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What is crypto mining? | Mining made simple

Mining is the process of verifying transactions on a proof-of-work blockchain in exchange for a reward. The process uses high-powered computers to solve complex mathematical equations. Unlike minting Ethereum and other proof-of-stake coins, mining Bitcoin requires huge amounts of energy and computational power, and it’s usually performed by specialised hardware called ASICs (application-specific integrated circuits), rather than standard CPU.

Anybody can mine Bitcoin, but unless you have access to an ASIC or a GPU, it’s unlikely that you’ll win a reward. You don’t need to be a mathematician participate, either. While mining involves solving difficult mathematical equations, the math itself is pretty much guess work, rather than technical know-how. To validate a block, miners must come up with a 64-digit hexadecimal number (a “hash“) that is less than or equal to a target hash.

A hash, or a 64-digit hexadecimal number, looks like this:


Mining, then, is less about math and more about luck, because all you need to do is guess the closest value to the target hash. No GCSE math required. The tricky part is that there are trillions of potential guesses, which is why miners turn to computer power to do the guess work for them.

The higher the “hash rate” (i.e. the more guesses made per second), the higher the chances of successfully validating a block.

Mining rewards come in the form of freshly mined crypto. For Bitcoin, the reward is 6.25 bitcoins per block, approximately US$174,458 at the time of writing. This reward will be cut in half in 2024 during the next halving.

Good to know

The Bitcoin halving is an event that takes place every four years as part of the Bitcoin protocol. During the halving, the block reward that miners receive for validating transactions is cut in half in order to limit the supply of bitcoin over time. The total number of bitcoins that will ever exist is capped at 21 million.

Bitcoin, Dogecoin, Monero and Litecoin all use mining as a means of verifying transactions.

What’s the benefit of mining?

Mining maintains the integrity and security of a decentralised network. By requiring miners to solve complex mathematical problems before adding a new block to the blockchain, the Bitcoin network ensures that transactions are legitimate and cannot be tampered with.

Mining also prevents the problem of “double-spending” (i.e. someone spending the same unit of a digital currency twice), which was a key goal laid out in the original Bitcoin whitepaper.

Miners, then, can be thought of as auditors who keep the network honest.

How does it work?

Here’s a step-by-step on how it works.

  1. New transactions are broadcast to the Bitcoin network by users who want to send Bitcoin to each other.
  2. Miners then collect these transactions and create a block of transactions, which they will try to add to the blockchain. Each block contains a header and a list of transactions.
  3. The miner then works to solve a complex mathematical puzzle called a “hash function” by using powerful computers. (This is the ‘proof-of-work’ bit that involves the 64-digit hexadecimal number.)
  4. The first miner to solve the problem and validate the block is rewarded with newly minted Bitcoins and transaction fees.
  5. Once the block is verified and added to the blockchain, the miner moves on to the next block of transactions and continues the process.
  6. The difficulty of the proof-of-work algorithm is adjusted periodically to maintain an average block time of 10 minutes. As more miners join the network, the difficulty increases, and as miners leave, the difficulty decreases. This makes Bitcoin mining highly competitive.
Is Bitcoin mining controversial?

Yes. Bitcoin mining is incredibly energy intensive. Every year, Bitcoin consumes around 127 terawatt-hours (TWh) a year of electricity, more than the entire country of Norway. The energy consumed by the Bitcoin network has increased tenfold in five years, and it’s likely to continue increasing as more miners join the network.

The more miners, the higher the difficulty to verify a block, meaning the higher the computational demands.

In 2010, anybody could mine a block using their home computer, but today, competition is so high that miners resort to warehouses jam-packed with powerful computer equipment such as ASICs and GPUs to increase the probability of validating a block.

Becoming an individual Bitcoin miner is risky and expensive due to the extensive hardware requirements. To mitigate cost and risk, many miners now join mining pools, which involves pooling resources to share processing power over a network. Rewards from mining pools are typically split among the network based on work contributed.

Is it legal?

Bitcoin is legal in most countries, but each country has its own regulations and requirements. Countries where Bitcoin is illegal include China, Qatar, Vietnam, Egypt, Morocco, Bolivia, Ecuador, Nepal, and Pakistan. It’s important that you research the law in your country of residence before considering mining Bitcoin.

US President Joe Biden recently proposed a 30% excise tax on Bitcoin mining in hopes of reducing activity. The tax is expected to apply to all Bitcoin farms, regardless of whether the energy source is renewable or not.

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