Mining Bitcoin: A Step-By-Step Guide

Mining has been thought of as something incredibly rewarding and “in-fashion” because the miners are rewarded with crypto tokens, which can be viewed as “pennies from heaven”, as California prospectors thought of gold mining in 1849. And if someone has the capacity to mine, why not do it?

Bitcoin mining is the process by which new bitcoins are entered into circulation. What is more, it is a vital part of the preservation and evolution of the blockchain ledger. Mining is achieved using computers that solve unusually complex math problems.

Bitcoin mining within the blockchain is based on 5 steps:

1. Verify if transactions are valid.

2. Transactions are bundled into a block.

3. The header of the most recent block is selected and entered into the new block as a hash.

4. Proof of work is completed.

5. A new block is added to the blockchain and added to the peer-to-peer network.

How Bitcoin mining works

The mining process starts with the blockchain, an online decentralized ledger that records transactions. Then, as mentioned above, these transactions are bundled into a block. These blocks are tied together to create a “chain,” hence, the term “blockchain.”

As blockchain expert Mark Mueller-Eberstein said: “There is no “central power” overseeing the ledger of transactions. Instead, bitcoin blockchain technology enables a decentralized and distributed ledger where transactions are shared among a network of computers — in almost real-time — rather than being stored on a central server with a central authority (like a bank) overseeing transactions.”

Bitcoin miners’ computers solve very sophisticated maths problems; this mandates the supply of enormous computational and electrical power. Each miner receives a reward of 6.25 bitcoins per block (as of May 2021).

Remember that:

“The reward rate is cut in half every 210,000 blocks, which roughly means every four years.

This process, called “halving,” is algorithmically enforced, ensuring a predictable, unalterable rate of introducing new bitcoins into the existing supply — eliminating concerns of inflation.

Due to the inherent difficulty in mining bitcoins, there are a number of requirements when it comes to the actual mining process”.

What is Needed to Mine Bitcoin

Bitcoin is structured in a way as to change the difficulty required to mine one block every 14 days (or every 2,016 blocks mined), with the goal of maintaining the time required to mine one bitcoin to 10 minutes.

This is why the level of difficulty when it comes to mining is rising. Regular household computers will not have much luck in the Bitcoin ecosystem.

As explained by The Balance:

“The first and most important piece of equipment needed to mine bitcoin is specialized mining hardware called application-specific integrated circuits, or ASICs. A new ASIC device can cost anywhere from several hundred dollars to $10,000. But the price of mining hardware is only a fraction of the expense involved. ASICs consume tremendous amounts of electricity, the cost of which can quickly exceed the cost of the device using it. You’ll also need to choose Bitcoin mining software to join the Bitcoin network. This isn’t nearly as expensive as hardware. In fact, there are plenty of reliable software options available for free”.

Is it Profitable?

All costs and expenses need to be taken into account first: hardware, software, and electricity, the current value of Bitcoin, and also the taxes you might pay.

At first glance, it appears very profitable. 6.25 bitcoins per block? With the current value of Bitcoin, that is a significant amount of money. There is a catch, however. A single ASIC can consume as “much electricity as 500,000 Playstation 3 devices”, which is why Bitcoin mining simply isn’t profitable from home. The profitability of Bitcoin mining is directly related to the cost of electricity in a given country/area.

Is it legal?

In general, it depends on two factors:

Your geographic location

Whether you mine crypto through legal means.

However, in most places, the answer is yes. It is legal.

An example of veering onto an illegal territory would be using illegal means to mine Bitcoin.

As described by Infosec Insights:

“Some cybercriminals use Javascript in browsers or install malware on unsuspecting users’ devices to hijack” their devices’ processing power. This type of cyber attack is known as cryptojacking”.

Bitcoin mining is also viewed differently by different governments around the globe. The U.S. Library of Congress published a report stating that in Germany, for example, mining Bitcoin is viewed as fulfilling a service that’s at the heart of the Bitcoin cryptocurrency system. The opposite situation is the case in China, where some government officials are cracking down on Bitcoin mining, “leading many organizations to stop mining Bitcoin altogether”.

Criticism of Bitcoin Mining

Bitcoin has been criticized for the amount of electricity consumed by mining. As of 2015, the estimated combined electricity consumption attributed to mining was 166.7 megawatts and by 2017, was estimated to be between one and four gigawatts of electricity.

In 2018, bitcoin was estimated to use 2.55 to 3.572 GW, or around 6% of the total power consumed by the global banking sector.

Furthermore, a 2021 estimate from the University of Cambridge says bitcoin consumes more than 178 (TWh) annually, ranking it in the top 30 energy consumers if it were a country.

Bottom Line

Mining is definitely a rewarding and profitable endeavor, but it requires extensive domain-specific knowledge and a high initial financial input (buying the necessary software and computers).

About Coinsbit

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