How Does Bitcoin Mining Work?

Changelly explains all the details about the bitcoin mining pools work

Cryptocurrency mining can be both breathtaking and painstaking. Those miners, who share their success stories about incredible profits from the rewards, are spreading the idea of wealth through the mining process. However, there are a lot of pitfalls to avoid in mining to get closer to this success. Changelly has made a comprehensive guide on Bitcoin (primarily) and altcoins mining so you can meet a situation head-on! 

What Is Bitcoin Mining?

Bitcoin mining is a process of extracting the block and confirming transactions in the blockchain. Mining is a complicated process; that’s true. However, it attracts users because of its reward system. The network forms a block with built-in cryptographic protection, which functions without a single settlement center and a controlling institution. 

The network’s basis is an infrastructure of thousands of independent nodes (servers or separate personal computers with the appropriate software). Registers of all transactions are collected and stored uniquely. Information in one of them can be changed only with subsequent synchronization with all others. Each transaction record is necessarily confirmed by the network distributed around the world. In this system, everything is interconnected and transparent. 

Well, it all seems too complicated. Let’s figure out the key points and dot all the I’s.

  1. The main reason for mining attractiveness is the ability to earn cryptocurrencies instead of buying them. 
  2. The miners get rewards for completing the blocks and verifying the transactions in a blockchain. 
  3. The rewards are paid to those miners who will discover a solution to the hashing puzzle first. This probability depends on the total mining power of the network. 
  4. Each miner needs to have a mining rig. It can be both GPU and ASIC hardware. The more you spend on the equipment, the more income you will get through the mining process. 

Before rushing to get the modern and expensive equipment, test yourself and find out whether mining is the right thing for you. Actually, you don’t need to be a miner to get some cryptocurrency. You can buy any coin or exchange it fast and easily via Changelly.

What Coin Miners Actually Do

Miners are doing the work of auditors. They are proving the Bitcoin transactions’ legitimacy. Frankly speaking, miners keep the BTC honest and prevent a double spending problem. 

Double spending is a potential risk for the digital currency system when the same money can be spent twice simultaneously. It is a vulnerability of the Bitcoin network, which can be prevented by waiting for six transaction verifications. If you don’t understand the double-spending process, check out our explanation with examples.

The miners verify the transaction. Once he/she proves 1 Mb of transactions (which is actually a block), the miner gets rewarded. 1 Mb of transactions can consist of one transaction or even thousands. However, the miner who verified the transaction must be the first to get a reward.

In order to get a reward, the miner should verify 1 MB of information in the transaction and be the first to find the right answer to a numeric problem among every other miner. The miner doesn’t need to make any mathematical calculations. The miner needs to be the first (or actually its hardware) to create a 64-graphs hash. It’s guesswork but for the hardware and its power. That’s why the more powerful your equipment is, the luckier you are to get the reward. 

To get some kind of prediction of your income, you can use the mining calculator, which helps get the right info about earnings based on the equipment, hashrate, electricity cost, etc. There is a wide range of calculators on the market; get the one that suits you the best.

Mining and Bitcoin Circulation

Another essential purpose of mining is that it is the only way to release the new Bitcoins into circulation. In this sense, the miners are minting the cryptocurrency. There are more than 18 million Bitcoins in circulation, and all of these BTC coins are here because of miners’ work since the first (genesis) block creation. The last Bitcoin will be minted in 2140. Nevertheless, miners will continue to verify transactions and support the system’s integrity. 

Circulation and rewards are not the only reasons for Bitcoin mining. Miners can vote for the protocol changes and have overall voting power within the system. One of the most fundamental reasons for voting is a case when the community wants to conduct the hard fork. By the way, we’ve made a chronological list of all the previous Bitcoin forks.

How Much a Miner Earns

Bitcoin mining rewards are reduced by half every four years. In 2009, the reward per one mined block was 50 BTC. In 2012, this reward was reduced to 25 BTC. In 2016, miners got only 12.5 BTC. Finally, on May 11, 2020, the reward halved to 6.25 BTC, and this number will change only in 2024. You can read all about Bitcoin halvings in our explanation.

The cost of the equipment necessary for efficient cryptocurrency mining is continually growing, and today it can be dozens of thousands of dollars. Besides, this technique consumes a lot of electricity for operation and requires additional cooling of the system. However, many digital currencies have already peaked and are drifting sideways, making these currencies less attractive for investment.

Therefore, if in the years of the birth of cryptocurrencies, your investments could be recouped in a few weeks, now it will take several years. Mining has become a serious investment, and its owner has to analyze many factors to make a decision.

It is almost impossible to predict the income from mining. It depends on too many factors: the price of the cryptocurrency, the block reward, the block time, the hash rate of the network, its complexity, the cost of electricity, and the mining capacity equipment, the cost of maintaining the farm, etc.

The cheaper the electricity is, the higher the profit will be. The cost of electricity depends on the region and equipment. Electricity occupies at least 85% of all miners’ expenses, and maintenance, depreciation, and rent – 15%. At the same time, economies of scale work – for 100 devices and 1,000 comparable costs for security and rental of premises.

Equipment Needed to Mine

By 2010, the entire mining process was completely dependent on the processing power of the computer. To start mining, you needed to install the necessary software and create an electronic wallet to which the mined cryptocurrency would be sent. Back then, for a smooth process, all you needed was a strong internet connection and a 24/7 working computer. 

In 2010, the first software appeared that made it possible to use a video card’s power for mining. Since the graphics processor in a video card consists of hundreds of graphics cores, the mining process on video cards has become more efficient and yielded significantly better results than on processor power. 

Considering the fact that two or even more video cards can be connected to one motherboard, then the efficiency of such systems is even higher. Later, such systems with multiple video cards were called mining farms. Accordingly, a regular PC case is not enough to accommodate these video cards, and whole racks with video cards connected to the motherboard with special loops, which are called risers, have become widespread.

Later, the so-called ASICs (application-specific integrated circuit) appeared. These are costly, complex mining solutions. Their main task is to process huge amounts of information for cryptocurrency mining. Their peculiarity is that they are often made for a specific cryptocurrency. Among the core disadvantages are the noise of their work and low maintainability.

The return on investment in ASIC hardware depends on many factors. So, you need to consider the hash rate (speed), adequacy and correctness of the equipment for mining, the difficulty of mining, and the dynamics of prices for a particular cryptocurrency.

Future of Mining

Nobody knows what will happen to the cryptocurrency in a few months or even years. Many factors indicate that cryptocurrency is the future because the total capitalization of the first cryptocurrencies is already about $300 billion. The blockchain technology itself is extremely secure so that it can be used not only for cryptocurrency transactions.

There are some issues with mining hardware. When an ASIC model for a popular coin appears on the market, the hash rate begins to grow faster in the network, new blocks appear more often, and the algorithm adapts to the new conditions of mining difficulty. Mining on video cards and CPUs is becoming less profitable; some users are losing financial motivation to create blocks. Consequently, the extent of the growth center remains in the hands of a smaller number of players. As the network level increases, the risk of a 51% attack goes up too.

The “Explain It Like I’m Five” Version

As we have already said, the miners play the guessing game. One of the main features of mining is block time. An average block time of Bitcoin cryptocurrency is ten minutes. However, it means that a Bitcoin block can be found in a minute or an hour. 

Let’s take 10 minutes as an average. So every miner participating in BTC mining gets a new puzzle every 10 minutes or so. It’s worth mentioning that every miner gets the same puzzle and tries to figure it out in the form of a 64-digit hexadecimal number. 

What Is a 64-Digit Hexadecimal Number?

As you can see, this element should have 64 digits, which consists of numbers and letters. Hexadecimal means its base is 16, while simple ‘decimal’ considers only ten digits. So, in the hexadecimal system, each digit has 16 possibilities. The traditional numeric system offers only ten digits (from 0 to 9); that’s why hexadecimal consists of the letters ‘a, b, c, d, e, f’. 

Miners are randomly generating 64-bit hexadecimal numbers, which is called a nonce (number only used once), as fast as possible. In Bitcoin mining, a nonce is 32 bits, and a hash is 256 bits. The first miner, who generates a nonce equal to the target hash, gets a reward. 

How to Start Cryptocurrency Mining

Let’s take a look at different types of mining. Since your computer does mining, those types correspond with the part that will complete the tasks. Currently, there are four types of mining. 

1. Mining With CPU

cpu illustration threadripper1920x

Back in the days of crypto genesis, the CPU was the primary component of mining. It was the most effective way since most processors could easily use their multi-threads to speed up solving the equations. Nowadays, CPU mining is almost non-existent beyond the few cryptos that still support it. 

2. Mining With GPU

MSI GT75 Titan

One day someone figured out that GPU may work better with mining and performing multiple calculations at once. They’ve modified the needed code to make it compatible, and it worked out successfully. This discovery resulted in a rush to buy the most powerful GPUs on the market, emptying stocks, and raising the price.

It soon ended, but it brought a lot of attention to the mining as a whole, even from previously not interested users. Today GPU mining is a default option that minimizes risks while still allowing miners to profit.

3. ASIC Mining

ASIC-Obelisk SC1 Slim

The final type of mining is ASIC mining. ASIC means an “application-specific integrated circuit” and is a piece of hardware specially designed to maximize mining efficiency. Its productivity compares to a hundred of GPUs. It would cost you a lot but, on the other hand, ASICs have smaller energy consumption. 

However, it comes with a price: while you can use GPUs to mine almost any crypto out there, ASICs are typically designed to mine a single coin, so Bitcoin ASIC will only mine Bitcoins, and so on. What’s more, some cryptos recently started to push back against ASIC mining, making it less profitable to use, or even restrict it at all. So, it is a high risk but high reward type of mining.

3. Cloud Mining

Cloud Cryptocurrencies mining

Cloud mining is something of an oddity among the mining community, as people do not consider it a valid mining option. It is a company that runs all the needed mining hardware and rents its equipment capacity to the users for a fixed fee. So, you pay a company to mine for you.

There is also the ever-present threat of being scammed, as many cloud mining services often take the money and disappear. Still, if you find a reliable service with fair prices, you will be able to set up a profitable mining venture, as there would be no additional electricity bills and no need to buy expensive equipment.

What Is the Best Way to Mine Crypto?

It depends on many factors like what coin you want to mine, what type of hardware you plan to use, and whether or not you are taking risks. While GPU mining is a stable but slow source of crypto income, ASIC gets a fast and aggressive mining approach. At the same time, cloud mining would allow you to gain crypto without delving into the technical details of which rig is better and why.

The same could be said for different mining models. Mining pools would allow you to start mining crypto coins quicker, but for a lower cut of a reward. Joining an existing mining pool would require you to buy better equipment. Solo mining would allow you to receive a full reward but for higher expenses. As you can see, every option has its ups and downs. It would be better for a novice to fully assess risks, look up mining, and then decide. 

What Are Coin Mining Pools?

Mining rewards are paid to the miners who discover a solution to the target hash first. A small percent of the mining power is connected to the tiny chance of finding the block for one miner. By working together with other miners, miners can get a steady flow of Bitcoin. However, they share payouts, which can vary. We’ve already told you all about Bitcoin mining pools in our long read.

Anyway, the easiest way to get Bitcoin is to simply buy it on the exchange. When you are thinking about a Bitcoin purchase, consider Changelly as a marketplace. We aggregate the list of rates from the exchanges and other liquidity providers to deliver you the most attractive cross-rates. 

Buying Bitcoin cryptocurrency in the long-term may get you more profit than acquiring all the hardware and spending money on electricity. Follow the Bitcoin price fluctuations and choose the right time for buying Bitcoin. By the way, we’ve got a comprehensive article about Bitcoin price prediction; check it out.

Is Bitcoin Mining Legal?

Many people are concerned about whether there is criminal liability for the use of Bitcoins or other cryptocurrencies. Indeed, according to the laws of most countries of the world, illegal circulation of banknotes is prohibited and may entail criminal and administrative liability. However, in Germany, cryptocurrencies are accepted as a means of payment. In Japan, it is legal tender. 

Since not every country’s jurisdiction answers whether Bitcoin mining is legal or not, there is a list of crypto-friendly countries that you can read about in the Changelly blog. Here is a small excerpt about laws and regulations in the EU.

In 2015, the European Court of Justice (ECJ) ruled that Bitcoin-to-fiat exchange transactions are exempt from VAT. The court’s decision specifies that the VAT law applies to the supply of goods and services provision. Bitcoin transactions have been categorized as payment transactions in currencies, coins, and banknotes and are therefore not subject to VAT. The court recommended that all EU member states exclude cryptocurrencies from the list of assets subject to taxation.

Risks of Mining

There are some risks associated with the mining process.

  1. One of the most significant risks is a hardware breakdown. They are often associated with improper overclocking of equipment or poorly organized cooling. Sometimes, the hashes calculation forces the coolers to work at 100% frequency, which negatively affects the cooling system. Also, the power circuit may fail. Failure of one card is not a global problem, as the farm continues to function. 
  2. Your hardware may become outdated. As the hashrate is growing, so do the requirements for hardware power. The ASIC, GPU, and CPU lines update quite often. 
  3. Hardware requires a lot of space. When it is just a small mining farm, it’s easy to find a free space for it. It is also uncomfortable to keep the hardware at home because it produces loud noises and heats the room. 
  4. The payback of mining is the main factor that matters in the case of profitability. There is a risk of overpriced hardware purchases. The problem exists in the ASIC miners market on a larger scale. The prices of ASIC miners can grow very quickly.
  5. The risk of cryptocurrency mining is associated with the value of coins since a decrease in the rate can lead to the disadvantage of mining in general. Sometimes the cost of electricity exceeds the profit. At the same time, the rise in the exchange rate can lead to super-profits in a short period.