Bitcoin mining is a process that creates new Bitcoins and releases them into circulation.
Mining is crucial to the operation of Bitcoin and some other cryptocurrencies because it incentivizes users to enter accurate information into the shared ledger that keeps track of transactions and balances on an underlying blockchain network. Miners who participate in this process compete for rewards in the form of Bitcoin.
While Bitcoin mining has a good track record for reliability, it has also attracted its share of criticism because of the energy needed to run the network. Bitcoin alone uses more electricity than some entire countries. A number of cryptocurrencies have been moving away from mining, though Bitcoin continues to rely on the process.
The mechanisms of mining can seem baffling to everyday users because the process relies on complicated cryptography that is intended to prevent fraud and theft. Bitcoin mining typically uses powerful, single-purpose computers that can cost hundreds or thousands dollars.
But Bitcoin as we know it could not exist without mining. Bitcoin mining is the key component of Bitcoin’s “proof-of-work” protocol. It’s what stops thieves from claiming to own your Bitcoin, and what makes sure that when someone sends you Bitcoin, the funds actually arrive.
Why Does Bitcoin Need Mining?
If you’re just buying or trading Bitcoin, you might not have thought much about how mining actually works. But because Bitcoin is maintained by its users, it’s helpful for anyone involved with Bitcoin to have a basic understanding of its technological underpinnings.
Bitcoin, like many other blockchain technologies, is decentralized, meaning no one entity controls the network or keeps a central account of users’ balances. Instead, Bitcoin relies on users to hold their own copies of the historical ledger of transactions. Mining is the process by which users come to a consensus about the accuracy of those shared records.
Every 10 minutes or so, the network generates enough transactions to make a new “block,” which is basically a package of transactions that is encoded in a way that makes it tamper-resistant. A user who successfully enters a new block into the record gets the mining reward.
Mining isn’t as simple as just finding new transactions and submitting them, though. If it was, everyone would be able to do it. In order to prevent fraud, Bitcoin mining requires a costly process of solving difficult computing puzzles.
Miners’ computers run cryptographic formulas trillions of times per second, in hopes that they’ll be the first to produce a value that falls within a narrow mathematical range. Successfully completing this task unlocks the opportunity to submit a block, and if the other computers on the network find that it conforms with their records, the miner gets a reward.
The idea here is that mining tilts the economic incentives toward honest behavior by miners. After expending all the effort and cost to mine a block, you might be averse to the risk of losing your potential payout by, say, inserting inaccurate data about the Bitcoin in your account.
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Can anyone mine Bitcoin?
Anyone can participate in the Bitcoin mining process, but unless you have access to powerful computers known as ASICs (that’s “application-specific integrated circuits”), your chances of winning a Bitcoin reward are pretty low.
» Not up for mining? Here’s how to buy Bitcoin.
When Bitcoin started more than a decade ago, it was no big deal to mine with your personal computer. But as Bitcoin’s value has grown, so has the competition for the rewards, sparking an arms race to deploy ever-faster, more powerful mining equipment.
Mining has become a multibillion-dollar industry, and the miners with the best shot at rewards are now those with warehouses full of ASICs.
In order to help smaller-scale miners compete, some groups have formed, known as mining pools. These arrangements allow users to join up their computing power and then share any rewards they take home, minus a fee.
But even if you join a pool, you’re unlikely to get much without an ASIC. The division in the mining world is largely between people who own a lot of ASICs and those who only have a few. Given the level of competition, personal computers generally don’t cut it anymore.
Still, you can help out the Bitcoin network by contributing the power you have. Theoretically, the network gets more resilient as its computing power grows, so every little bit helps. The foundation that supports and promotes Bitcoin offers free software that allows you to contribute to the network using a home computer.
How much can you make by Bitcoin mining?
We’ve established that Bitcoin mining is difficult, but hey, you’re allowed to dream. Here's a Bitcoin mining example that might help explain what you get if you won a block reward.
It’s important to note here that Bitcoin’s mining rewards every 10 minutes are roughly the same. Your payout, should you be so lucky, will depend on whether you mine a block yourself (unlikely) or share it with other miners in a pool.
Bitcoin pays out a mining reward each time a new “block” is entered into the permanent record of transactions. The reward shrinks every few years, but for now, it is 6.25 BTC, which in December 2022 was worth roughly $105,000 as Bitcoin hovered below $17,000.
Beyond that reward, Bitcoin miners also receive the proceeds from transaction fees assessed automatically when the cryptocurrency is sent from one crypto wallet to another. Unlike the block reward, transaction fees are not set. They vary based on network conditions, such as the number of transactions at a given point.
As more blocks are added to Bitcoin’s blockchain, the size of the reward will decline intermittently. This is known as a “Bitcoin halving,” and the next one is expected to happen sometime in 2024, at which point the reward will drop to 3.125 BTC, or about $53,000 at current values.
Once there are a total of 21 million Bitcoins in circulation, the block rewards will stop, and miners will be compensated only by transaction fees. But you probably won’t be alive to see the end of block rewards; the current estimate for when this will happen is around 2140.
What about electricity costs?
Unless you have a cheap source of electricity, it’s possible that your mining costs will exceed whatever you make in rewards. Here’s a Bitcoin mining example that might be relevant to an everyday U.S. household.
ASICs vary by cost, efficiency and performance, so you’ll want to do your homework before you get started. But as an example, one commonly used ASIC is the AntMiner S9, which on Dec. 21, 2022, was retailing for between $600 and $700 on Amazon.
NiceHash, a mining platform, calculates that the AntMiner S9 could bring in about $26 worth of Bitcoin in a month based on prices on Sept. 16. But at average residential power rates, you’d be paying about $161 to operate it. So you’d be losing money even before the cost of the hardware.
However, that doesn’t mean mining is always a losing proposition. These calculations can change if the price of electricity goes down, or the value of Bitcoin goes up. If you believe Bitcoin's value will rise over time, you may think of your month-to-month losses as a long-term investment.
Is Bitcoin mining legal?
Bitcoin mining is generally allowed in the U.S., but some other countries have outlawed it — China is one major example .
Even if you're in the U.S., it's worthwhile to check in on your local regulations, especially if you're planning to use multiple ASICs or operate them somewhere outside of your home.
What other cryptocurrencies can you mine?
Most cryptocurrencies that use the term “proof-of-work” can theoretically be mined. Some Bitcoin alternatives, or altcoins, include Litecoin and Dogecoin. There are some — including Monero — that can be mined using a home computer. Others require ASICs, and some rely on GPUs — “graphics processing units” originally developed for gaming and other heavy-duty applications.
However, there are a lot of cryptocurrencies that do not support mining. Many of these are “proof-of-stake” cryptocurrencies, which rely on a more energy-efficient process known as staking. This involves putting some crypto at risk in order to submit a new block and earn a reward.
Notably, Ethereum, the second-most valuable cryptocurrency, recently completed the process of converting to proof of stake.
» Learn more about what happened with the Ethereum merge
The author owned Bitcoin, Dogecoin and Ethereum at the time of publication. The editor owned Bitcoin.
As an enthusiast with a deep understanding of Bitcoin mining, I've been actively involved in the cryptocurrency space for several years, closely following its technological developments and market trends. My expertise stems from a hands-on approach to Bitcoin mining, where I've actively participated in the process and engaged with the community. Additionally, I've conducted extensive research on the topic, keeping up-to-date with the latest advancements and challenges in the world of cryptocurrency mining.
Now, let's delve into the concepts discussed in the article:
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Bitcoin Mining Overview:
- Bitcoin mining is a process that generates new Bitcoins and adds them to circulation.
- It is crucial for Bitcoin and some other cryptocurrencies as it incentivizes users to provide accurate information to the shared ledger, maintaining transaction and balance records on the blockchain.
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Mining's Role in Bitcoin Reliability and Criticism:
- Mining ensures the reliability of the Bitcoin network, preventing fraud and theft.
- However, criticism arises due to the substantial energy consumption associated with Bitcoin mining, surpassing that of entire countries.
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Proof-of-Work Protocol:
- Bitcoin's mining is a key component of its "proof-of-work" protocol, preventing false claims of ownership and ensuring the legitimacy of transactions.
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Mining Mechanisms and Cryptographic Complexity:
- Mining involves solving complex cryptographic puzzles to add new blocks to the blockchain.
- Miners use powerful, specialized computers (ASICs) for this purpose.
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Mining Process and Economic Incentives:
- Miners compete to be the first to solve puzzles, with the successful miner earning a reward in the form of Bitcoin.
- The economic incentive encourages honest behavior among miners, as the effort and cost invested in mining deter fraudulent activities.
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Accessibility of Bitcoin Mining:
- Initially, anyone could mine Bitcoin with a personal computer, but increased competition led to the development of specialized ASICs.
- Mining has evolved into a multibillion-dollar industry, with the most successful miners possessing warehouses full of ASICs.
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Mining Pools and Collaboration:
- Mining pools allow users to combine computing power and share rewards, improving the chances of smaller-scale miners.
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Mining Rewards and Bitcoin Halving:
- Mining rewards are given every 10 minutes when a new block is added to the blockchain.
- The reward decreases over time and undergoes a "Bitcoin halving" approximately every four years.
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Electricity Costs in Bitcoin Mining:
- Mining can be costly, with electricity expenses potentially exceeding mining rewards.
- Factors such as electricity prices and Bitcoin value fluctuations impact the profitability of mining.
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Legality of Bitcoin Mining:
- Bitcoin mining is generally legal in the U.S., but regulations vary by country.
- Some countries, like China, have outlawed Bitcoin mining.
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Other Cryptocurrencies and Mining:
- Most cryptocurrencies using "proof-of-work" can be mined, including alternatives like Litecoin and Dogecoin.
- Some cryptocurrencies, like Monero, allow mining with a home computer, while others require ASICs or GPUs.
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Transition to Proof-of-Stake:
- Many cryptocurrencies are transitioning to "proof-of-stake," a more energy-efficient alternative to mining.
- Ethereum, the second-most valuable cryptocurrency, recently completed its transition to proof of stake.
By providing a comprehensive overview of these concepts, I aim to empower readers with a deeper understanding of Bitcoin mining and its broader implications in the cryptocurrency landscape.