A Complete Guide on How Bitcoin Mining Works
Bitcoin mining is a computational process that achieves two distinct and important goals. First, it allows miners to “find” new bitcoins that are added to circulation. Second, bitcoin miners verify transactions while mining. This helps ensure the integrity of the blockchain, which serves as a ledger of transactions.
Bitcoin mining works by having a computer attempt to produce a string of characters that is less than or equal to a target hash. The target hash is a 64-digit alphanumeric code, and miners are rewarded with bitcoin if they are the first to come up with a solution.
If you are a bitcoin bull, you might wonder if it’s time to start mining it. This article will take a look at how bitcoin mining works and whether it is something you should consider.
The Evolution of Bitcoin Mining
In the early days of bitcoin mining, the central processing unit, or CPU, in an everyday desktop computer or laptop was powerful enough to uncover new blocks. Later, it was discovered that graphics processing units, or GPUs, used for gaming were more efficient at solving the hashing problem.
These days, bitcoin miners use specialized hardware called application-specific integrated circuits, or ASICs, designed just for mining. These devices can cost anywhere from under $500 to around $20,000. There are even mining pools run by third parties where groups of machines work to solve the same problem, then split the profit if they manage to mine a new block.
All of this means that a single miner has little chance to successfully mine a block. Without specialized hardware, their chances are even lower. Thus, without the most up-to-date ASIC, one cannot hope to recoup the money they spend on their mining rig — or on the electricity used to power it. Realistically, joining a mining pool with one of these machines gives you the best chance of success these days.
How Bitcoin Mining Works
When a bitcoin miner successfully finds a valid hash, a block is added to the blockchain, verifying the most recent batch of transactions. In addition to preserving the integrity of the blockchain, verification helps to prevent double spending.
Double spending is the phenomenon wherein someone spends the same bitcoin twice. Because bitcoin is a digital currency and not a physical one, you don’t physically hand it over to someone like you would to a cashier at a grocery store. Thus, the blockchain helps prevent people from reusing their coins.
Bitcoin aims to add new blocks to the blockchain every 10 minutes; this is how long it theoretically takes to mine one bitcoin. It does this to maintain a steady rate of new blocks.
However, the more computer power there is at work to find new blocks, the faster new blocks can be found. Because new miners and more computing power are being added to the network all the time, the difficulty of verifying these transactions must increase to maintain a stable flow of blocks.
That means that as more collective computer power is added to the network, the more difficult it becomes for a single, underpowered machine to mine a new block. The difficulty is adjusted over time as computing power changes.
Good To Know
In the very early days of bitcoin mining, the network difficulty of mining gave you a better than 1 in 5 chance of finding a new block. Hence, any machine was good enough for bitcoin mining. Today, the odds of solving for a hash below the target is 1 in 22 trillion; it has been as high as 1 in 25 trillion.
The extreme difficulty of bitcoin mining today is why high-powered machines are needed to successfully find new blocks. These high-end machines are capable of trillions of hashes per second, expressed as terahashes per second.
How Much Do Bitcoin Miners Make?
Bitcoin mining is an arduous process, especially these days. In order to incentivize that work, miners are rewarded in bitcoin each time they mine a block. This helps the system be self-sustaining.
However, the number of bitcoins rewarded for each mined block has been reduced over time. Every 210,000 blocks, or about every four years, the reward is halved. It started at 50 in 2009, then it was 25 in 2012. In 2016, it was 12.5, and most recently, in 2020, it was reduced to 6.25, where it remains.
Of course, the price of bitcoin has also changed over time. In the summer of 2013, bitcoin was worth around $100, meaning 25 coins were worth about $2,500. Today, 6.25 bitcoins are worth about $130,000.
The total number of bitcoins available is capped at 21 million. To date, the total number of bitcoins mined is over 19 million. However, because of the halving of rewards, it will take until about the year 2140 to mine all bitcoins. But miners will still be needed to verify transactions; thus, after 2140, miners will be rewarded with fees paid by those using the network.
Should You Start Mining Bitcoin?
With some companies now accepting bitcoin, you might wonder if you should start mining yourself. Bitcoin mining has changed dramatically in only about 10 years. When bitcoin mining was new, anyone could do it using whatever hardware they happened to have. But mining difficulty has increased so much that it is no longer viable to mine using your CPU. Even mining with a GPU would likely be wasting electricity unless you join a mining pool. However, some mining pools advise people not to mine with a GPU — an ASIC is recommended.
Consider Joining a Mining Pool
All of this means that these days, you will be spending more on a specialized machine made for mining. And yet, your best odds will come from joining a mining pool, meaning you only get a piece of the reward if the pool successfully mines a block. The price of bitcoin has increased, which does help offset the fractional reward, but mining pools distribute rewards based on how much work you do, too.
Thus, you’ll need an ASIC to take full advantage of the competitive edge a mining pool provides. If you can’t afford the hundreds or even thousands you’ll have to spend on that hardware, bitcoin mining may not be right for you. And don’t forget about the high amounts of electricity needed to run bitcoin mining equipment — that also has a cost.
Bitcoin mining is an important part of protecting the integrity of the blockchain ledger, but the costs to participate have increased significantly over the years. Gone are the days when you could use any computer you had lying around; now, specialized hardware is almost a must.
Is Bitcoin Mining Legal?
If you are wondering whether bitcoin mining is legal, the answer is yes in most cases. There are a few countries where bitcoin mining is outlawed, such as Algeria, Bangladesh, China, Egypt, Iraq, Morocco, Nepal, Qatar and Tunisia, according to TheStreet, reporting on a November 2021 Law Library of Congress report. Russia has proposed a ban, and Sweden is calling for a ban within the EU over energy concerns. You may want to look into local regulations where you live, but for now, bitcoin mining is legal in the U.S. and most other countries, but not all U.S. states allow it.
Daria Uhlig contributed to the reporting for this article.
Information is accurate as of June 27, 2022.
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