How Does Bitcoin Mining Work?

There are a lot of baffling things about the world of bitcoin and cryptocurrency, but perhaps the most opaque, or seemingly ludicrous, is the concept of bitcoin mining. Yet an understanding of the basics of bitcoin mining – or, as it’s technically known, a proof-of-work consensus mechanism – is a vital part of understanding bitcoin’s revolutionary potential.

So, what exactly is bitcoin mining?

When we talk about bitcoin mining, we’re talking about a worldwide network of computers that compete with one another to solve a series of complex cryptographic problems. Every time a computer solves one of the problems correctly it’s rewarded with a set amount of bitcoin.

Mining is known as a ‘proof-of-work’ process because the answer to the problem is random, meaning that the only way to solve it is by guessing. The more guesses you make – or hashes – the better your chance of solving the problem and receiving some freshly mined bitcoin. While there’s a bit of variance, this happens around once every ten minutes, meaning a steady amount of bitcoin is being sent into circulation.

How to mine bitcoin?

Blockchain solves one of the most intractable problems of, well, accounting, namely: how can two people agree on a monetary transaction without the help of a trusted intermediary? For instance, if Person A wants to send $100 to Person B, then you need someone (usually a bank) to verify that Person A actually has $100 to send to Person B and that Person B is able to receive it.

Blockchain solves this dilemma by ensuring that every transaction that’s ever been made using the currency in question (i.e. bitcoin) is written in the blockchain itself. So the blockchain knows if Person A has that $100 to send to Person B and will stop the transaction from happening if they don’t.

How does the blockchain know that all these transactions are legit in the first place? That’s where mining comes in. Every time you make a transaction using the bitcoin blockchain, it’s added to a ‘block’. When the block is full of data, it gets wrapped up in a complex cryptographic problem and is sent off to the miners to verify against the complete copy of the blockchain that they all share.

What is a hashrate?

The number of guesses being made every second by the network is known as the hashrate. For bitcoin, this figure currently stands at around 160 exahashes, or 160,000,000,000,000,000,000 guesses being made each and every second.

It perhaps goes without saying that a hashrate of this size requires a lot of computing power. It wasn’t always like this. Back in bitcoin’s earliest days, people would mine bitcoin using leftover processing power on their gaming computers. But this was also a time when the hashrate was being measured in megahashes – i.e. one trillionth of the current hash rate – and the price of a single bitcoin was less than a dollar.

(If you’re wondering why blocks aren’t being solved at one trillion times the speed, it’s because the algorithm makes things more difficult to solve as more computing power comes online.)

Mining and bitcoin circulation

When bitcoin’s genesis block was mined on January 12, 2009, each block produced 50 bitcoins. However, bitcoin’s anonymous creator Satoshi Nakamoto wanted bitcoin to be a deflationary currency (i.e. scarcity should increase over time) so he built two limits into the code.

First, he capped the amount of bitcoin that could ever be produced at 21 million coins. When the 21 millionth coin is mined – somewhere around the year 2140 – mining will cease and the network will be sustained by transaction fees instead.

Second, he made it so that after every 210,000 blocks the amount of bitcoin generated by each block would halve. There’s been three halvings so far, one roughly every four years, and so the amount of bitcoin being mined from each block has dropped from 50 to 25 to 12.5 and, as of May 2020, 6.25.

Who are the bitcoin miners?

Well, it’s hard to know exactly. While the cryptocurrency industry is far more open, legitimate and transparent these days, mining remains a relatively opaque part of the business.

We know that around two-thirds of the hashrate comes from mining pools in China, where ready access to computer chips and cheap, excess hydropower means large operations are easier to sustain. There are also substantial operations in America, Canada, Iceland, Iran, Norway and Kazakhstan – basically places where supportive regulation and/or an abundance of cheap, renewable energy makes it affordable to run titanic mining rigs.

We also know that all these miners use a truly prodigious amount of power. The Cambridge Bitcoin Electricity Consumption Index estimates the bitcoin network’s energy demands to be around 120TWh per year, placing it between Pakistan and the UAE in terms of its energy usage.

Is bitcoin bad for the environment?

Given the perils of climate change, one would think this is a pretty bad advertisement for bitcoin. But there are two caveats. One, bitcoin still uses less energy than, say, gold mining or the modern banking system, the latter of which is around 10 times more energy intensive.

Second, and more importantly, bitcoin uses a lot more renewable energy than those industries – an estimated 74% of bitcoin’s energy usage comes from renewable sources according to a 2019 Coinshares report, and there’s little reason to think that trend would have reversed since. Because mining operations are mobile – and profit margins are remarkably slim – miners will always chase the cheapest sources of energy. And there are very few places these days where coal is the cheapest option.

So, while the energy consumed by bitcoin mining is certainly less than ideal, it’s also an industry that has powerful incentives to follow excess renewable energy wherever it can be found.

Cover image source: SPF (

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This content was reviewed by Content Producer Marissa Hayden as part of our fact-checking process.

Luke Ryan is a Melbourne-based writer whose work has appeared in the Guardian, Saturday Paper, Executive Style, Quartz, Crikey and many more. He is currently Head of Content for cryptocurrency exchange CoinJar.

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