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Bitcoin Mining: What It Is And How Does It Work

February 10, 2024
min. read

”...It’s simply a case of thinking and calculating in terms different from those laid down to us by the international banking group to which we have grown so accustomed that we think there is no other desirable standard…”
Henry Ford, Sunday, December, 4, 1921, New York Tribune

What is Bitcoin mining?

Bitcoin mining is a continuous competitive computational process, where every successful calculation performed according to a given algorithm is rewarded with Bitcoins. Once every two weeks, the system automatically adjusts the calculation difficulty so that approximately every ten minutes one of the mining process participants could achieve a result and receive a bonus. The system generates the required reward in Bitcoins and sends them to the winner. This is how the world's first cryptocurrency is issued, and this simple Bitcoin mining definition helps to understand the monetary interest of Bitcoin mining participants.

According to the system rules, every four years there is a 2-fold reduction in the amount of Bitcoin mining reward (halving). As of early 2023, the current bonus was 6.25 BTC, or about $140,000. The next halving is expected by late 2023 - early 2024, as a result of which the mining reward will decrease to 3.125 BTC. 

Bitcoin miner's rewards during the time

The total number of issued Bitcoins is limited to 21 million at the system level, which means that according to various estimates, a full Bitcoin issue may occur by 2080-2140.

However, this formal knowledge is clearly not enough to really answer the question: What is Bitcoin mining and how does it work?  Let's try to dive deeper and figure out what motivates the participants of the mining process, why Bitcoin comes out of nowhere, but is so expensive, what is its true value and, most importantly, why is it needed at all and why has it become so popular?

Strictly speaking, not only Bitcoin is mined today; mining is also used to generate many other cryptocurrencies. Thus, our question could be generalized to: What is crypto mining for dummies? Nevertheless, Bitcoin has been and remains the first both in terms of the time of its creation and capitalization (the total value of all issued coins). An understanding how Bitcoin mining works makes it easy to comprehend what crypto mining is in general.

Bitcoin is certainly a peculiar phenomenon of the early 21st century, but the concept itself has existed in various forms for over a hundred years. Back in 1921, Henry Ford published an article about an “energy currency” capable of bringing harmony to the world, and in the second half of the 20th century, scientific works based on computer technology and cryptographic methods began to appear.

The Ford's energy currency concept. NY Tribune, 1921
The Henry Ford's energy currency concept. New York Tribune, Dec 04, 1921

Anyway, on January 3, 2009, someone named Satoshi Nakamoto launched a payment system with Bitcoin as a transaction (payment) unit, and on January 12 he made the first transaction using it - a transfer of 10 BTC. Satoshi‘s own identity still remains undisclosed, and while Banksy is highly likely to be an actual person, there are great doubts about Nakamoto in this regard. 

The Sastoshi Nakamoto's Bitcoin White Paper
The Sastoshi Nakamoto's Bitcoin White Paper. Introduction. Jan 03, 2009

Many experts have noted that it would be impossible for one person to create such a perfect system, because in addition to the “ideal program code,” it relies on a profound knowledge of cryptography, peer-to-peer networks, etc. The most likely version is that Satoshi Nakamoto is the pseudonym of a group of very professional enthusiasts somehow connected with the intelligence community, in the depths of which cryptography has received its greatest development.

Today, when Bitcoin mining has become an entire industry, and Bitcoin itself has gained both global fame and tangible material value, whereas initially it had none, for many the key question is When will Bitcoin become legal tender at the global level and will it? rather than What is Bitcoin mining and how does it work?

Why Bitcoin needs miners

So… what is Bitcoin mining? Miners are both people who are engaged in mining, and the equipment itself - it all depends on the context. The mining process ensures the continuous issue of Bitcoin. But why does Bitcoin mining never stop? What motivates the people involved in mining?

At first it was just a mathematical game for a narrow circle of initiates. At that time, Bitcoin was not yet traded on numerous exchanges and existed exclusively as a digital asset, like a box of gold or a second life in a computer game - with no real value. In a textbook case from 2010, when American programmer Laszlo Hanez bought two pizzas for 10,000 BTC, one can see one of the first spontaneous attempts at Bitcoin pricing on the over-the-counter market.

It was a time when you could get a Bitcoin mining reward by working on an ordinary computer, since the calculation difficulty was low. However, as the number of new participants in mining grew, increased competition and the computing power of mining hardware, the system steadily increased the difficulty of calculations - after all, the more equipment, the faster the task is solved.

In response to the apparent demand, some companies began to manufacture highly specialized equipment designed exclusively for solving mining tasks - so-called ASICs or "Application-Specific Integrated Circuit." The more ASICs are involved in Bitcoin mining, the more electricity is consumed, the higher the Bitcoin network difficulty, and the higher the cost of each Bitcoin mined. So the computer game gradually turned into a huge and very energy-intensive industry.

Bitcoin Miner S21: 200TH/s, 3.5kW, 17.5W/TH
Bitcoin Miner S21 / source: Bitmain

Initially, Bitcoin mining was impossible without human miners who promote Bitcoin technology with their knowledge and enthusiasm on ordinary home computers, but today mining is impossible without special hardware miners that require impressive energy resources. Bitcoin needs human miners and hardware miners. Therefore, the answer to the question of What is Bitcoin mining in simple terms? is that today mining is the mass production of digital assets with the aim to multiply capital using special equipment and electricity that powers it.

Risks and limitations of Bitcoin mining

Since Bitcoin mining in simple terms is essentially Bitcoin production, it is characterized by the typical risks and limitations of any energy-intensive industry. The main risk is that if the Bitcoin price falls too low, its production may be unprofitable. In this case, miners simply have to be turned off, and all costs incurred in connection with their acquisition (CAPEX) and possible loans (more typical of mining corporations) remain unpaid until better times. 

The main task of a successful Bitcoin miner (whether a person or company) is to ensure the profitability of his enterprise. The cost of electricity consumed by miners is the most expensive item among operating costs (OPEX) when mining Bitcoins. Access to cheap electricity and energy-efficient mining hardware allow mining companies to stay afloat the longest if Bitcoin becomes cheaper, reaching critical values.

Strong Bitcoin price fluctuations (volatility) are the main source of mining' risks. But at the same time, this is a double-edged sword - a miner can either lose a lot or make good money. Therefore, despite the fact that Bitcoin remains a risky asset and classic investors are in no hurry to add it to their portfolios, many companies have emerged on the market where Bitcoin mining is the main or one of the main businesses. 

As for private enthusiasts, they encounter even more risks: where to get cheap electricity? where to place miners (mining hardware)? how to ensure the miner’s maintenance and security? Each of these issues contains risks of profit limitations, losses or loss of expensive mining equipment, and requires high qualifications and readiness for any turn of fate. Remember that each country has its own attitude to mining: in places like China, Bitcoin mining is completely banned, and in others, like El Salvador, Bitcoin is the official state currency. In most countries, the legislative regulation of this industry is still quite vague. 

Today, Bitcoin mining is no longer a computer game, but a serious business with engineering, programming, legal and organizational issues. However, once you realize how much miners earn, your desire will help you overcome any risks and limitations.

How much do miners earn?

What is Bitcoin mining in numbers? In our evaluation, we use the HashrateIndex service and the very common miner model manufactured by Bitmain - Antminer S19j Pro. During the mining hype of April 2021, this miner’s price reached $12,000, while by the end of 2022 it plummeted below $ 2,000. The same trend is characteristic of all miner models. This leads to another mining risk - in the worst times you can sell your miners only at a big loss (unless, of course, you bought them when things were even worse).

What is Bitcoin mining

With an average electricity price of $0.06/kW, this miner would earn about $3,000 per year, which amounts to  $1,350 when we subtract the electricity fee. You can also deduct other maintenance costs, which will result in around $1,000 net. Note that this miner maintained profitability with some margin of safety even at the minimum Bitcoin price. Let's say it was bought in early 2022 at the then-current price of $8,000. In order to pay off in the same market conditions, it would need to work for 8 years! A dubious prospect, isn't it?

However, let's imagine that the Bitcoin exchange rate has tripled (as it has more than once). Then the same miner will earn $6,000 in two years. Now imagine that there are not one, but 10 such devices, bought at the beginning of 2023 at a price of $2,000 per unit. These 10 miners, which cost us $20,000, can earn as much as $60,000 in the next year if Bitcoin returns to its 2022 highs, let alone the prospects of the next 3-5 years, when the miners will fully pay off and start generating net income.

What do you need to start mining?

So, we figured out what Bitcoin mining is, how it works and how much you can earn. All you need is an understanding of how to start mining. First of all, it is important to have an idea of where your miners will be placed, how they will be cooled, which power grid you’ll be using and where to get the Internet. Considering the amount of electricity consumed (3 kW for the Antminer S19j Pro) and the level of noise they produce, an apartment or garage is not the best place. But if you have no problems with the infrastructure, then it's time to choose the mining hardware. The prices of miners follow the price of Bitcoin, so the more discouragement there is in the market, the more attractive they are.

Miners differ not only in power, but also in energy efficiency. The more efficient the miner is, that is, the less it consumes according to calculations, the less each mined Bitcoin will cost, but the higher the miner price will be. It is important to find some kind of middle ground or take advantage of the most lucrative offer. Even if the miner is not the most efficient, you got it at a reasonable price and it has already started working while you are looking for better market offers.

When the miner is already in your hands, in addition to connecting it to an electrical outlet, you need to connect it to a computer and a mining pool. You will need either certain IT skills, or professional help. But why do you need a mining pool?

What are mining pools?

Why do you need to connect to a mining pool? The thing is that Bitcoin mining has turned into a large mining companies’ business, and there is simply nothing for a single miner to do in this market. The chances of a successful calculation with one or just a few devices, considering the volume of mining hardware operating in the world, is so low that if you don’t connect to a mining pool, you are doomed to fail. In other words, your miners will be totally uncompetitive if you don't connect them to something bigger and more powerful.

A mining pool is a huge number of miners linked together in order to solve a computational task together. The probability of success is much higher with this approach, and the larger the mining pool, the better for everyone. service gives a complete picture of mining pools and their sizes in real time.

Mining pools' ranking. F2Pool
Mining pools as of the end of January 2023 and TOP-5

The largest mining pool Foundry USA includes about a third of the total mining power (hashrate) of the Bitcoin network - it is a little more than 90,000 PH/s or 90,000,000 TH/s. Remember that the Antminer S19j Pro has a mining power of 104 TH/s, which means that the Foundry USA mining pool contains about 865,000 similar devices, and everyone is working together to solve one computational task!

If the task is solved successfully, the mining pool receives a mining reward, distributes it among all participants in proportion to their participation shares, and takes the pool commission for itself. In the modern mining business, if you want to earn something, you will have to work together and share with others - this is the only way to not just have fun, but also make the mining process profitable.

How does the mining process work?

Still… How does Bitcoin mining work if it's so difficult, expensive and unpredictable? Why is it still working? It's all about Bitcoin itself. Imagine a bank without a chief accountant, and an account book with information about all payments stored on all computers at the same time, and accessible to everyone. This book cannot be corrected retroactively, and in order to add a record, you need to solve a very difficult mathematical task. With the complete transparency of these records for others, huge computing resources, incommensurable in their cost with the goals of such an attack, are required to cause even minor harm to this system. This information storing technology protected by cryptographic methods is called “blockchain”.

So, the Bitcoin blockchain is, first and foremost, an unsurpassed system of trust and information storage, and Bitcoin is an internal currency that ensures its operation and security. Trust is of great value in the modern world: we are always accompanied by banks, lawyers, notaries and other institutions that ensure this very “trust”, although it’s hard to feel its spirit while drawing up endless contracts, powers of attorney and other paperwork. In addition to exceptional reliability and security, one of the main advantages of the blockchain is the exclusion of third parties from the trust system. The Bitcoin blockchain has remained non-compromised for over 10 years, and there is every reason to believe that it will remain so in the future. The higher the trust in the system, the more valuable the system that provides it. That's why Bitcoin has real value.

That is why Bitcoin mining is not only a competitive mining process in the struggle for rewards, as follows from the Bitcoin mining definition, but it is essentially a process that ensures the security of the information storage and accumulation system, ensuring a level of difficulty that makes it impractical for any attempts to destroy this system or harm it in any way. The more difficult mining is, the more pointless are any attempts to undermine trust in this system in terms of the cost of efforts. That is why Bitcoin mining is so difficult and energy-consuming in terms of the tasks to be solved, but simple in terms of monitoring its results and the clarity of the financial model of the mining process.

The emergence of Bitcoin and blockchain technology is somewhat akin to the emergence of the Internet. It is impossible to imagine the modern world without the Internet - it has become so familiar that no one has thought about how the process works and who owns it for a long time - everyone just uses it, and corporations manufacture servers and computers. The same thing is happening today with Bitcoin and its mining.

How to mine Bitcoins without buying mining hardware?

Bitcoin mining has turned into a multibillion-dollar industry and is concentrated in large mining pools, and Bitcoin hashrate is breaking new records. In such conditions, it is very difficult for ordinary enthusiasts to ensure mining profitability, let alone deal with the high threshold for entering this business and the difficulty of exiting it without significant losses.

The Minto company offers an elegant solution for those who are still loyal to Bitcoin and want to mine, but are not ready to invest in physical mining hardware. 

Minto tokenized the mining power of its data centers in a ratio of 1 TH/s = 100 BTCMT, where BTCMT is a hashrate token of Bitcoin mining, and now everyone can buy a mining farm hashrate of the desired capacity in the form of BTCMT tokens. BTCMT staking means joining the BTC mining process, after which the token holder begins to receive daily mining rewards in Bitcoin. 

BTCMT is a liquid digital asset traded on the Pancake Swap decentralized exchange, where anyone can buy or sell the desired hashrate at any time.

The Minto project is absolutely transparent to users, and its project tokenomics is described in detail in the Whitepaper. Daily mining statistics, hashrate watcher, and an online stream from our data centers and other necessary information are available on the project site. The project is managed by a community voting on development issues with BTCMT tokens in proportion to the share of each participant.

Minto has returned Bitcoin mining to ordinary users and continues to work on the development of an effective mining infrastructure.

Bitcoin Mining: FAQ

Why does mining use so much electricity?

High electricity consumption during Bitcoin mining is a consequence of the security algorithm embedded in its system. The Bitcoin network can be compared to a public account ledger, which cannot be forged, and which does not need a chief accountant. The calculation difficulty in solving the task of adding a new record to this book guarantees high security, and the reward for a successful solution - the continuity and competitiveness of the mining process.

Bitcoin mining hardware - miners are special computers that serve only one purpose, and work 24/7. Like any electrical appliance, they are powered from the power grid and consume as much electricity as they can, like electric kettles. No one has yet figured out how to make the water boil for free. It’s the same with miners, the only difference is that they do not boil water, but solve mathematical tasks.

Is Bitcoin mining legal?

It depends on the state policy. As of early 2023, Bitcoin mining is completely banned in China, Vietnam, Algeria, Bangladesh, Bolivia, Egypt, Qatar, Morocco and Nepal. Bitcoin is the official means of payment in El Salvador and the Central African Republic. In other countries, cryptocurrencies and mining are allowed in one form or another, but you always need to pay attention to the nuances of legislation. For instance, mining may not be prohibited, but if you build a mining farm at home and connect it to a household electrical network, big problems await you.

Who pays crypto miners?

Miners earn Bitcoins as a reward for solving difficult computational tasks. The difficulty of calculations guarantees the reliability and security of the entire system, since its hacking requires incomparable computational energy resources. About once every two weeks, the system automatically adjusts the calculation difficulty so that the task is solved in about 10 minutes. For each successful solution, the system generates 6.25 new BTC (as of 2023) and pays it to the winning crypto miner. This is how the Bitcoin issue occurs. Approximately once every 4 years, the reward amount is halved (a.k.a. halving). The nearest halving will occur around the end of 2023 - the beginning of 2024. As a result, the reward for miners will decrease to 3.125 BTC.

Is crypto mining profitable for beginners?

Today, when crypto mining has turned into a huge industry, it is almost impossible to start earning quickly, especially for beginners. In order to mine Bitcoin or any other cryptocurrencies, investments in mining hardware, access to relatively inexpensive electricity, IT expertise, suitable premises, etc. are necessary. In addition, mining is characterized by prolonged unfavorable market periods, when the main goal is just to maintain arbitrarily small profitability. All these factors suggest that, as in any other established business, there will no longer be any easy money here, but if you have an opportunity and a great desire, then you need to plan out your work for 5-10 years ahead before beginning.

How much money can you make mining Bitcoin?

A typical miner manufactured by Bitmain - the Antminer S19j Pro, with an average electricity price of $0.06/kW, allows to earn about $3,000, and after deducting all the expenses - about $1,000 net for the whole of 2022. Considering that 2022 was extremely unfortunate for miners, the fact that this miner maintained profitability throughout the year and that its price dropped to $2,000 from the maximum price of $12,000 are both huge advantages. 

If we assume that the Bitcoin exchange rate will triple in the coming years (as it has happened more than once), the miner will make $6,000 in two years. A miner’s payback period largely depends on the incoming price, but it should be understood that after that the miner will generate net income for several more years. Therefore, on the 5 to 10-year horizon, with a proper reserve of funds and patience, you can get a lot of money mining Bitcoin.

What is a good hashrate for Bitcoin mining?

The hashrate that you can afford can be considered good or suitable for Bitcoin mining. Profitability of miners is primarily a combination of the incoming price, the price of electricity and the price of maintenance, besides, you always need to remember the cyclical nature of mining income and have a certain financial cushion so that you don't have to get rid of miners on the cheap. 

If you plan to engage in Bitcoin mining, take a responsible approach to buying mining equipment, and understand what electrical power you can use to power them up, where they will be located and how they will be serviced. The success of Bitcoin mining lies not so much in the hashrate of the mining hardware, but in the reliability and continuity of its operation for the maximum possible time. 

A good miner is like a reliable old truck - it has already paid for itself several times over a long time and now each trip gives only profit, so it is not so important how much horsepower (or hashpower) it had when buying.

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