Bitcoin mining is the process of creating new bitcoins by solving extremely complicated math problems that verify transactions in the currency. When a bitcoin is successfully mined, the miner receives a predetermined amount of bitcoin.
Since its inception in 2009, Bitcoin gained widespread popularity in 2010 due to its fluctuating prices and increasing value.
As the value of cryptocurrencies and bitcoins have skyrocketed in recent years, the demand for mining has naturally increased. But for most people, the prospects of Bitcoin mining are not good due to its complex nature and high cost. Here’s how Bitcoin mining works and some of the main risks you should be aware of.
Understanding Bitcoin
Bitcoin is one of the most popular types of cryptocurrencies, which are digital mediums of exchange that exist solely online. Bitcoin runs on a decentralized computer network or distributed ledger that tracks transactions in the cryptocurrency. When computers on the network verify and process transactions, new bitcoins are created, or mined. These networked computers, or miners, process the transaction in exchange for a payment in Bitcoin.
Bitcoin is powered by the blockchain, the technology that powers many cryptocurrencies. A blockchain is a decentralized ledger of all transactions in a network. Groups of accepted transactions together form a block and form a chain. Think of it as a long public record that works like a long invoice. Bitcoin mining is the process of adding blocks to the chain.
How Bitcoin mining works
To successfully mine a block, bitcoin miners compete to solve highly complex mathematical problems that require expensive computers and vast amounts of electricity. In order to complete the mining process, miners must be the first to arrive at the correct or closest answer to the question. The process of guessing the correct number (hash) is known as proof of work. Miners guess the target’s hash by randomly guessing as many as possible, which requires a lot of computing power. The problem is compounded as more miners join the network.
The computer hardware required is known as an application-specific integrated circuit, or ASIC, and can cost up to $10,000. ACCs consume large amounts of electricity, which has drawn criticism from environmental groups and limited the profitability of miners.
If a miner successfully adds a block to the blockchain, they will receive 6.25 bitcoins as a reward. The reward amount is halved every four years or every 210,000 blocks. In the year since March 2023, bitcoin has traded at around $24,300, making 6.25 bitcoins worth $152,000.
