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August 2, 2022
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What is Bitcoin mining?

Bitcoin mining is the process for validating Bitcoin transactions and minting new coins. Since Bitcoin is decentralized, there’s no central authority managing transactions or issuing coins like 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 of Bitcoin’s transactions. Miners check each block, and, once they confirm it, they add it to the blockchain.

For helping to keep the network secure, miners earn Bitcoin rewards as they add blocks. The rewards are paid using transaction fees and through the creation of new Bitcoin. However, there is a fixed maximum supply of 21 million Bitcoins. Once that many are in circulation, rewards will be paid entirely using transaction fees.

How Bitcoin mining works

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

Here’s what occurs next to mine 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 start generating hashes using mining software. The goal is to generate the target hash– one that’s below or equal to the block’s hash.
  • The first miner to generate the target hash gets to attach the block to their copy of the Bitcoin blockchain.
  • Other miners and Bitcoin security nodes check 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 set amount of Bitcoin as a reward; the amount is cut in half for every 210,000 blocks that are mined (this is called Bitcoin halving).

This system Bitcoin uses is called proof of work because miners need to prove they expended computing power during the mining process. They do this when they provide 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. When more miners join, or they start using mining devices with more processing power, 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 built for one purpose, and ASIC miners are designed for mining a specific cryptocurrency. These are the most powerful option for Bitcoin mining. New ASICs can cost thousands of dollars, but they’re also the only type of device where you can potentially make a profit from Bitcoin mining.

GPU mining

GPU mining uses one or more graphics cards to mine crypto. A typical “mining rig” is a computer that has one or more high-end graphics cards. This kind of mining is costly up front because you need to buy the graphics cards. Although it’s popular for mining other types of cryptocurrency, it doesn’t work well for Bitcoin due to the lack of power compared to ASICs.

CPU mining

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

Cloud mining

Cloud mining involves paying a company to mine crypto for you. Instead of setting up your own mining device, you’re essentially renting one and receiving the profits after maintenance and electricity costs are deducted. While it may sound like a good deal at a glance, cloud mining normally requires committing to a contract, and, if crypto prices fall, 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 get the chance to mine new blocks. With Bitcoin mining, it’s very difficult to mine blocks if you’re operating solo. Each mining pool has its own hardware requirements, with most requiring you to have either an ASIC miner or a GPU.

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