How to Mine Bitcoin: What Is It, How to Start, and More

What Is Bitcoin Mining and How Does It Work?

Unlike fiat money, cryptocurrencies such as Bitcoin are not issued by central authorities. New Bitcoins are created in a decentralised manner, i.e. without government or central bank control, which guarantees the security and reliability of the system.

Since there is no central controlling body, all transactions are processed, verified, and added to a public ledger called blockchain by the network nodes — miners.

So, what does it mean to mine Bitcoin? The process of mining new Bitcoins is somewhat similar to that of precious metals. As Bitcoin's official document states,

“The steady addition of a constant amount of new coins is analogous to gold miners expending resources to add gold to circulation. In our case, it is CPU time and electricity that is expended”.

Mining today is inherently a rather complex and knowledge-intensive industry with its own market and competitive environment. This article will give you an idea of the mining process and mining-related business.

Key Takeaways

• Bitcoin mining is a mechanism for verifying transactions and creating new Bitcoins;
• The largest mining centers are located in the U.S., Kazakhstan, Russia, and Canada;
• In order to start mining, you need to purchase powerful hardware and be ready to pay high electricity bills;
• The profitability of mining depends on the efficiency of the mining device and electricity cost;
• In some countries, mining is taxed.

Bitcoin Mining Statistics

1. As of October 2022, the size of the reward for a block in the Bitcoin network is 6.25 BTC.
2. It takes about 10 minutes to find a new block.
3. In October 2022 the global expected power consumption of Bitcoin for 2022 is 130 TWh.

4. On October 6, 2022, Bitcoin's mean hash rate peaked at 257.3 EH/s.

5. As of October 2022, the US-based mining pool Foundry USA accounts for the highest Bitcoin mining hash rate — 27.6% of the total network. It is followed by AntPool (19.8%) and F2Pool (14.7%).

6. The largest mining centers are in the U.S. (35.4%), Kazakhstan (18.1%), Russia (11.23%), and Canada (9.55%).

7. By the end of August 2022, the total income of Bitcoin miners surged to $551 million.

What is Bitcoin Mining? Bitcoin Mining Explained

In simple words, Bitcoin mining is the process of creating new Bitcoins. It is also the mechanism that confirms new transactions and ensures their security and legitimacy. This mechanism is trustless, meaning that you do not have to trust a third party, such as a bank, to validate transactions. Instead, you rely on the network participants called miners who contribute their computers’ processing resources to secure the blockchain network.

Miners verify blocks of transactions by solving mathematical puzzles. Miners who successfully find a special key to solve the puzzle receive rewards in the form of freshly mined Bitcoins and transaction fees. Because miners compete to solve the puzzle, they have to use special hardware (graphics and CPU or ASIC miners) with powerful computing power.

Let us go over the concepts of Bitcoin and blockchain in order to help you to grasp the idea of mining better.

What Is Bitcoin?

Bitcoin (BTC) is a digital currency that allows secure transactions without intermediaries. The generation of new Bitcoins and transaction validation are done collectively by the network members. Thus, no single entity can control, block or cancel Bitcoin transactions.

Bitcoin Advantages Over Fiat

Bitcoin transactions are inexpensive, especially when it comes to transferring large sums or sending money abroad. Among other advantages of Bitcoin over fiat is scarcity. Bitcoin has a limited issue of 21 million coins, which makes it inflation resistant.

What Is Blockchain?

Blockchain is a decentralised network of blocks, each block storing information about transactions within the network. These blocks follow one another in strictly chronological order, each block including data about previous blocks.

Unlike traditional databases which rely on centralised servers, blockchain consists of thousands of nodes. At the time of this writing, the Bitcoin blockchain has 10,000 nodes distributed across the world.

For the data to be recorded on the blockchain, the majority of nodes should reach consensus. That is why this technology is called trustless — you do not have to trust a single admin or authority. Instead, the transactions are processed by a network of users.

3 Concepts of Blockchain

• Decentralisation. The transactions in the network are verified through consensus by the nodes who have equal voting rights.
• Blocks. Any blockchain consists of a chain of blocks — data structures with the transaction data.
• Hashing. The input data is transformed on the blockchain by a special algorithm into a string of a fixed size. This process is called hashing and its purpose is to encrypt transactions and secure the network./li>

Why Bitcoin Needs Miners

Due to the decentralised nature of its blockchain, Bitcoin requires participants who will check the authenticity of transactions. Miners take the role of performing the following functions:

• Processing transactions and adding them into blocks. The transactions are confirmed by multiple parties, who agree on a single history of transactions. Thus, their consensus prevents double spending;
• Creating new coins. Mining is the only way to release new BTC coins into circulation.

Why Mine Bitcoin?

Mining is both the way to keep the Bitcoin blockchain running and to produce new coins. This process is very energy-intensive, but at the same time, it adds security to the network. Because any action on a blockchain requires a lot of computational power, it would be extremely expensive to reverse transactions or perform any other malicious attack.

The system handsomely rewards miners, because they essentially maintain and secure the network. Miners receive Bitcoins for their proof of work, that is for the spent computational power. Hence, the consensus mechanism used by Bitcoin is called “proof-of-work” (PoW). PoW is considered to be one of the most secure consensus mechanisms, and most decentralised. That is why it attracts a lot of miners who both want to make profit and to perpetuate Bitcoin.

How Does Bitcoin Mining Work

Since Bitcoin mining is aimed at protecting the network, the process itself is highly complex. It involves solving algorithms which are part of the PoW consensus mechanism.

Typically, the more powerful equipment a miner has, the higher chance they will solve a puzzle and receive a reward. The amount of computing power is measured in hashes.

Below we will provide information about the key components and elements of Bitcoin mining.

The Mining Requirements

To start mining Bitcoins, you need the following:

• Powerful mining hardware;
• Access to the cheapest possible electricity;
• Mining software;
• Membership in a mining pool (solo mining would require a substantial mining setup).

Elements of a Bitcoin Transaction

Each transaction consists of three elements: input, amount, and output.

Suppose User A wants to send Bitcoins to User B. In this case, the input is the sender's Bitcoin address (i.e., User A's wallet address) and the location of his Bitcoins. The amount is the amount of Bitcoins User A wants to send. The output is the recipient's wallet address, i.e., User B's wallet address.

The Merkle Tree and the SHA-256 Algorithm

Merkle Trees are used for optimized verification of transactions. This data structure allows the network nodes to reduce the volume of downloaded data thanks to hashing. Here is an example of a hash tree with three leaf transactions:

In the Bitcoin blockchain, Merkle trees are built using SHA-256 double hashing. SHA-2 (Secure Hash Algorithm 2) is one of the most popular families of hashing algorithms. The number 256 in the name of the algorithm means that the output will be a string of 256 fixed bits in length, no matter what data is received at the input.

The Block Header

A block header is used to identify a specific block in the entire blockchain. Each block contains a unique header and is identified by its own hash.

The block header includes the following elements:

• Block version number;
• Hash of the previous block;
• Merkle tree root;
• Timestamp;
• Target of the mining complexity;
• Cryptographic Nonce used in block generation.

The mining process is essentially a calculation of the hash (output) of the block header in the blockchain.

Solving the Hash Puzzle

Now that we have explained briefly the Markle Tree and the SHA-256 algorithm concepts, we can take a closer look at the main task that Bitcoin miners perform. Let’s say that all the information in the block (X) is hashed by means of the SHA-2(256) algorithm, resulting in the hash sum (H).

The blockchain algorithm sets some minimum limit to the hash value, let's call this number Y. The miner, in turn, counts the hash sum of the whole block and compares it to the minimum limit Y. If H<Y, the puzzle is considered to be solved. If not, the miner changes the free variable Nonce (N) and applies the SHA-2(256) algorithm again until the puzzle is solved.

If you change N by 1, the hash value changes completely and unpredictably. There is no known pattern of how the hash result changes depending on the change of Nonce. Therefore, all of the mining is done by simply going through the Nonce.

Bitcoin miners receive rewards in BTC when they find a random number that can only be generated by running a hashing algorithm. The whole process looks like a computational lottery, where the probability of winning is highly dependent on the computing power the miner applies.

Mining and Bitcoin Circulation

The size of the reward per block in the Bitcoin network is predetermined and is currently 6.25 BTC. The reward is halved every 210,000 blocks or about every 4 years. This process is called halving. This is one of the main mechanisms that affect the supply of BTC, as it limits the issue of coins. After each halving, the amount of mined BTC decreases. For example, 1,800 Bitcoins were mined daily until May 2020 and only 900 after.

Bitcoin mining will stop approximately in 2140 when the maximum of 21 million BTC will be mined.

Prevention of Hacking

Due to the properties of cryptographic hash functions, hashing plays one of the most important roles in blockchain security and reliability. Since each block in the blockchain contains the hash of the previous block, to change the data of one block, you will have to change the data of the previous block. And so on all the way to the very first block. This is virtually unrealizable.

Why Do Bitcoins Need to Be Mined?

Bitcoin’s developer Satoshi Nakamoto stated in an official Bitcoin document:

“Once a predetermined number of coins have entered circulation, the incentive can transition entirely to transaction fees and be completely inflation free.”

From that, we can conclude that BTC mining was designed to function as a temporary incentive. While the number of people in the network is not very high, the transaction fees are not enough to reward miners. Mining, on the other hand, covers miners’ expenses on equipment and electricity.

When the last Bitcoin is mined around the year 2140, Bitcoin is expected to be ubiquitous. The number of transactions in the network could approach that of Visa and other payment systems. Therefore, the fees collected by miners should be enough to keep the equipment running.

How to Mine Bitcoin?

There is no short answer to the question of how to mine Bitcoins. There are many approaches to the process — solo, group, and cloud mining. There are different types of mining equipment, too. Below we go over all the available options the novice miner can choose from.

What Do I Need to Mine Bitcoins?

First of all, it is necessary to understand that Bitcoin mining is a highly competitive industry. The main source of costs is electricity. Significant up-front investments in hardware are also required. Profitability mainly depends on access to cheap electricity and efficient equipment.

Then, first of all, it is necessary to determine the best geographical location for your equipment. Find a country or region with relatively cheap electricity and a regulatory environment open to mining.

Finally, buy an appropriate BTC mining device, install the software required for mining and choose a pool for mining. Let’s see what kind of equipment you can find on the market.

How to Choose Hardware for Bitcoin Mining?

For profitable mining, you need to invest in a powerful computing device such as a device called ASIC or Application Specific Integrated Circuit. As its name implies, ASIC is customised for particular use. As ASICs are designed for mining, they are much more powerful than more traditional GPUs. Such equipment can reach a hash rate of 200 TH/s.

Being powerful and energy-efficient, ASICs require a substantial investment. As a rule, they are produced by companies located in the People's Republic of China. Among them are PinIdea, Bitmain, Ebang Communication, and Baikal.

The Economics of Mining Bitcoin

According to Arcane Research , miners using expensive electricity will gradually be forced out of the industry. Thus, in the long term, only those miners who use undervalued energy or are paid to serve as "energy tools" will remain profitable.

At its peak in October 2021, hash prices reached $0.422 per TH/s, a year later in October 2022 hash prices were down 81%.

Bitcoin miners without access to cheap energy are now forced to upgrade their machines to more energy-efficient ones, such as the Antminer S19 series. Researchers at Arcane Research calculated that the latest generation Antminer S19 ASIC miner brings in about $13,000 per Bitcoin mined (at $40 per MWh energy cost). The old Antminer S9 model is already working at a loss.

Comparison of Mining Hardware Profitability

There are many sites dedicated to mining that publish mining equipment comparisons. These sites include Minerstat, Nicehash, and Asicminervalue.

Below is a rating of actual equipment as of October 2022.

Buying and Setting Up the Hardware

It is recommended to purchase mining equipment from official stores. Here is the list of top ASIC producers:

• Canaan
• Bitmain
• Halong Mining
• Pangolin
• Goldshell
• iBeLink
• Jingle Mining
• NiceHash

The detailed instructions on how to set up a miner can be found on their official websites. Also, an essential requirement for Bitcoin mining is a proper ventilation system. Poor ventilation can cause overheating and damage to the machine.

How to Mine Bitcoin at Home?

Today it is very difficult to mine BTC at home. The reason is a huge number of existing miners with advanced equipment.

However, it is still possible to make a stable profit from mining at home. There are two popular options you can consider:

• Using services with rental capacity "in the cloud." This is what's called cloud mining. Miners simply rent out mining farms. Usually, the contract lasts for 12 months, and the user starts receiving income the very next day.
• Mining in a pool, sharing the rewards with other pool members. It will require purchasing at least one ASIC. More mining rigs will increase your likelihood of finding a block.

Does Crypto Mining Damage Your GPU/Computer?

Mining gradually wears out any equipment. Your device has to work at full capacity around the clock.

The likelihood of mining a single block on a personal computer and getting a reward is practically non-existent. In order to avoid reckless spending, it is recommended to use special equipment like ASIC.

Can You Mine Bitcoin on Your iPhone?

Technically, it is possible to mine cryptocurrencies on a mobile phone. A completely different question is whether it will pay off. And the answer to that is unambiguous — no, the risk of ruining your device is not worth the possible returns.

What Are Mining Pools?

A mining pool is a server that divides a large and complex hashing task into smaller and simpler tasks and distributes them to connected devices.

Thus, the computing power of the pool participants is combined together, which significantly increases the chances of finding a block. Each miner contributes the processing power to the effort of discovering a block. When a new block is found, the reward is divided between all participants of the pool in accordance with their contribution.

Pooling Resources for Bitcoin Mining

Each participant's contribution to the pool is estimated in shares. A share is a portion of the work a particular computer is contributing to the pool. Mining pools require less investment in electricity and hardware than solo mining.

Is Bitcoin Mining Profitable?

It is hard to precisely calculate the income from Bitcoin mining. There are a lot of factors which influence profitability, such as BTC value, the size of rewards, the device characteristics, the price of electricity and mining equipment. Electricity makes up to 85% of all miners' expenses, the rest goes for the equipment.

At the same time, it should be taken into account that the mining equipment lasts only for up to four years. Old devices will be less profitable and you might end up spending more on electricity.

It is also worth remembering about bitcoin price fluctuations in order to understand how profitable mining can be. And always be prepared to sell bitcoins that have been mined to lock in profits... or loss

How Much Does a Miner Earn - Bitcoin Halving

Right now, the reward per block on the Bitcoin network is 6.25 BTC. In 2009, the reward per block was 50 BTC and since then the reward has halved every 210,000 blocks or about every 4 years.

Halving is believed to have a positive effect on the price of Bitcoin. After halving in 2013 and 2017, BTC increased 12 and 13 times each year. After the halving award in May 2020, the price of BTC broke price records.

What Does It Take to Run a Profitable Bitcoin Mining Venture?

To build a profitable mining business, it is necessary to consider the factors that affect the profitability of investing in cryptocurrency mining:

• Electricity tariffs (electricity costs up to 85% of all miners' expenses);
• The power of the mining equipment;
• Available system settings for an efficient algorithm;
• The correctly selected pool.

It is not advisable to start mining in a solo mode at the present time. To create your own productive farm, you will need an extremely huge investment.

Choice of Hardware

The best devices for BTC mining are ASICs (Application-Specific Integrated Circuits), which are combined into farms. ASIC miner is designed only for one task: mining a specific currency with a specific algorithm.

Location

When choosing a location, consider the countries with the cheapest electricity. Bitcoin mining consumes a lot of electricity — about 130 terawatt-hours per year, which is equivalent to the electricity consumption of a small country. An ASIC miner alone consumes just over 3,000 watts, the equivalent of running a dryer or a heater.

Another factor to consider when choosing a location for mining is regulation. Politicians' attitudes towards mining can change overnight and end up with a total ban.

Profit From Bitcoin Mining

The profitability of BTC mining primarily depends on the current exchange rate. Due to the high rates in 2020-2021, the mining equipment was easy to pay off within a year. For example, 1 BTC coin reached the value of $69K by November 10, 2021. But in the beginning of October 2022 the rate dropped to $20K.

In dollar terms, income from crypto-mining has decreased threefold. At the same time, the complexity of the Bitcoin network has increased (according to Blockchain explorer). And the most efficient ASIC model allows earning about $50 per day, according to Asicminervalue.

How to Calculate Bitcoin Profit?

To calculate profit from mining, it is best to use an online calculator. For example, the one on the Nicehash website. Typically the profit depends on the following values:

• Hardware Hash Rate — the total processing speed of blocks;
• Pool Fee — the service fee of the mining pool;
• Power Consumption field — the total number of watts used in the course of block hashing;
• Cost per KWh — cost per kilowatt of electricity in the region where the farm is installed;
• Hardware Cost field — the total price of boards, ASICs, components, and power supply.

Cost of Power

The power consumption of the equipment is the most important indicator, without which it is impossible to even approximately calculate the profit from Bitcoin mining. The exact cost depends on the model of the mining device. On average, electricity costs miners pay are around $0.05 per kilowatt-hour.

Time

Operating time is not usually taken into account in mining profit calculations, but it is usually necessary to calculate depreciation when running a business under all accounting rules.

Bitcoin value

The rate of BTC is as important as the price of electricity, and it is much more volatile, which complicates the mid-and long-term calculation of the profitability of mining.

Efficiency

The mining efficiency metric measures actual results versus the resources used to achieve those results. It is important to understand how many resources are used for each step of the process.

A Pickaxe Strategy for Bitcoin Mining

If you do not want to worry about equipment and electricity costs, you could try the “Pickaxe” strategy. This strategy is based on that employed by miners during the 1849 California gold rush. Instead of panning for gold, they made and sold pickaxes to gold miners. In the modern context, it means investing in the companies that manufacture “pickaxes” — the hardware used in Bitcoin mining. For instance, AMD and Nvidia are among the largest producers of GPUs which are used for mining purposes.

Is Bitcoin Mining Legal?

The legality of Bitcoin mining varies from one jurisdiction to another. In the vast majority of countries, mining is legal. Some countries are even willing to accommodate miners from other regions. They view mining as a good opportunity to attract foreign investment in the economy. But at the same time crypto earned from mining is often subject to taxes in such countries.

Risks and Limitations

Bitcoin mining is quite a risky business. The main risk is related to the volatility of the BTC price. A drop in the value is fraught with a critical decrease in profits.

In addition, there is a risk of becoming a victim of a cloud mining scam. Recently, a lot of fraudulent projects imitating cloud mining have emerged.

Unfortunately, the legal aspects of the crypto industry are in their infancy. Even in such developed countries as the U.S. many issues of cryptocurrency regulation have not been properly addressed yet.

Taxes on Bitcoin mining

Mining usually qualifies as self-employment. Miners in many countries must pay an income tax. Being self-employed, they are allowed to deduct expenses such as electricity and storage costs.

In some countries, mining is temporarily untaxed. For example, in Belarus mining will not be taxed until January 2023. But this policy applies only to individuals using their own capital and mining for their personal purposes.

The Bottom Line

Now, if you wondered, “What does it mean to mine Bitcoins”, this article must have covered all the related questions. Bitcoin mining is similar to gold mining, but instead of pickaxes miners use powerful hardware equipment. They spend computing power to solve hash puzzles, resulting in the creation of new coins.

It is important to understand that the Bitcoin mining industry is highly competitive and the era of mining on personal computers is over. It is now impossible to make a profit with simple video cards assembled into a small farm. Mining requires investment in high-quality equipment. It may pay off only in about a year, depending on electricity costs in your region. Despite this, mining still remains a good way to make money with Bitcoin, even now.

Another important factor that may influence mining profitability is Bitcoin price volatility. If BTC drops in value, miners should be ready to hold their BTC rewards until the price recovers.

FAQ

How Does Mining Confirm Transactions?

Transactions are validated by miners. Each miner uses their hardware computing power to compete in solving a cryptographic hash puzzle. The winning miner adds the new transaction block to the decentralised ledger of the Bitcoin blockchain.

Why Does Mining Use So Much Electricity?

The more Bitcoins are in circulation, the more computing power is required to mine each new Bitcoin, which results in higher energy consumption.

How Is Bitcoin Mined?

Bitcoin runs on a decentralised network. The computers connected to the network verify the transactions. The new Bitcoins are mined in the process of this verification.

How to Start Bitcoin Mining?

In order to start mining, you need to purchase a GPU or ASIC device. You also need to register a crypto wallet where you will receive BTC rewards for mining.

How Much Money Can You Make Mining Bitcoin?

The profit depends on many factors, the major of which are the equipment efficiency, the electricity price, and the price of BTC.

How Do You Join a Bitcoin Mining Pool?

Find a mining pool with a good reputation (for example, Binance pool ) and follow the instructions on the official website.

What Is a Good Hash Rate for Bitcoin Mining?

One of the most advanced ASIC Antminer S19 Pro reaches 110 ± 3% TH/s.

What Is a Bitcoin Miner?

“Bitcoin miner” can refer to either the Bitcoin network participant who is involved in the mining process or the mining equipment they use.

*This communication is intended as strictly informational, and nothing herein constitutes an offer or a recommendation to buy, sell, or retain any specific product, security or investment, or to utilise or refrain from utilising any particular service. The use of the products and services referred to herein may be subject to certain limitations in specific jurisdictions. This communication does not constitute and shall under no circumstances be deemed to constitute investment advice. This communication is not intended to constitute a public offering of securities within the meaning of any applicable legislation.