The future looks bright for Bitcoin miners and enthusiasts, and it’s a potentially rewarding venture for anyone who wants to give it a shot. However, let us first spend some time learning the fundamentals of Bitcoin mining.
There are three ways for bitcoin miners to acquire bitcoins. These are:
- Purchasing bitcoins on the exchange market
- Accepting bitcoin in exchange for goods and services
- Mining new bitcoins
Bitcoin mining is probably the most exciting of these three options as it takes miners on a journey of discovery. There is a caveat, however. Bitcoin mining can be rather taxing since solving complicated mathematical equations to verify transactions and add them to the blockchain digital ledger requires very high computing power.
What Is Bitcoin?
Bitcoin is the first decentralised digital currency that enables peer-to-peer transactions without the need for intermediaries such as banks, governments, agents, or brokers by using blockchain technology. You simply need to open an account on the Bitcoin network and have some Bitcoins in it; then you can transfer those Bitcoins. How to get Bitcoins into your wallet? You can either buy them online or mine them.
Bitcoin can be used to make online purchases as well as an investment vehicle. It is primarily used to purchase goods and services.
Compared to traditional fiat currencies, assets can be transferred more quickly on the bitcoin network. The system also has lower transaction fees because it is decentralised and has no intermediaries. Furthermore, since the system is cryptographically secure, it means that the identities of the sender and the receiver are kept private, and it is nearly impossible to counterfeit or hack the transactions. All data is available on a public ledger so that anyone can view the transactions.
What Is Blockchain?
Blockchain is a public distributed ledger that records transactions in chronological order. Any record or transaction added to the blockchain cannot be modified or altered, ensuring transaction security. A block is the smallest unit of a blockchain and functions as a container for all transaction details. A block has four primary attributes or fields:
- Previous hash: This attribute stores the value of the previous block’s hash, which is how the blocks are linked to one another.
- Data: This is the total number of transactions included in this block—the total number of transactions mined, validated, and included in the block.
- Nonce: The nonce is a random value used to vary the output of the hash value in a “proof of work” consensus algorithm. It is the parameter used to generate the hash value for every block. The process of transaction verification in the blockchain is known as proof of work.
- Hash: The value obtained bypassing the previous hash value, the data and the nonce through the SHA-256 algorithm; it serves as the block’s digital signature.
SHA-256 is a cryptographic hash algorithm that generates a unique 256-bit alphanumeric hash value for any given input, and that is the unique feature of this cryptographic algorithm: It will always return a 256-bit hash, no matter what input you provide.
3 Concepts of Blockchain
To understand bitcoin mining, you must first understand the three major blockchain concepts.
- Public distributed ledger: A record of all transactions maintained in the blockchain network around the world. Transactions are validated by bitcoin users.
- SHA-256: SHA-256: Blockchain prevents unauthorised access by employing a hash function known as SHA-256 to ensure the security of the blocks. Once generated, their hash value cannot be changed. SHA-256 is a one-way function, which means that it can accept an input string of any size and will return a fixed 256-bit output, but you won’t be able to derive the reverse of the input reverse fully from the output (what you have generated).
- Proof of work: A difficult mathematical puzzle that miners have to solve to validate transactions. To do so, the miner’s primary goal is to determine the nonce value, which is the mathematical puzzle that miners must solve in order to generate a hash that is less than the network’s target for a specific block.
What Is Bitcoin Mining?
Bitcoin mining refers to the process of creating new bitcoin by solving puzzles. Bitcoin miners often use computing systems equipped with specialised chips to solve mathematical puzzles. The first bitcoin miner to solve the puzzle wins bitcoin. The mining process also serves to verify transactions on the cryptocurrency network and ensures they are trustworthy.
Bitcoin was initially mined on desktop computers with regular central processing units (CPUs). However, the process was extremely slow. Now it is generated via a global network of large mining pools. Bitcoin miners pool mining systems that consume massive amounts of electricity to mine the cryptocurrency.
Bitcoin mining is considered harmful to the environment, especially in areas where electricity is generated using fossil fuels. As a result, many bitcoin miners have relocated their operations to areas with renewable energy sources in order to reduce Bitcoin’s impact on climate change.
Just as gold is mined from the earth with large implements and machines, bitcoin mining also makes use of big systems akin to data centres. These systems produce new coins by solving mathematical puzzles generated by Bitcoin’s algorithm.
By solving computational math problems, bitcoin miners also help ensure the integrity of the cryptocurrency’s network. They verify 1 megabyte (MB) worth of transactions, which is the size of a single block. Theoretically, these transactions can be as small as one transaction, but they typically number in the thousands depending on how much data each transaction stores. The goal of verifying Bitcoin transaction data is to prevent double-spending. Counterfeiting is always an issue with printed currencies. However, when you spend $20 at a store, the clerk receives the bill. It’s a different story with digital currency.
Since digital information can be easily replicated, there is a risk that a spender will make a copy of their bitcoin and send it to another party while keeping the original.
Bitcoin transactions are aggregated into blocks, then added to the blockchain database. Full nodes in the Bitcoin network keep a record of the blockchain and verify transactions that occur on it. Bitcoin miners download the entire blockchain history and assemble valid transactions into a block. The miner receives a block reward if the block of assembled transactions is accepted and verified by other miners.
The block reward will be halved every 210,000 blocks (approximately every four years). It was 50 in 2009. It dropped to 25 in 2013 before dropping to 12.5 in 2016. The reward was changed to 6.25.5 in Bitcoin’s most recent halving event,
Transaction fees are another reason that bitcoin miners participate in the process. In addition to receiving rewards, miners also receive transaction fees for any transactions contained within a given transaction block.
As Bitcoin reaches its targeted limit of 21 million (expected around 2140), miners will be compensated with fees for processing transactions by network users. These charges keep miners motivated to continue mining and maintaining the network. The expectation is that competition for these fees will keep them low after halving events are over.
How Bitcoin Mining Works
Anytime you hear about mining, you are likely to imagine heavy machines digging into the earth’s surface looking for precious metals. It then gets complicated to imagine the same mining applying to Bitcoin, given it’s a digital asset.
Well, the thought of regular mining is not too far-fetched when it comes to Bitcoin mining. It still involves the use of heavy machines, however, in the form of computational power.
For a transaction to be successful in the Bitcoin network (/learn/bitcoin/what-is-the-lightning-network), all the nodes must approve it. Nodes are powerful computers that run the Bitcoin mining software to validate transactions. For a transaction to go through, all the nodes in the system must verify it. This secures the system from the possibility of double-spend and other fraud possibilities. The process is responsible for the security and development of the network and public ledger.
Bitcoin mining is also the process through which new Bitcoin currencies enter into circulation. Some nodes in the Bitcoin network act as miners. They add new blocks into the network by solving complex computational arithmetic puzzles.
Solving a puzzle involves finding a number used together with the data from the nodes and passed through a hash function, then giving a certain result. The various nodes work separately to randomly guess the possible number. The one who finds the number is the victor and gets rewarded in the form of Bitcoin cryptocurrencies.
Processing a single block can take around 10 minutes. It however favors the most powerful nodes. Higher processing power increases your chances of guessing more numbers hence a higher possibility of finding the right one.
Bitcoin mining is such a costly and demanding task. You need the most powerful computers and spend a lot of time-solving arithmetic puzzles. All this without guaranteed rewards. However, more miners still swear by Bitcoin mining as various nodes keep joining the system. The reason lies in their importance in the network and the possible rewards. This brings us to the next topic on mining and circulation.
History of Bitcoin Mining
Two developments have contributed to the current evolution and composition of bitcoin mining. The first is the creation of custom bitcoin mining machines. Because bitcoin mining is essentially guesswork, getting the correct answer before another miner has almost entirely to do with how fast your computer can generate hashes. Desktop computers with standard CPUs dominated bitcoin mining in the early days. However, as the algorithm’s difficulty level increased over time, it became more difficult to discover transactions on the cryptocurrency’s network. According to some estimates, finding a valid block at the early 2015 difficulty level would have taken “several hundred thousand years on average” using CPUs.
Miners gradually discovered that graphics cards, also known as graphics processing units (GPUs), were more efficient and faster at mining. However, they used a lot of power for individual hardware systems that weren’t really needed for cryptocurrency mining. FPGAs, which are a type of GPU, were an improvement, but they suffered from the same drawbacks as GPUs.
Miners now use custom mining machines known as ASIC miners, which are outfitted with specialised chips for faster and more efficient bitcoin mining. They range in price from a few hundred to tens of thousands of dollars. Today, bitcoin mining is so competitive that only the most advanced ASICs can be profitable. The cost of energy consumption actually exceeds the revenue generated when using desktop computers, GPUs, or older models of ASICs. Even if you have the latest unit, one computer is rarely enough to compete with mining pools—groups of miners who pool their computing power and split the mined bitcoin among themselves.
Bitcoin forks have also impacted the makeup of the bitcoin miner network. Between 1 in 16 trillion odds, scaling difficulty levels, and the massive network of users verifying transactions, one block of transactions is verified roughly every 10 minutes. However, keep in mind that 10 minutes is a goal, not a rule.
Currently, the Bitcoin network can execute around four transactions per second, with transactions recorded on the blockchain every 10 minutes.
In comparison, Visa can process approximately 65,000 transactions per second. However, as the network of Bitcoin users expands, the number of transactions made in 10 minutes will eventually outnumber the number of transactions that can be processed in 10 minutes. Unless a change is made to the Bitcoin protocol, waiting times for transactions will also begin to increase.
The biggest problem that the Bitcoin protocol is facing is scaling. Bitcoin users have proposed several solutions to this issue. Developers have proposed either creating a secondary “off-chain” layer of Bitcoin that would enable faster transactions that could later be verified by the blockchain or increasing the number of transactions that each block can store. The first solution would make transactions faster and cheaper for miners because there would be less data to verify per block. The second would deal with scaling by increasing the block size to allow for more information to be processed.
In July 2017, bitcoin miners and mining companies representing roughly 80% to 90% of the network’s computing power voted to integrate a programme that would reduce the amount of data required to verify each block.
The programme that Bitcoin miners voted to add to the Bitcoin protocol is known as SegWit, or a segregated witness. This term is a combination of the words segregated, which means distinct, and witness, which refers to the signatures on a Bitcoin transaction. The term “segregated witness” refers to the separation of transaction signatures from a block and their attachment as an extended block. Though adding a single programme to the Bitcoin protocol may not appear to be much of a solution, it has been estimated that signature data accounts for up to 65% of the data processed in each block of transactions.
In August 2017, less than a month later, a group of miners and developers initiated a hard fork, leaving the Bitcoin network to create a new currency based on the same codebase as Bitcoin. Although this group acknowledged the need for a scaling solution, they were concerned that using SegWit technology would not fully address the scaling issue.
Instead, they chose the second option to increase the number of transactions that each block can store. The resulting currency, Bitcoin Cash, increased the block size to 8MB to speed up the verification process, allowing for around 2 million transactions per day.
What is the bitcoin mining math puzzle?
At the heart of bitcoin mining is a mathematical puzzle that miners must solve in order to receive bitcoin rewards. Though it is frequently described as difficult, the mining puzzle is actually quite simple and can be considered a guesswork.
Miners attempt to generate a 64-digit hexadecimal number called a hash less than or equal to a target hash in SHA256, Bitcoin’s PoW algorithm. A miner’s systems employ significant brute force in the form of multiple processing units stacked together and spit out hashes at varying rates in Bitcoin’s PoW algorithm. A miner’s systems use considerable brute force in the form of multiple processing units stacked together and spit out hashes at different rates—megahashes per second (MH/s), gigahashes per second (GH/s), or terahashes per second (TH/s)—depending on the unit, guessing all 64-digit combinations until they find a solution. Bitcoin is awarded to systems that correctly guess a number less than or equal to the hash.
Here’s an example to demonstrate the procedure. Assume you ask your friends to guess a number between 1 and 100 that you’ve thought of and written down on paper. Your friends do not have to guess the exact number; they simply have to be the first to guess a number that is less than or equal to your number.
If you think of the number 19 and your friend thinks of the number 21, they lose because 21 is greater than 19. However, if one friend guesses 16 and another guesses 18, the latter wins because 18 is closer to 19 than 16. The bitcoin mining math puzzle is, in essence, identical to the scenario described above but with 64-digit hexadecimal numbers and thousands of computing systems.
Mining and Bitcoin Circulation
The Bitcoin network depends on nodes to verify transactions, secure the network, and introduce new blocks to the network. Nobody would be willing to do this for free once they have understood how Bitcoin mining works. Instead, there is a need for incentives. For Bitcoin, it provides rewards for every new block a node introduces in the system.
At the time of Bitcoin’s release, a miner would earn 50BTC for every block it introduced in the network. This would encourage most computers to join the system even before Bitcoin became valuable. However, with time BTC becomes more stable and valuable, thus a need to reduce the rewards.
Bitcoin halving is the means to reduce the miner earnings. It involves reducing the miner rewards by half. In the Bitcoin network, the halving happens after every 210,000 blocks are mined. This happens to be around every four years. It will keep on until all the 21million Bitcoin coins are mined.
The first Bitcoin halving occurred in 2012 with the rewards reducing to 25BTC for every block mined. There have since been other halvings in 2016 and 2020 reducing the rewards to 12.5BTC and the current 6.25BTC for every mined block.
Bitcoin halving has proven an ideal way to manage Bitcoin circulation. Bitcoin, like other assets, depends on demand and supply for value. A constant high reward would attract many miners to increase Bitcoin supply, thus reducing demand and value. However, as the rewards reduce the mining level remains the same limiting the possibility of oversupply.
Also, there is always concern about what happens when the rewards get to zero. Well, Bitcoin still needs the miners. The possible option is to rely on transaction fees for rewards for the miners to keep verifying transactions. Even though the transaction fees are currently part of the eradication process, they only account for a smaller amount of rewards. This explains why if you look into what is Bitcoin payment, you realise it’s one of the most affordable payment options.
Setting up a Bitcoin miner
Now that you have established how to mine Bitcoins, the next aspect is to learn who to get started on Bitcoin mining.
The first step to start Bitcoin mining is to source for Bitcoin mining hardware. To find the right hardware, you have to understand its hash rate and energy consumption. The hash rate is the number of calculations the hardware can solve within a minute in trying to solve the computational puzzle. A higher hash rate increases your chances of solving the puzzle, hence unlocking the block for the rewards.
Energy consumption is another essential consideration when setting up a miner. To run the miner requires a high-energy supply, which costs a lot of money. You however don’t want to spend all your money on the power supply. The process can easily become unsustainable.
Once you know what to look for in a Bitcoin miner, you can proceed to choose your mining hardware. There are various Bitcoin mining hardware options; GPUs, FPGAs, and ASICs. The effectiveness of the mining hardware is based on how many Bitcoins have been mined.
In the earlier days, Bitcoin mining was quite easy. You only needed your personal computer to get started. This GPU mining has since become too slow as several high-powered computers join Bitcoin mining. While you can improve the power by including a graphic card with graphical processing units, it might still not be enough.
The other mining hardware option is the Field Programmable Gate Array (FPGA) where various integrated circuits are configured for Bitcoin mining. They are an improvement on the GPUs, however, not of the strongest output.
The most functional Bitcoin mining hardware is the Application Specific Integrated Circuit (ASIC). The ASIC machines are specially made to mine Bitcoin at the highest speeds while consuming less power. The only concern however is that they are expensive to purchase and operate. The investment though in most cases is worth it, given the possibility of returns.
Once you have your mining hardware, the next step is to pair it with Bitcoin mining software.
Bitcoin Mining Pools
Bitcoin mining is set such that the more active miners participate, the harder it becomes to discover new blocks. Given the lucrative nature of Bitcoin mining, several computers keep joining the network. You thus need high computational power, which is hard to achieve by an individual computer. That is where the mining pool comes in.
A mining pool is where various miners work together to increase their mining power. The miners combine their computational resources to increase the processing power for the high energy needed for Bitcoin mining. They share the resources like the Bitcoin mining software, just as they do the related costs and risks. In the case of a successful block, every miner shares the reward based on their input in the system.
The mining pool coordinates all the interactions of the pool members. It manages the pool member hashes, records the output of each member, manages the pool member hashes, and assigns the rewards to every member based on their output.
There are various means to share block rewards after successful verification. Two of the most popular are Pay-per-share (PPS) and full pay-per-share (FPPS). The PPS model allows instant payout for the miners based on the accepted shares from their computers. For FPPS, the mining rewards come together with the transaction fees accumulated over the verification period.
The mining pool has proven as one of the worthy ways to join the Bitcoin mining system. It allows you to participate in helping the Bitcoin network thrive, even with the relatively smaller computational power you might have. The mining pool also increases your chances of successfully finding a block, especially in the PoS system.
Still, various concerns come with joining a mining pool. Expect to experience downtime and network issues from time to time given the various computers involved in the network. The other concern is the possibility of a shady network. Some mining pools only recruit the miners for the computational power but never remit any rewards.
What is mining difficulty?
Mining difficulty is a term that frequently appears in bitcoin mining literature, referring to the difficulty of solving the math puzzle and generating bitcoin. Mining difficulty affects the rate at which bitcoins are created.
Mining difficulty changes every 2,016 blocks or roughly every two weeks. The difficulty of the next cycle relies on how efficient miners were in the preceding cycle. It is also influenced by the number of new miners who have joined Bitcoin’s network, as this increases the hash rate, or the amount of computing power used to mine the cryptocurrency. As the price of bitcoin increased in 2013 and 2014, more miners joined its network, and the average time to discover a block of transactions fell from 10 minutes to nine minutes.
However, this is not always the case. as more miners compete for a solution, the difficulty of the puzzle will increase. If computational power is taken off the network, the difficulty will decrease to make mining easier.
The mining difficulty level in March 2022 was 27.55 trillion. This means the probability of a computer producing a hash that is less than the target is 1 in 27.55 trillion. To put that in context, you are approximately 91,655 times more likely to win the Powerball jackpot with a single lottery ticket than you are to correctly guess the hash on a single attempt.
What Are the Economics of Mining Bitcoin?
In the end, bitcoin mining is a business venture. Profits from its output—bitcoin—are determined by the amount invested in its inputs.
There are three major costs of bitcoin mining:
- Electricity: This is the power that keeps your mining systems running 24 hours a day, seven days a week. When you consider that the process consumes as much electricity as certain countries, the costs can add up quickly.
- Mining systems: Contrary to popular belief, desktop computers and standard gaming systems are neither suitable nor efficient for bitcoin mining. The process can overheat such systems and cause bandwidth issues in a home network. ASIC systems, which are customised machines for bitcoin mining, are the primary infrastructure investment for bitcoin miners. Such machines can cost anywhere from $4,000 to $12,000. Despite such high costs, a single ASIC-equipped system produces less than one bitcoin. Bitcoin miners pool thousands of ASIC systems into mining pools that run continuously to generate the 64-digit hexadecimal number required to solve a hash puzzle.
- Network infrastructure: Network speeds have no discernible impact on the bitcoin mining process. However, it is critical to have an Internet connection available 24/7 without any interruptions. The connection should also have latency from nearby mining pools. Dedicated networks reduce external dependency and keep latency to a minimum. Going offline does not necessarily halt the syncing of transactions. However, it can make the process time-consuming and possibly error-prone after a connection has been restored.
For miners to profit, the total costs for these three inputs should be less than the output (in this case, the bitcoin price). Given the skyrocketing price of bitcoin, the prospect of minting your own cryptocurrency may seem appealing.
Regardless of what Bitcoin supporters tell you, mining the cryptocurrency is not a hobby. It is an expensive venture with a high failure rate. As demonstrated in the section on mining difficulty, there is no guarantee that you will earn bitcoin rewards even after investing significant time and money. Aggregating mining systems to run a small bitcoin mining business could be an option. However, even such businesses are vulnerable to the volatile cryptocurrency prices. If the cryptocurrency’s price falls, as it did in 2018, it will become unprofitable to run bitcoin mining systems, forcing small miners out of business. The fact that the number of bitcoins awarded to miners decreases every four years makes the activity even less appealing.
Because of the significant difficulty in the economics of mining bitcoin, the activity is now dominated by large mining companies with operations on multiple continents. AntPool, the world’s largest bitcoin mining company, operates mining pools across the globe. Many bitcoin mining companies have also gone public, albeit at relatively low valuations.
How much electricity does the bitcoin mining process use?
Bitcoin mining used to be concentrated in China, a country that relies on fossil fuels like coal to produce most of its electricity. Not surprisingly, the astronomical energy costs of bitcoin mining have drawn the attention of climate change activists, who blame the activity for increased emissions. According to some estimates, the mining process for cryptocurrency consumes as much electricity as entire countries. However, proponents of bitcoin have released studies claiming that the cryptocurrency is primarily powered by renewable energy sources.
However, it’s worth noting that these studies are based on conjectures and self-reported data from mining pools. For instance, a Coinshares report from 2019 made several assumptions about miner power sources in their evaluation of the bitcoin mining ecosystem
Is Bitcoin mining legal?
Yes, Bitcoin mining is legal in most countries around the globe. Still, there is space for different views based on geographical location. While most countries accept Bitcoin mining, some ban all the crypto-related activities, mining included. China for example has recently banned Bitcoin and all related activities.
What are the Bitcoin mining environmental concerns?
The high-energy consumption of Bitcoin mining is a major concern. Studies have shown Bitcoin mining consumes the same power in a year as the whole of Argentina. However, there have been claims that most of the energy used in Bitcoin mining comes from renewable energy sources.
What are some of the risks in Bitcoin mining?
Bitcoin mining comes with various risks like malware dangers. To find more computing powers, some miners can infiltrate other computers. They can either use phishing techniques or run malicious codes on visitor computers. There are also the reduced computer performance risks and the high electricity and computing costs.