What Is Bitcoin Mining?
Bitcoin mining is the process of validating the information in a blockchain block by generating a cryptographic solution that matches specific criteria. When a correct solution is reached, a reward in the form of bitcoin and fees for the work done is given to the miner who reached the solution first.
Over time, the reward for mining Bitcoin is reduced. This reward process continues until there are 21 million bitcoin circulating. Once that number is reached, the bitcoin reward will cease, and Bitcoin miners will be rewarded through fees paid for the work done.
- Validating transaction information and maintaining the integrity of the blockchain is mining’s purpose, while the bitcoin reward is the incentive to mine.
- Bitcoin mining is necessary to maintain the ledger of transactions upon which Bitcoin is based.
- Miners have become very sophisticated over the past several years, using complex machinery to speed up mining operations.
- Bitcoin mining has generated controversy because it is not considered environmentally friendly.
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.
How Much a Miner Earns
The rewards for Bitcoin mining are reduced by half roughly every four years.1 When 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.4 Not 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.
If you want to estimate how much bitcoin you could mine with your mining rig’s hash rate, the site CryptoCompare offers a helpful calculator. Other web resources offer similar tools.
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.1
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.
Bitcoin Profit and Bitcoin Mining Profitability
Bitcoin Profit is an automated crypto robot that helps trade Bitcoins and other cryptocurrencies to earn profit. It uses an AI algorithm to identify trading opportunities in the crypto market that can automatically close and open your trade, saving your time and manual intervention during trading. It claims that around 85% of its trades produce profits in normal market conditions. However, technical knowledge is required to calculate the profit generated through the Bitcoin mining process.
Talking about the actual Bitcoin profit – the real money making – it depends upon the cost of the AISC hardware, electricity consumption, and the effectiveness of the mining software. Bitcoin Mining profitability has decreased in recent times compared to the previous years because of the rise in electricity costs, costlier hardware, difficulty in mining due to an increase in competition, and a decrease in the Bitcoin prices. Earlier, Bitcoin Mining was initiated using CPUs and easy AI Algorithms, making it profitable and less costly.