How does Bitcoin mining work?

Whether you’re an investor or not, you’ve probably heard of bitcoin. While you can buy bitcoin, you can also mine it. But how does Bitcoin mining work?

Bitcoin mining machine with the text “how does bitcoin mining work?” and The Motley Fool jester cap logo

Whether or not you’re an investor, you’ve probably heard of bitcoin. While you can buy bitcoin, you can also mine it. But how does Bitcoin mining work? In this article, we’ll take a look at what Bitcoin is, how it works, and how you can get involved in Bitcoin mining.

What is Bitcoin?

Before we can talk about bitcoin mining, we need to understand Bitcoin. Bitcoin is a cryptocurrency built on a blockchain, which is a decentralised trustless public ledger. That’s a mouthful, so let’s break it down:

  • ‘decentralised’ means it’s shared between people rather than being in only one place;
  • ‘trustless’ means you don’t need to trust anyone – the system is transparent, so you can verify it for yourself; and
  • a ledger is just a list of transactions.

How does Bitcoin mining work?

As the name suggests, a blockchain is a chain of blocks. A block is a clump of data (1 megabyte of transactions, in the case of bitcoin). Each block is linked to the next block by two numbers, known as a nonce and a hash, making a chain. Those two numbers are the key to bitcoin mining.

The harder we work for something, the more we value it. This also applies to Bitcoin. If Bitcoin mining were easy, it would have no value. Bitcoin is designed to make it hard to calculate the hash and the nonce, but easy for someone to check whether it’s correct. This is ‘proof of work’ – if you calculate the right numbers, you’ve done the work by using CPU time and electricity to mine the block. The first miner to calculate the right number gets a reward in Bitcoin.

If you’re interested in the nuts and bolts, there’s a great blockchain demo that you can play with to see exactly how it works.

How can you mine Bitcoin?

Back when Bitcoin started, any computer could mine Bitcoin. That’s still technically true, but in reality, you won’t get far without a lot of computing power. Remember, the only miner who earns a reward is the first one to calculate the right answer. That’s usually going to be the miner with the most computing power.

There’s a calculator that estimates how much you could mine with your computer – and how much you’ll spend on electricity to do it.

If buying high-powered computers and paying for electricity to run them doesn’t appeal to you, you could join a mining pool. That’s a group of people who all chip in computing power to mine Bitcoin. They share any rewards in proportion to their contribution, and the pool organiser takes a percentage of the earnings. Nowadays, most Bitcoin is mined by mining pools.

How can you join a mining pool?

There are plenty of mining pools out there, but not all mining pools are equal. Cryptocompare compares the various pools, so before you join one, make sure you know what you’re getting into. Check the fees, location, and reliability rating.

Bitcoin mining apps like BTC.com or Windows 10 Bitcoin Miner are another option. They usually have their own mining pools and it can be easier to get started, but they come with the same warnings as the open pools.

Is Bitcoin mining worth it?

Bitcoin is volatile, but Bitcoin mining can be fun. If you have good equipment and live somewhere with cheap electricity, you might even make money by joining a mining pool. But, as with everything, there’s a catch: the difficulty adjustment.

The system is designed to keep the mining rate at about ten minutes per block. As more miners join the network, the proof of work calculation becomes harder so the mining rate stays constant. Add in the volatility of Bitcoin, and you should think carefully before diving in.

On the other hand, as bitcoin mining becomes more popular and the calculations get harder, miners will need ever more computing power and electricity. That might point to some less volatile ways to invest than bitcoin mining.

Of course, as with all investing, past performance is not an indication of future results, so proceed with caution.