How to Mine Bitcoin: How Does Bitcoin Mining Work? | SoFi

Bitcoin miners rely on high-powered computer systems to validate blocks of digital transactions on the blockchain network and earn Bitcoin (BTC). Learning how to mine Bitcoin isn’t hard, but it can be expensive and time consuming.

Once a miner has completed a certain number of calculations (1 MB) to verify a block of transactions, they may be rewarded with new Bitcoins — if they are the first to verify the block.

This competitive process in turn helps to secure the system and prevent fraud. And it enables a network-wide consensus that essentially backs the validity of each Bitcoin, even without a central authority.

What Is Bitcoin Mining?

Mining Bitcoin is more than just the creation of Bitcoin tokens; it’s also the decentralized global system by which miners validate and secure all Bitcoin transactions — and earn Bitcoin themselves.

How does Bitcoin mining work exactly? It goes back to the blockchain technology that Bitcoin and other types of cryptocurrencies are built on. For many blockchain-based crypto networks to run, miners rely on super-charged computer systems — or in some cases cloud-based technology — to validate blocks of digital transactions that are then appended to the blockchain ledger.

How Bitcoin Mining Works

When a Bitcoin transaction is executed, it gets sent to miners for verification. Bitcoin miners use special computer hardware to do the complex mathematical calculations or hashing, required to confirm each item on the blockchain — an immense undertaking called proof-of-work (PoW) that involves literally trillions of calculations.

Many different types of crypto use a PoW algorithm, including Dogecoin, Litecoin, Bitcoin Cash, Monero, and others. It can be useful to understand the differences between certain types of crypto, like Bitcoin vs. Dogecoin, in order to learn more about mining crypto.

Understanding Bitcoin Hashing and Hash Rate

To solve these problems, each machine or node has to make millions of guesses per second — called hashing. This requires a lot of electricity. Estimates vary, but Bitcoin miners consume around 129 Terawatt-hours of energy, which is around 0.6% of the world’s total.

To successfully mine a block and receive bitcoin rewards, a miner has to hash the block’s header, which is a summary of the information contained within a given block. In order to keep the timing of each block consistent, the difficulty of solving each block has to increase over time. This keeps the number of Bitcoins entering the market steady. (If it got easier to validate each block, miners would get more rewards faster, which would quickly deplete the existing supply of Bitcoins).

The Bitcoin hash rate is a measurement of how many times the Bitcoin network attempts to complete those calculations each and every second. It’s the approximate average of all the hash rates of each individual miner in the network.

When a miner has a higher hash rate it increases the miner’s chances of finding the next block and receiving a Bitcoin reward. More hashing power also is an indication of a network’s overall security.

It takes about 10 minutes for miners to successfully confirm a block of transactions (1 MB) and get rewarded with new Bitcoin. But mining is intensely competitive, especially because the reward is halved every 210,000 blocks and now stands at 6.25 BTC.

What Is Bitcoin Halving, Why Does It Matter?

Every type of cryptocurrency follows its own protocol. Bitcoin is a deflationary crypto, which means the number of coins being minted is steadily decreasing.

How many Bitcoins are left? The number of Bitcoins that can be produced is capped at 21 million. That’s where the halving of Bitcoin rewards comes in.

Since mining rewards create Bitcoin, the number of Bitcoin you can earn from mining is decreased over time through the process called halving. In June of 2024, the Bitcoin block reward for mining is slated to drop to 3.125 BTC from 6.25 BTC.

Understanding Proof of Work

The process of mining Bitcoin actually helps secure the network, and the transactions that fly across it every day. For a hacker to take control of the blockchain, to commit fraudulent charges, and to steal Bitcoin, they’d have to control over 51% of the network.

It’s an important insight into the decentralized world of mining cryptocurrency: Rewarding miners creates a competitive environment that encourages more miners to join the network. This increases the size of the network, making it harder to get more than 51% control of it, which in turn makes transactions more secure for users who are sending Bitcoins back and forth.

Can Bitcoin Work Without Miners?

The short answer is no. Bitcoin relies on a proof-of-work consensus mechanism that requires miners and mining for transaction verification and block creation, for minting new coins, and for helping to secure the network. That’s how the system is built.

If Bitcoin were to switch to a proof-of-stake system, the way Ethereum did with the Merge in 2022, then miners would no longer be needed.

There is an ongoing debate about the value of crypto staking vs. mining. While mining uses special hardware to solve complex computational problems, staking locks up crypto for a fixed period. PoW is energy intensive, whereas PoS requires less energy. PoW relies on a high hash rate to secure a network, whereas PoS relies on a large amount of tokens (money) — a high level of market capitalization.

In a proof-of-stake network, transactions aren’t validated by miners running vast computer rigs, but validators who stake a certain amount of their crypto in order to help monitor and run the network — and earn crypto rewards.

Recommended: Is Crypto Mining Still Profitable in 2022?

Mining Bitcoin: What You Need

With the right equipment, nearly anyone can mine Bitcoin — in theory. The catch? As just discussed, Bitcoin mining has become highly competitive because of the potential rewards — and the complexity of the calculations and technology involved.

When Bitcoin was first launched in 2009, all miners needed was a sturdy PC and they could potentially get in the Bitcoin-mining game. Things progressed quickly, though. In 2010, software was released that let miners mine with graphics processing units (GPUs), the technical name for a video card.

The Evolution of Bitcoin Mining Hardware

This was a major shift in Bitcoin mining because a single GPU was 100 times faster than a central processing unit (CPU), which was how most people were initially mining.

Next, miners built computers specifically for mining Bitcoin, as well as other cryptocurrencies. These “crypto mining rigs” typically featured motherboards, the main hub of a computer, which supported four to eight graphics cards.

If a single card was 100 times faster than a CPU, it’s easy to see how the average user looking to mine Bitcoin might be left in the dust by a high-powered crypto rig that featured anywhere from four to eight GPUs churning away at blockchain calculations.

From there, as is the case with many things tech, the hardware got better, faster, and more specialized. In 2013 the first Bitcoin ASIC miners hit the scene. ASIC stands for application-specific integrated circuit. These mining tools are built to do one thing — mine cryptocurrencies (including Bitcoin), and they are far more powerful than GPUs.

Mining-Specific Hardware

How do you mine Bitcoin with your own rig? A mining rig is basically a super custom PC. The fundamental components are what you’d expect: You need a motherboard, RAM, a CPU, and storage.

The key enhancements are either the added GPUs, as noted above, or using an ASIC. Generally, using an ASIC is the preferred mining tool. GPUs are no longer considered fast enough to solve Bitcoin calculations and earn rewards; you’re up against far more powerful machines.

While ASICs are more effective at processing Bitcoin transactions than their GPU and CPU predecessors, and they’re generally more energy efficient, they can come with some upfront costs. And this doesn’t include the potentially high utility costs needed to maintain them (read: keep them cool enough to function).

The cost of electricity is a significant one for most miners, and something to include in your calculations, as it can impact your profits.

Miners also need to take into account the cost of mining fees.

Mining Software and a Bitcoin-Compatible Wallet

Selecting the best software to mine Bitcoin doesn’t have to be complicated or expensive. While mining Bitcoin can be costly in terms of hardware and electricity, the software to mine Bitcoin usually isn’t. Most Bitcoin mining software is free and open-source.

Once you have the hardware and software in place to mine Bitcoin, next you’ll need to set up a type of crypto wallet that’s compatible with Bitcoin.

Another option to consider may be a mining pool.

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How Bitcoin Mining Pools Work

A bitcoin mining pool is a group of users who have decided to join forces to validate Bitcoin transactions (create a new block). Users who join mining pools contribute their own CPUs, GPUs, or ASICs to a network and when rewards are paid out, they all get a share.

If you’re going solo, mining software will try to verify transactions with just the processing power of whatever hardware (CPU, GPU, or ASIC) that you’ve got. That said, many people agree that the computations have gotten so complex, it’s less likely that a solo miner will create a new block on their own. If you’re joining a pool, the mining software will help you connect to your pool.

Many mining pools these days are located in China because of the cheaper electricity. Some of these pools are actually companies, including F2Pool, AntPool, BTCC, and BW. While these are some of the biggest pools, there are pools based in the U.S. and Europe as well.

While pools might seem appealing to miners with less computing horsepower, there may be some things to consider before joining. Pools may charge users a fee. And miners might be paid out their shares based on the level of their contribution, which could mean that miners with fancy ASICs take home more of the rewards.

Since this is Bitcoin, there’s probably another innovation around the corner.

Cloud mining is an example — an option if you don’t want to own your own mining hardware and would rather mine with someone else’s. However, cloud mining may also come with its own costs and risks that have left some members of the Bitcoin community less than impressed with this approach to mining coins.

What’s Cloud Mining?

Much like storing data or running applications in the cloud, cloud mining is the process of paying someone else to use their crypto mining hardware. This could save a miner the upfront cost of setting up an ASIC system.

To get started, a miner would likely open an account with a cloud mining company, decide how much they want to spend, and how much they want to mine.

While cloud mining may seem like an easier way to get started with Bitcoin mining, it’s worth mentioning that there have been reports of cloud mining companies that might not be on the up and up. Miners looking to get started might consider doing a fair bit of research before deciding if cloud mining is right for them — as well as what company to go with.

Recommended: A Closer Look at Bitcoin Cloud Mining

Is Mining Bitcoin Legal?

The question of whether Bitcoin mining is legal is still fairly complex and can vary from region to region. The short answer is that Bitcoin itself, as well as Bitcoin mining, are both legal in many developed countries, including the U.S., U.K., and Japan. In general though, it’s wise to consider the use of any cryptocurrency within the context of the laws and regulations in a specific jurisdiction, as many are still in flux.

In some countries, the use of cryptocurrencies is forbidden and mining Bitcoin is illegal. In others, like China and India, the use of crypto is restricted. In Canada it’s not illegal to use cryptocurrencies, but they are not considered legal tender — which is a key distinction in how crypto is treated in the U.S. as well.

The question of Bitcoin’s legality is increasingly complex and depends on a wave of cryptocurrency regulations around the world that seem to fluctuate week to week, region to region. These may include how Bitcoin is defined (e.g. as a commodity or a currency); how it can be used (e.g. for some purchases or payments but not others); how it’s taxed.

According to IRS guidelines issued in 2014, cryptocurrencies like Bitcoin are considered property, and are taxed as such. Also, if an employer compensates an employee using a cryptocurrency, the employee will get a W2 or 1099 tax form and may owe income taxes on their crypto trading.

The status of cryptocurrency mining as well as crypto’s legal standing can shift as new regulations come into play.

Is Bitcoin Mining Right for You?

Despite some hurdles, learning how to mine Bitcoin is still an intriguing and potentially lucrative opportunity for some. With the right equipment, it’s possible to validate enough transactions to earn actual Bitcoin tokens. That said, mining Bitcoin is not the gold rush it once was. Even if you invest in some serious Bitcoin mining ASICs, mining itself keeps getting more complex and competitive.

That doesn’t mean you can’t do crypto mining, though. There are thousands of cryptocurrencies that could use help from eager miners willing to donate some processing cycles from their CPUs or GPUs, and even if you don’t hit the mother lode, you could mine for a better understanding of how cryptocurrency works. Whether or not you want to grab a metaphorical hat and mining pick is up to you.

The Takeaway

Bitcoin mining requires a substantial investment of time and energy on the part of any would-be miner. The equipment alone can set you back thousands. And while the payoff — assuming you earn actual BTC — could make the overhead cost worth it, there are no guarantees. Bitcoin mining has become highly competitive.

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FAQ

How do you start mining for Bitcoin?

The most important step if you want to mine Bitcoin is to look into the cost of setting up your own mining rig (or computer hardware and software) and comparing that to the cost of joining a mining pool or cloud mining. Next, it would be a good idea to compare potential rewards and risks of different mining options, since Bitcoin mining is expensive and competitive, and there are no guarantees of “striking it rich.”

How hard is it to mine one Bitcoin?

It’s very difficult. Miners are rewarded when they are the first to confirm a 1 MB block of Bitcoin transactions. Currently the reward is 6.25 BTC. Being able to get that reward takes considerable time and energy — and there are no guarantees.

What are the steps to mining Bitcoin?

The first step is to decide which type of mining you want to set up (PC, mining pool, or cloud mining). Next, you have to obtain the necessary hardware and software to run your node, as well as setting up a Bitcoin-compatible crypto wallet to pay mining fees and (perhaps) rewards.

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