How does Bitcoin mining work?

When Bitcoin (CRYPTO: BTC) was launched in 2009, it introduced the concept of Bitcoin mining. Miners are responsible for confirming transactions and creating new coins; they receive bitcoin rewards for their efforts.

Considering the value of Bitcoin, getting it as a reward is a tempting proposition. There is no doubt that most of us have at least briefly considered Bitcoin mining after first hearing about it. However, when you dig a little deeper, you find it’s not as great as it sounds. In this guide, we’ll explain exactly how it works and whether Bitcoin mining is worth it in 2022.

Image source: Getty Images.

What is Bitcoin Mining?

Bitcoin mining is the process of validating Bitcoin transactions and minting new coins. Since Bitcoin is decentralized, there is no central authority that manages transactions or issues coins as there is with government-backed currencies. Bitcoin miners, who can be anyone, handle this instead.

To record transactions, Bitcoin uses a blockchain, a public ledger that contains all Bitcoin transactions. Miners verify each block and once they confirm it, they add it to the blockchain.

For helping to maintain network security, miners earn Bitcoin rewards when they add blocks. Rewards are paid using transaction fees and through the creation of new Bitcoins. However, there is a fixed maximum supply of 21 million Bitcoins. Once this number is in circulation, the rewards will be fully paid using transaction fees.

How Bitcoin Mining Works

The Bitcoin mining process always starts with a block that contains a group of transactions. Transactions have already undergone an initial security check by the network to verify that the sender has enough Bitcoin and has provided the correct wallet key.

Here’s what’s happening next to mine of a block:

  • The network creates a hash (a string of characters) for the block of transactions. Bitcoin uses an algorithm called SHA-256 to do this, and it always generates hashes with 64 characters.
  • Bitcoin miners are starting to generate hashes using mining software. The goal is to generate the target hash – one that is less than or equal to the block hash.
  • The first miner to generate the target hash can attach the block to their copy of the Bitcoin blockchain.
  • Other Bitcoin miners and security nodes verify that the block is correct. If so, the block is added to the official Bitcoin blockchain.
  • The Bitcoin miner then receives block rewards. Blocks offer a fixed amount of Bitcoin as a reward; the amount is halved for every 210,000 blocks mined (this is called Bitcoin halving).

This system used by Bitcoin is called proof-of-work because miners have to prove that they spent computing power during the mining process. They do this when providing the target hash.

One important thing to know about Bitcoin mining is that the network varies the difficulty to maintain an output of one block every 10 minutes. As more miners join, or they start using mining rigs with more processing power, the mining difficulty increases.

Types of cryptocurrency mining

There are several types of cryptocurrency mining depending on the method you choose. Here are the most popular ways to mine Bitcoin.

ASIC mining

An application-specific integrated circuit (ASIC) is a specialized device designed for a single purpose, and ASIC miners are designed to mine a specific cryptocurrency. This is the most powerful option for mining Bitcoin. New ASICs can cost thousands of dollars, but they are also the only type of device where you can potentially profit from Bitcoin mining.

GPU mining

GPU mining uses one or more graphics cards to mine crypto. A typical “mining rig” is a computer with one or more high-end graphics cards. This type of mining is expensive upfront because you have to buy the graphics cards. Although popular for mining other types of cryptocurrency, it does not work well for Bitcoin due to lack of power compared to ASICs.

CPU exploitation

CPU mining uses the central processing unit of a computer. It’s the most accessible way to mine crypto because all you need is a computer, and it worked in the early days of Bitcoin. It is no longer recommended for Bitcoin mining as the CPUs do not have enough processing power to compete with ASICs.

Cloud operation

Cloud mining involves paying a company to mine crypto for you. Instead of setting up your own mining device, you rent one and receive the profits after maintenance and electricity costs have been deducted. While it might seem like a good deal at a glance, cloud mining normally requires committing to a contract, and if crypto prices drop, you’re unlikely to break even.

Mining pools

A mining pool is a group of crypto miners who pool their resources and share rewards. By working together, miners are much more likely to have the chance to mine new blocks. With Bitcoin mining, it is very difficult to mine blocks if you are operating solo. Each mining pool has its own hardware requirements, with most requiring you to have an ASIC miner or a GPU.

Is Bitcoin mining profitable?

Bitcoin mining is generally no longer profitable for individuals due to the costs involved and the competition.

Here are the main factors that determine how much you can earn mining Bitcoin:

  • Mining rig cost: Quality ASICs range from around $1,000 to over $15,000.
  • Hash rate: The hashes per second that the mining device can generate. The higher it is, the more you earn. This is expressed in terahashes per second (TH/s), or how many billions of hashes the device generates per second.
  • Efficiency: The amount of energy required by a mining device. This is expressed in watts per terahash (W/TH), or the number of watts the device needs to generate one trillion hashes.
  • Electricity costs: The price you pay for electricity. The only way to make money mining Bitcoin is with cheap electricity.
  • Bitcoin price: Bitcoin is extremely volatile and the amount you earn will rise or fall with its price movements.

Fortunately, you don’t have to do the math yourself. Many mining profitability calculators are available. Plug in how much you pay for electricity, and the calculator will tell you how much passive income you can expect to earn per day, per month, and per year.

Divide the earnings by the cost of the mining rig to find out how long it will take before you make a profit. In most cases it is more than a year and often more than two. Keep in mind that it might end up taking even longer due to the increased mining difficulty.

The other problem is that mining devices have a limited lifespan. With proper maintenance and care, three to five years is average, but they are often obsolete after three years.

To sum up, Bitcoin mining offers very limited profitability at best and requires a large initial financial commitment. It makes more sense to learn how to invest in cryptocurrency and invest that money in buying coins.

How to Start Bitcoin Mining

Here is a quick guide on how to start mining Bitcoin:

  1. Buy an ASIC miner. You can find them at many online retailers, including Amazon (NASDAQ:AMZN), eBay (NASDAQ:EBAY)and new egg (NASDAQ:NEGG).
  2. Choose a location to configure your ASIC. Miners generate quite a bit of heat, so there needs to be an area with good air circulation. You will also need a 220V outlet.
  3. Set up a crypto wallet to securely store cryptocurrency. There are free crypto wallets you can download, as well as hardware wallets that offer more security and usually cost between $50 and $150.
  4. Join a mining pool. Due to the current difficulty of Bitcoin mining, being part of a mining pool is a must.

As stated earlier, there are different ways to mine Bitcoin, and the process is different depending on which one you choose. The best way to have a reasonable chance of making a profit is to use an ASIC and a mining pool.

Understanding the Risks of Bitcoin Mining

The biggest risk of Bitcoin mining is that you won’t get your start-up costs back. ASIC miners aren’t cheap, and those with enough processing power normally cost at least $1,000. Although you may find cheaper options, remember that paying less also means earning less.

It is possible to get your money back and possibly profit, but mining revenues are far from stable. If the Bitcoin price goes down, so does your income. And an increase in mining difficulty can reduce profits.

While would-be miners often focus on profitability, there is also the security aspect to consider. Bitcoin mining uses a significant amount of electricity. It’s notoriously bad for the environment, and it can be a safety hazard if you’re not careful.

Mining devices can damage your home’s electrical system or overload the power grid. Fires have also been reported in poorly designed mining farms without adequate cooling.

Is Bitcoin Mining Worth It?

If you analyze the numbers, you will most likely find that Bitcoin mining is not worth it for you. It usually takes at least a year, and potentially more than two years, before you break even on the cost of your mining rig. This assumes that you are not experiencing any issues such as issues with your power grid or the Bitcoin price crashing.

You better buy Bitcoin with the money you planned to invest in mining. If the price increases, you will increase your investment, which would not be the case if you were still waiting to recover the cost of a miner. You can also consider different types of crypto investments. Here are some options available on the stock market:

Alternatively, you can invest in cryptocurrencies directly by buying them on cryptocurrency exchanges. There are many investment options available, so just choose the one that suits you best.

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