What is Bitcoin mining?

March 23, 2021

There are a few ways to get Bitcoin. You can buy them from a retailer, an ATM or an exchange, you can trade them, you can earn them (depending on the regulation of your country), or you can mine them. Bitcoin mining is probably one of the less common ways to receive Bitcoin but it’s still a method used by some.

Back when cryptocurrency was less well-known and had a lower market cap, volume of transaction and price tag, Bitcoin mining was a profitable way to earn Bitcoin. Now, it’s become an expensive undertaking that requires a lot of energy and equipment. However, despite the cost, mining still attracts many investors in the industry because of the tasty reward for the endeavor.

How does Bitcoin and cryptocurrency mining work?

The creation of Bitcoin happens through “mining”. This means that those who create a Bitcoin token are the miners of it. Miners get paid in Bitcoin for doing the work of verifying the validity of Bitcoin transactions on the network. The reason behind this is because Bitcoin is decentralised and relies on the network (rather than one central entity like a company) to operate.

Bitcoin miners ensure transparency and honesty in the network and reduces the risk of issues such as double-spending, which is where a Bitcoin owner could send a copy (a false fraudulent token) of a Bitcoin token to another user. Since the currency is digital, it would be possible if not for the miners and the process behind verifying Bitcoin transactions. Double-spending would be a little like printing counterfeit cash and spending the original bill (which holds genuine value) and the counterfeit (which is worthless because it’s a fake). This means that the spender has been able to spend double despite only truly holding half of the value.

From a technical point of view, Bitcoin mining resolves this because miners verify transactions and algorithmically look out for any possible “counterfeit” Bitcoin. If the transaction is genuine, it goes through. If it’s false, it’s rejected.

Bitcoin miners receive their reward of Bitcoin once they have verified 1 megabyte worth of Bitcoin transactions. This is called a “block” (which is where “blockchain” comes from) and once they have mined a block, they get their reward. Because the block size is small and is set, it can result in a backlog on the network, meaning the verification process slows down which can lead to delayed or slow transactions going through.

How to earn Bitcoin through mining

To earn Bitcoin as a Bitcoin miner, there are two requirements:

  1. You need to verify approximately 1 megabyte of transactions – or effectively mine one block, and
  2. You have to be the first miner to verify the transaction by means of answering an algorithmic challenge. This is called the proof-of-work.

To find the answer to this challenge, you don’t need to be a specialised mathematician. This is the mechanic process that requires special equipment and has begun to take a lot of energy and electrical resources to operate. To “solve” the challenge, the miner needs to discover a 64-digit hexadecimal number, which is known as a “hash”, either less than or the same as the target set by the blockchain. So it comes down to the machine that can solve the problem or discover the hash as quickly as possible.

How much does a Bitcoin miner earn?

Approximately every four years, there’s an occurrence in the cryptocurrency industry called the “Bitcoin halving.” When this happens, the Bitcoin reward earned from each block is halved. So in 2009, the first block of Bitcoin mined earned 50 Bitcoin tokens – a whopping amount today. In 2012, this was halved and a block mined would earn 25 Bitcoin tokens. In 2016, the Bitcoin halving meant that miners would receive 12.5 Bitcoin tokens.

In May 2020, the most recent Bitcoin halving took place. Now, Bitcoin miners will receive 6.25 Bitcoin tokens per block mined until the next halving. Depending on the price of Bitcoin, this could be a massive reward in terms of cash equivalence. However, any profit from Bitcoin mining only comes after buying the expensive equipment and after settling the electricity bill after the energy-intensive process.

Related