Bitcoin mining embodies several of the beautifully balanced incentives that make Bitcoin such a revolutionary system. So it’s unfortunate that many users are unaware of the process that produces bitcoins, as mining is one of the most ingenious and intriguing aspects of the system.
Mining is, in many ways, Bitcoin’s backbone, simultaneously solving the “double spending” problem that could mean the same bitcoins are spent twice, making the underlying blockchain immutable, and bringing new coins into circulation.
As a practical matter, mining is not something the average Bitcoin user needs to understand in order to acquire and spend bitcoins.
If the platform works as intended, users should see their transactions confirmed and need not worry about how. But knowing a little about it makes involvement in the Bitcoin space all the more satisfying.
Bitcoin mining is done by — who else? — Bitcoin miners.
Theoretically, anyone can become a Bitcoin miner. Like many other Bitcoin users, miners verify new transactions and new blocks and forward these to connected Bitcoin nodes. They are part of the peer-to-peer network just like anyone else, and, from a network perspective, there isn’t anything to identify them as miners.
But miners take on an additional task within the network. They use the transactions they receive to try and “mine” new blocks themselves. This system has them serving an important function for the network: If two conflicting transactions exist on the network because someone tries to cheat and spend the same bitcoin twice, the miner picks which of these transactions is confirmed and includes it in a block of verified data. The conflicting transaction is then rejected from the network.
As such, mining solves Bitcoin’s double spend problem.
This mining of new blocks is a somewhat complex mathematical process, the details of which are beyond the scope of a primer guide. But in a simplified metaphor, it can be thought of as a unique type of lottery. Miners “guess” what the next block could look like. If they guess correctly, their block is accepted by the network. If they guess incorrectly, they can guess again and as often as they want.
However, each guess requires a tiny bit of computing, or hash, power to make. And because Bitcoin miners effectively compete against each other to be the first to find a new block, many try to guess as fast and as often as they can. This has naturally evolved into a sort of arms race over the years. Miners have increasingly optimized their computers to churn out a lot of hash power and spend a lot of computing energy doing so.
This energy consumption is why Bitcoin mining is sometimes viewed as wasteful. But in actuality, this “wasted energy” offers the second great benefit to the Bitcoin network: it makes the blockchain tamper-resistant and immutable.
As a key property of the Bitcoin system, transactions that have been done in the past are practically impossible to undo. The only way for an attacker to potentially reverse an old transaction is to rebuild the entire blockchain that has been established since that transaction happened. This would also require the attacker to go through the whole “guessing game” and mine a whole new series of blocks from scratch.
However, all of this “guessing” would require at least as much energy as has been invested by all of the miners since that transaction took place and potentially much more in order to overtake the original chain. Depending on how much hash power an attacker controls, this is either impossible or very expensive. Because this is impossible or prohibitively expensive, it’s safe to trust that older transactions will indeed not be reversed, making the Bitcoin blockchain relatively immutable.
Of course, miners don’t invest all of this energy into finding blocks for charity. Each new Bitcoin block includes one special transaction. This transaction pays the miner in brand-new bitcoins that didn’t exist before, as well as transaction fees.
And that is the third great benefit of Bitcoin mining: it’s how new bitcoins come into circulation, without the need of a central issuer.
So, now that you understand what mining is, perhaps you want to become a miner and earn some new bitcoins yourself. That’s possible — but it’s not easy.
Back in the early days of Bitcoin, when the currency was hardly worth anything at all, anyone could mine bitcoins, even using a laptop computer. But this quickly changed when bitcoin gained real monetary value. Once miners realized that graphics cards could be dedicated to the task more efficiently, specialized mining farms emerged throughout 2010 and 2011. And since 2012 and 2013, Bitcoin mining has professionalized even further, as specialized chips and machines — known as “ASIC miners” — came to market. If you want to mine profitably, you will probably need one of these.
It should also be noted that most Bitcoin mining today happens through mining pools. Instead of individual miners taking part in the peer-to-peer network, most of them actually bundle their hash power together through such a mining pool and share any rewards they receive. This smoothes out the “luck factor” inherent in mining, so no one has to go without reward for months or years at a time.
And last but not least, you will probably need relatively cheap (or free) energy; otherwise you are likely to spend more on your electricity bill than you will ever earn in rewards. Larger operations may also require a decent cooling system or a cold climate. And some basic technical skills to set up the operation and maintain it will come in handy, too.
All of this is doable if you want to put in the time, money and effort. And if you have access to the right resources, it could even earn you a nice profit. But keep in mind that you will be competing in a highly professionalized industry. Bitcoin mining is not free money.