Bitcoin mining is a process that creates new Bitcoins and puts them into circulation.
Mining is critical to the functioning of Bitcoin and others cryptocurrencies because it incentivizes users to enter accurate information into the shared ledger that tracks transactions and balances on an underlying blockchain network. Miners participating in this process compete for rewards in the form of Bitcoin.
While Bitcoin mining has a good track record in terms of reliability, it has also attracted its share of criticism due to the energy it takes to run the network. Bitcoin alone uses more electricity than some entire countries. A number of cryptocurrencies have moved away from mining, although Bitcoin continues to rely on the process.
The mechanics of mining can seem disconcerting to everyday users because the process is based on complicated encryption that is meant to prevent fraud and theft. Bitcoin mining typically uses powerful, single-use computers that can cost hundreds or thousands of dollars.
But Bitcoin as we know could not exist without mining. Bitcoin mining is the key component of the “proof of workprotocol. It’s what stops thieves from claiming they own your Bitcoins and what ensures that when someone sends you Bitcoin, the funds actually arrive.
What is Bitcoin mining, really?
If you’re just buying or trading Bitcoin, you may not have thought much about how mining actually works. But since Bitcoin is run by its users, it is useful for anyone involved with Bitcoin to have a basic understanding of its technological underpinnings.
Bitcoin, like so many others blockchain technologies, it is decentralized, which means that no entity controls the network or maintains a central account of user balances. Instead, Bitcoin relies on users to keep their copies of the historical record of transactions. Mining is the process by which users reach a consensus on the accuracy of those shared records.
Every 10 minutes or so, the network generates enough transactions to create a new “block,” which is basically a packet of transactions encoded to make it tamper resistant. A user who successfully inserts a new block into the record gets the mining reward.
However, mining isn’t as simple as finding new transactions and submitting them. If it were, everyone would be able to do it. In order to prevent fraud, Bitcoin mining requires an expensive process of solving difficult computer puzzles.
Miners’ computers run cryptographic formulas trillions of times per second, hoping to be the first to produce a value within a narrow mathematical range. Successfully completing this task unlocks the opportunity to send a block and if other computers on the network find that it complies with their records, the miner receives a reward.
The idea here is that mining skews economic incentives towards honest behavior on the part of the miners. After spending all the effort and cost to mine a block, you may be against the risk of losing your potential payment, for example, by entering inaccurate Bitcoin data into your account.
Can anyone mine Bitcoin?
Anyone can participate in the Bitcoin mining process, but unless you have access to powerful computers known as ASICs (aka “application specific integrated circuits”), your chances of winning a Bitcoin prize are pretty low.
When Bitcoin started over a decade ago, it wasn’t a big deal to mine with your personal computer. But as Bitcoin’s value has grown, competition for prizes has also grown, sparking an arms race to implement ever faster and more powerful mining equipment.
The mining industry has become a multi-billion dollar industry, and the miners with the best earning potential are now the ones with warehouses full of ASICs.
To help small-scale miners compete, some groups have been formed, known as mining pools. These deals allow users to pool their computing power and then share all the rewards they take home, minus a commission.
But even if you join a pool, you’re unlikely to get much without an ASIC. The split in the mining world is largely between people who own many ASICs and those who only have a few. Given the level of competition, personal computers generally don’t cut it anymore.
However, you can help the Bitcoin network by contributing with the power you have. Theoretically, the network becomes more resilient as computing power increases, so every little part helps. The foundation that supports and promotes Bitcoin offers free software that allows you to contribute to the network using a home computer.
How Much Can You Earn With Bitcoin Mining?
We’ve established that Bitcoin mining is difficult, but hey, you can dream. So, if you were to actually win a Bitcoin mining award, what would you get?
It is important to note here that Bitcoin’s mining rewards every 10 minutes are roughly the same. Your winnings, if you are that lucky, will depend on whether you mine a block yourself (unlikely) or share it with other miners in a pool.
Bitcoin pays out a mining reward every time a new “block” is entered into the permanent record of transactions. The reward drops every few years, but for now it’s 6.25 BTC, which was worth around $ 125,000 in September 2022 while Bitcoin was hovering around $ 20,000.
In addition to that reward, Bitcoin miners also receive transaction fee proceeds that are automatically valued when the cryptocurrency is sent from one crypto wallet to another. Unlike the bulk reward, transaction fees are not set. They vary based on network conditions, such as the number of transactions at a given point.
As more blocks are added to the Bitcoin blockchain, the reward size will decrease intermittently. This is known as the “Bitcoin halving” and the next is expected to happen in 2024, at which point the reward will drop to 3,125 BTC, or around $ 62,500 at current values.
Once there are a total of 21 million Bitcoins in circulation, bulk rewards will cease and miners will only be compensated by transaction fees.. But you won’t be alive to see the end of the block rewards; the current estimate for when this will happen is around 2140.
What about electricity costs?
Unless you have a cheap source of electricity, your mining costs may outweigh anything you earn in terms of rewards. Here is an example of Bitcoin mining that might be relevant to an everyday American family.
ASICs vary in cost, efficiency, and performance, so you’ll want to do your homework before starting. But for example, a commonly used ASIC is AntMiner S9, which was retailing for around $ 800 on Amazon as of September 12, 2022.
NiceHash, a mining platform, calculates that AntMiner S9 could carry Bitcoin worth around $ 42 in a month based on September 16 prices. But at average residential power rates, you would pay about $ 152 to get it to work. So you would lose money even before the cost of the hardware.
However, that doesn’t mean mining is always a losing proposition. These calculations can change if the price of electricity falls or the value of Bitcoin rises.
What other cryptocurrencies can you mine?
Most cryptocurrencies that use the term “proof-of-work” can theoretically be mined. Some examples include Litecoin And Dogecoin. There are a few, including Monero, that can be mined using a home computer. Others require ASICs and some rely on GPUs, “graphics processing units” originally developed for games and other demanding applications.
However, there are many cryptocurrencies that don’t support mining. Many of these are “proof of participation“Cryptocurrencies, which are based on a more energy efficient process known as staking. This involves putting some cryptocurrencies at risk to send a new block and earn a reward.
In particular, Ethereumthe second most valuable cryptocurrency, recently completed the proof of stake conversion process.
The author owned Bitcoin, Dogecoin and Ethereum at the time of publication. The publisher owned Bitcoin.