How Does Bitcoin Mining Work?

23 Min Read
Last Updated July 23rd 2021

Bitcoin is a cryptocurrency. It was invented in 2008, supposedly by a group of people unknown but who adopted the name of Satoshi Nakamoto.

In 2009, the implementation of Bitcoin was released as open-source software. Back then, few people took Bitcoin seriously. It had zero value. Who could comprehend the Bitcoin price rising to the dizzy heights of today?

But, on May 22nd 2010, the first real-world Bitcoin transaction took place.

Laszlo Hanyecz bought two pizzas in Jacksonville, Florida, for 10,000 BTC. Bitcoin value was 0.0025 cents for one Bitcoin, so the transaction cost was $25. Bitcoin takes parity with the US dollar.

Following this, in five days, the price of Bitcoin grew 1000%, from $0.008 to $0.08 for 1 Bitcoin.

Suddenly, Bitcoin caught the public eye and attracted investors.

A few years back, Bitcoin jumped up to $20k and made millionaires out of many savvy investors who bought Bitcoin when it was a super low price, of say, less than $1 per Bitcoin.

A few weeks ago (April 2021), Bitcoin price hit over $64k.

As Bitcoin gained popularity, the price crept up, and Bitcoin mining became popular. But is Bitcoin mining still profitable? It's a great question, and we'll talk more about the profitability of Bitcoin later.

Contents

What is Bitcoin Mining?

Bitcoin mining is an established process for entering new Bitcoins into circulation.

Bitcoin mining is also an essential component for the maintenance and development of the blockchain ledger. To mine Bitcoin, you need Bitcoin mining software, which can be expensive.

Blockchain is essentially a digital ledger of cryptocurrency transactions. Blockchain records information to the ledger so that it is near impossible to hack, change or cheat the system.

The blockchain ledger is duplicated and distributed across the vast network of highly sophisticated computer systems (known as nodes) that solve highly complex mathematical problems.

Each node stores one copy of the blockchain – all of the transactions done on the network.

There is no central place for storage as blockchain is decentralized.

Cryptocurrency mining is highly challenging and costly, and the fact is the rewards for Bitcoin mining are sporadic.  But Bitcoin mining appeals to many cryptocurrency investors because miners may receive crypto tokens for the work, which can be lucrative.

Bitcoin mining is appealing to technically minded, entrepreneurial types because it seems like an easy way to make money, a bit like the gold rush in 1849. Bitcoin mining is also an attractive option because you don't need to put any money down to earn cryptocurrency. But there are costs involved.

What is a Bitcoin Miner?

A Bitcoin miner is a person who sets up a bitcoin mining rig to verify and submit transactions to the blockchain.

We explain how Bitcoin mining works below.

How Does Bitcoin Mining work?

Is Bitcoin mining complicated?

Yes and no.

The simple explanation is that a Bitcoin miner adds more bitcoins to the digital system.

Bitcoin mining itself is a computational process whereby the computer hardware calculates highly complex mathematical computational equations. For this, a Bitcoin miner needs high-tech, expensive equipment to run a Bitcoin mining rig.

Check Out: What Are The Benefits of Bitcoin Trading?

How do you Mine for Bitcoins?

It sounds easy enough to hand over the Bitcoin mining process to a computer. But, you're not talking about mining Bitcoin with a bog-standard laptop. To set up a mining rig to mine Bitcoin, you need a GPU (graphics processing unit) or an application-specific integrated circuit (ASIC).

If you are considering mining Bitcoin, it's vital to understand the level of investment involved. There's an equal investment of time, knowledge, money and buying the right equipment.

How Long does it Take to Mine 1 Bitcoin?

No matter how many miners there are, it takes 10 minutes to mine one Bitcoin.

It takes a lot of power to mine one Bitcoin.

If powered by ASICS miners, it takes 72,000GW (72 Terawatts) of energy to mine one Bitcoin. That's a lot of energy, and energy is costly, bearing in mind there is no guarantee of reward to the Bitcoin miner.

How to Mine Bitcoins

Miners get paid for their work as auditors for Bitcoin. A Bitcoin miner must verify the legitimacy of Bitcoin transactions, a process that helps prevent the double-spending problem.

What is Double-spending?

Double-spending is where a Bitcoin owner illegally spends the same Bitcoin twice.

With physical currency, of course, you can't spend it twice. If you spend ten dollars on a bottle of wine, you can't use that same ten dollars to buy a bottle of gin. It physically isn't possible.

With digital currency, however, it could be relatively easy to make a copy of a digital coin. You then send a copy of that coin to someone else whilst still holding on to the original currency. It's a genuine risk and one of the primary reasons for the existence of Bitcoin miners.

Verification of every Bitcoin transaction is where the job of a Bitcoin miner comes into force. Their task is to thoroughly check cryptocurrency transactions to ensure that Bitcoin users don't try to spend the same Bitcoin twice.

When a Bitcoin miner has verified one block (1 megabyte) of Bitcoin transactions, they are eligible to receive a quantity of Bitcoin. Satoshi Nakamoto established the 1MB limit.

1MB could be one transaction or several thousand transactions. It depends on the amount of data. And, although this makes a Bitcoin miner eligible for rewards, there is no guarantee of a reward for every verified transaction.

Don't Miss: Bitcoin Price Prediction for 2025 and 2030

Are All Bitcoin Mining Rewards Guaranteed?

Nope.

As a Bitcoin miner, you could do all the work to get the Bitcoin transactions verified and submitted and end up with a big, fat nothing. And you've incurred costs to implement the completed blocks.

The truth is, there are prerequisites to achieving rewards for Bitcoin mining –

  1. Verify 1MB of transactions – that's the easy part. All Bitcoin miners, with the right equipment, can achieve this
  2. Be the first miner to get the correct answer – OK, the answer doesn't have to be 100% accurate. If you are the first to get closest to solving the numerical problem, you will get your rewards (known as proof of work).

    That said, your answer has to be equal to or less than the correct answer.

Winning a Block

How Does a Bitcoin Miner solve a numerical problem?

The answer may sound complicated.

The Bitcoin miner doesn't have to solve an advanced mathematical problem. All they have to do is try to be the first Bitcoin miner to create a 64-digit hexadecimal number; - known as a hash – that is less than or equal to the target hash.

Yes, it's a bit of guesswork.

The problem is the sheer number of potential solutions is enormous.

We could be talking about trillions and trillions of possible guesses.

Bitcoin mining is tedious and potentially exhausting work, with no guarantee of a successful outcome. For successful Bitcoin mining, you need vast computing power, lots of it. You need a high hash rate, measured in terms of megahashes per second (MH/s), gigahashes per second (GH/s) and terahashes (TH/) per second.

That's a lot of hashes.

If you're interested, you can get an estimate for your Bitcoin mining rig's hash rate by checking with a crypto compare site calculator.

How do Bitcoin Miners Make Money?

Bitcoin miners complete blocks of verified transactions to the blockchain because they want to receive Bitcoin rewards. If a Bitcoin miner finds a solution to a complex hashing puzzle, he receives Bitcoin rewards, and these rewards are potentially well worth the significant effort involved.

A hash is a function that converts an input of letters and numbers into an encrypted output of a fixed length. A hash is created using an algorithm and is essential to blockchain management in cryptocurrency.

Bitcoin does not rely on a central bank or government because it is a decentralized currency. Bitcoin miners are motivated to keep trying to find the answers to the complex puzzles by the lure of Bitcoin rewards. 

Bitcoin miners play a major role in legitimizing, validating and monitoring Bitcoin transactions.

Is Bitcoin Mining Profitable?

As you'll discover in this article, a Bitcoin miner is competing with millions of other miners to find a solution to a problem.

And, as if that isn't hard enough, a Bitcoin miner has to be the first to come up with the solution and be the miner that has demonstrated a history of hard work and effort verifying Bitcoin transactions and completing blocks. 

If you are the winning miner, you receive Bitcoin rewards. But, it's far from easy. When Bitcoin mining started in 2009, the difficulty level was one. A simpleton could probably have mastered it.

But now, in 2021, the difficulty level of getting close to the winning target number is over 13 trillion.

Bitcoin mining could be considered more of a gamble than buying the winning lottery ticket. You have to get closest to the target hash to win the reward. 

Yes, if you are successful, all your hard work and investment in equipment and energy costs would be worth it.

So, the answer to whether Bitcoin mining is profitable, only if you are the winning miner.

Read more: 15 Reasons Why You Should Invest in Bitcoin Today

Is Mining Bitcoin Like the New Gold Rush?

With Bitcoin gaining momentum over the last few years, the draw for Bitcoin mining is the attraction of receiving Bitcoin as a reward. Some have seen mistakenly believed that Bitcoin mining is the route to riches.

Greed and FOMO have bought members of the public rushing to buy Bitcoin, which means more transactions, which translates to more verification and blocks from Bitcoin miners.

But mining Bitcoin is not the only way to make money from cryptocurrencies.

The price of Bitcoin now seems a little out of reach for the average person to buy. But there are thousands of other cryptocurrencies available to buy with fiat currencies. For instance, Ethereum, NEO and LTC are popular cryptocurrencies that you can purchase and later use to buy Bitcoin if you wish.

Some online platforms pay for blog posts with cryptocurrency. And you can earn crypto from some shopping sites.

Read Also: Bitcoin Facts: Top 7 Facts You Didn't Know About

Mining and Bitcoin Circulation

Bitcoin mining is the only way to bring new cryptocurrency into circulation.

Bitcoin miners are needed to mint currency. In November 2020, in the first block, known as Genesis, there were roughly 18.5 million Bitcoins in circulation. Bitcoin miners created every single Bitcoin. If there were no Bitcoin miners, Bitcoin numbers would be capped at the current level.

Will Bitcoin Mining Come to an End?

Bitcoin mining may inevitably end at some point. The Bitcoin protocol outlines that the total number of bitcoins will be capped at 21 million. But it will take some time before this happens.

Over time, the rate of Bitcoin mining reduces. Likely, the consensus is that the final Bitcoin won't come into circulation until 2040. Of course, transactions will still need verifying, so Bitcoin miners will continue to do their work and earn their fees to ensure the integrity of the Bitcoin network.

Being a Bitcoin miner also gives you voting power for proposed changes in the Bitcoin network protocol. Miners, therefore, have some degree of influence on decisions made, such as with forking, which is a splitting of the chain on which Bitcoin runs, so that it goes off in a different direction, and with different rules to the existing blockchain. Forking would create two different visions of Bitcoin.

How Much a Miner Earns

Every four years, the rewards for Bitcoin mining are reduced by half.

In 2009, when Bitcoin was first mined, one block would earn a Bitcoin miner 50 BTC.

At today's Bitcoin price (May 2021) of $58k, the return would be $2,900,000 if the Bitcoin miner reward was still at 50 BTC.

But it isn't.

In 2012, a block would earn 25 BTC, and in 2016, it reduced again to 12.5 BTC.

The last reduction is 2020, which bought the Bitcoin mining reward down to 6.25 BTC.

At todays price, $58k x 6.25 = $362,500

Yes. It seems unfair to come down from 50 BTC to 6.25 BTC, but let's look closer.

The price of Bitcoin in November 2020 was $17,900. A Bitcoin miner would have earned  $111,875 ($17,900 x 6.25) for one completed block.

Mining Bitcoin is a lot of hard work. Would $362k make your effort worth it?

It depends.

How Long does it Take for a Bitcoin Miner to Become Profitable?

Er, well, it may never happen. Later in the article, you will discover why it is hard to make money from Bitcoin mining. But, suffice to say, you may never hit the big bucks.

To keep track of when the halving occurs, you can check the Bitcoin Clock, which updates the information on halving in real-time.

Miner Rewards

Historically, the market price for Bitcoin has corresponded with each reduction of new coins entered into circulation. Scarcity is always a trigger for FOMO and, because of this, the price rises.

To find out how many Bitcoin blocks mined since 2009, you can check online for real-time data. One such site is Blockchain Info

What Do I Need to Mine Bitcoins?

In the beginning, it was a lot easier to mine Bitcoin. You could have competed for blocks at home with your everyday, typical computer. But, over time, it becomes increasingly difficult to mine Bitcoin.

The Bitcoin network aims to produce one block roughly every ten minutes to enable the smooth functioning of the blockchain and retain the ability to process and verify transactions quickly.

The more mining rigs competing to solve the hash problem, the quicker they will find a solution. But, conversely, the more collective power, the more complex and challenging the mining level becomes to keep the block production at a stable rate.

Bitcoin can evaluate 2,016 blocks which take about two weeks.

When there is less computing power, the level of difficulty decreases.

We mentioned this earlier, but it's worth reminding you that when Bitcoin first launched in 2009, it had a mining difficulty level of one. Ten years later, in 2019, the difficulty level was rated at above 13 trillion.

No, that's not a typo. We did say 13 trillion.

In 2009, it was possible to get set up as a Bitcoin miner relatively cheaply.

Now, if a Bitcoin miner wants to mine competitively, they have to invest in high-tech, powerful computer equipment. An investment in equipment such as a GPU (graphics processing unit) or ASIC (application-specific integrated circuit) can be as low as $500 or cost tens of thousands of dollars.

Some miners try to set up a Bitcoin mining rig cheaply. They like the challenge and the fun of trying to mine Bitcoin for low investment. These have-a-go's may buy individual graphics cards (GPUs) and mash-up a homemade mining operation.

It's certainly not an efficient way to mine Bitcoin. Still, the enterprising budding miners get a great sense of accomplishment if they manage to get their homemade Bitcoin mining device to work.

The Simple Explanation for Bitcoin Mining

Understanding Bitcoin mining can be a bit mind-boggling. It's challenging to imagine how a Bitcoin miner comes up with a solution to the hash problem. So here's how we would tell it to you if you were, say, five years old.

You're with three friends at a party, and you ask them to think of a number between 1 and 100. You ask them to write their answer down on a piece of paper and place it in a sealed envelope.

You have the number already in your head, and your friends don't have to come up with the correct answer. All they have to do is guess a number less than or equal to the number in your head. They can have unlimited guesses.

The number in your head is, say, 25. One friend guesses 38, and one guesses 18, and the other friend guesses 23.

38 loses because 38 is greater than 25.

18 and 23 are both viable answers because they are less than 25. It doesn't even matter that 23 is closer to the correct answer than 18.

But what would happen if you posed the same game to millions of potential miners? Instead of a number between 1 and 100, you are thinking of a 64-digit hexadecimal number. It's a whole different ball game and almost unimaginable that a miner could even get remotely close to the correct answer.

With the scenario of potentially trillions of answers, it isn't uncommon for simultaneous answers to occur. Solutions higher than the target number are disregarded immediately. But, for the millions of answers equal to or less than the target answer, what happens then?

The answer is a bit harsh and makes you wonder why there are so many Bitcoin miners.

Firstly, there can only be one winning answer.

Then the Bitcoin network decides by a simple majority of 51% of which bitcoin miner to choose for reward. The winner is often the miner who has historically done the most work and verified the most transactions.

The losing blocks become, what is known as, an orphan block which means they aren't added to the blockchain. The miners that successfully solved the hash problem but hadn't verified the most transactions receive no Bitcoin reward.

In some ways, this incentivizes Bitcoin miners to work hard at verifying as many Bitcoin blocks as possible. It seems a lot of hard work for no guarantee of reward, but if your answer is selected, it comes with a big payoff, which keeps Bitcoin miners committed to their efforts.

What is a 64-Digit Hexadecimal Number?

A 64-digit hexadecimal number is a 64 digit number, such as -

0000000000000000045fcc705cf0136f95e27c5918206e9f948ac43e4df548ee

Well, that sounds easy enough.

But it isn't just a number, is it?

It also consists of letters of the alphabet. To better understand why there are letters in the middle of the numbers, let's break apart the word hexadecimal.

We know the decimal system means it is base 10, so every digit of a multi-digit number has 10 possibilities, from zero through nine.

But Hexadecimal is base 16.

"Hex" derives from the Greek word for 6, and "deca" comes from the Greek word for 10.

So, this means, in a Hexadecimal system, each digit has 16 possibilities.

But the challenge then arises that our numerical system only offers us ten ways of representing numbers (0 to 9). This simple explanation is why we have to put letters into the 64-digit hexadecimal number – specifically a, b, c, d, e and f.

Thankfully, Bitcoin miners do not have to calculate the total value of the 64-digit number (the hash)

What have 64-digit Hexadecimal numbers got to do with Bitcoin?

Remember the undisclosed number in your head? The one your three friends were trying to guess? That number in Bitcoin terms is called the target hash.

So, all the Bitcoin miners are beavering away with their giant computers, trying to guess the target hash. They do this by generating multiple random nonces as quickly as possible.

What's a Nonce? 

Simple, it's an abbreviation for 'number used only once'. A nonce is the only possible way of generating the 64-bit hexadecimal numbers.

A nonce is smaller than the hash, which is 256 bits. A nonce is only 32 bits, but the first miner to generate a hash equal or less to the target hash will be the one rewarded with Bitcoin for completing the block.

Below is an image showing a summary of what happened when block #490163 was mined

Mined Block

Image source Blockchain Info

Hopefully, it makes a bit more sense to see an image summary of a Bitcoin block like this.

You can see the nonce that generated the successful hash was 731511405. AntPool is a successful mining pool and, in this block, they confirmed 1768 transactions

How do I Guess the Target Hash?

Target hashes always begin with at least eight zeros and as many as 63 zeros.

As we've said before, there is no minimum target, but there is a maximum target. Your guess needs to be equal to or less than the target hash.

How can I maximize my chances of guessing the target hash before anyone else?

Well, you likely won't do it with a homemade mining rig made of GPU's. You'll need a super-fast mining rig.

Or, another option is to join a Bitcoin mining pool.

A Bitcoin mining pool is a group of crypto coin miners who combine their computing power. If they are successful, they share the Bitcoin rewards.

It's a bit like a lottery syndicate. Bitcoin mining pools typically mine larger numbers of blocks than individual Bitcoin miners. Guessing the winning number seems an enormous task for a single miner but a little more feasible as part of a mining pool.

So, are you saying that Mining Bitcoin is a Numbers Game?

Yes, in a way, very much so. Bitcoin mining is a numbers game.

Bearing in mind, at the time of writing (May 2021), the difficulty level of the most recent block is over 17.59 trillion. Remember, in 2009, when the difficulty level was one?

To put it in perspective, you've got more chance of picking out the winning lottery number where the odds are a few million to one. Even with the best, most powerful mining rig, the odds don't change.

In other words, Bitcoin mining is just a numbers game. 

You cannot guess the pattern or make a prediction based on previous target hashes. With the difficulty level so high, the chance of any given nonce producing a hash below the target is, therefore, one in 17.59 trillion.

These aren't great odds if you're working on your own, even with a tremendously powerful mining rig. Working with a Bitcoin mining pool lowers the odds, but we're still talking big numbers.

So, How do I Decide if Bitcoin will be Profitable for Me?

Bitcoin mining equipment is expensive, and you'll need the best to be even in with a chance of solving a hash problem.

The other concern is the cost of the significant amount of electrical power that mining rigs use to generate vast quantities of nonces searching for a solution.

The sad truth is that Bitcoin mining is mostly unprofitable for individual miners.

You could take a gamble on setting up a Bitcoin mining rig with all the associated costs. You could join a mining pool. But you could still end up with nothing except the costs of operating your Bitcoin mining rig.

If you want to calculate the costs and benefits of setting up a Bitcoin mining rig, you can crunch some numbers through the Cryptocompare calculator.

Check Out: Bitcoin Price Prediction Forecast

What are Coin Mining Pools?

If a Bitcoin miner is the first to find the solution to the puzzle, he receives Bitcoin as a reward.

You have to look at probability data because possible success is related to how much mining power you have on the network.

If you have a minor percentage of mining power, the chances of discovering the next block are severely limited. You could purchase a mining card for a few thousand dollars, but this only represents 0.001% of the network's mining power.

The odds are against you.

It could take years to find the next block, and, as you now know, the difficulty increases all the time. The current difficulty level of 17.59 trillion could be double that number or even higher in a year.

There's a real chance you might never recoup your investment.

How can I Increase my Chances of Discovering the Next Bitcoin Block?

One possible solution is to join a Bitcoin mining pool operated by a third party coordinating a group of Bitcoin miners. The shared effort also means shared profits, but by working together, it may be possible to start a steady flow of Bitcoin from the day the pool activates their miner.

If you're considering joining a Bitcoin mining pool, you can check out mining pool statistics on Blockchain.info

Is there an Easier way to Profit from Cryptocurrencies?

Yes, Bitcoin mining can seem overwhelming, costly and with no guarantee of return.

The easiest way to get Bitcoin, or any cryptocurrency, is to buy it. There are many exchanges online where you can buy cryptocurrencies.

Another alternative is to consider investing in companies that manufacture equipment used for mining Bitcoin. It's a back door entry into Bitcoin that works for many investors interested in cryptocurrencies.

In the California gold rush of 1849, thousands rushed to pan for gold. But, some savvy investors chose to manufacture pickaxes instead to sell to the gold hunters.

Clever.

You might consider investing in companies that manufacture ASICs equipment or GPUs. The financial and time investment may likely be a lot less stressful than trying to operate a Bitcoin mining rig.

Is Bitcoin Mining Legal?

Not everyone loves Bitcoin.

As a decentralized currency with no government regulation, the concept of Bitcoin has caused some concern that it may overthrow the dominance of fiat currencies, thus taking away government control. And the government rarely, if ever, want to relinquish control over currencies.

So, yes, in some countries, Bitcoin is 100% illegal.

That said, many countries have accepted Bitcoin and have not ruled it illegal.

Currently (2021), the countries that have declared Bitcoin illegal are the following –

  • Algeria
  • Egypt
  • Morocco
  • Bolivia
  • Ecuador
  • Nepal
  • Pakistan

But, for most of the globe, Bitcoin and Bitcoin mining is accepted as legal.

The Risks of Bitcoin Mining

The principal risks of Bitcoin mining are the financial risks and the regulatory risks.

To set up as a Bitcoin miner, you could spend thousands of dollars on high-tech mining equipment but end up making no return on your investment.

As we've mentioned before, one way to mitigate risk is to join a mining pool.

When considering mining Bitcoin, you first need to check that Bitcoin mining is allowed in your country. Research on whether Bitcoin is widely accepted or if there is a ban or regulations against it.

Considering the amount of money you might invest in mining equipment and operating costs, these basic checks could save you from wasting a lot of money.

The other risk that could occur due to the growth of Bitcoin mining is the ever-increasing energy needed for the computers that are running the mining algorithms. It takes a lot of energy, and that's not likely to change or slow down any time soon.

Technology is expanding exponentially so that the efficiency of ASICS microchips has improved and will likely continue to do so. But, the truth is that the Bitcoin network is growing so fast that technology can't keep pace with it.

And with ever-increasing environmental concerns, Bitcoin mining could be targeted to lower the carbon footprint and the impact on the environment.

We can hope that greener energy sources come into force in the future. Ethereum (ETH) leads the way by switching to less energy-intensive consensus mechanisms like proof-of-stake (POS).

What is Proof of Stake?

The POS concept is that you can mine or validate block transactions according to how many coins you hold. The more coins a miner has, the more mining power they have

The problem is that no energy source comes without its own set of problems, even if it is considered a green energy source. So what might look like an energy-intensive solution for Bitcoin mining it's not necessarily a guarantee for the future.

Recap of How Does Bitcoin Mining Work

  1. There are no guarantee of rewards from Bitcoin mining
  2. To a degree, Bitcoin mining is a numbers game
  3. It is expensive to set up and run a Bitcoin mining rig
  4. To save running costs, you can join a mining pool
  5. You can buy and sell cryptocurrencies instead of mining
  6. Ever-increasing energy costs could pose a risk to the future of Bitcoin mining
  7. The difficulty of Bitcoin mining is increasing exponentially
  8. Bitcoin and Bitcoin mining is illegal in some countries

We hope this article has given you a clearer understanding of how Bitcoin mining works and all the associated costs, risks and potential rewards.

Please note that the above information is not providing advice on tax, investment, or financial services. We provide the above information without consideration for risk tolerance and a specific investor's financial circumstances.

Investing in Bitcoin or Bitcoin mining may not be suitable for all investors. It does involve risk and the possibility of a loss of capital.

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