How Bitcoin Mining Works: Explanation and Examples - NerdWallet - The first knowledge sharing application in Vietnam

Bitcoin mining is a process that creates new Bitcoins and releases them into circulation.

Mining is crucial to the operation of Bitcoin and some other cryptocurrencies because it incentivizes users to enter accurate information into the shared ledger that keeps track of transactions and balances on an underlying blockchain network. Miners who participate in this process compete for rewards in the form of Bitcoin.

While Bitcoin mining has a good track record for reliability, it has also attracted its share of criticism because of the energy needed to run the network. Bitcoin alone uses more electricity than some entire countries. A number of cryptocurrencies have been moving away from mining, though Bitcoin continues to rely on the process.

The mechanisms of mining can seem baffling to everyday users because the process relies on complicated cryptography that is intended to prevent fraud and theft. Bitcoin mining typically uses powerful, single-purpose computers that can cost hundreds or thousands dollars.

But Bitcoin as we know it could not exist without mining. Bitcoin mining is the key component of Bitcoin’s “proof-of-work” protocol. It’s what stops thieves from claiming to own your Bitcoin, and what makes sure that when someone sends you Bitcoin, the funds actually arrive.

Why Does Bitcoin Need Mining?

If you’re just buying or trading Bitcoin, you might not have thought much about how mining actually works. But because Bitcoin is maintained by its users, it’s helpful for anyone involved with Bitcoin to have a basic understanding of its technological underpinnings.

Bitcoin, like many other blockchain technologies, is decentralized, meaning no one entity controls the network or keeps a central account of users’ balances. Instead, Bitcoin relies on users to hold their own copies of the historical ledger of transactions. Mining is the process by which users come to a consensus about the accuracy of those shared records.

Every 10 minutes or so, the network generates enough transactions to make a new “block,” which is basically a package of transactions that is encoded in a way that makes it tamper-resistant. A user who successfully enters a new block into the record gets the mining reward.

Mining isn’t as simple as just finding new transactions and submitting them, though. If it was, everyone would be able to do it. In order to prevent fraud, Bitcoin mining requires a costly process of solving difficult computing puzzles.

Miners’ computers run cryptographic formulas trillions of times per second, in hopes that they’ll be the first to produce a value that falls within a narrow mathematical range. Successfully completing this task unlocks the opportunity to submit a block, and if the other computers on the network find that it conforms with their records, the miner gets a rewardView all sources

Bitcoin.org . What is Bitcoin mining? . Accessed Sep 13, 2022.

The idea here is that mining tilts the economic incentives toward honest behavior by miners. After expending all the effort and cost to mine a block, you might be averse to the risk of losing your potential payout by, say, inserting inaccurate data about the Bitcoin in your account.

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Can anyone mine Bitcoin?

Anyone can participate in the Bitcoin mining process, but unless you have access to powerful computers known as ASICs (that’s “application-specific integrated circuits”), your chances of winning a Bitcoin reward are pretty low.

» Not up for mining? Here’s how to buy Bitcoin.

When Bitcoin started more than a decade ago, it was no big deal to mine with your personal computer. But as Bitcoin’s value has grown, so has the competition for the rewards, sparking an arms race to deploy ever-faster, more powerful mining equipment.

Mining has become a multibillion-dollar industry, and the miners with the best shot at rewards are now those with warehouses full of ASICs.

In order to help smaller-scale miners compete, some groups have formed, known as mining pools. These arrangements allow users to join up their computing power and then share any rewards they take home, minus a fee.

But even if you join a pool, you’re unlikely to get much without an ASIC. The division in the mining world is largely between people who own a lot of ASICs and those who only have a few. Given the level of competition, personal computers generally don’t cut it anymore.

Still, you can help out the Bitcoin network by contributing the power you have. Theoretically, the network gets more resilient as its computing power grows, so every little bit 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 make by Bitcoin mining?

We’ve established that Bitcoin mining is difficult, but hey, you’re allowed to dream. Here’s a Bitcoin mining example that might help explain what you get if you won a block reward.

It’s important to note here that Bitcoin’s mining rewards every 10 minutes are roughly the same. Your payout, should you be so 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 each time a new “block” is entered into the permanent record of transactions. The reward shrinks every few years, but for now, it is 6.25 BTC, which in December 2022 was worth roughly $105,000 as Bitcoin hovered below $17,000.

Beyond that reward, Bitcoin miners also receive the proceeds from transaction fees assessed automatically when the cryptocurrency is sent from one crypto wallet to another. Unlike the block 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 Bitcoin’s blockchain, the size of the reward will decline intermittently. This is known as a “Bitcoin halving,” and the next one is expected to happen sometime in 2024, at which point the reward will drop to 3.125 BTC, or about $53,000 at current values.

Once there are a total of 21 million Bitcoins in circulation, the block rewards will stop, and miners will be compensated only by transaction feesView all sources

CoinDesk . What Is a Block Reward? . Accessed Sep 13, 2022.

What about electricity costs?

Unless you have a cheap source of electricity, it’s possible that your mining costs will exceed whatever you make in rewards. Here’s a Bitcoin mining example that might be relevant to an everyday U.S. household.

ASICs vary by cost, efficiency and performance, so you’ll want to do your homework before you get started. But as an example, one commonly used ASIC is the AntMiner S9, which on Dec. 21, 2022, was retailing for between $600 and $700 on Amazon.

NiceHash, a mining platform, calculates that the AntMiner S9 could bring in about $26 worth of Bitcoin in a month based on prices on Sept. 16. But at average residential power ratesView all sources

U.S. Energy Information Administration . Electric Power Monthly . Accessed Sep 13, 2022.

However, that doesn’t mean mining is always a losing proposition. These calculations can change if the price of electricity goes down, or the value of Bitcoin goes up. If you believe Bitcoin’s value will rise over time, you may think of your month-to-month losses as a long-term investment.

Is Bitcoin mining legal?

Bitcoin mining is generally allowed in the U.S., but some other countries have outlawed it — China is one major example View all sources

CoinDesk . China Can’t Seem to Stop Bitcoin Mining . Accessed Dec 21, 2022.

Even if you’re in the U.S., it’s worthwhile to check in on your local regulations, especially if you’re planning to use multiple ASICs or operate them somewhere outside of your home.

What other cryptocurrencies can you mine?

Most cryptocurrencies that use the term “proof-of-work” can theoretically be mined. Some Bitcoin alternatives, or altcoins, include Litecoin and Dogecoin. There are some — including Monero — that can be mined using a home computer. Others require ASICs, and some rely on GPUs — “graphics processing units” originally developed for gaming and other heavy-duty applications.

However, there are a lot of cryptocurrencies that do not support mining. Many of these are “proof-of-stake” cryptocurrencies, which rely on a more energy-efficient process known as staking. This involves putting some crypto at risk in order to submit a new block and earn a reward.

Notably, Ethereum, the second-most valuable cryptocurrency, recently completed the process of converting to proof of stake.

» Learn more about what happened with the Ethereum merge

The author owned Bitcoin, Dogecoin and Ethereum at the time of publication. The editor owned Bitcoin.

How Bitcoin Mining Works: Explanation and Examples – NerdWallet