What is bitcoin mining?

What is bitcoin mining?

Mining is the process by which Bitcoin transactions are verified. This guide explains how Bitcoin mining works in simple, easy-to understand steps.
Updated: Jan 24, 2022
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8 min read

Put simply, bitcoin mining is the process of verifying bitcoin transactions. It basically involves adding transaction records to the Bitcoin public ledger (the blockchain) to record the movement of bitcoins between wallets. The miners that do this job are rewarded for using their computer power to create new blocks on the blockchain with bitcoin.

I. Why is it called mining?

Because it’s a process that takes power to extract a finite resource, just like with physical mining. And the comparisons also do not end there. As a regular mine digs deeper, it becomes more difficult, requiring more energy and probably resources to extract more minerals. This is the case with Bitcoin. There is a finite amount of bitcoins (21 million), and the only way to extract these bitcoin is through ‘mining’.

II. How does mining work?

It all comes down to computer power. In the case of Bitcoin, the energy required for mining comes from a network of computers solving complex mathematical problems – a process called ‘hashing’. Large amounts of transactions are combined together in ‘blocks’, which then require miners to solve computational problems. This verifies all the transactions, and after it’s done the block is added to the chain of previous blocks (the ‘blockchain’). All miners get paid transaction fees for their work, and one of the miners who worked on the block is rewarded at random with some newly mined bitcoin each time a block is solved.

This means technically, that the first time you buy bitcoins – they will go through this process before they can land in your ownership.

III. What do I need in order to start Bitcoin mining?

If you want to start mining bitcoin, you have two main options: setting up your own mining rig, or buying a cloud mining contract. Here are what the two entail:

  • Mining using your own rig – You’ll need to buy specific hardware and maintain and run it specifically for mining. In the early days of Bitcoin, it was possible to mine with CPUs from your normal laptop or desktop computer. However, as the difficulty of mining increased, the PCs could not handle the job, and miners had to resort to GPUs and specialised mining rigs known as ASICs (Application-Specific Integrated Circuit) and software to do the job. We have a page to guide you through it; so make sure to check it out.
  • Cloud Mining – You can earn bitcoins through mining without having to own a mining rig. All you need is to lease some hashing power from a company that has already set up mining rigs and gets a percentage of the bitcoin income.

IV. What is a mining pool?

A mining pool is a group of bitcoin miners working together and sharing the rewards. Mining pools combine resources and share all their miners’ processing power, splitting the income according to the amount of work each miner has contributed. By miners banding together in pools, they increase the odds of being rewarded for solving a block, allowing them to have more regular returns. Think of it as a large group of people playing betting on different horses in a race and agreeing to split the resulting winnings between them. The rewards may be smaller, but there’s a far greater chance of consistent income.

V. Is Bitcoin mining profitable?

Honestly, this is a complicated question for many reasons. Bitcoin mining is certainly not a get-rich-quick scheme any more (early on you could generate a lot of bitcoin using just a laptop, whereas now you need to invest in a lot of technology), and any investment will take at least a few months to repay itself. But in the long run, yes bitcoin mining can be profitable as long as you go about it correctly. Issues you need to consider are:

  • Electricity costs – these are one of the primary concerns if you are running your own mining rig. Since bitcoin mining requires a lot of energy, the mining rigs consumes a large amount of electricity, which translates to high cost of electric bills.
  • Cooling costs – The side effect of all the electrical energy used is a lot of heat, which needs to be cooled down. Achieving this is difficult and costly since you will need to set up your mining rigs in a cool area and purchase more tools such as extra fans to facilitate cooling.
  • Cloud mining fees – If you choose to get involved in cloud mining, then there will be additional fees to help maintain the mining hardware. These fees are charged at various rates according to the amount of hashes carried out by the system. Platforms such as Genesis charge around $0.00028 per GH/s, whereas other such as Hash flare charges $0.0035 per 10 GH/s.
  • Mining pool fees – Mining pools charge fees for being a part of them, so these will impact the level of profit you will make. Generally most of them will charge you around 1% – 3% of your profits.
  • Popularity of mining – Bitcoin mining is designed to become more difficult as more people do it. As more miners join the network, the block creation rate increases and so does the mining difficulty. This means that an upsurge in miners will lower profits of mining.
  • Bitcoins released per block – As the number of bitcoins approaches the 21 million cap, mining rewards fall. The block reward is halved after every 210,000 blocks, which is roughly 4 years. In 2009, the block reward began at 50 BTC, and in 2018 it’s come down to 12.5 BTC per block. This reward will be halved again in 2020 to 6.25 BTC.
  • Fluctuations in value of bitcoin – It is hard to measure profitability of mining because of the changing value of bitcoin itself. If the price of bitcoin rises, mining will become more profitable, but if it falls then profits will fall or be wiped out. Many people consider bitcoin mining hoping that prices will rise so that they can get considerable profits.

VI. That’s a lot of factors, how do I figure out if it will be right for me?

There are many bitcoin mining profitability calculators around which you can use to get an idea if the venture is really worth it. You can put in all the information and they will give you estimates of how much money you’ll make. You will be asked to enter your hashing power (H/s, KH/s, MH/s, GH/s, or TH/S), power consumption, and the pool fees. For a more accurate figure, there are online bitcoin mining profitability calculators that will need you to enter extra details such as hardware cost and power cost.

VII. Should I get involved in bitcoin mining?

It’s up to you. If you’re interested in the technology behind it and/or willing to see mining as a long-term investment, it can be a lot of fun and give you a steady income of bitcoins. As Bitcoin mining difficulty is always increasing and the rewards are reducing, it’s no longer a path to making loads of bitcoin quickly, but this in no way means it’s a waste of time. Consider what you’re looking for and think if hardware or cloud mining is the right option for you.

VIII. How do I get started?

Keep reading, keep learning. Then when you’re ready, you’ll need to select either some services for cloud mining, or hardware to set up at home. Let’s dive into those next…

Sources & references
Risk disclaimer

Invezz is a place where people can find reliable, unbiased information about finance, trading, and investing – but we do not offer financial advice and users should always carry out their own research. The assets covered on this website, including stocks, cryptocurrencies, and commodities can be highly volatile and new investors often lose money. Success in the financial markets is not guaranteed, and users should never invest more than they can afford to lose. You should consider your own personal circumstances and take the time to explore all your options before making any investment. Read our risk disclaimer >

Harry Atkins
Financial Writer
Harry was a Financial Writer for Invezz, drawing on more than a decade writing, editing and managing high-profile content for blue chip companies, Harry’s considerable experience… read more.

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