How does Bitcoin Mining work? A Layman’s Guide to Bitcoin Mining

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Bitcoin is poised for an exponential high in price and market value in the coming years. Experts have predicted that BTC is likely to surge to 4.94 billion USD by 2030 from its previous value of 1.49 billion USD in 2020. Around 15,000+ top companies have already started accepting BTC as payments and more companies are inclined to join the Bitcoin bandwagon in coming times. The increasing demand and popularity of Bitcoin have led to a rise in the generation of Bitcoins. This is where Bitcoin mining comes to play.

Bitcoin mining simplified 

So, what does it mean by Bitcoin mining and how does it work?

Purpose of Bitcoin mining

Well, Bitcoin mining refers to the process of releasing new BTCs into circulation. Unlike fiat currencies that are printed on paper, BTCs are digital assets. You have to mine them or “mint” (as the process is called) to bring them into circulation.

But, that’s not the only purpose of Bitcoin mining. Mining is also performed to verify transaction data whenever a new block is added to the Bitcoin blockchain. The world knows by now that Bitcoin has been developed on state-of-the-art blockchain technology. Every block in the blockchain stores transaction data and once it gets completely filled with data, it is added to the main chain through mining. In other words, Bitcoin mining helps to update the blockchain ledger every time a fresh block is added so that miners always receive the updated information.

It must be stressed here, that Bitcoin mining also aids to prevent the problem of Bitcoin double-spending. The problem was common during the early days of Bitcoin when scammers used to spend the same digital token (say, BTC) multiple times by manipulating the blockchain network. The problem has been majorly addressed by the advanced immutability feature of modern blockchain platforms. Additionally, verification of transaction data as facilitated by Bitcoin mining has also been able to check the problem by providing minors with updated data on the blockchain ledger.

Process of Bitcoin mining

Now, how does Bitcoin mining work?

Put simply, Bitcoin mining refers to a process where miners deploy specialized computers to solve complicated mathematical equations of the Bitcoin algorithms. The goal is to figure out the most accurate random number that can solve the equation. Upon successful guesswork of the number, a fresh block is added and the minor receives a batch of Bitcoin as the reward.

• Major aspects of Bitcoin mining

Bitcoin mining involves two major concepts- Proof-of-Work and Hash.

Proof-of-Work– Proof-of-Work refers to the questions or equations that miners have to answer correctly to add a fresh block and release BTC. In crypto jargon, PoW implies a zero-knowledge proof that assures that the statement offered by the providing party to the verifier is “true”. In regard to Bitcoin mining, PoW is the process of verifying Bitcoin transactions by miners.

Hash– The term “Hash” implies the correct number that miners need to compute out to solve the PoW equations during the mining process. It is a 64-digit-long hexadecimal number. The difficulty level of solving every fresh PoW does not lie solely in the equation. Rather, it is largely determined by the ability of the mining device to guess the numbers of possible answers to derive the right hash.

• Who gets the mining reward?

It’s not that all miners who are able to compute the right Hash will be rewarded. The reward is exclusively reserved for the miner who becomes the “first” one to solve the puzzle.  With Bitcoin commanding rising attention with each passing day, the number of Bitcoin miners is also rising. Cut-throat competition rules the mining scene today where it is becoming a major challenge to reach the first rank.

The current reward for Bitcoin mining is around 6.25 Bitcoin. As Bitcoin rewards get halved after every 4 years, the reward will be around 3.125 Bitcoin in 2024. This way, the reward amount will only keep depleting till the entire amount of BTC has been mined out.

How do you execute Bitcoin mining?

Bitcoin mining is executed through mining rigs. 

Initially, the Bitcoin mining rigs were slightly improved versions of regular PCs. But now, with the evolution of blockchain over time and rising competition around, you need highly advanced mining computers with more enhanced computational power. It led to the introduction of “Application-Specific Integrated Circuit” or ASIC in the Bitcoin mining scene. These are specialized computers that are exclusively engineered for crypto mining.

Today it needs 12 trillion-x more power for mining a single BTC than what was required in 2009.

Different ways to take part in Bitcoin mining

There are three main ways to take part in Bitcoin mining

Go solo

You can choose to set up your own Bitcoin mining rig and execute the mining process independently. If you win the reward, the reward will be exclusively yours. However, setting a whole Bitcoin mining rig can be a high-end process. Not only are the ASIC machines expensive but they also consume an immense amount of electricity. The electric bills could hike up to $30,000 – $50,000 a month. So, only proceed with solo mining if you are equipped to invest accordingly.

Join Mining pool

Mining pools are based on the fundamentals of collective effort. When you join a pool, you contribute your computing endeavor in a Bitcoin mining pool composed of other miners who too have contributed their computing power to mint BTC. So, it’s like a set of miners globally are trying to mine Bitcoin together and they are connected by one common network. Collective effort increases the odds of guessing the right hash faster than is possible through a solo attempt. When the pool wins the reward, it gets divided and distributed among pool members.

Cloud Bitcoin mining

In simple words, cloud mining refers to the process where a miner rents the specialized computing resources required for Bitcoin mining. It offers a more affordable option than buying and maintaining the whole set of high-end Bitcoin mining hardware and software. 

Tips for miners

On a final note, here are some tips for miners to ensure a safe and more efficient Bitcoin mining experience.

• Always make sure to check the hash rate of your Bitcoin mining rig. It refers to the rate of speed at which a mining rig can compute the right hash. Your chosen ASIC should not have anything less than 60TH/s.
• The ASIC should be easy to maintain.
• Your chosen Bitcoin mining pool must command a stellar reputation. Go for large pools as they are more likely to solve hash faster than smaller ones.
• If you are opting for cloud mining, make sure you are getting high-performing ASICs only.