sound confusing? That’s why we dive deep into how mining works and other facts about Bitcoin below.

Bitcoin Origins

Before getting into how mining works, a quick overview of the history of Bitcoin is important. The white paper describing Bitcoin was released in October 2008.

The paper described an electronic, peer-to-peer cash system where you can make transactions and transfers directly, without having to trust intermediaries like banks to facilitate the transaction.

The concept of Bitcoin relied heavily on the themes and ideas in the cyberpunk community, one which valued privacy in the digital age. Bitcoin would utilize blockchain technology, which is a distributed ledger that everyone can access.

This decentralized access to the open ledger provides trustless transactions. In 2009, the first Bitcoin block of the blockchain was “mined.” Satoshi Nakamoto, the pseudonymous founder of Bitcoin, received 50 coins in exchange for mining the first block of the chain.

Satoshi continued mining blocks in the early days and received up to 1 million Bitcoin for his efforts before he disappeared and left Bitcoin to the global community. 

Today, Bitcoin mining takes place all around the world. Because Bitcoin is a decentralized currency, anyone who wants to mine can get started in hopes of earning some Bitcoin for their efforts in supporting the global crypto ecosystem.

Understanding Tokenomics

Tokenomics is the understanding of a cryptocurrencies supply, demand, and value. Many different factors determine the current value.

One key factor is the fact that Bitcoin has a limited supply. There will never be more than 21 million Bitcoin tokens. As of August 2021, 18.77 million bitcoins have been mined and are in circulation. There are only 2.3 million left.

The fact that the circulating supply of Bitcoin has a cap of 21 million continues to drive the demand upwards. More people are discovering cryptocurrency and are buying Bitcoin. But the same amount of tokens is available.

The law of supply and demand says value will only increase, unlike fiat currency, which governments devalue every year by printing money and adding new currency into circulation. 

Based on the Bitcoin mining halving schedule, the last Bitcoin is set to release into circulation in the year 2140. Every four years since inception, the amount of Bitcoin awarded to miners in exchange for a new block is cut in half.

During the first four years of Bitcoin mining, successful blocks made 50 Bitcoin. After the first halving in 2012, miners were making 25 Bitcoins for their efforts. Today, miners receive 6.25 Bitcoin per block mined, valued at around $375,000, according to a $60K Bitcoin evaluation. 

Many miners keep their Bitcoin as long as possible, in hopes of appreciation. Others sell right away to cover their operational costs and even live off the profit.

They can sell Bitcoin through an online crypto exchange, or they can cash it out at a ByteFederal Bitcoin ATM for instant cash. 

What Is Bitcoin Mining?

Bitcoin mining is not the process of discovering new coins hidden in cyberspace. Rather, mining is the process of creating a new block for the Bitcoin blockchain.

Blocks are the databases that store transactions. It takes resources like electricity, software, and time in order to mine a new block, which can then facilitate users’ transactions.

Each new block mined can record about 1600 transactions on its 0.804MB size. In July 2021, the daily trading volume of Bitcoin was over $9 billion, meaning there are a lot of daily transactions to track.

Bitcoin is a proof of work cryptocurrency, as opposed to a proof of stake cryptocurrency. This means that miners work, using expensive mining software and computers, and lots of electricity to validate and create new blocks.

In reward for their efforts, the miners who successfully create a new block in the chain receive Bitcoin. This Bitcoin is then added to the circulation.

Miners also receive a portion of the transaction fees incurred by users for buying and selling Bitcoin, though this is a much smaller revenue source. Both of these incentives are crucial for encouraging network participants to aid with the validation of a distributed ledger.

New blocks are mined, on average, about every 10 minutes. That’s about 144 blocks mined every day. 

Bitcoin blocks are mined by solving cryptographic puzzles to verify transactions on the network and record those transactions on the blockchain. Miners compete with each other for the opportunity to mine the next block and receive the reward. 

How Does Bitcoin Mining Work?

So how does Bitcoin mining actually work? What do these people, businesses, and computer programs do to generate blocks and earn the most valuable crypto?

A miner will have a computer used specifically for mining Bitcoin. This computer is then referred to as a node. 

This node will collect and organize Bitcoin transactions from the last 10 minutes into a block. But in order for their block to become published on the ledger, the node will need to complete a complex, cryptographic puzzle, before all of the other nodes do. 

The first node to solve the problem then shares its success with all other nodes around the world. The nodes validate that the puzzle was solved correctly, and if so, the new block gets added to the chain, validated by all other nodes, and the process repeats.

Solving the Cryptographic Puzzle

Most people understand that creating a block means organizing transactions into a small database. That piece is easy to digest.

But what about this cryptographic puzzle? How do miners compete for the right to publish a block and earn their tasty Bitcoin reward? This is the part that is very difficult for non-technophiles to understand.

Basically, the miner who is trying to win is automatically creating a block using an algorithm on their mining software. It organizes transactions from the memory pool.

On the block header or the beginning of the block, a cryptographic hashing function takes place. This is the summary of the data that follows on the block. 

It also includes a reference to an existing block on the blockchain. And it includes a nonce, which is a number only used once. Regarding Bitcoin, the nonce needs to be a whole number between 0 and 4,294,967,296. So the miner essentially has to guess a number below a predetermined number in order to win.

The block header, with all of its information and nonce, is put through a hashing function. If the nonce included in the header is below the target hash, it is awarded the block and broadcasted to all the other nodes.

The Bitcoin reward is then created, and the original transaction for that particular Bitcoin gets recorded on that very block. The first transaction of the new Bitcoin is a coin base.

However, if the miners’ header produces a nonce above the target hash, they have to change the nonce and continue trying. Their software performs this function thousands of times per second.

Why Is Mining Important?

So why does mining need to happen in the first place? The process of mining new blocks is Bitcoin’s way of creating a safe, secure, trustless currency.

When new blocks are mined, they record individual transactions, broadcasting them to the network of other nodes around the world. These blocks, and individual transactions, are reviewed and validated by all of these other nodes.

It’s the processor auditing Bitcoin transactions. It prevents the possibility of double-spending. With physical cash, double spending is impossible. But with a digital currency, double spending, buying something multiple times with the same money, is more likely.

So mining for new blocks is a way of creating a truly decentralized currency where users can actually trust the system to remain fair and free of hackers and thieves. 

It’s this process that enables users to trust the network, ultimately increasing demand and boosting the value of the coin. 

The Cost of Bitcoin Mining

With each successful block created, the cryptographic puzzle becomes harder to solve. In order to compete, individual nodes require a higher hash rate, and thus, more computing power.

In the early days, Bitcoin miners used their current computers with a fast CPU to mine for Bitcoin. But soon they discovered the graphics processing units (GPUs) were more effective at mining.

Bitcoin mining hardware, known as an application-specific integrated circuit (ASIC), is now used by miners who hope to compete. 

The cost of a mining rig will likely set you back at least $1,500 or more and will need to be upgraded every few years to compete with other miners using the latest technology.

But the big cost for miners is electricity. Running this hardware and software requires a lot of power. For miners to remain profitable, cheap electricity is vital. That’s why most of the historical Bitcoin mining took place in China, where electricity was super cheap.

Bitcoin has been widely criticized for being a waste of energy, contributing to pollution and greenhouse gas emissions. But today, with miners looking to find the cheapest source of electricity, most of the mining has moved into renewable energy sources.

It’s a win-win. It’s better for the environment, and cheaper for the miners, as the upfront investment in solar power is worth the long-term savings. 

Who Mines for Bitcoin?

In the beginning, Bitcoin mining was done by individuals. Satoshi Nakamoto mined much of the early Bitcoin. People could mine hundreds of Bitcoin per week using a basic laptop computer, and lots of electricity.

But soon after, smart miners founds that by combining computing power with other miners, their efficiency increased, along with their ability to compete for new blocks.

Mining pools were then created, as a way of combining the computing power of individual miners together. When a block is awarded, Bitcoin rewards are distributed among the pool of miners according to their power contributions. 

Today, much of the mining is still completed by mining pools, as your chances of individually mining a new block are slim to none. 

But because Bitcoin is worth so much more than it used to be, there are many businesses that exist solely to mine for Bitcoin. While these businesses originally started in places like Asia, where cheap power was abundant, they are now located around the world, and even in the US.

Modern mining operations often go public, receiving lots of funding with which they can purchase top-of-the-line computing power and renewable energy equipment. 

There are many countries around the world that are hoping to attract crypto mining operations. While China was the original mining hub, the US recently took over that title due to China’s recent crypto mining ban.

Countries like Kazakhstan are hoping to attract crypto miners. States like Texas are hoping to do the same. New York City and Miami are fighting to become the central hub in the US.

Is it Possible to Start Mining Today?

Going into 2022, Bitcoin mining is well-established. Major players such as full-blown operations and huge mining pools dominate the landscape.

But is it too late to get in on the action and earn Bitcoin yourself? Many people say it’s too late, and others say better late than never. It really depends on if you can purchase enough computing power.

Mining rigs are as expensive as they come nowadays, and are often out of stock, further increasing prices. But once you have the hardware, the mining software is free to download.

Then, you just need to join a mining pool to share your power and get started. If you have the money to buy or rent equipment, as well as access to cheap or renewable electricity, it might be worth the investment. 

Enjoying Bitcoin Rewards

So how does Bitcoin mining work? In summary, heavy-duty computers run algorithms in order to create Bitcoin blocks and solve a cryptographic puzzle. The first miner to solve the puzzle sends their results to all the other nodes, who confirm the solution.

They are awarded a new block on the chain, and a handsome Bitcoin reward. For established mining pools and companies, Bitcoin mining is very profitable, especially as the value of Bitcoin continues to rise to new heights.

Looking for more Bitcoin and crypto news? Head over to our blog now to find other helpful articles.  

By Rob