How Does Bitcoin Mining Work? History, Earning Potential & Costs

Bitcoin Mining

The Crypto market is booming in 2021 with over 11,000 cryptos listed on CoinMarketCap. Many of these cryptos work on either Proof of Stake or Proof of Work model. Bitcoin is one of the oldest cryptocurrencies with a fair share in the whole crypto market.

Bitcoin is also popular as Digital Gold and the currency also works on the Proof of Work (PoW) model where miners have to solve each complex problem for validating an upcoming transaction as well as generate new bitcoins as a reward.

As of 2021, there are over 18.8 Million Bitcoins in circulation. The Bitcoin source code has a stipulation that sets a bar on the total supply of Bitcoin. There will be 21 Million bitcoins in total that will ever be mined. The mining of the total bitcoin supply is set to complete in 2140.

Bitcoin Mining — Defined

Bitcoin works on a Proof of Work model, according to which all transactions are to be validated by miners before they are confirmed and added to a new block in the Blockchain. To put it in simple words, Blockchain is a digital ledger where all Bitcoin transactions are stored.

This ledger is distributed through chained blocks all across the Bitcoin network. Each new transaction is validated by miners all across the globe before it is added to the ledger. Therefore, Blockchain makes each transaction secured that can never be altered or changed.

A good analogy to understand Bitcoin mining is gold mining. To mine gold, miners require certain equipment and machinery. They use their own resources to find gold, and then it passes through various steps before it is deemed valuable. Gold also holds significant value due to its scarcity, and the same is the case with Bitcoin.

Who are Bitcoin Miners?

Bitcoin miners are ordinary people who are willing to provide their own resources such as powerful GPUs to mine Bitcoin. These miners are distributed all across the globe, and no single company or firm controls them.

These miners are an integral part of the Bitcoin ecosystem because they are responsible for validating transactions by solving complex problems created by the PoW algorithm of Bitcoin, which is based on the SHA-256 hashing function.

To enter Bitcoin mining for earning rewards, each miner has to first confirm 1 megabyte (MB) worth of transactions. Once a miner has surpassed the threshold, then miners start to earn bitcoin rewards on each transaction they complete. The 1MB standard by Satoshi Nakamoto, who is the unknown identity behind Bitcoin.

Once a miner satisfies the 1MB transactions policy, then they have to solve complex block problems to earn rewards. The miners who first give accurate or nearly accurate answers to the problems are rewarded with Bitcoin.

History of Bitcoin Mining

According to Decrypt, Satoshi Nakamoto mined around 22,000 blocks when Bitcoin was first created. These blocks are equivalent to 1.1 Million BTC in rewards. The mining didn’t need much computing power when Bitcoin was initially launched. The process was much simpler, and miners could simply use their personal laptops or computers for solving complex problems.

The mining complexity is increasing day by day as more and more bitcoin miners have entered the competition. The mining complexity is now through the roof. Therefore, the mining rewards are halved after every four years.

The Block reward for bitcoin is halved after every 210,000 blocks are mined. In 2009, the block reward was higher and miners have been rewarded 50 bitcoins. In 2013, the block reward was halved and the reward came down to 25. Again, after four years the block reward was at 12.5 and in 2020, it came down to 6.25.

In the upcoming 4 years, the block reward will be 3.125. There will be many halving cycles before all 21 Million bitcoins are mined. The mining process is slowed down by half after every cycle. Therefore, 2140 will be the year when all Bitcoins will be successfully mined.

According to Bitcoin Clock, 98% of all Bitcoins will be mined in 2030. However, the remaining 2% will take over a century because block rewards will be much lower.

How Much Do Bitcoin Miners Earn?

In the early years of Bitcoin, the reward for mining each block was set at 50 Bitcoins. The price of Bitcoin was a few dollars and mining each block was much easier. Later, after four years, the reward was halved to 25 Bitcoins and the price of bitcoin went up. After another halving cycle, the reward per block was 12.5.

As of 2021, the Bitcoin reward per Block is 6.25 Bitcoin. So, if a miner solves a single block, they will be rewarded with 6.25 Bitcoins. The current Bitcoin price revolves around $50,000. Hence, a miner could potentially earn $312,500 for solving a single complex block.

It might seem easy, but a single block needs a ton of processing power before it is resolved. Also, complex problems are more difficult than ever, so normal computers do not have a chance to solve these complexities.

How Bitcoin Mining is Decentralized

The distinct quality that makes Bitcoin special is its decentralization. All our fiat currencies are regulated by the government, and they control their supply and demand depending on the economy and circumstances. Therefore, people have to trust their government with their money.

Bitcoin uses nodes (separate devices) from all across the globe. These nodes are not owned or regulated by a single entity. However, anyone can participate in the bitcoin network and become a Bitcoin miner.

Therefore, no single person or entity can really make any desired changes to the Blockchain. This makes the whole system decentralized. Also, each transaction block works like a chain. The bitcoin miners ensure the authenticity of all blocks and if someone tries to introduce a fake transaction, the chain automatically detects it and rejects the transactions.

This decentralized model is used in most of the cryptocurrencies that are totally dependent on individuals rather than government or other organizations.

Computing Power vs Complexity

Bitcoin uses a simple rule when it comes to the complexity of mining blocks. According to this rule, the complexity of problems increases when there are millions of miners on the bitcoin network. However, the complexity decreases when there are only a few miners across the globe.

Each Bitcoin block has to be mined in 10 minutes. Therefore, the complexity levels are reconsidered by the algorithm after every two weeks. If the number of miners increases, the complexity also tends to increase and vice versa.

This algorithm allows us to keep a stable supply while tackling the competition. Therefore, it’s harder to mine bitcoins today than it was five years ago. The difficulty level for bitcoin mining was at 1 when Satoshi Nakamoto alone mined over a million bitcoins. He was alone at that time, but in 2019, the difficulty level touched 13 Trillion because of competitiveness.

What Do I Need to Mine Bitcoins?

Bitcoin miners need extreme processing power to mine blocks today’s date. Miners create something known as Bitcoin Mining Rigs, where they use collective processing power to solve a particularly complex problem.

These miners create powerful computer machines by combining the most powerful GPUs or application-specific integrated circuits (ASIC). They need multiple components to have enough computational power that is enough to mine blocks. This equipment can cost thousands of dollars based on your setup.

Moreover, these components also consume a lot more electricity. So miners have to factor in those costs as well. These setups also release a lot of heat, and they need cool environments to run smoothly. This is why many people have set up their mining rigs in cold countries such as Iceland.

Is Bitcoin Mining Still Feasible?

With increased complexity, bitcoin mining might not be feasible for some people, depending on their geographical situations. For Example, third-world countries might find it difficult to earn profit from crypto mining rigs. Their electricity expenses might surpass their profits. Also, some countries have power issues. Thus, Bitcoin mining isn’t feasible for everyone.

The hotter regions are also not recommended for installing mining rigs. A lot of heat is produced when intense computational resources are used to solve complex problems. Therefore, bitcoin mining farms are often planted in colder areas with cool temperatures.

Also, GPUs and other equipment, maintenance costs are also to be considered while installing a bitcoin mining farm. These components are often expensive, but countries like China mass-produce these components at a relatively lower price, that’s why China is the number one country in crypto miners. Also, it is 10 times cheaper than Germany when it comes to all mining costs.

Use of Mining Pools

Many people with less computational power also want to contribute to the Bitcoin network by offering their limited resources. However, with such a small computational power, they won’t be able to compete with large mining rigs that are using hundreds of GPUs at once to find a solution to a complex problem.

Therefore, many small miners combine to form a mining pool, which is managed by a third party. The computational power of all small mining computers is merged to find solutions for complex block problems. Also, all bitcoin rewards are also distributed among all the contributors once they mutually solve a block.

The mining pools are gaining popularity and many third parties offer such software where you commit to using your computers as mining machines to earn rewards based on your power contribution. However, this approach might not be profitable for some people because rewards are going to be relatively low, and your profit margins might be extremely thin.

Is Bitcoin Mining Legal?

Bitcoin mining is legal in various regions and countries across the globe, but many governments still have concerns, and they do not allow Bitcoin mining setups to be installed in their country. Also, Bitcoin is a huge threat to fiat currencies that is why governments are hesitant to allow it.

Some countries where Bitcoin mining is illegal are Algeria, Egypt, Morocco, Bolivia, Ecuador, and Nepal. However, miners should always verify from their own government before they set up mining rigs. China and the US currently have some of the biggest mining setups that widely contribute to Bitcoin mining.

Bottom Line

Bitcoin mining might seem complex, but many third parties have made it much easier. The mining rewards are also decreasing for Bitcoin due to the abundance of miners. However, people are still willing to work on Crypto mining due to its skyrocketing prices.

Individual miners can also contribute by giving their computational power to a Bitcoin mining pool to earn some rewards. There are hundreds of other currencies that also work on PoW models. However, Proof of Stake is another interesting model that Ethereum uses for its network.

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