How does Bitcoin mining work?

You probably understand how Bitcoin is bought and sold in a marketplace, but it’s more complicated when it comes to how digital coins are created. This is where Bitcoin mining comes in, the process by which new units of currency are made, or “struck”, and brought into the market. But how does the process work and why is it so bad for the environment? Here’s all you need to know.

How does Bitcoin mining work?

Awesome miner

Unlike a centralized physical bank, Bitcoin acts as a decentralized bank ledger, a record of transactions kept in multiple places at once and maintained by network contributors. This record is called the blockchain. The blockchain is updated by adding new blocks of data to this chain, which contains information regarding Bitcoin transactions.

To add a block of new transactions to the chain, miners must calculate the correct random numbers that solve a complex equation generated by the blockchain system. Once they do, a set of rules written in the Bitcoin code allocates the miner a certain amount of Bitcoin. This, in a nutshell, is the mining process, but it gets more complicated than that.

Miners use expensive and complex mining rigs to do these calculations, and the more computing power you have, the easier it is to mine Bitcoin. Quick processing means more guesses about the right solution to the blockchain equation and a better chance of finding the right answer. The catch is, the miners have to be the first to come up with the answer or they don’t get the reward, although they still lend their computing power to the network.

Once a miner finds this answer, a transaction group (or block) is added to the general ledger. The miner who solves the equation is rewarded with Bitcoin and all fees for the transactions which are added to the blockchain ledger. Then the whole process starts over again until someone finds the solution to the next equation so that the next block can be added.

What is a mining platform?

Graphic card

Nvidia GeForce RTX 3070 Founders Edition

A typical platform will include all the components of a PC: motherboard, CPU, GPU, RAM, storage, and power. As mining has evolved, people have created more complex setups and specialized equipment designed to maximize processing capacity. The early miners used their personal computers with only the processing power of a processor at their disposal.

However, since it can take a long time to mine a single unit of Bitcoin, miners have had to upgrade over the years. This means multiple high-end graphics cards, grouped together to handle more equations at a time. In turn, this requires more power, better cooling, and a way to remove all that heat, which often increases the price of mining. The increased demand for graphics cards among miners contributed to their increased scarcity during the COVID-19 pandemic and the ensuing price hike in the aftermarket.

Another option that has become popular is to invest in preconfigured mining hardware, such as an application specific integrated circuit (ASIC) miner. They are essentially banks of microprocessors with a cooling system. People also team up to form mining pools that combine their processing power and then split the rewards for the blocks they mine.

What is a hash rate?

hash rate


The system-generated questions that Bitcoin miners answer are called “proof of work” equations. In order to answer the question correctly, miners must produce the correct 64-digit hexadecimal number to solve it. The first miner to correctly guess a number, or hash, equal to or less than the target’s value gets the reward for that block. Of course, if a miner wants to make any money, they must have a platform that can calculate the hash before anyone else. This is where the hash rate comes in.

The difficulty in solving each new proof of work problem comes not from the equation itself, but from the number of possible answers a machine has to solve to guess the correct hash. This constant computation requires immense amounts of energy and power, especially in the case of mining farms that use 24-hour mining rig banks to mine new Bitcoins.

Essentially, a hash rate is the number of guesses per second that your platform can handle. Depending on the processing power of a person’s mining equipment, they are able to calculate the responses to a certain hash rate, which can range from megahages per second (MH / s) to gigahashes per second (GH / s) , all up to terahashes per second (TH / s).

How Much Money Can You Make By Mining Bitcoin?

bitcoin value

(Source: Google)

Considering the complexity of the operation, you might be wondering how miners can even make a profit. Bitcoin was designed to become more difficult to mine as more and more people join. The reward rate is also halved for every 210,000 blocks added to the blockchain. This is on average about every four years.

Bitcoin also has a limited supply; only 21 million units will ever exist. As of this writing, over 18 million units have been minted so far. Due to the decrease in the reward and the increase in the difficulty level, it will still have to wait around 2140 to hit the entire Bitcoin stock.

Despite the challenges, miners still see it as a worthwhile investment. As of November 2021, the reward for mining a block is 6.25 bitcoins. And at the time of this writing, a single unit of Bitcoin equals over $ 50,000, so we’re looking at a return of almost $ 400,000 for a block, depending on today’s conversion rate.

Having said that, it is still quite difficult to make a profit. Between the costs of energy, the price of specialized mining platforms and the volatility of Bitcoin, there is a significant barrier to entry into the current market.

Why is mining necessary?



Since Bitcoin is still a form of currency, you need to exchange labor for payment. Bitcoin mining serves this purpose, but it also helps alleviate some issues unique to digital currency. For example, you cannot give someone the same $ 5 bill more than once, or continue to debit the same amount from your checking account an infinite number of times. Either you are physically out of money or the bank won’t let you withdraw more than what it saved.

Bitcoin mining not only adds new currencies to the pool, it also verifies transactions that have already taken place using the blockchain’s decentralized ledger. If there was no ledger for cryptocurrency, people could illegally spend the same amount multiple times, known as double spending, with no way of knowing if they actually had the money. currency to save their transactions. It was a common scam in the early days of Bitcoin.

And because Bitcoin uses blockchain instead of conventional banking, there has to be a way to keep track of transactions without allowing a person to tamper with or hide them. This is why it is so important to have multiple copies of the ledger at the same time. Solving proof-of-work equations makes it possible to verify transactions on the blockchain by adding them to the record.

Whenever the blockchain is updated, the entire ledger is updated for everyone on the network, so all miners will always have the most recent version of the ledger. This helps maintain the integrity of the general ledger and eliminate discrepancies.

What is the environmental cost of mining crypto?

energy consumption

(Source: Digiconomist)

While many have flocked to crypto mining as a means of generating income, the process has become expensive and time consuming. Since so many people are now involved in mining new parts, it also takes a lot more computing power to mine a block than in the past.

According to Digiconomist, a single Bitcoin transaction takes 1,544 kWh, which equates to 53 days of electricity for the average American household. Add up all the transactions that are happening across the world, and the energy cost of mining crypto is believed to be higher than some countries. This has led Tesla to stop accepting Bitcoin as a form of payment, Malaysian authorities to publicly destroy mining rigs, and China to ban all mining and trading outright.

Crypto mining certainly has its problems, but it also has a purpose. It creates new currency units and maintains the integrity of the blockchain ledger, which helps prevent illicit transactions. Whether this target justifies the environmental cost is debated. As efforts are made to make mining more environmentally friendly, other digital currencies, such as Ethereum, are planning to wipe out the mining process altogether.

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Maria D. Ervin