How Does Bitcoin Mining Work? What is Crypto Mining? (2024)

Bitcoin mining is intrinsically essential for creating new digital assets and value transfer on the network. So, what is Bitcoin mining and how does it work?

Bitcoin mining is a process where transactions are validated and then added to the blockchain network by owners of sophisticated mining devices, otherwise known as ‘miners.’ These miners compete against each other by solving complex maths problems to secure the network.

In exchange, the miners are rewarded with newly minted Bitcoins.

Bitcoin miners have to rely on powerful devices due to the difficulty of validating Bitcoin network transactions. Bitcoin uses a proof-of-work (PoW) consensus algorithm, which requires miners to compete to solve complex mathematical puzzles.

To increase efficiency, miners usually join mining pools and utilise specialised rigs to increase their chances of validating transactions and getting the associated reward. The most popular hardware for Bitcoin miners is the application-specific integrated circuit (ASIC), although some miners use the graphics processing unit (GPU).

The Bitcoin dynamics follow a meticulous process in ensuring all transactions meet the required standard.

The Bitcoin mining process is laid out in the Bitcoin whitepaper and follows these outlined steps:

Transactions are first sent into the ‘mempool,’ which collects all related data. Miners choose which transaction should be attended to first based on the fees attached to them, with the majority opting for higher fees when selecting a transaction to work on.

Once the transaction is picked and added to a block, the first miner to solve the complex mathematical exercise would broadcast the new block to other miners on the network. This miner gets to earn a miner’s reward of 6.25 BTC.

The new block is then vetted to see if all transactions are valid, i.e., if there’s no double spend in the broadcasted node. A double-spend occurs when the same Bitcoin is spent twice due to a malicious attack that alters records on the blockchain. A secondary metric will see if the new block properly references the previous one. Once these two components are in place, the new block is accepted as the ‘truth’ and added to the network.

In other words, the miners dictate the transactions that should be added to the Bitcoin network, depending on if a particular block follows the hard-core steps listed on the Bitcoin protocol.

This fastidious process has been known to ensure the security of the Bitcoin network. However, the trade-offs are transaction speed as the Bitcoin network processes about five transactions per second, and much energy is lost in the competitive process.

Crypto mining comes with its own set of challenges. For one, miners need to purchase expensive hardware gear to increase their chances of solving algorithmic puzzles. Another is the need for access to low-cost electricity due to the large amount of energy required in validating transactions.

The first Bitcoin miner to pass the battery of tests and add the requisite block to the network gets 6.25 BTC as a reward. These rewards are cut in half every time 210,000 blocks are added to the blockchain or every four years. This event is called the Bitcoin Halving.

Although miners can use GPUs of a regular computer, ASICs have proven to be more efficient in bringing new Bitcoins into circulation and making a sizable profit. You also have to worry about other attendant costs such as costs of electricity. To increase efficiency, individual miners usually join mining pools.

Considering the challenges involved in crypto mining, people might question if it’s worth the effort, but given the potential rewards, it can be extremely worthwhile.

If you factor in Bitcoin’s average growth rate of 82.9%, earning 6.25 Bitcoins can be a huge source of income if done at scale.

As expected, many Bitcoin mining firms are springing up daily to profit from this opportunity, especially as the next Halving event could trim incentives from 6.25 BTC to 3.125 BTC per reward.

The legality of crypto mining varies from country to country, with different opinions expressed by world governments on the issue.

In the UK, Bitcoin and other crypto mining is legal, with no limits. However, there are customs fees to pay when importing mining equipment. And there is income tax and National Insurance to be paid on any cryptocurrencies received from mining.

The crypto ecosystem is currently unregulated, leaving a lot of loopholes for bad actors to exploit. However, a few world leaders are currently working on a framework, with some others – such as China – preferring to ban crypto mining and cryptocurrencies as a whole.

However, there’s no concerted global template on crypto mining, although discussions are ongoing. A typical pro-crypto country is Latin American nation El Salvador, currently harnessing volcanic energy to mine cryptocurrencies like Bitcoin. This stands in contrast with the leanings of the U.S., which is yet to pick a side despite being one of the largest crypto markets in the world.

In essence, a country’s stance on the legality of crypto mining is largely subjective. You can check relevant government websites to learn about their stance.

Any crypto miner who wants to mine digital assets like Bitcoin needs several tools to get started.

The first is a Bitcoin wallet to store earned coins as a Bitcoin miner. Crypto wallets are used for the secure storage of digital assets like Bitcoin. Some of the popular options available include Ledger wallets and Coinomi wallets.

The next set of tools is the Bitcoin mining hardware and the software. The hardware is a specialised computer or mining equipment that is used to mine Bitcoin, while the mining software powers its operation.

Bitcoin mining hardware is power-hungry devices that solve complex mathematical problems in order to secure the network and create new bitcoins.

There are various factors that should be considered when shopping for a Bitcoin mining device. They include the cost, energy efficiency, and hash rate. The hash rate is the speed at which the bitcoin equipment can verify transactions and add blocks to the blockchain. The leading Bitcoin mining hardware is the Antminer S19 Pro, given its efficiency, maximum hash rate, and power consumption.

Bitcoin mining software is also crucial in a miner’s arsenal. Mining software allows miners to link their Bitcoin hardware to the Bitcoin blockchain. It’s crucial to the mining operation as it controls how the mining equipment operates and interfaces with the blockchain. Some of the popular Bitcoin mining software includes GMiners, Shamining, and BTCMiner.