Bitcoin 101

Ultimate Guide to Bitcoin Mining

In this in-depth guide to bitcoin mining we’ll comprehensively cover cryptocurrency mining: what it is, why it is critical and how it has evolved in the decade since Bitcoin launched in 2009.

In this guide to bitcoin mining you will learn:

  • Why mining is critical to the Bitcoin network

  • What Proof of Work is, and how it compares to other systems used by alternative blockchains

  • Summaries of the various types of cryptocurrency mining: cloud mining, CPU, GPU, ASIC rigs; and their main differences.

  • Mining hardware and software – an explanation of the equipment required to participate in the mining process, and the scale of computing and electric power used.

  • What bitcoin mining pools are

  • Environmental accusations, and the transition to renewable sources to lower production costs

  • Which altcoins involve mining, and how the process differs

The word “mining” is not used once in Satoshi’s Nakamoto’s famous “Bitcoin: A Peer-to-Peer Electronic Cash System” whitepaper, the document which set the ball rolling on cryptocurrency as we know it. However, the activity which has come to be known as mining is absolutely fundamental to Bitcoin, the process that secures the network and makes it tick, providing a strong foundation of proof and verification.

Though adding new transactions to the network requires significant proof-of-work, verifying that transactions are correct is trivial. This duality is one of the most ingenious aspects of Bitcoin.

To understand where the mining industry is today, it is necessary to chart the evolution of bitcoin mining from the days when you could use your computer’s CPU to mine coins, right through to the birth and expansion of a vast commercialised industry that now commands a hashrate of over 120 EX/h.

What is Bitcoin Mining and Why Is It Needed?

As a decentralised digital currency, Bitcoin does not rely on a central authority to verify and validate transactions. Instead it relies on miners, functioning as nodes on the Bitcoin network which solve complicated mathematical problems and commit blocks of transactions to a public ledger.

Only by continuously and correctly solving these hard-to-guess mathematical problems can blocks be committed and verified by network members, thereby ensuring a single, indisputable ledger of balances and transactions.

By verifying the monetary flow in this way, miners eliminate the risk of double spend – i.e. the same coins being “spent” more than once.

Mining is a necessarily competitive enterprise; when one person transfers bitcoin to another, all network members can confirm whether the sender has a sufficient balance, with nodes vying to solve the aforementioned maths problem and gain the right to validate the transaction and add it to the blockchain.

This system, known as proof-of-work (PoW), assures the security and stability of the network by guaranteeing an ironclad seal of approval for every transaction. Additionally, it deters denial of service attacks and service abuses such as network spam, by making such efforts both time-intensive and costly.

Though adding new transactions to the network requires significant proof-of-work, verifying that transactions are correct is trivial. This duality is one of the most ingenious aspects of Bitcoin.

When blocks are confirmed, the winning miner/node receives newly minted bitcoin as compensation for the processing power expended in solving the mathematical problem and enlarging the currency’s supply; transaction fees, meanwhile, are paid by individuals responsible for the original transaction, and these too go to the miner.

With mining, currency is issued in a controlled, auditable and fair manner. Contrast this with the way in which central banks can pump money into the economy out of thin air; funds which can then be spent by governments or provisioned for loans, leading to market bubbles and, in extreme cases, to devastating inflation.

The Bitcoin network is programmed in such a way that a new block is created every ten minutes, with block rewards “halving” every four years and miners incentivised to continue validating transactions due to the increasing market value of bitcoin.

However, bitcoin cannot be artificially created; the difficulty of the mathematical problems ingeniously correlates with the the capacity of the miners’ collective processing power. In other words, there is no such thing as “quantitative easing” or “arbitrary/easy money” in the Bitcoin ecosystem.

As noted by Saifedean Ammous in his book The Bitcoin Standard, “Bitcoin is the hardest money ever invented: growth in its value cannot possibly increase its supply; it can only make the network more secure and immune to attack.”

Block Rewards and Bitcoin’s Supply Growth Schedule

Given how far we have come, it is easy to forget that Bitcoin units had no recognised exchange value in the beginning: programmers and cryptography specialists merely ran the software, connected to the nascent network, tinkered with the code, mined bitcoins and sent them back and forth amongst themselves.

At the outset, a reward of 50 coins was paid for miners of each block. The activity was not particularly profitable since the cost of hardware required to mine coins exceeded the value of the currency, but that soon changed. Four years after the genesis block was mined, the block reward halved to 25 coins (2012), and then again to 12.5 (2016).

The increased complexity of mining necessitates such quadrennial halving, with rewards to reduce to 6.25 BTC in 2020. Unlike other liquid commodities, bitcoin has a fixed quantity of 21 million coins, with around 18 million having already been mined. Barring a change in Bitcoin’s protocol to permit a larger supply, 21 million is the absolute limit and will be reached in the year 2140.

While proof-of-work is not the only consensus mechanism used to secure crypto networks (proof-of-stake is more energy-efficient, requiring neither electricity nor mining hardware), PoW has succeeded in safeguarding the Bitcoin network since its inception.

Types of Cryptocurrency Mining

Since the beginning, miners have expended electricity and processing power to gain the right to verify transactions. As solving proof-of-work equations has become more difficult, specialist hardware for mining bitcoin has emerged. These are summarised below.

CPU mining: The first bitcoins were mined using personal computers installed with mining software such as cpuminer, with hash rates less than or equal to 10MH/sec.

GPU mining: Graphical Processing Units (GPUs), designed to process and render images and video, were the first viable alternative to CPU mining – efficient, cheap and requiring no formal training in parallel programming or FPGA tools. Better able to process large blocks of data than CPU, GPUs were capable of achieving hundreds of millions of hashes per second, and this method was favoured by Laszlo Hanyecz – the first person to use bitcoin as a medium of exchange.

ASICs: The rate of generating hashes (which validate transactions) was increased with the introduction of specialized machines such as ASICs in 2012. These high-performance rigs are uniquely able to run complex hashing algorithms like SHA-256 and Scrypt, allowing their operators to generate more bitcoin. The deployment of ASICs has made adding processing power to the Bitcoin network much more efficient and commercialised the industry.

Cloud mining: Cloud mining utilises the processing might of remote data centres fully equipped with sophisticated mining hardware, with miners paying usage fees to harness capacity. Most cloud mining contracts run for one year, with the payout schedule agreed in advance. According to a report by TokenInsight, “most of the cloud mining products on the market are not worth investing in.”

Hardware, Software and Energy Consumption

Mining bitcoin necessitates a significant outlay in terms of setup and maintenance costs: an arms race of sorts has been conducted over the years, and those wishing to participate must shell out for expensive rigs, including cooling equipment to overcome the significant amount of heat generated by the hardware.

As the number of people mining bitcoin goes up, the network adjusts the difficulty of solving the mathematical puzzle, which means ever more powerful hardware is needed to achieve the same result and the individual chances of successfully mining a block and earning the reward decrease.

Just as mining hardware options have proliferated and evolved over the years, so too has mining software. Nowadays most mining software can be run on multiple systems like Mac and Windows, while being compatible with various mining hardware such as GPU and ASIC devices. In order to use some software programs, it is necessary to join a bitcoin mining pool.

As per the Cambridge Bitcoin Energy Consumption Index, the Bitcoin network’s current annual electricity consumption is over 80 TWh (terawatt hours) – more than that of many countries. Indeed, the figure constitutes around 0.4% of global annual electricity consumption.

According to Bitcoin energy expert, Alex de Vries, the network uses far more energy-per-transaction than all the world’s banks combined, when taking into account the energy used by data centres. The scale of computing and electric power is truly staggering.

That said, a report by CoinShares “calculates an estimate of the renewables penetration in the energy mix powering the Bitcoin mining network at 73%, making Bitcoin mining more renewables-driven than almost every other large-scale industry in the world.”

What Are Bitcoin Mining Pools?

Given the growing difficulty associated with bitcoin mining, it was inevitable that miners would pool their resources and share their hashing power. In 2010, the first Bitcoin mining pool – SlushPool – launched in Prague, and since then many mining pools have emerged. Cryptocurrency generated via a pool is divided among participants, with pools imposing fees to cover maintenance costs.

According to the aforementioned report by CoinShares, 65% of global mining is concentrated in China, with the Sichuan province alone producing 54% of global hash rate and the remaining 11% divided more or less evenly between Yunnan, Xinjiang and Inner Mongolia. Other major mining regions include the United States, Canada, Czech Republic, Russia and Georgia.

Is bitcoin mining still profitable? At a certain level, yes – or it would not happen at all. Data from indicates that network miners received $5.4bn in total block rewards in 2019. However, the concentration of power in the hands of professional mining operations means the industry is no longer viable for hobbyists and solo miners.

Key players in the bitcoin mining market include mining pools, F2Pool, Poolin, AntPool, and hardware firms Bitmain, Canaan, Whatminer and Ebang, with Bitmain accounting for over 60% of ASIC market share.

The Possibility of a 51% Attack

Because a tremendous amount of computing power is now required to mine bitcoin – more than any single entity could lay their hands on – the mining community has become more exclusive and monopolistic. Some argue that this increasing centralisation goes against the ethos of Bitcoin and gives rise to the possibility of a takeover by mining giants colluding to control over 51% of the network’s computational power.

there is always the potential for an attack motivated by non-financial gain i.e a nation station that feels its financial sovereignty is threatened by Bitcoin.

In an imagined 51% attack, large amounts of hashrate would be used to generate fraudulent transactions. While theoretically feasible from a technical standpoint, such an attack would require an inordinate amount of computing power and would result in minimal financial gains, since the attack itself would undermine the economic incentives motivating people to use bitcoin: the value of block rewards depends upon the integrity of the network.

To date, there have been no successful double-spend attacks on any bitcoin transactions which have been confirmed at least once, but there is always the potential for an attack motivated by non-financial gain i.e a nation station that feels its financial sovereignty is threatened by Bitcoin.

If a nation state or sufficiently wealthy corporation managed to marshal 51% of all hashing power with the intention of bringing the Bitcoin network to its knees, it would effectively increase the price of mining equipment, rewarding current miners and enabling them to invest greater amounts of capital into buying superior equipment.

The knock-on effect would be to facilitate faster growth of Bitcoin’s hash rate, making it even more difficult to attack and undermine. Because the difficulty of discovering a new bitcoin block is periodically adjusted, the network can accommodate an influx of new hashpower joining the network, without impacting the rate with which new blocks are generated.

Crypto Mining Beyond Bitcoin

While Bitcoin introduced the world to cryptocurrency mining, there are over 400 mineable coins on the market at the time of writing, with the majority of smaller altcoins still mined by CPUs and GPUs and the market concentrated in North America and Europe.

Read more about the most profitable cryptocurrencies to mine.

Established mining pools may be expected to integrate more altcoin mining in the years to come, with the possibility of CPU and GPUs being replaced by FPGA/ASIC in the long-term.

There are many valid reasons why altcoin mining operates on a different scale to bitcoin, the main one being that altcoins are less valuable than BTC, reducing the incentive to direct miners to them, when they could be securing the Bitcoin network. The ideological appeal of Bitcoin, coupled with its longevity and market cap, make it the most appealing option for those interested in mining cryptocurrency.

However, mining altcoins is essentially a bet on their potential future value. Most of the current bitcoin whales got rich by mining bitcoin when it had negligible value; the trick therefore, is backing the right horse now.

In Conclusion

While regulatory status remains unclear in many of the most productive bitcoin mining regions – China, North America, Russia etc – the industry shows no signs of slowing down, and advances in cloud mining operations and efficient mining hardware/software is set to drive the market for years to come.

Despite being regularly criticised for its high energy consumption, the bitcoin mining industry is heavily renewables-driven and centred on regions dominated by cheap hydro-power.

Perhaps the last word on mining should go to the pseudonymous Satoshi Nakamoto, who in 2010 gave his view on the future path of bitcoin mining: “In a few decades when the (block) reward gets too small, the transaction fee will become the main compensation for nodes. I’m sure that in 20 years there will either be a very large transaction volume or no transaction volume.”

So far, all signs point to the former being true. With close to 120 Ex/h (exahash per second) securing it, Bitcoin has become the world’s most powerful distributed computing network, secured on the back of an ever growing mining community.

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