What is Bitcoin mining?

In our prior exploration of bitcoin’s operations in the second segment of our enlightening Bitcoin basics series, we unveiled Bitcoin’s mystery, detailing how it functions. We recommend checking it out if you haven’t yet done so. Moving forward, we dive deeper into the Bitcoin ecosystem, looking specifically at Bitcoin acquisition and the concept known as “Bitcoin mining”.

Currently, you can acquire Bitcoins in two ways. Firstly, by purchasing Bitcoins or fractions of a Bitcoin on an exchange, and secondly by accepting Bitcoin as a form of payment for goods or services. The third, slightly more complex method, is through “mining,” which involves creating new Bitcoins and introducing them into the system.

Just as gold and silver are mined from the earth’s crust, Bitcoin mining involves individuals worldwide working to secure the Bitcoin network, with the reward for their efforts being paid in bitcoins. But what underpins this process? Let’s delve into the technology behind it – the Blockchain.

Understanding the Intricacies of Blockchain Technology

At its core, the Blockchain is a publicly accessible, distributed ledger that exists on Bitcoin nodes globally. It comprises “blocks,” which are essentially groups of transactions linked together in a literal “chain.”

One of the critical responsibilities of miners is to validate these Blockchain transactions. This is achieved by applying a complex mathematical formula to the information contained in each block, resulting in a shorter sequence of letters and numbers known as a ‘hash.’

A hash is, in essence, a time-stamped seal of approval applied to blocks of transactions. It’s a unique string of characters derived from the information within the block and the hash of the preceding block in the chain.

Any alteration to a block’s components results in the generation of a new hash, which consequently alters the block and the subsequent blocks in the chain. This means that any attempt to interfere with the Blockchain is highly visible and challenging to reproduce. Each new block added to the Blockchain makes the preceding blocks more difficult to alter, further enhancing the security of the system.

Miners utilize powerful computer systems and specialized software to validate blocks of transactions. Once a ‘correct’ hash sequence is found, the block is sealed off, and the miner responsible for validating the transactions is rewarded with Bitcoins.

At the time of writing, miners receive 12.5 Bitcoins for each verified block. This amount halves after every 210,000 blocks. The fact that there will only ever be 21 million Bitcoins ensures that their value remains stable over time. As the number of bitcoins created in each block decreases over time, the dollar value of each bitcoin increases.

The difficulty of producing a valid hash also increases over time. For example, Bitcoin’s difficulty adjusts every 2016 blocks and is designed such that mining a single block takes approximately ten minutes. This ensures that users can’t hash hundreds of transaction blocks each second, and Bitcoins are distributed over a more extended period.

Is Bitcoin Mining a Profitable Venture?

Bitcoin’s price surged from $750 to an all-time high of $20,000 in 2017, offering investors and traders fantastic opportunities to profit from holding and trading the cryptocurrency.

While most people will purchase Bitcoins on an exchange or accept them as payment for services, a few daring bitcoin “prospectors” wish to mine their share. However, many miners find that they spend more time and resources trying to keep up with the difficulty of mining Bitcoin than they actually spend mining Bitcoin.

The fundamental rule of Bitcoin mining is that the more you mine, the more complex the process becomes. Unfortunately, Bitcoin has proven too difficult to mine for most traditional computer systems, leading to the creation of specialized ‘Bitcoin mining rigs.’

Due to this, mining workstations with custom computer processors specifically designed to solve the Bitcoin hashing function have been built or purchased. These modified processors, known as ASICs, allow miners to hash more efficiently, giving them a comparative advantage. However, acquiring these systems often comes with an unintended consequence: the cost of powering these rigs often exceeds the cost of acquiring the equipment in the first place.

According to Blockchain.info, bitcoin miners worldwide consume 1,005.59 kilowatt-hours of electricity per day in their quest to generate more bitcoins. This suggests that the industry spends over $150,000 per day on electricity.

Despite the costs, Bitcoin mining can be highly profitable because bitcoins are awarded as a reward for completing the process. As the value of bitcoin increases over time, the income can cover the expenses.

At the time of writing, 12.5 Bitcoins are awarded as a reward for validating transaction blocks on the Blockchain. This is a tantalizing prospect for miners, and it has even led to the establishment of large-scale Bitcoin mining companies that purchase high-end computer equipment in bulk to mine Bitcoin.

In the fourth part of our Bitcoin Basics series, we will ponder the possibilities of Bitcoin failing in the future. Stay tuned for more insights into the fascinating world of Bitcoin and cryptocurrencies.

  • Luke Handt

    Luke Handt is a seasoned cryptocurrency investor and advisor with over 7 years of experience in the blockchain and digital asset space. His passion for crypto began while studying computer science and economics at Stanford University in the early 2010s.

    Since 2016, Luke has been an active cryptocurrency trader, strategically investing in major coins as well as up-and-coming altcoins. He is knowledgeable about advanced crypto trading strategies, market analysis, and the nuances of blockchain protocols.

    In addition to managing his own crypto portfolio, Luke shares his expertise with others as a crypto writer and analyst for leading finance publications. He enjoys educating retail traders about digital assets and is a sought-after voice at fintech conferences worldwide.

    When he's not glued to price charts or researching promising new projects, Luke enjoys surfing, travel, and fine wine. He currently resides in Newport Beach, California where he continues to follow crypto markets closely and connect with other industry leaders.