What Is Bitcoin Mining and How It Works

How to mine Bitcoin is a common question among individuals looking to enter the world of cryptocurrency mining. With the rising difficulty levels and associated costs, understanding the profitability and legality of Bitcoin mining is crucial. This article will provide comprehensive answers to your burning questions about Bitcoin mining. Discover the necessary steps to get started, weigh the potential profitability, and gain clarity on the legal aspects of this mining process. Get ready to delve into the Bitcoin mining world and make informed decisions regarding its viability.

What Is Bitcoin Mining?

Bitcoin mining is digitally validating Bitcoin transactions and adding them to the blockchain ledger. The process involves verification of new transactions against the Bitcoin network, resulting in the generation of new bitcoins.

It is achieved by solving complex cryptographic hash puzzles to verify blocks of transactions added onto the distributed blockchain ledger.

Many computing power and complex equipment are needed to solve these puzzles. Miners are rewarded with Bitcoin, released into circulation hence the term Bitcoin mining.

What Is Blockchain?

Blockchain is Bitcoin’s underlying technology. It is a public distributed ledger with transactions chronologically recorded. Additional records or transactions on the blockchain cannot be modified or altered, keeping transactions safe from hacking. A block, the smallest blockchain unit, holds all the transaction details. A block consists of four primary attributes:

• Previous hash: Stores the last block’s hash value, linking the blocks to one another.
• Data: an aggregate of transactions on a block. It is a set of transactions mined, validated and stored in the block.
• Nonce: Bitcoin uses a “proof of work” consensus algorithm, in which the nonce refers to a random value varying the hash value output. Every block generates a hash value, and the nonce is the parameter generating that hash value. 
• Hash: This is the digital signature of the block and is obtained by passing the previous hash value, the data and the nonce through the SHA-256 algorithm, a cryptographic hash algorithm that creates a unique 256-bit alphanumeric hash value for every input. Every input will always have a 256-bit hash.

3 Concepts of Blockchain

Understanding the three key concepts of blockchain is critical in understanding bitcoin mining:

Public distributed ledger

This is a record of all transactions on the blockchain network worldwide. Validation of transactions is done on the network by bitcoin users.

SHA-256: 

Blocks are kept secure, and unauthorized access is guaranteed using a hash function called SHA-256. The hash value cannot be altered once generated as a digital signature. 

Proof of work: 

In mining, transactions are validated by solving a complex puzzle: proof of work. The primary objective is to determine the nonce value; the puzzle miners must solve to generate a hash that is less than the target defined by the network for a particular block.

How Bitcoin Mining Works

Blockchain is a highly secure and transparent decentralized peer-to-peer network. Records in the blockchain are securely kept through timestamps and cryptographic functions, making it almost impossible to make alterations.

Mining Requirements 

A miner will first select his tools and equipment and set them up. They include:

• Hardware – GPU, a graphics processing unit, crypto mining SSD, or ASIC, an application-specific integrated circuit.
• Mining software 
• A wallet 
• Choose a Preferred mining pool where the miner opts for pool mining instead of solo mining. 

After set up and the system fired up, the mining process is performed autonomously. Additional human involvement is only in system failure, power outages, or regular system maintenance. 

Elements of a Bitcoin Transaction 

Three elements are involved in Bitcoin transactions:

• A transaction input
• A transaction output 
• The transaction amount 

A bitcoin mining software will generate a unique cryptographic hash puzzle for every transaction input. The number of transactions required to form a block is then grouped into a Merkle tree. 

The Merkle Tree and the SHA-256 Algorithm

A Merkle tree is a data structure that summarises all the transactions in a block. It allows efficient verification of transactions in the bitcoin network. In the Merkle tree, individual transaction IDs are paired repeatedly using the SHA-256 algorithm until only one hash. The Merkle root identifies the entire tree. 

The Block Header 

The Merkle root, a unique identifier of a Merkle tree, is stored in the block header. The block header stores information about the block and has the following components: 

• The version number of the bitcoin software
• The hash of the previous block 
• The Merkle root (root hash) 
• Timestamp 
• Cryptographic nonce 
• The target 

This information is critical in solving the hash puzzle and adding a block transaction. 

Solving the Hash Puzzle 

Miners solve the hash puzzle by finding the hash below a given target through the difficulty requirement. The target, expressed as a 67-digit number, determines the difficulty depending on the number of miners. This difficulty adjusts at every 2016 block created, depending on the time taken in the previous 2016 blocks to solve the puzzle.  

Miners calculate the hash of a block by adding a nonce to the block header until the hash value yielded is less than the target. Once the puzzle is successfully solved, a new block is created and validated in the Bitcoin network, and the transactions bundled in it are verified, and the block is added to the chain. 

The first miner to get the correct hash value earns a reward in Bitcoin, allowing more Bitcoins in circulation.

How to Start Mining Bitcoin

Bitcoin mining is quite tasking and an expensive venture. However, the right equipment and background knowledge can take a shot. The following are essential steps to consider:

Choice of Bitcoin Mining Hardware

Choosing the proper hardware is essential. To earn a profit, it’s best to use optimized mining hardware, such as a Graphics Processing Unit (GPU) or Application-Specific Integrated Circuit (ASIC) miner. Other minimum requirements include a high-speed internet connection of at least 50 kilobytes per second, with no data restrictions. 

Decide Between Solo and Pooled Mining

Solo mining is less likely to be consistently profitable. Many individuals will therefore join a mining pool for more predictable crypto rewards.

Install and Configure Bitcoin Mining Software

Depending on the choice of hardware, operating system, and other factors, there is a wide range of mining applications. 

Begin Mining for Bitcoin

On the complete configuration of the rig, mining commences. To be functionally successful, mining rigs must run for at least six hours daily. However, a longer running time increases the likelihood of earning rewards from mining.

Monitor and Fine Tune Your Mining Rig

Monitoring the rig’s performance and power usage is essential to ensure efficient running and profitability. Minor configuration changes might improve earnings.

Risks and Limitations of Bitcoin Mining

Power Usage

The bitcoin network consumes vast amounts of energy. As of June 2022, the Bitcoin network’s annual electricity consumption was 91.6 TWh. This consumption is higher than that of countries such as Belgium and the Philippines and a little less than the Netherlands and Argentina.

Bandwidth Use

Bitcoin mining involves constantly downloading and uploading data. Bitcoin mining works best on an unmetered, unlimited internet connection. For a metered connection, one could use more data than is allowed causing disconnection or incurring additional charges.

Hardware Damage

Bitcoin mining is highly intense and requires proper and careful installation and configuration. There is no cause for worry about hardware damage beyond normal wear and tear on the correct system set-up. Faulty hardware or ventilation can overheat and damage machines. 

Bitcoin Supply and Reward Constraints

The halving of the number of bitcoins created per block occurs every year. Bitcoin has a limited supply of 21 million, and no creation of new bitcoins happens once minted. Bitcoin miners will therefore profit only from transaction fees.

Initially, the reward for successfully mining was 50 bitcoins. Following the initial halving in 2012, mining rewards came down to 25 bitcoins. Halving has happened twice since 2012, and the current bonus is 6.25 BTC. The next halving is in 2024.

The Bottom Line

Bitcoin “mining” is critical in validating and confirming new transactions to the blockchain and preventing bad actors’ double-spending. It is also a way of introducing new bitcoins into the system. Proof of work (PoW) is energy-intensive. Still, this energy is embodied in the value of bitcoins and the Bitcoin system and keeps this decentralised system stable, secure, and trustworthy.