Bitcoin (BTC) is a cryptocurrency, a virtual currency designed to act as money and a form of payment outside the control of any one person, group, or entity, thus removing the need for third-party involvement in financial transactions. It is rewarded to blockchain miners for the work done to verify transactions and can be purchased on several exchanges.
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What Is Bitcoin Mining?
Bitcoin mining is the process by which new bitcoins are entered into circulation. It is also the way the network confirms new transactions and is a critical component of the blockchain ledger's maintenance and development. “Mining” is performed using sophisticated hardware that solves an extremely complex computational math problem. The first computer to find the solution to the problem receives the next block of bitcoins and the process begins again.
Cryptocurrency mining is painstaking, costly, and only sporadically rewarding. Nonetheless, mining has a magnetic appeal for many investors who are interested in cryptocurrency because of the fact that miners receive rewards for their work with crypto tokens. This may be because entrepreneurial types see mining as pennies from heaven, like California gold prospectors in 1849. And if you are technologically inclined, why not do it?
The bitcoin reward that miners receive is an incentive that motivates people to assist in the primary purpose of mining: to legitimize and monitor Bitcoin transactions, ensuring their validity. Because many users all over the world share these responsibilities, Bitcoin is a “decentralized” cryptocurrency, or one that does not rely on any central authority like a central bank or government to oversee its regulation.
However, before you invest the time and equipment, read this explainer to see whether mining is really for you.
Why Bitcoin Needs Miners
Blockchain “mining” is a metaphor for the computational work that nodes in the network undertake in hopes of earning new tokens. In reality, miners are essentially getting paid for their work as auditors. They are doing the work of verifying the legitimacy of Bitcoin transactions. This convention is meant to keep Bitcoin users honest and was conceived by Bitcoin's founder, Satoshi Nakamoto.1 By verifying transactions, miners are helping to prevent the “double-spending problem.”
Double spending is a scenario in which a Bitcoin owner illicitly spends the same bitcoin twice. With physical currency, this isn't an issue: When you hand someone a $20 bill to buy a bottle of vodka, you no longer have it, so there's no danger you could use that same $20 bill to buy lotto tickets next door. Though counterfeit cash is possible, it is not exactly the same as literally spending the same dollar twice. With digital currency, however, as the Investopedia dictionary explains, “there is a risk that the holder could make a copy of the digital token and send it to a merchant or another party while retaining the original.”
Let's say you had one legitimate $20 bill and one counterfeit of that same $20. If you were to try to spend both the real bill and the fake one, someone who took the trouble of looking at both of the bills' serial numbers would see that they were the same number, and thus one of them had to be false. What a blockchain miner does is analogous to that—they check transactions to make sure that users have not illegitimately tried to spend the same bitcoin twice. This isn't a perfect analogy—we'll explain in more detail below.
Why Mine Bitcoin?
In addition to lining the pockets of miners and supporting the Bitcoin ecosystem, mining serves another vital purpose: It is the only way to release new cryptocurrency into circulation. In other words, miners are basically “minting” currency. For example, as of March 2022, there were just under 19 million bitcoins in circulation, out of a total of 21 million.
Aside from the coins minted via the genesis block (the very first block, which founder Satoshi Nakamoto created), every single one of those bitcoins came into being because of miners. In the absence of miners, Bitcoin as a network would still exist and be usable, but there would never be any additional bitcoin. However, because the rate of bitcoin “mined” is reduced over time, the final bitcoin won't be circulated until around the year 2140. This does not mean that transactions will cease to be verified. Miners will continue to verify transactions and will be paid fees for doing so in order to keep the integrity of Bitcoin's network.
To earn new bitcoins, you need to be the first miner to arrive at the right answer, or closest answer, to a numeric problem. This process is also known as proof of work (PoW). To begin mining is to start engaging in this proof-of-work activity to find the answer to the puzzle.
No advanced math or computation is really involved. You may have heard that miners are solving difficult mathematical problems—that's true but not because the math itself is hard. What they're actually doing is trying to be the first miner to come up with a 64-digit hexadecimal number (a “hash”) that is less than or equal to the target hash. It's basically guesswork.1
So it is a matter of randomness, but with the total number of possible guesses for each of these problems numbering in the trillions, it's incredibly arduous work. And the number of possible solutions (referred to as the level of mining difficulty) only increases with each miner that joins the mining network. In order to solve a problem first, miners need a lot of computing power. To mine successfully, you need to have a high “hash rate,” which is measured in terms gigahashes per second (GH/s) and terahashes per second (TH/s).
Aside from the short-term payoff of newly minted bitcoins, being a coin miner can also give you “voting” power when changes are proposed in the Bitcoin network protocol. This is known as a Bitcoin Improvement Protocol (BIP). In other words, miners have some degree of influence on the decision-making process for matters such as forking. The more hash power you possess, the more votes you have to cast for such initiatives.
How Much a Miner Earns
The rewards for Bitcoin mining are reduced by half roughly every four years.1When bitcoin was first mined in 2009, mining one block would earn you 50 BTC. In 2012, this was halved to 25 BTC. By 2016, this was halved again to 12.5 BTC. On May 11, 2020, the reward halved again to 6.25 BTC.
As of March 2022, the price of Bitcoin was around $39,000 per bitcoin, which means you'd have earned $243,750 (6.25 x 39,000) for completing a block.4Not a bad incentive to solve that complex hash problem detailed above, it might seem.
To keep track of precisely when these halvings will occur, you can consult the Bitcoin Clock, which updates this information in real time. Interestingly, the market price of Bitcoin has, throughout its history, tended to correspond closely to the reduction of new coins entered into circulation. This lowering inflation rate increased scarcity and, historically, the price has risen with it.
What You Need to Mine Bitcoins
Although individuals were able to compete for blocks with a regular at-home personal computer early on in Bitcoin's history, this is no longer the case. The reason for this is that the difficulty of mining Bitcoin changes over time.
In order to ensure the blockchain functions smoothly and can process and verify transactions, the Bitcoin network aims to have one block produced every 10 minutes or so. However, if there are 1 million mining rigs competing to solve the hash problem, they'll likely reach a solution faster than a scenario in which 10 mining rigs are working on the same problem. For that reason, Bitcoin is designed to evaluate and adjust the difficulty of mining every 2,016 blocks, or roughly every two weeks.
When there is more computing power collectively working to mine for bitcoins, the difficulty level of mining increases in order to keep block production at a stable rate. Less computing power means the difficulty level decreases. At today's network size, a personal computer mining for bitcoin will almost certainly find nothing.
All of this is to say that, in order to mine competitively, miners must now invest in powerful computer equipment like a graphics processing unit (GPU) or, more realistically, an application-specific integrated circuit (ASIC). These can run from $500 into the tens of thousands of dollars. Some miners—particularly Ethereum miners—buy individual graphics cards as a low-cost way to cobble together mining operations.
Today, Bitcoin mining hardware is almost entirely made up of ASIC machines, which in this case, specifically do one thing and one thing only: Mine for bitcoins. Today's ASICs are many orders of magnitude more powerful than CPUs or GPUs and gain both more hashing power and energy efficiency every few months as new chips are developed and deployed. Today's miners can produce almost 200 TH/s at only 27.5 joules per terahash.5
Say I tell three friends that I'm thinking of a number between one and 100, and I write that number on a piece of paper and seal it in an envelope. My friends don't have to guess the exact number; they just have to be the first person to guess any number that is less than or equal to it. And there is no limit to how many guesses they get.
Let's say I'm thinking of the number 19. If Friend A guesses 21, they lose because 21 > 19. If Friend B guesses 16 and Friend C guesses 12, then they've both theoretically arrived at viable answers because of 16 < 19 and 12 < 19. There is no “extra credit” for Friend B, even though B's answer was closer to the target answer of 19. Now imagine that I pose the “guess what number I'm thinking of” question, but I'm not asking just three friends, and I'm not thinking of a number between 1 and 100. Rather, I'm asking millions of would-be miners, and I'm thinking of a 64-digit hexadecimal number. Now you see that it's going to be extremely hard to guess the right answer. If B and C both answer simultaneously, then the system breaks down.
In Bitcoin terms, simultaneous answers occur frequently, but at the end of the day, there can only be one winning answer. When multiple simultaneous answers are presented that are equal to or less than the target number, the Bitcoin network will decide by a simple majority—51%—which miner to honor.
Typically, it is the miner who has done the most work or, in other words, the one that verifies the most transactions. The losing block then becomes an “orphan block.” Orphan blocks are those that are not added to the blockchain. Miners who successfully solve the hash problem but haven't verified the most transactions are not rewarded with bitcoin.
The Mining Process
What Is a ’64-Digit Hexadecimal Number’?
Here is an example of such a number:
The number above has 64 digits. Easy enough to understand so far. As you probably noticed, that number consists not just of numbers, but also letters of the alphabet. Why is that?
To understand what these letters are doing in the middle of numbers, let's unpack the word “hexadecimal.”
The decimal system uses factors of 100 as its base (e.g., 1% = 0.01). This, in turn, means that every digit of a multi-digit number has 100 possibilities, zero through 99. In computing, the decimal system is simplified to base 10, or zero through nine.
“Hexadecimal,” on the other hand, means base 16 because “hex” is derived from the Greek word for six, and “deca” is derived from the Greek word for 10. In a hexadecimal system, each digit has 16 possibilities. But our numeric system only offers 10 ways of representing numbers (zero through nine). That's why you have to add letters, specifically, letters A, B, C, D, E, and F.
If you are mining Bitcoin, you do not need to calculate the total value of that 64-digit number (the hash). I repeat: You do not need to calculate the total value of a hash.
What do ’64-digit hexadecimal numbers’ have to do with Bitcoin mining?
Remember that analogy, in which the number 19 was written on a piece of paper and put in a sealed envelope? In Bitcoin mining terms, that metaphorical undisclosed number in the envelope is called the target hash.
What miners are doing with those huge computers and dozens of cooling fans is guessing at the target hash. Miners make these guesses by randomly generating as many “nonces” as possible, as quickly as possible. A nonce is short for “number only used once,” and the nonce is the key to generating these 64-bit hexadecimal numbers I keep mentioning. In Bitcoin mining, a nonce is 32 bits in size—much smaller than the hash, which is 256 bits. The first miner whose nonce generates a hash that is less than or equal to the target hash is awarded credit for completing that block and is awarded the spoils of 6.25 BTC.
In theory, you could achieve the same goal by rolling a 16-sided die 64 times to arrive at random numbers, but why on Earth would you want to do that?
The screenshot below, taken from the site Blockchain.info, might help you put all this information together at a glance. You are looking at a summary of everything that happened when block No.490163 was mined. The nonce that generated the “winning” hash was 731511405. The target hash is shown on top. The term “Relayed by AntPool” refers to the fact that this particular block was completed by AntPool, one of the more successful mining pools (more about mining pools below).
As you see here, their contribution to the Bitcoin community is that they confirmed 1,768 transactions for this block. If you really want to see all 1,768 of those transactions for this block, go to this page and scroll down to the Transactions section.
What Are Mining Pools?
The miner who discovers a solution to the puzzle first receives the mining rewards, and the probability that a participant will be the one to discover the solution is equal to the proportion of the total mining power on the network.
Participants with a small percentage of the mining power stand a very small chance of discovering the next block on their own. For instance, a mining card that one could purchase for a couple of thousand dollars would represent less than 0.001% of the network's mining power. With such a small chance at finding the next block, it could be a long time before that miner finds a block, and the difficulty going up makes things even worse. The miner may never recoup their investment. The answer to this problem is mining pools.
Mining pools are operated by third parties and coordinate groups of miners. By working together in a pool and sharing the payouts among all participants, miners can get a steady flow of bitcoin starting the day they activate their miners. Statistics on some of the mining pools can be seen on Blockchain.info.
A Pickaxe Strategy for Bitcoin Mining
As mentioned above, the easiest way to acquire Bitcoin is to simply buy it on one of the many Bitcoin exchanges. Alternately, you can always leverage the “pickaxe strategy.” This is based on the old saw that during the 1849 California Gold Rush, the smart investment was not to pan for gold, but rather to make the pickaxes used for mining.
To put it in modern terms, invest in the companies that manufacture those pickaxes. In a cryptocurrency context, the pickaxe equivalent would be a company that manufactures equipment used for Bitcoin mining. You may consider looking into companies that make ASIC equipment or GPUs instead, for example.
Downsides of Mining
The risks of mining are often financial and regulatory. As aforementioned, Bitcoin mining, and mining in general, is a financial risk because one could go through all the effort of purchasing hundreds or thousands of dollars worth of mining equipment only to have no return on their investment. That said, this risk can be mitigated by joining mining pools. If you are considering mining and live in an area where it is prohibited, you should reconsider. It may also be a good idea to research your country's regulation and overall sentiment toward cryptocurrency before investing in mining equipment.
One additional potential risk from the growth of Bitcoin mining (and other PoW systems as well) is the increasing energy usage required by the computer systems running the mining algorithms. Though microchip efficiency has increased dramatically for ASIC chips, the growth of the network itself is outpacing technological progress. As a result, there are concerns about Bitcoin mining's environmental impact and carbon footprint.