What Is Bitcoin Mining and How Does It Work?

BTC is mined on a Proof of Work network — here’s how the process works in detail.

Key Takeaways:

• Bitcoins are a cryptocurrency created through a process called ‘mining’, where miners are required to solve a complex mathematical puzzle in order to add blocks to the blockchain; in return for Bitcoin mining, they are rewarded with new bitcoins.

• In this system, called Proof of Work (PoW), anyone with a computer and the proper setup can become a miner to validate and record transactions with other miners on the Bitcoin blockchain.

• Mining farms are industrial-scale warehouses packed with mining equipment for the sole purpose of mining cryptocurrency.

• Every 210,000 blocks, or roughly every four years, the Bitcoin mining reward halves.

• Since mining rewards gradually decrease for Bitcoin, there is another type of incentive for miners who verify transactions: network fees.

• As Bitcoin gets harder to mine, and as Bitcoin mining rewards halve, many might find it less alluring to try mining bitcoins. 

What Is Bitcoin Mining?

Bitcoins are a cryptocurrency created through a process called ‘mining’, where miners are required to solve (mine) a complex mathematical puzzle before they can add new transactions to the blockchain. In return, they are rewarded with new bitcoins. In this system, called Proof of Work (PoW), anyone with a computer and the proper setup can become a miner to validate and record transactions with other miners on the Bitcoin blockchain.

Process for Validating Bitcoin Transactions and Minting New Bitcoins

Bitcoin transactions and the minting of new coins are fundamental processes in the Bitcoin network, relying on blockchain technology and cryptographic principles. Below is a detailed breakdown of these processes:

Transaction Validation

• A Bitcoin transaction is created when a user sends bitcoins from one address to another. The transaction includes the sender’s address, the recipient’s address, the amount to be sent, and a digital signature.

• The digital signature is generated using the sender’s private key, ensuring the authenticity of the transaction, which is then broadcast to the Bitcoin network, where it is picked up by nodes (computers running the Bitcoin software), which verify the transaction.

• Nodes verify that the transaction is signed by the rightful owner of the bitcoins being spent, confirm the bitcoins have not been previously spent, and ensure the transaction follows the protocol rules and data structure.

Inclusion in a Block

• Verified transactions are grouped into a block by miners competing to solve a complex mathematical problem based on a cryptographic hash function.

• The solution involves finding a nonce (a random number) that, when hashed with the block’s data, produces a hash value with a certain number of leading zeros. The first miner to solve the problem gets to add the block to the Bitcoin blockchain.

Adding the Block to the Blockchain and Minting New Coins

• Once a miner finds the correct nonce, they broadcast the new block to the network, where other nodes verify the Proof of Work and validity of all transactions in the block. If the block is valid, it is added to the blockchain, and the network updates to reflect this new state.

• After a block is added to the blockchain, the transactions within it are considered confirmed. As more blocks are added on top of the confirmed block, the transaction receives more confirmations, making it increasingly difficult to reverse.

• When a miner successfully adds a block to the blockchain, they receive a mining reward, which is a combination of newly minted bitcoins (block subsidy) and transaction fees from the transactions included in the block.

• The block subsidy (new bitcoins minted) is halved approximately every four years, in an event known as ‘Bitcoin halving‘ (see below). This process continues until the total supply of bitcoins reaches 21 million, which is the maximum limit set by the Bitcoin protocol.

Bitcoin’s Energy-Intensive Process

However, Bitcoin mining is an energy-intensive process. As mentioned above, it is critical for verifying and adding new transactions to the blockchain, ensuring the security and integrity of the Bitcoin network. But when miners compete to solve complex mathematical problems to meet the required hash criteria, the process is computationally intensive because it requires a lot of trial and error. Miners must perform many hash computations to find a valid nonce, making the process energy-intensive.

To efficiently perform the PoW calculations, miners use specialised hardware known as Application-Specific Integrated Circuits (ASICs). These devices are designed specifically for Bitcoin mining and are more efficient at performing the necessary computations than general-purpose hardware.

This massive computational effort consumes a significant amount of electricity, which has raised concerns about the environmental impact of Bitcoin mining. However, miners often seek out locations with cheap and abundant electricity to maximise their profitability, sometimes using renewable energy sources to offset environmental concerns.

Block Time and Difficulty Adjustments

It is important for the Bitcoin mining process to keep a relatively constant pace regardless of how many miners are active, but it is difficult to predict how many miners will join. 

Bitcoin uses a mechanism called ‘difficulty adjustment’ to keep the mining speed constant, at approximately 10 minutes per block. The ‘difficulty’ is adjusted every two weeks, taking into consideration the existing hash power (amount of miners) in the past. If the hash power is insufficient (i.e., the average block time is longer than 10 minutes), the difficulty is lowered. Conversely, if the hash power is too high (i.e., the average block time is faster than 10 minutes), the difficulty is increased.

Confused by block time and halving rates? Here’s an intro to Bitcoin halving.

How Are Difficulty Adjustments Determined?

Bitcoin’s protocol requires miners to compete with each other to solve a ‘cryptographic puzzle’ (Proof of Work), and the winner proposes a new block for the blockchain. The cryptographic puzzle is solved by adjusting the nonce (a 32-bit arbitrary random number) so that the block hash is smaller than the target hash (a value that is smaller than 256 bits).

Miners need to find a nonce so that the hash of the block is less than or equal to the target hash specified by the network. If the hash is below the target, then the miner wins, adds the block to the blockchain, and receives the mining rewards. If not, the miner changes the nonce and tries again. The more hash power in the network, the smaller the target hash. A smaller target hash means that it’s harder for miners to find the correct nonce to create a block hash that is smaller than the target hash.

For instance, imagine the computer randomly picking a number between 1 and 100. The probability of finding a number below 10 is 10%, but the probability of finding a number below fifty is 50%. This is how the Bitcoin network performs difficulty adjustments.

What Are Hashrates in Bitcoin Mining?

From the previous section, we see why hash power is important for Bitcoin mining and how it is linked to block time and difficulty adjustment. Hash power is measured by the hashrate.

Hashrate

The hashrate is a measure of the number of hash operations done in a given amount of time. This varies depending on the hardware involved. 

For example, if a miner has a device that generates a hashrate of 30 MHz, then there are 30 million hashes per second (a hash is one conversion from one state to another — or, to simplify, one calculation). So a Graphics Processing Unit (GPU) that yields a hashrate of 30 MHz makes 30 million calculations per second.

Hashrate calculation

The higher the hashrate, the more likely a miner will solve the block and gain a block reward. The probability of a miner solving the block can be roughly estimated by the following formula:

P = X / Y

Where:

P = the probability of solving a block

X = the miner’s hashrate

Y = the total hashrate of the network, which is the total hashrate of all miners currently mining

Mining farms

Mining farms are industrial-scale warehouses packed with mining equipment for the sole purpose of mining cryptocurrency. With thousands of GPUs and ASICs, the overall hashing power is far greater than that of just one solitary piece of mining hardware. This is designed to make it more likely that a block will be solved and a reward earned.

How Are Mining Rewards for Bitcoin Calculated?

Mining rewards are compensation (in the form of newly created bitcoins) generated by the system to pay for the work done by miners who solve the cryptographic puzzle required for mining a new block. Hence, the greater the hashrate, the higher the chance to receive the mining reward. The reward for Bitcoin mining is currently 3.125 BTC per block. 

To improve the return on investment (ROI), mining companies and individuals often need to spend quite a bit up front on hardware and electricity to increase the chance of successful mining. With the drastic increase in the total hashrate of the Bitcoin network, it becomes almost impossible for an individual alone to mine bitcoin due to limited resources.

Mining pools, however, allow individuals to pool resources together and contribute to their outsourced mining. In this way, mining pools gain more resources to compete against each other, and individuals share the rewards in proportion to their hashrate. This mitigates the low probabilities and high upfront costs they may face when mining alone.

Mining is not the only way to earn bitcoins, however. Learn about Bitcoin trading here.

Bitcoin Halving: Half the Mining Rewards

Every 210,000 blocks, or roughly every four years, the Bitcoin mining reward halves. In the beginning, the Bitcoin block reward was 50 BTC. In 2012, it was halved to 25 BTC, and halved again in 2016 to 12.5 BTC. In 2020, the block reward halved again, to 6.25 BTC, and in April 2024, it halved to its current 3.125 BTC. It will continue to halve until all 21 million BTC are mined.

Read our in-depth guide What Is Bitcoin Halving and How Does It Affect BTC Price?

Bitcoin’s Token Supply

Currently, at the time of writing, there are more than 19 million bitcoins mined (of the total token supply of 21 million).

The total supply and actual supply of bitcoins vary slightly due to loss of private keys or hardware damage. Additionally, some bitcoins are permanently lost and cannot be recovered, making the actual supply smaller than the theoretical value. The inventor of Bitcoin, Satoshi Nakamoto, also has a considerable amount of bitcoins left untouched after mining it years ago.

Some have predicted that all bitcoins will be mined a few years after 2100.

Another Way for Bitcoin Miners to Get Paid: Transaction Fees

Since rewards gradually decrease for Bitcoin mining and other coins that adopt the PoW mechanism, there is another type of incentive for miners to verify transactions: network fees. For cryptocurrencies that work under the PoW consensus mechanism, users need to pay a network fee for every transaction. This transaction fee may vary in different network traffic conditions and for different cryptocurrencies. The transaction fee is usually calculated in satoshis (the smallest unit of bitcoin) per byte.

Transaction fees are the incentives for miners to verify user transactions. Note that it is possible to pay no or low transaction fees, but that significantly lowers the chance for the transaction to be included in the next block.

Final Words — Is Bitcoin Mining Still Worth It?

As Bitcoin gets harder to mine, and as mining rewards halve, many might find it less alluring to try mining bitcoins. In addition, newcomers have to compete with professional-level mining farms and invest in expensive mining rigs in order to be competitive. Other options to receive crypto rewards include lockups, Crypto Earn, and holding cryptocurrency.

Market participants can download the Crypto.com App to buy Bitcoin or other cryptocurrencies, starting with as little as US$1.

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