How Bitcoin Mining Works and Other Essential Questions
Bitcoin, mining, crypto, blockchains, ASIC, and seed number. These are just a few of the words you will have come across if you’ve had anything to do with the Bitcoin or mining process and communities.
However, you’d be forgiven for not understanding the meaning of all these words and others like them. If you’re a noob or just want to double-check your Bitcoin and crypto knowledge then you’ve come to the right place.
Below, we’ve outlined all the answers to the most important questions. Offering explanations to all things BTC and, more specifically, mining. You’ll learn all you need to and leave here with valuable knowledge and an increased love for the world’s most famous crypto. Let’s get started!
What Is Bitcoin Mining?
One of the most frequently asked questions is hands down, “What is Bitcoin mining?”, so what better question to cover first.
For new bitcoin to enter into circulation, they must be mined. Mining also enables new transactions to be confirmed by the network, as well as being a key part of the development and maintenance of the blockchain ledger.
The action of mining is carried out via means of the miner (you) using sophisticated and powerful hardware which can solve incredibly complicated math problems. The first computer to solve the problem validates the block and collects the reward - the bitcoin.
This process then repeats itself over and over again. Roughly 900 bitcoin are currently mined each day, although this will become less as the years go by.
Mining for BTC is slow, expensive, and it isn’t guaranteed to be rewarding for you. For example, if you mine alone rather than as part of a mining pool and you use less powerful hardware, it could take years and years for you to mine just one block. It could even take years and you mine zero blocks.
However, despite the time, the costs, and the unguaranteed results, mining is popular, to say the least. Especially among those who do have the right resources, are happy to join a mining pool, or are thrilled by a challenge.
Usually, before someone starts mining alone or as part of a team, they rightfully take the time to investigate all they need to and learn what to expect. And we’re here to help you do just that. We can help you decide if mining is the right path for you.
Important Points to Takeaway
- If you mine BTC, you don’t have to pay for it like you would if you purchased the crypto from another investor - although you do have the pay for the hardware involved
- Blocks of bitcoin are added to the blockchain. The miner receives the bitcoin inside the block once the block has been validated
- The block is validated once the complex mathematical puzzle has been solved by your computer. The first with the solution then wins. The more mining power you have on your network, the more likely you are to be the winner.
- To be able to mine, you’ll need to set up a mining rig of your own - ASIC (application-specific integrated circuit) or a GPU (graphics processing unit)
- If you can’t get access to your own mining rig or prefer to not mine alone, paying a small fee to join a mining pool where you can reap rewards along with the others in your pool is the best option
Money Motivates
Unsurprisingly, the main reason why miners invest time and money into mining is that they want to be rewarded with bitcoin. As of November 10, 2021, one BTC is valued at nearly $70,000 - who wouldn’t want the chance of owning something so valuable?
However, mining the currency yourself isn’t the only way you can get a hold of it. If you want to cut out the middleman and go straight to owning “x” amount of BTC because you think it is a good investment then you can buy it using fiat currency, or you can exchange other cryptos if you find an interested seller.
For example, the platform Bitstamp enables users to exchange different cryptocurrencies so you can use your NEO or Ethererum to buy Bitcoin directly.
Alternatively, if none of these options are for you and you’re looking for a way to earn BTC rather than buy it then you also have a few options at your disposal. As the world becomes more accustomed to the idea of buying and selling tangible or digital goods using crypto, more companies are willing to pay in Bitcoin also.
You can find companies that want blog writers, or online shoppers that will now pay in cryptocurrencies. This is the easiest and only way to currently get your hands on some bitcoin without having any initial upfront costs.
Mining and New Bitcoin Circulation
As well as making people rich and promoting the advantages of having an “unregulated” digital currency, mining is also the only way that new bitcoin can enter circulation.
- In total, there are 21 million bitcoin that can ever exist. As of November 2021:
- 18,869,393.75 have been mined
- This accounts for 89.854% of the total 21 million
- With 2,130,606.3 left to be mined before the magic 21 million is reached and no new BTC can enter circulation
- The final coin is estimated to be mined in the year 2140
Mining is the only way to release the remaining BTC. It is akin to miners minting the bitcoin themselves. If everyone stopped mining right now, the remaining 2,130,606.3 BTC would stay where they were waiting to be released. The ones already mined could be used, sold, bought, exchanged, etc, but without a miner, the rest will be unusable.
You can keep track of how many have been mined and how many are remaining here.
What Are Mining Pools?
So, as we’ve learned, the miner who finds the solution to the mathematical puzzle first, gets the reward. And the probability of you being the one to find the solution first is equal to the amount of the mining power that is on the network in total.
Therefore, anyone who is mining but has a small percentage of mining power has only a little chance of being able to solve the puzzle and mine the block.
For example, you could buy a mining card for, let’s say, a couple of thousand dollars but this would actually represent less than 0.001% of the total mining power on the network. Meaning you’ve paid a relatively high amount of money ($2,000 isn’t small change, after all), and stand very little chance of ever mining a single block. It could take years.
And what’s more, as time goes on, the algorithm difficulty increases rendering the mining power even weaker. The money you invest could end up going to waste altogether.
The answer to this problem is mining pools.
Mining pools are owned and operated by a third party. They essentially allow miners to buy into a syndicate. The third-party will own vast amounts of rigs and have huge amounts of mining power on the network. Plus, the more people in the group or the more money that the members of the group invest, the more mining power there will be on the network still.
Think of it like a lottery syndicate at work. If you buy ten scratch cards, you’ll most likely go home empty-handed. However, if you and your colleagues pool your resources, you can buy hundreds or thousands of scratch cards and have a high chance of winning. You have to share the prizes but having a greater chance of winning as a team is a worthwhile trade.
In the same way, mining pools put their resources together, and the pool’s host will keep everything coordinated and organized while also offering the space for the rigs and the rigs themselves.
As well as having a better chance of success (and more frequent success) as part of a mining pool, you’ll also not have to worry so much about money. You don’t have to be a millionaire to join or have some kind of degree. You just need enough to pay your share of the rig and whatever the small transaction or hosting fee the third party has in place.
Mining pools are the perfect option for the inexperienced and the experienced. You’ll take out relative to what you put in so everyone is happy. Mining pools are a safer option for all.
The Downsides to Bitcoin Mining
Honestly, the downsides to mining bitcoin are minimal. There are obvious ones such as the fact that if mining BTC or other crypto is illegal in your country then it’s absolutely not worth the risk. Mining in a country where it is illegal is no small crime so it’s not even worth considering. Be sure to check what your country’s rules and regulations are before getting involved or investing any money.
Additionally, the other obvious downside is that you can’t guess your return of investment (ROI), even in a mining pool, you aren’t guaranteed to be making a certain amount of money each day or each month.
At the end of the day, it’s still an investment that takes a leap of faith, like all investments. Joining a pool will absolutely help mitigate your risk and your ROI will be higher but it can be frustrating not having a definite answer about what you can expect. But again, this is the same as all types of investments.
Now for a couple of less obvious downsides, the first one being is the increase in energy needed for the computers that are running the mining algorithms all day every day. Microchip efficiency has improved dramatically, especially with the ASIC microchips but the pace of the network growth is much faster than the technological process needed for the chips. This means that there are currently massive concerns about the amount of energy needed just to mine one BTC and what effect this is having on the environment. It takes roughly 191 tons of carbon just to mine a single bitcoin - is this sustainable?
Well, realistically, no it’s not. However, there are efforts in place to try and mitigate this high carbon footprint and use greener energy for the process. Solar energy or geothermal energy are both possible options being talked about right now so we will have to see what the future holds in this respect.
Is Bitcoin as Valid as Paper Money?
Bitcoin is classified as a “decentralized” currency. This is because it doesn’t rely on a government, a central bank, or any other central authority to regulate or control it. Due to this lack of control, world governments often speak unfavorably about the validity of crypto.
However, their opinion is… well, irrelevant. Bitcoin is as valid as paper money in the sense that if a service accepts it, you can use it. Some countries have banned crypto altogether such as China, Egypt, Turkey, and others. But where BTC is acceptable then yes, it is just as valid as paper notes.
Additionally, miners and investors constantly ensure its validity by legitimizing and monitoring Bitcoin transactions.
What Is Double Spending?
Having miners all over the world constantly auditing and verifying Bitcoin transactions is essential to preventing anyone from trying to defraud or scam other investors. It stops anyone from being able to “double-spend” and was put in place by Satoshi Nakamoto, Bitcoin's founder, for this very reason. So what is double-spending? Is it something to worry about?
Double spending is when a BTC owner spends the same bitcoin twice by tampering with the transaction record. As a digital currency, bitcoin has to potentially deal with fraud issues that paper money doesn’t experience.
For example, if you go to your local store to buy some groceries and hand the cashier a $50 bill, you cannot use that bill again. The store now has it and you’re not getting it back. You can’t pop next door and respend the money on something else.
However, double-spending means someone is trying to respend that money except they’re using digital currency to do it instead of a physical paper note. A BTC owner could make a copy of their digital coin and send the copy to the recipient while keeping hold of the original. (Of course, counterfeiting money is sometimes an issue but it’s not the same as being able to spend the same note twice).
How Miners Help Prevent Double-Spending
Bitcoin miners are like users all over the world checking the serial numbers of paper money to ensure that the same bill isn’t being used more than once. By validating transactions, they can know that a user hasn't tried to make a copy of the original and isn’t trying to spend or sell the digital copy.
Here, it’s important to note that, as per Satoshi Nakamoto’s process, only 1 MB of transaction data fits into a bitcoin block. This 1 MB has caused vocal and consistent controversy among many miners since they state if the block size could accommodate more data then transactions could be validated quicker and preventing double-spending would be even more effective.
Is Double Spending Something to Worry About?
On January 20, 2021, it was reported by various major news outlets and tech sites that double spending had occurred. Due to this “breach”, the following day, the value of BTC dropped by 15%. After all, who is going to want to invest and trust in a cryptocurrency that can be copied?
However, by the evening of the very same day, the value had started to stabilize back to its previous value as people started to realize that a double-spend hadn't actually happened. The news had been misreported and the following panic was all for nothing.
Immediately after this ripple, Insights wrote a fantastic breakdown of exactly what happened and why media outlets got it so wrong. The result was that the double-spend was just an illusion. Double spending is NOT something to worry about. In 12 years, not a single incident of double-spending has happened. Given the steps in place to prevent it, it’s incredibly unlikely it will ever actually be possible for anyone to pull off.
How Much Do Miners Earn?
While you may mine for years and not earn anything, we’re going to answer this question based on the hypothetical that a miner has indeed validated the blockchain and been rewarded with the bitcoin. In this situation, how much does the miner earn?
Well, the answer depends on two factors. The first is how many BTC is in the block. The number reduces by half roughly every four years. Back in 2009, if you mined one block you would be rewarded with 50 BTC (imagine that!). However, in 2012 this was halved to 25 BTC. And again, in 2016 this was halved to 12.5. Most recently, the halving happened in May 2020 and took the reward down to 6.25. The next halving is expected sometime in 2024.
This four-year halving happens to enable more people to have a share and make it more difficult for users to mine all 21 million.
So, now you know how many BTC you will get, it’s time to move on to the second point. Its value. Today, (November 10, 2021), BTC’s value is at $68,018.17. A current all-time high. So, the amount you, as a miner, will earn will depend on the time you mine and the market value.
Bitcoin and Bitcoin Mining FAQs
To finish off this guide, we’re going to quickly run through some of the most common FAQs surrounding Bitcoin and Bitcoin Mining. Check out these top questions and come away knowing more than you did before!
Am I Guaranteed to Get BTC from Mining?
Unfortunately, not. Mining is not a get-rich scheme where you can expect to become a millionaire by the end of the year. Like all investors, it carries risk and one of the biggest risks is walking away with nothing. Particularly if you are mining solo.
Since you need to be the first person to solve the complex math problem, and thousands of others around the world are doing the same each day, you’re not guaranteed to ever be the first to do so.
What Is Meant By Complex Math Problem?
Don’t worry - this isn’t like algebra class! First and foremost, your computer/mining rig will be doing all the work, you don’t have to actually solve the problem yourself.
Having said that, the complex problem is very… well, complex. Even for a computer.
The bitcoin is in a block, the block can only be validated once a miner arrives at a 64-digit hexadecimal number (a hash) that is equal to or less than the target hash. This means every computer is essentially working via guesswork to find the correct number.
While it is mostly random, the more computer power you have the faster your computer can input guesses and arrive at the correct number. Your hash rate should be as high as possible to be successful.
What Is a "64-Digit Hexadecimal Number"?
Oh, the magical 64-digit hexadecimal number. If you’ve done even just light reading about BTC, you should have some knowledge or at least have seen others mentioning this number.
First off, here is a random example of a 64-digit hexadecimal number:
000000000000000008g9246dnpp89e63278sbca782o1p863bxlk6ay42087ydn5
The number above has 64 digits. Perfectly simple so far. You’ll also notice that as well as being 64 digits, the “number” is actually a mix of both numbers and letters.
To fully understand what’s going on, you’ll first need to understand the meaning of the word hexadecimal. According to the brainiacs at Investopedia, the best way to explain the word hexadecimal and its origins go as follows.
“The decimal system uses as its base factors of 100 (e.g., 1% = 0.01). This, in turn, means that every digit of a multi-digit number has 100 possibilities, zero through ninety-nine. In computing, the decimal system is simplified to base 10, or zero through nine.
"Hexadecimal," on the other hand, means base 16, as "hex" is derived from the Greek word for six, and "deca" is derived from the Greek word for 10. In a hexadecimal system, each digit has 16 possibilities. But our numerical system only offers 10 ways of representing numbers (zero through nine). That's why you have to stick letters in, specifically letters a, b, c, d, e, and f.”
Important reminder - miners of BTC, don’t need to calculate the total value of the hash (the 64-digit hexadecimal number).
How Easy Is It for a Computer to Guess the 64-Digit Number?
Not as easy as you might think. And here’s why. So, to make this simple, let me start by giving you an analogy. Imagine you tell a couple of your friends that you are thinking of a number between 1 and 100, and they both have to guess. To win, they can both guess (as many times as needed) the exact number or guess a number that is less than your answer.
For example, if you’re thinking of the number 12 and friend A says 13, they are wrong as the number is higher. If friend B guesses the number 8, they win because they guessed lower than the answer. Now imagine that instead of a number between 1 and 100, it’s a 64-digit hexadecimal number. Suddenly, trying to randomly guess doesn’t seem so easy, even for a computer.
What Happens If Two Miners Solve the Equation At the Same Time?
Well, in the above analogy, both friends A and B can be right at the same time. Both just needed to guess the number 12 or below and they will both win. Additionally, one doesn’t get extra points if they are closer to 12, they both equally win.
However, while multiple simultaneous answers happen a lot when mining for Bitcoin, fortunately, in this situation, there will only be one winner. To determine which miner takes the BTC, the mining network will usually side with the miner who has verified the most transactions as they have been seen to have done more work.
This is the fairest way to deal with this problem.
Why Is It Called Mining?
Mining is simply used as a metaphor to better show how new bitcoin are released into circulation. Think of it like you are mining for gold in Sutter’s Mill, except you’re doing it digitally rather than physically.
Why Is Mining Necessary?
Anything that happens digitally is at greater risk of being copied, altered, stolen, or counterfeited. Mining is there to prevent this from happening, it’s a safety feature that benefits everyone. Since mining is so intensive both in terms of money and resources, it’s cheaper and easier for a potential hacker to legitimately mine bitcoin than try to copy or counterfeit it.
What Does “mining confirms transactions” Mean?
Mining has two purposes. The first is to introduce new Bitcoin into circulation. The second is to validate and confirm new transactions of the blockchain.
What does this mean? Well, because BTC is decentralized and not controlled or regulated by any central authority, there needs to be another way to validate the currency. This is where the miners come in. The process of mining achieves a decentralized consensus through proof-of-work (PoW).
Why Does Mining Crypto Require So Much Electricity?
There’s no denying that mining crypto nowadays requires a, sometimes eye-watering, amount of electricity. Early in BTC’s existence, users would run a simple program on their PC to mine. It was cheap and took very little electricity.
However, the network grew, public interest grew, and the algorithm became more difficult and required more powerful hardware. Thus this combination led to a massive demand for electricity.
More people than ever are mining, mining pools made up of hundreds of thousands of people are now popular, and the required rigs drain electricity like crazy as it keeps up with demand.
Is Bitcoin Mining Legal?
The answer will depend on your location. Some countries aren’t happy it exists but allow it nonetheless. Others have outright banned ownership. There are no universal laws or agreements as to whether it should be completely legalized or not.
As of September 2021, China announced all crypto transactions are now illegal. Likewise, BTC is also illegal in Bolivia, Indonesia, Turkey, and Egypt. However, previous countries have changed their laws in recent years to make BTC legal in their territories, so this list could become smaller still in the future.
Act Now with Mining Syndicate!
If you feel ready to start mining but don’t know where to begin then we’re here to point you in the right direction. While mining alone has its benefits - well, one benefit - you get to keep 100% of the mined bitcoin. There are plenty of downsides too. The cost of mining, the time, and the stress make mining solo not worth it.
When you are competing with mining pools that have the most computer power, it’s unlikely you’ll ever be able to make mining alone rewarding. For this reason, joining a mining pool is always the best way to be part of the action with little risk and high reward.
If you would like any more information about starting or expanding your Bitcoin horizon; reach out to us at Mining Syndicate. Our mission is simple: Strengthen the Bitcoin network by enabling small-scale miners to affordably purchase and reliably host miners.
As a small miner, Chris became frustrated by the lack of hosting options available for miners with under 100 units. As luck would have it, he found a 2.5MW mining facility for sale right down the road, and thus, Mining Syndicate was born. Facilities #2 and #3 are already in the works.
Why is Mining Syndicate so successful? Because we have a team of people who are just like you, eager to be a part of the future of mining. If you would like more information about how you can be a part of Mining Syndicate, how our facility works, or the products we sell, you can reach out to us:
We look forward to hearing from you, come join the team and be part of the future!