What Is Bitcoin Mining?

Bitcoin mining is the process of creating new bitcoin by solving puzzles. It consists of computing systems equipped with specialized chips competing to solve mathematical puzzles. The first bitcoin miner, as these systems are called, to solve the puzzle is rewarded with Bitcoin. The mining process also confirms transactions on the cryptocurrency’s network and makes them trustworthy. 

For a short time after Bitcoin was launched, it was mined on desktop computers with regular central processing units (CPUs). But the process was extremely slow. Now the cryptocurrency is generated by using large mining pools spread across many geographies. Bitcoin miners aggregate mining systems that consume massive amounts of electricity to mine the cryptocurrency. 

In regions where electricity is generated by using fossil fuels, bitcoin mining is considered detrimental to the environment. As a result, many bitcoin miners have moved operations to places with renewable sources of energy to reduce Bitcoin’s impact on climate change.

KEY TAKEAWAYS

• Bitcoin mining is the process of creating new bitcoin by solving a computational puzzle.
• Bitcoin mining is necessary to maintain the ledger of transactions upon which Bitcoin is based.
• Miners have become very sophisticated over the past several years, using complex machinery to speed up mining operations.
• Bitcoin mining has generated controversy because it is not considered environmentally friendly.

Just as gold is mined from the earth by using large implements and machines, bitcoin mining also uses big systems akin to data centers. These systems solve mathematical puzzles generated by Bitcoin’s algorithm to produce new coins. 

By solving computational math problems, bitcoin miners also make the cryptocurrency’s network trustworthy by verifying its transaction information. They verify one megabyte (MB) worth of transactions—the size of a single block. These transactions can theoretically be as small as one transaction but are more often several thousand, depending on how much data each transaction stores. The idea behind verifying Bitcoin transaction information is to prevent double-spending. With printed currencies, counterfeiting is always an issue, although generally, when you spend $20 at the store, that bill is in the clerk’s hands. With digital currency, however, it’s a different story.

Digital information can be reproduced relatively easily, so with Bitcoin and other digital currencies, there is a risk that a spender can make a copy of their bitcoin and send it to another party while still holding onto the original.²

Bitcoin transactions are aggregated into blocks that are added to a database called blockchain. Full nodes in Bitcoin’s network maintain a record of the blockchain and verify transactions occurring on it. Bitcoin miners download the entire history of blockchain and assemble valid transactions into a block. If the block of assembled transactions is accepted and verified by other miners, then the miner receives a block reward. 

The block reward is halved every 210,000 blocks (or roughly every four years). In 2009, it was 50. In 2013, the reward amount declined to 25, and in 2016, it became 12.5. In Bitcoin’s most recent halving event, in 2020, the reward was changed to 6.25.

Another incentive for bitcoin miners to participate in the process is transaction fees. In addition to rewards, miners also receive fees from any transactions contained in that block of transactions. As Bitcoin reaches its planned limit of 21 million (expected around 2140), miners will be rewarded with fees for processing transactions that network users will pay. These fees ensure that miners still have the incentive to mine and keep the network going. The idea is that competition for these fees will cause them to remain low after halving events are finished.