Decoding cryptocurrency: What is Bitcoin mining?

Similar to 19th century prospectors mining for gold, some of today’s tech pioneers are mining Bitcoin to obtain this trending digital currency.

What does Bitcoin mining mean when Bitcoin is a currency that only exists digitally?

Traditional and physical currencies are typically printed and put into circulation by a government or central bank. Bitcoin is a decentralized (meaning it has no governing body) and finite currency. It is put into circulation through a process called mining. These days, this work is done using a system of computer hardware called a mining rig.

It certainly doesn’t involve a pickax or heavy machinery. Bitcoin, as well as some other cryptocurrencies, is mined when sophisticated computers solve highly complicated math problems. These Bitcoin transactions are collected into blocks that are recorded and verified via a database technology called blockchain .

The Bitcoin blockchain is set up to process a block of transactions every 10 minutes. The reward for each block is currently 6.25 Bitcoin — this amount is halved every 4 years. The next “halving” will occur in June 2024. That doesn’t mean setting up a mining rig will drive results within 10 minutes though, since several thousand high-powered mining machines around the globe are all competing for each block.

As an individual Bitcoin miner, your chances of being the first miner to solve the math equation is small. That’s because competition is fierce, thanks to numerous companies around the globe investing in large mining farms. To boost your chances, you might join a mining pool.

Operated by third parties, mining pools coordinate groups of miners. By working together and sharing payouts between members of the group, miners are more likely to maintain a steady flow of Bitcoin.

Mining Bitcoin is a costly venture. The high-powered mining computers can cost thousands of dollars. And even with this investment, there’s no guarantee a miner will solve any problems and earn a return.

But hardware isn’t your only expense. Another potential risk is the tremendous energy costs required by computer systems running mining algorithms. As the blockchain network expands, these energy needs have increased exponentially. So much that Bitcoin mining has generated some controversy for its carbon footprint.

In the early days of cryptocurrency, individual miners could use personal computer equipment with a simple graphics card to mine Bitcoin. But that’s no longer the case. As Bitcoin’s price increased exponentially over the past decade, application specific integrated circuit (ASIC) machines built specifically to mine Bitcoin have become popular with miners. Due to their costs and the power needed to run them, Bitcoin mining is not really something an individual can do anymore.

If you earn Bitcoin (or any cryptocurrency) by mining, it counts as your regular taxable income — meaning you’ll owe tax on it at your standard income tax rate.

Early miners who mined Bitcoin were more easily able to turn a profit. As cryptocurrency has grown in popularity and more miners entered the industry, the ability to make money mining has decreased. Now, professional mining pools made up of expensive hardware have become the standard and do most of the mining. This, combined with the high energy costs makes it difficult for individual miners to earn Bitcoin for their efforts.

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Bitcoin mining is a process that validates and confirms new transactions to the blockchain and is how new bitcoin is introduced into the system. While understanding how it works is certainly an integral step in learning about cryptocurrency, if you’re thinking about trying your hand at Bitcoin mining, it’s also important to note the associated tech costs and that there’s no guarantee you’ll strike gold.