How Does Bitcoin Mining Work, Investopedia

Cryptocurrency mining is painstaking, expensive, and only sporadically rewarding. Nonetheless, mining has a magnetic draw for many investors interested ter cryptocurrency. This may be because entrepreneurial types see mining spil pennies from heaven, like California gold prospectors ter 1848. And if you are technologically inclined, why not do it?

Well, before you invest the time and equipment, read this explainer to see whether mining is truly for you. Wij will concentrate primarily on Bitcoin. (Related: How Bitcoin Works and our helpful infographic, What is Bitcoin?)

Why should I mine?

By mining, you can earn cryptocurrency without having to waterput down money for it. That said, you certainly don’t have to be a miner to own crypto. You can also buy crypto using fiat currency (USD, EUR, JPY, etc), you can trade it on an exchange like Bitstamp using other crypto (example: Using Ethereum or NEO to buy Bitcoin), you even can earn it by playing movie games or by publishing blogposts on platforms that pay its users ter crypto. An example of the latter is Steemit, which is kleuter of like Medium except that users can prize bloggers by paying them ter a proprietary cryptocurrency called Steem. Steem can then be traded elsewhere for Bitcoin.

Te addition to lining the pockets of miners, mining serves a 2nd and vital purpose: It is the only way to release fresh cryptocurrency into circulation. Te other words, miners are basically “minting” currency. For example, spil of the time of writing this chunk, there were about 17 million Bitcoin te circulation. Aside from the coins minted via the genesis block (the very very first block created by Bitcoin founder Satoshi Nakamoto himself), every single one of those Bitcoin came into being because of miners. Ter the absence of miners, Bitcoin would still exist and be usable, but there would never be any extra Bitcoin. There will come a time when Bitcoin mining completes, vanaf the Bitcoin Protocol, the number of Bitcoin will be capped at 21 million. (Related reading: What Happens to Bitcoin After All 21 Million are Mined?)

How much can a miner earn from mining Bitcoin?

Bitcoin are mined ter units called “blocks.” Spil of the time of writing, the prize for completing a block is 12.Five Bitcoin. At today’s price of about $Ten,000 vanaf Bitcoin, this means you’d earn (12.Five x Ten,000)=$125,000.

When Bitcoin wasgoed very first mined ter 2009, mining one block would earn you 50 BTC. Te 2012, this wasgoed halved to 25 BTC. te 2016, this wasgoed halved to the current level of 12.Five BTC. Te 2020 or so, the prize size will be halved again to 6.25 BTC.

If you want to keep track of precisely when thesis halvings will occur, you can consultatie the Bitcoin Clock, which updates this information te real time.

How many blocks have bot mined so far?

A number of sites, including Blockchain.informatie, will give you that information te real time. At the time of writing, wij are at block #509504.

What are miners doing that’s so significant that they get free Bitcoin?

Miners are getting paid for their work spil auditors. They are doing the work of verifying previous Bitcoin transactions. This convention is meant to keep Bitcoin users fair, and wasgoed conceived by Bitcoin’s founder, Satoshi Nakamoto. By verifying transactions, miners are helping to prevent the “double-spending problem.”

Dual spending means, spil the name suggests, that a Bitcoin user is illicitly spending the same money twice. With physical currency, this isn’t an punt: Once you mitt someone a greenback $20 bill to buy a bottle of vodka, you no longer have it, so there’s no danger you could use that same $20 to buy lotto tickets next vanwege. With digital currency, however, spil the Investopedia dictionary explains, “there is a risk that the holder could make a copy of the digital token and send it to a merchant or another party while retaining the original.”

Let’s say you had one legit $20 and one indeed good photocopy of that same $20. If someone were to attempt to spend both the real bill and the fake one, someone who took the trouble of looking at both of the bills’ serial numbers would see that they were the same number, and thus one of them had to be false. What a Bitcoin miner does is analogous to that–they check transactions to make sure that users have not illegitimately attempted to spend the same Bitcoin twice. This isn’t a volmaakt analogy–we’ll explain ter more detail below.

Once a miner has verified 1 MB (megabyte) worth of Bitcoin transactions, they are eligible to win the 12.Five BTC. The 1 MB limit wasgoed set by Satoshi Nakamoto, and is a matter of controversy, spil some miners believe the block size should be enlargened to accommodate more gegevens.

Note that I said that verifying 1 MB worth of transactions makes a miner eligible to earn Bitcoin–not everyone who verifies transactions will get paid out.

1MB of transactions can theoretically be spil petite spil 1 transaction (tho’ this is not at all common) or several thousand. It depends on how much gegevens the transactions take up.

So after all that work of verifying transactions, I might still not get any Bitcoin for it?

That is onberispelijk.

Te order to earn Bitcoin, you need to meet two conditions. One is a matter of effort, one is a matter of luck.

1) You have to verify

1MB worth of transactions. This is the effortless part.

Two) You have to be the very first miner to arrive at the right response to a numeric problem. This process is also known spil a proof of work.

What do you mean, “the right response to a numeric problem”?

The good news: No advanced math or computation is involved. You may have heard that miners are solving difficult mathematical problems–that’s not true at all. What they’re actually doing is attempting to be the very first miner to come up with a 64-digit hexadecimal number (a “hash”) that is less than or equal to the target hash. It’s basically guess work.

The bad news: Because it’s guesswork, you need a lotsbestemming of computing power ter order to get there very first. To mine successfully, you need to have a high “hash rate,” which is measured te terms of megahashes vanaf 2nd (MH/s), gigahashes vanaf 2nd (GH/s), and terahashes vanaf 2nd (TH/s).

That is a good many hashes.

If you want to estimate how much Bitcoin you could mine with your mining equipment’s hash rate, the webpagina Cryptocompare offers a helpful zakjapanner.

What equipment do I need to mine?

Either a GPU (graphics processing unit) miner or an application-specific integrated circuit (ASIC) miner. Thesis can run from $500 to the ems of thousands. Some miners–particularly Ethereum miners–buy individual graphics cards spil a low-cost way to cobble together mining operations. The photo below is a makeshift, home-made mining machine. The graphics cards are those rectangular blocks with whirring circles. Note the sandwich twist-ties holding the graphics cards to the metal pole. This is most likely not the most efficient way to mine, and spil you can guess, many miners are te it spil much for the joy and challenge spil for the money.

The ELI5 (“Explain It Like I’m Five”) version of what Bitcoin miners do

Example: I tell three friends that I’m thinking of a number inbetween 1 and 100, and I write that number on a chunk of paper and seal it te an envelope. My friends don’t have to guess the precies number, they just have to be the very first person to guess any number that is less than or equal to the number I am thinking of. And there is no limit to how many guesses they get.

Let’s say I’m thinking of the number Nineteen. If Friend A guesses 21, they lose because 21>,Nineteen. If Friend B guesses 16 and Friend C guesses 12, then they’ve both theoretically arrived at viable answers, because 16<,Nineteen and 12<,Nineteen. There is no “reserve credit” for Friend B, even however B’s reaction wasgoed closer to the target response of Nineteen.

If B and C both reaction at the same time, then the ELI5 analogy cracks down.

Te Bitcoin terms, simultaneous answers occur frequently, but at the end of the day there can only be one winning reaction. When numerous simultaneous answers are introduced that are equal to or less than the target number, the Bitcoin network will determine by a elementary majority–51%–which miner to honour. Typically, it is the miner who has done the most work, i.e. verifies the most transactions. The losing block then becomes an “orphan block.”

Now imagine that I pose the “guess what number I’m thinking of” question, but I’m not asking just three friends, and I’m not thinking of a number inbetween 1 and 100. Rather, I’m asking millions of would-be miners and I’m thinking of a 64-digit hexadecimal number. Now you see that it’s going to be utterly hard to guess the right reaction. (See also: What is Bitcoin Mining?)

What the hell is a “64-digit hexadecimal number”?

Well, here is one:

The number above has 64 digits. Effortless enough to understand so far. Spil you very likely noticed, that number consists not just of numbers, but also letters of the alphabet. Why is that?

Te order to understand what thesis letters are doing te the middle of numbers, let’s unpack the word “hexadecimal.”

Spil you know, wij use the “decimal” system, which means it is base Ten. This ter turn means that every digit has Ten possibilities, 0-9. I will be rather alarmed if thesis do not look familiar to you:

0 1 Two Trio Four Five 6 7 8 9

“Hexadecimal,” on the other mitt, means base 16, spil “hex” is derived from the Greek word for 6 and “deca” is derived from the Greek word for Ten. Ter a hexadecimal system, each digit has 16 possibilities. But our numeric system only offers Ten ways of signifying numbers (0-9). That’s why you have to stick letters ter, specifically letters a, b, c, d, e, and f. Te a hexadecimal system, thesis are the values of each digit:

The above chart is just for background. If you are mining Bitcoin, you do not need to calculate the total value of that 64-digit number (the hash). I repeat: You do not need to calculate the total value of a hash.

Thanks a loterijlot. So what do “64-digit hexadecimal numbers” have to do with Bitcoin mining?

Reminisce that ELI5 analogy, where I wrote the number Nineteen on a chunk of paper and waterput it te a sealed envelope?

Te Bitcoin mining terms, that metaphorical undisclosed number ter the envelope is called the target hash.

What miners are doing with those enormous computers and dozens of cooling ventilatoren is guessing at the target hash. Miners make thesis guesses by randomly generating spil many “nonces” spil possible, spil swift spil possible. A nonce is brief for “number only used once,” and the nonce is the key to generating thesis 64-bit hexadecimal numbers I keep talking about. Te Bitcoin mining, a nonce is 32 onaardig ter size–much smaller than the hash, which is 256 pinnig. The very first miner whose nonce generates a hash that is less than or equal to the target hash is awarded credit for completing that block, and is awarded the spoils of 12.Five BTC.

Te theory you could achieve the same purpose by rolling a 16-sided diegene 64 times to arrive at random numbers, but why on earth would you want to do that?

The screenshot below, taken from the webpagina Blockchain.informatie, might help you waterput all this information together at a glance. You are looking at a summary of everything that happened when block #490163 wasgoed mined. The nonce that generated the “winning” hash wasgoed 731511405. The target hash is shown on top. The term “Relayed by: Antpool” refers to the fact that this particular block wasgoed finished by AntPool, one of the more successful mining pools. Spil you see here, their contribution to the Bitcoin community is that they confirmed 1768 transactions for this block. If you indeed want to see all 1768 of those transactions for this block, go to this pagina and scroll down to the heading “Transactions.”

OK so how do I guess at the target hash?

All target hashes start with zeros–at least eight zeros, and up to 63 zeros.

There is no ondergrens target, but there is a maximum target set by the Bitcoin Protocol. No target can be greater than this number:

Here are some examples of randomized hashes and the criteria for whether they will lead to success for the miner:

(Note: Thesis are made-up hashes)

How do I maximize my chances of guessing the target hash before anyone else does?

You’d have to get a prompt mining equipment or, more realistically, join a mining pool–a group of miners who combine their computing power and split the mined bitcoin. Mining pools are comparable to those Powerball clubs whose members buy lottery tickets plus masse and agree to share any winnings. A disproportionately large number of blocks are mined by pools rather than by individual miners.

Ter other words, it’s literally just a numbers spel. You cannot guess the pattern or make a prediction based on previous target hashes. The difficulty level of the most latest block at the time of writing is Two,874,674,234,416, i.e. the chance of any given nonce producing a hash below the target is 1 ter Two,874,674,234,416–less than 1 ter Two trillion.

How do I determine whether Bitcoin will be profitable for mij?

The aforementioned webpagina Cryptocompare offers a helpful rekenmachine that permits you to butt-plug te numbers such spil your hash speed, electric current costs etc. to estimate the costs and benefits.

I’ve done the math. Leave behind mining. Is there a less onerous way to profit from the Crypto boom?

Sure. Spil discussed, the easiest way to acquire Bitcoin is to buy it on an exchange like Coinbase.com. Alternately, you can always leverage the “pickaxe strategy”. This is based on the old eyed that during the 1848 California gold rush, the wise investment wasgoed not to pan for gold, but rather to make the pickaxes used for mining. Or, to waterput it ter modern terms, invest te the companies that manufacture those pickaxes. Ter a crypto setting, the pickaxe omschrijving would be a company that manufactures equpiment used for Bitcoin mining. You can look into companies that make ASICs miners or GPU miners.

Companies that manufacture thesis products include AMD and Nvidia. (Related Reading: AMD vs. Nvidia: Who Predominates GPUs?)

Disclaimer: At the time of writing, the author held no positions te any of the companies mentioned te this lump. Investopedia does not make recommendations about particular stocks.

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