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Bitcoin mining: How does Bitcoin mining work and is it profitable?
Bitcoin mining can be a way of making some cryptocurrency on the side, but it also serves an important purpose in maintaining and securing the blockchain.
With its industry lingo and unfamiliar math, Bitcoin mining may seem difficult. But with a little bit of basic knowledge, you’ll be surprised at how quickly you can get your head around it.
By the time you finish this simple-language beginner-friendly guide, you should have a good understanding of how Bitcoin mining works and what it does.
Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific
provider, service or offering. It is not a recommendation to trade.
What is Bitcoin mining?
Bitcoin transactions are processed on a blockchain. As the name suggests, this is like a chain of blocks, where the newest block is joined onto the one that came before it.
When someone sends a Bitcoin transaction, it gets packed into the next available block.
These blocks are created every 10 minutes on average. As of April 2021 there have been over 677,000 blocks in Bitcoin’s history.
These blocks are created by Bitcoin miners, and every time they make one they are rewarded with some brand new Bitcoin (the reward decreased to 6.25 Bitcoin per block as of 11 May 2020), and they also get to keep all the transaction fees from all the transactions on the block.
But only one miner can make each block, so it’s always a race to create the next one and earn the reward.
How are Bitcoin blocks created?
Bitcoin miners create new blocks by being the first to solve a math challenge.
The challenge is to create a suitable combination of numbers and letters by repeatedly applying the same math formula to different inputs.
The math formula is called SHA-256 (Secure Hashing Algorithm 256). The way it works is that you give it an input, and it will convert it into a long string of numbers and letters called a “hash”.
For example, when we use a simple online tool to input the word “bitcoin” and run it through the SHA-256 formula, in a process called hashing, we get the following hash: 6b88c087247aa2f07ee1c5956b8e1a9f4c7f892a70e324f1bb3d161e05ca107b
There are three very cool things about this process.
The same input will always produce the same output. Try hashing “bitcoin” yourself with online tools, and you’ll get exactly the same result as the above
The only way of getting the same hash is with the same input. The chance of two different inputs randomly producing the same hash is almost incomprehensibly small.
There is no current way of reverse-engineering a SHA-256 hash to find out what the input was.
Bitcoin miners constantly run different inputs through the SHA-256 algorithm. These inputs are a combination of information from every previous block, and a “nonce” which is just a number that miners add to each input to make sure they get a different result each time.
As of April 2021, all Bitcoin miners combined are running about 166 quintillion inputs per second through the SHA-256 algorithm.
All miners are in search of a winning hash. When a miner finds the winner, they’ve mined a block. They announce it to all the other miners, then everyone changes their inputs and starts looking for the next winning hash.
What makes a winning hash?
A winning hash is one that’s under a certain amount, which is mostly defined by how many zeros are at the start of it. At the time of writing, a winning hash is one that begins with at least eighteen zeros.
For example, here’s the hash of a block which was mined on 1 April 2021: 00000000000000000008851f0412bb91dcad489fd4e2e964806cd4d780b144ad
As you can imagine, the odds of hashing something, and the hash randomly beginning with nineteen zeros, is extremely low.
And that’s the whole point. Bitcoin miners are hashing quintillions (trillions of trillions) of inputs every single second, so to prevent blocks from coming out too quickly, you have to make it extremely difficult to find winning blocks.
The more hashing that’s being done, the harder it is to find a winning block (more zeros are required at the start of the hash). Conversely, when there’s less hashing being done, it gets easier to find a winning block (fewer zeros are required at the start of the hash).
The Bitcoin network automatically performs this adjustment every two weeks, revising mining difficulty with a goal of ensuring that new blocks are found every 10 minutes on average.
This mining technique, based on hashing many inputs in search of a suitable output, is called “proof of work”.
Many different cryptocurrencies use proof of work mining, and in all cases proof of work mining uses similar principles of hashing inputs, but Bitcoin is one of relatively few cryptocurrencies that use SHA-256.
How to mine Bitcoin
Mining Bitcoin is relatively easy, once you have the necessary materials. The hard part is optimising it, and making it profitable.
The steps involved are:
Get your Bitcoin mining hardware
Download your preferred Bitcoin mining software
Select and join a Bitcoin mining pool
Start mining
What’s the point of Bitcoin mining?
In itself, the act of hashing trillions of inputs, in search of a specific type of hash, serves no purpose.
But in the case of Bitcoin, it’s the time, money, and effort spent on this that’s important. While specialised equipment can hash inputs extremely quickly, and there are ways of optimising the mining process, there’s no way of “cheating”, and there’s no way of finding a winning hash without going through the actual process of hashing.
This is how the act of mining secures the network. It serves as a tangible resource which can’t be counterfeited or cheated, but which can still be transmitted over the network.
The act of mining can then imbue the Bitcoin blockchain, and Bitcoin itself, with the same properties.
How much money do Bitcoin miners make?
As of April 2021, each block mined gives the miner 6.25 Bitcoin, valued at about US$367,237 based on a price of US$58,758 per Bitcoin at the time of writing. They also get to keep the transaction fees being sent on that block, but the value of these is always insignificant next to the main block reward.
Whichever miner hashes the most inputs per second is the most likely to find a winner first. Conversely, a miner with a low hashrate is unlikely to ever find a winner, and is basically just playing the lottery.
To remain competitive amongst so much competition, miners join their hashrate together in mining pools, giving them a higher chance of winning more frequently. When anyone in the mining pool wins, they share the profits proportionate to the amount of hashrate they contribute to the pool.
The main Bitcoin mining pools at the time of writing, along with their share of Bitcoin’s total hashrate, is shown below.
Each mining pool is different, and has different terms and profit-sharing arrangements for its users.
Is Bitcoin mining profitable?
Whether Bitcoin mining is profitable depends on the situation, but for most people the answer will be no.
The cost of the electricity consumed, and constantly rising total network hashrates, ensure that the average person will lose money trying to mine Bitcoin.
To mine Bitcoin profitably, you typically need to have enough capital to set up a large low-cost mining operation that can benefit from economies of scale, and have access to cheap wholesale electricity.
And even then, mining profitability depends on Bitcoin prices holding up, and staying up to date with the latest equipment.
Because of the large startup costs, and the fact that Bitcoin mining profitability is dependent on Bitcoin prices rising in the future, it will almost always be more economical for the average person to just buy Bitcoin instead of trying to mine it.
The average frequency of block discovery is called block time. In the case of Bitcoin, Satoshi Nakamoto set the block time at 10 minutes.
If the block time was too fast, new Bitcoin would be created too quickly which would affect the inflation rate.
If it was too slow, Bitcoin transactions would be slower and less predictable, and miner pay would be less frequent.
There is no reason it had to be exactly 10 minutes, except because Satoshi Nakamoto decided it wasn’t too fast, wasn’t too slow, and suited Bitcoin’s intended inflation rate.
The speediest block times of any cryptocurrency are just a few seconds, while permissioned blockchains can be even faster.
There’s no fixed lower limit on block time, because it depends on the state of the network and the miners.
But once you go too low, you start encountering issues related to latency, such as accidental forks, additional security issues, and other unexpected problems.
Bitcoin uses SHA-256 because it’s a convenient, tried, and tested algorithm which suited Bitcoin’s needs at the time of its creation.
Other cryptocurrencies that use SHA-256 include Bitcoin Cash and Bitcoin SV, but most proof of work coins now employ other algorithms.
This is because, for them, it’s not safe to use SHA-256. There are now many powerful SHA-256 mining machines in the marketplace and some individual entities now have enormous amounts of SHA-256 hashing power.
This means other cryptocurrencies that use SHA-256 may be vulnerable to attack from just one Bitcoin mining farm.
The halving, or halvening, is when Bitcoin (or any other proof of work blockchain) reduces its block reward by 50%.
Bitcoin’s next halving will inevitably have a major impact, either on Bitcoin mining or Bitcoin prices.
When Bitcoin mining is unprofitable for a miner, they have to stop mining eventually. When enough miners stop mining, the mining difficulty will drop and it will become more profitable for those who remain.
In this way, Bitcoin mining will generally always be profitable for someone.
There might be gaps after large, abrupt Bitcoin price drops where mining is temporarily profitable for no one, but the network will fairly quickly compensate by lowering mining difficulty.
There is no central entity receiving all of the Bitcoin mining hashes, so no one knows what Bitcoin’s current hashrate actually is.
Instead, it’s estimated.
The estimate is based on a formula which looks at the average delay between blocks, in combination with the current Bitcoin mining difficulty.
From that, it’s possible to estimate how many hashes per second are being performed in total, for a measurement of the total Bitcoin hashrate.
This method is why, in their natural form, charts of Bitcoin’s hashrate are very spiky. Elements of random chance bump individual block times up and down, creating those big spikes. But when you smooth them out, you get a clearer average.
This is how you get accurate-ish estimates of Bitcoin’s current hashrate.
There is no definitive way of saying how much energy Bitcoin mining consumes in total, and all the most commonly-cited numbers are just estimated. Some may be completely wrong.
The way it’s estimated is by:
Estimating Bitcoin’s current hashrate.
Guessing what kind of machines all the miners are using, in which amounts.
Looking at the average energy consumption of each machine.
Guessing whether miners are running machines at maximum capacity (which consumes more energy but reduces their lifespan) or whether they’re running at reduced capacity (less hashrate, but also less energy consumption and longer machine lifespan).
Looking at the average energy consumption of each machine.
It’s not possible to say with certainty how much energy Bitcoin mining consumes, but it’s certain that it’s a lot.
There are two reasons why Bitcoin mining is so energy intensive.
The first is simply because hashing quintillions of inputs per second with SHA-256 takes a lot of energy.
The second is because the competitive nature of Bitcoin’s mining economy means the only way of winning, and being a commercially successful miner, is to hash as many inputs as possible whenever it’s profitable to do so, which means consuming as much energy as possible as fast as possible, as long as it’s profitable to do so.
This means that, at any given time, Bitcoin’s energy consumption is either constantly growing, or mining is unprofitable.
In this way, Bitcoin’s huge energy consumption is mostly a natural response to its price growth over the years. If Bitcoin prices keep increasing, its energy consumption will keep growing commensurately.
No. In the long run, there is no such thing as energy-efficient proof of work mining, regardless of the hashing algorithm or mining technology.
Even so-called “energy efficient” proof of work mining systems cannot escape the economic incentives which encourage miners to consume as much energy as possible as long as it’s profitable to do so.
Because energy is the main cost associated with mining, “energy efficient” algorithms simply mean that miners end up consuming the same amount of energy while producing more hashes. Because the hashes themselves serve no real purpose, this is of little benefit.
One of the main question marks hanging over Bitcoin’s long-term survival is the question of what happens when, after many halvings, Bitcoin’s block reward is just a fraction of one Bitcoin per block.
This may become a real problem in about 30 to 40 years.
It’s believed that Satoshi Nakamoto originally intended for transaction fees to make up the difference, but with the benefit of more time and research, it’s become clear that this theory is flawed.
Firstly, this is because in the network’s current form the numbers just don’t add up. Without significant changes, there is no feasible way for transaction fees to replace miner block revenue without the unlikely combination of simultaneously very high transaction fees, and very high transaction volume.
Furthermore, Bitcoin transaction fees are set at market rates, based on supply and demand. If there is surplus capacity on the blockchain, transaction fees will trend towards zero. If there is no surplus, transaction fees will simply keep rising until the network is too expensive to use.
In this way, it’s theorised that without major changes to the Bitcoin network, transaction fees will never be able to replace block rewards as Satoshi Nakamoto envisioned.
The Lightning Network is an off-chain scaling solution for Bitcoin. It’s a system of payment channels that runs off the main Bitcoin blockchain.
In its current form, it’s unlikely that the Lightning Network will ever work or see major use.
It may affect Bitcoin mining by absorbing some of the transactions and transaction fees that miners will need to sustain themselves as block rewards are reduced.
Disclaimer: Cryptocurrencies are speculative, complex and involve significant risks – they are highly
volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of
future performance. Consider your own circumstances, and obtain your own advice, before relying on this information.
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have holdings in the cryptocurrencies discussed.
James Edwards was the global cryptocurrency editor at Finder. He coordinates a distributed team of journalists to help further Finder's mission of helping people make better financial decisions.
He has been using Bitcoin since 2013 and began working in the industry in 2017. He takes pride in boiling down complex topics into language his parents can understand.
His expertise has seen him called on to report at events such as TechCrunch Disrupt, CoinDesk Consensus and IBM Think and has coordinated a vast number of high-profile interviews with the industry's brightest minds.
He is a regular contributor to Nasdaq, The Street and is frequently called upon for market commentary in Australia and abroad. See full bio
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