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bitcoin mining

What is bitcoin mining?

Bitcoin mining is the process of verifying new transactions to the Bitcoin digital currency system, as well as the process by which new bitcoin enter into circulation.

Bitcoin is a cryptocurrency that is traded for goods or services as payment. Bitcoin mining is done to record current bitcoin transactions in blocks, which are then added to a blockchain, or the record of past transactions.

Bitcoin miners use software to solve transaction-related algorithms that check bitcoin transactions. In return, miners are awarded a certain number of bitcoin per block. This entices them to keep solving the transaction-related algorithms, supporting the overall system.

Business Insider stated that nearly 90% of all bitcoin has been mined and that all bitcoin will enter circulation by 2140. Mining operations are typically costly, which makes it less practical for the average consumer to perform.

How does bitcoin mining work?

Because bitcoin is not overseen or regulated by a central authority, bitcoin miners confirm and verify transactions by solving complex mathematical cryptography calculations, which ultimately are included in a block to the blockchain.

Miners receive the latest batch of transaction data, which is then run through a cryptographic algorithm. A hash, or string of numbers and letters that does not reveal any transaction data, is generated and used for validity. The hash is designed this way to help ensure that its corresponding block has not been tampered with. If even one number is different or out of place, the corresponding data generates a different hash. The previous block's hash is included within the next block so that, if something has been changed in the previous block, the generated hash then changes. The hash must also be below a specified target set by the hash algorithm. If the generated hash is too big, it is generated again until it is below its specified target.

The hashing process is designed to make solving transaction-related algorithms more challenging over time. This means solving these algorithms also requires more and more computing resources.

To reward bitcoin miners, a certain number of bitcoin are issued to them in exchange for doing the work. Bitcoin mining, therefore, accomplishes three tasks. It verifies bitcoin transactions, creates a way to issue more currency and incentivizes more bitcoin mining.

The current processing power needed for bitcoin mining today means access to powerful computers and large amounts of electricity are a must. Bitcoin mining could originally be done by individuals on single computers. However, because the difficulty level of solving transaction-related algorithms grows over time, individual computers are highly unlikely to be able to mine bitcoin. Instead, most bitcoin miners use application-specific integrated circuits (ASICs) and other methods to mine for bitcoin.

The mining reward amount changes by half every four years.

What is proof of work in bitcoin mining?

Proof of work is a form of cryptographic zero-knowledge proof, which means that a providing party proves to the verifier that a statement is true -- without giving any additional information. In bitcoin mining, proof of work refers to the process where bitcoin miners verify bitcoin transactions.

What are the risks of bitcoin mining?

The following risks are associated with mining bitcoin:

  • Environmental. According to a Digiconomist report, because the process requires so much processing power and electricity, bitcoin mining has annually accounted for at least 95 megatons of carbon dioxide emissions. Other sources have cited lower numbers of 57 million tons. Bitcoin mining operations are generally located in areas where electricity is cheaper, such as in China, where coal generates a portion of the country's electricity. However, according to CNBC, after China banned bitcoin mining, the collective computing power of miners dropped 50% worldwide. The U.S. has since become the second-place choice for bitcoin mining, now accounting for almost 17% of global miners. If the U.S. slowly leans toward renewable energies, the environmental costs should stay lower than 95 megatons.
  • Price volatility. Since its introduction, bitcoin price has varied widely. This kind of volatility and the changing price of bitcoin rewards make it difficult for miners to know how much they will continue to earn from the process.
  • Profitability. Depending on factors like the mining rig used, the cost of the mining machines, bitcoin volatility, changing reward prices and continued cost of electricity, there is no guarantee that a single bitcoin miner will continue to make enough money to pay for the operating costs.
  • Regulatory risks. Regulations for cryptocurrency continue to develop and change as bitcoin becomes more popular. Regulations include how it is taxed or even if mining is allowed in certain areas.
  • Malware. In the malware world, a prevalent threat is mining botnet infections, in which user systems are used to mine bitcoin without the owners' knowledge.

What do you need to mine bitcoin?

Originally, bitcoin mining was conducted on the CPUs of individual computers. After this, the system was dominated by multi-graphics card systems, then field-programmable gate arrays and, finally, ASICs in an attempt to find more hashes using less electrical power usage.

To partake in bitcoin mining now, prospective miners need the following:

  • Competitive mining computers. These computers, often referred to as rigs, along with ASICs, which are microchips designed for a specified application, significantly help the mining process.
  • Electricity. Power is the main operating expense, and profitability surrounding the cost of power may be within a few cents per kilowatt-hour.
  • A low-cost power supply. With the main cost involved in bitcoin mining being power consumption, having an efficient power supply is important.
  • Mining software. This software solves cryptographic math problems in the mining process. For example, this can be open source software, such as CGMiner.
  • Mining pool. This process helps make bitcoin mining more accessible.

What are bitcoin mining pools and farms?

The bitcoin network aims to add a new block to the blockchain about every 10 minutes. It is generally difficult for an individual bitcoin miner to successfully create a new hash for a block. This is where mining pools help. They combine the computational resources of many individual miners to increase the chance of successfully hashing a block. Rewards are then distributed to the miners based on how many resources they provide. This method does not require as many of the upfront costs that are involved in bitcoin mining.

Bitcoin mining farms are similar to mining pools; however, with mining farms, mining rigs are typically all located in one location, data center or warehouse.

Is bitcoin mining legal?

Bitcoin mining is legal in many but not all countries. Some countries have passed regulations that effectively ban owning, trading or mining bitcoin. Bitcoin mining is illegal in the following countries:

  • Algeria
  • Bolivia
  • China
  • Egypt
  • Morocco
  • Nepal
  • Pakistan

Learn about three of the most popular cryptocurrencies on the market -- Bitcoin, Ethereum and Dogecoin -- and how they differ.

This was last updated in December 2021

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