Mining is the process that Bitcoin and several other cryptocurrencies use to generate new coins and verify new transactions. It involves vast, decentralized networks of computers around the world that verify and secure blockchains – the virtual ledgers that document cryptocurrency transactions. In return for contributing their processing power, computers on the network are rewarded with new coins. It’s a virtuous circle: the miners maintain and secure the blockchain, the blockchain awards the coins, and the coins provide an incentive for the miners to maintain the blockchain.

Understanding Blockchain And Bitcoin

Before understanding how Bitcoins are actually mined, it is important to understand the concept of blockchain and Bitcoin. 

Let’s look at blockchain as a general ledger, where all the cryptocurrency transactions are recorded. A blockchain is a kind of digital data structure that makes possible a ledger of transactions done digitally and share among a distributed network of computers. In short, a blockchain is a way of digitally documenting data on a distributed ledger.

Bitcoin is made up entirely of a blockchain network, which tends to store and record transactions on a huge network of computers. Each block stores transactions, which are then added to the blockchain, only once it is verified and validated by miners. Post this, it is impossible to make any changes to the transactions as it is now already on the blockchain. 

Digital currencies such as Bitcoin use distributed ledger technology, which is a unique feature of blockchain technology as it ensures no records can be altered, and thus offers much better transparency of transactions. The Bitcoin blockchain network uses the latest cryptographic algorithm techniques of SHA-256, which is responsible for converting the data into a unique string of characters.  

What is mining?

mining is a complex computational and technological process of validating the bitcoin transactions over the Bitcoin network. It is like a process of validating a block on the chain network and getting paid in Bitcoin. 

People who are involved in this process of mining are known as miners. The reason why it is called ‘mining’, is because just like any other form of natural resources, there is a finite number of Bitcoins available. The maximum amount of Bitcoin that can be created or mined is 21 million. Just like real mining, in mining, one needs to invest energy in order to generate or create Bitcoins. And here, the energy is in the form of electrical energy to mine Bitcoins. The miners compete against each other to solve complex hash puzzles, which are encoded cryptographically to verify the blocks containing transactions.

In this race of guessing, whosoever becomes the first miner to guess the number gets a chance to update the ledger of transactions on the Bitcoin blockchain network and also receives a reward for newly-minted Bitcoins. It is to be noted that this guessing of specific numbers is all done by the computer. So, the more powerful a computer one has, the more guesses a miner can make per second, and thus it increases the chances of winning this race. mining is primarily done:

How Does Mining Work?

Let’s break down the mining process to understand how it works and what is required to start the process:

Setting up Of Powerful Hardware Resources

Before a miner can initiate the process of minting Bitcoins, they need to set up their own rigs in terms of powerful computer resources and other specific tools to solve the complex puzzles efficiently. 

At present, ASIC-based hardware is the most advanced and capable of creating huge amounts of hashes per second. However, such advanced hardware is costly and may range in thousands of dollars.

Installing Mining Software and E-Wallets

Other than powerful hardware requirements, miners need specific software such as CG miner, XMR miner, and multimineral. Many of these software are free to download and can run on Windows and Mac computers. Once the software is connected to the necessary hardware, you are all set for mining. 

The miner would also require an e-wallet to store their rewards as Bitcoins. A bitcoin wallet is a digital place that facilitates storing, transferring, and accepting Bitcoin or other cryptocurrencies.

Mining Pool or Solo Mining

Miners can opt whether they want to mine solo or go for pool mining. As it is not that easy to mine alone, mining pools were invented. In a mining pool, groups of miners are formed together to deal with the growing difficulty of mining. Each miner is paid for their share of the work.

Start mining Process

Once the setup is all done and a miner decides whether he/she wants to opt for pool mining or solo one, next is, the miner is required to solve the complex mathematical hash puzzles to validate the transactions on a Bitcoin blockchain network. 

What Are The Incentives For Bitcoin Miners?

Why would any miner perform the validation of transaction data without any incentives, especially when the mining and validation process incurs huge amounts of infrastructure and energy costs? Miners validate the transactions and solve the complicated mathematical puzzle as they are heavily incentivized with a reward of earning free Bitcoins and transaction fee (a certain percentage on the transactions the miner inserted into the block)

Bitcoin Miner Payment= Block Reward + Transaction Fees

At present, Bitcoin miners are awarded 6.25 Bitcoins for every block that is added to a Bitcoin blockchain network. When Bitcoin was launched in 2009, every block miner used to be rewarded 50 Bitcoins. Gradually, it got limited to 25 Bitcoins in 2012, 12.5 Bitcoins in 2016, and 6.25 Bitcoins in 2020. This process is known as Bitcoin halving, where the block rewards are split in half. It occurs after mining every 210,000 blocks, which takes around four years.

Bitcoin Halving Event: Timeline

The significance of the Bitcoin halving process is that it cuts down the Bitcoin’s inflation and circulation rate and thus, it helps in maintaining the stability of its value. The last Bitcoin halving event took place in May 2020, and the next one is expected to be scheduled in 2024.

Types Of mining

Mining can be done in several ways and forms, each delivering different levels of hashing power and block rewards. Here are the various ways that one can mine Bitcoin:

• CPU Mining
• GPU Mining
• ASIC Mining
• FPGA Mining
• Cloud Mining 

Is mining Profitable?

Mining may look profitable, but is it, really? The inventor of Bitcoin, Satoshi Nakamoto, has created mining in such an arrangement that the more powerful the mining network will be, the more difficult it would be to solve that mathematical problem. So, the difficult process is adjusted with the combined mining power that the whole network possesses. 

In simple words, if more miners will compete, harder it would be to solve the puzzle. This arrangement was done to maintain stability and create a steady flow of new Bitcoins to keep inflation in check. The mining difficulty is set so that on average a new block will be added every ten minutes.

Mining Profitability Factors

As discussed above, the mining process is directly linked with rewards and thus people want to use it for high profits. However, it is not always so easy to turn your mining into a profitable one. So, consider and check the below-mentioned factors which have a substantial impact on the mining profitability:

• Hash rate
• Block rewards
• Mining difficulty
• Electricity and power consumption charges
• Mining pool fees
• Bitcoin’s market price

Should One Mine Bitcoin?

Well, generally people think of the mining as a profitable avenue of investment. However, it is to be noted that mining is certainly not a quick way to riches, and at the same time one needs to be technically skilled and well-equipped to carry out the complex process of mining. It also requires huge investments in expensive equipment which is tagged along with high computational power as well as reliable internet and electricity.  So, it is always advisable to test the waters before jumping in with your hard-earned money.