What Is Bitcoin Mining: How Does it Work, Proof of Work & Crypto Mining Hardware

In this article, we will talk about bitcoin mining and understand how it happens, proof of work & crypto building hardware & much more.

What Is Bitcoin Mining: How Does it Work, Proof of Work & Crypto Mining Hardware

What is Bitcoin mining and how does it work, proof of work & crypto mining Hardware. At the end of March 2022, the value of Bitcoin reached $43,394.80 on the foreign exchange market. This value is an indication of good news for the cryptocurrency. Over the years, the interest in Bitcoin currencies has grown so much that its value in terms of gold has increased.

What Is Bitcoin Mining: How Does it Work, Proof of Work & Crypto Mining Hardware

What Is Bitcoin Mining: How Does it Work, Proof of Work & Crypto Mining Hardware

The future looks bright for Bitcoin miners and enthusiasts, and it’s a potentially rewarding endeavor for anyone willing to try it. So, let’s take some time to learn the basics of Bitcoin mining, how does it work, Proof of work & crypto mining hardware.

What is Bitcoin mining?

Bitcoin mining is the process of distributing new Bitcoins. This allows the network to see recent transactions and is essential for maintaining and developing blockchain ledgers. “Mining” uses sophisticated hardware to solve highly complex mathematical problems. The first computer that finds a solution to the problem gets the next block of Bitcoin, and the process starts all over again.

Cryptocurrency mining is tedious, expensive, and only occasionally rewarding. However, mining attracts many investors interested in cryptocurrencies and rewards miners for using crypto tokens. This may be because enterprising people see mining as pennies in paradise, as California prospectors did in 1849. So if you’re tech-savvy, why not?

The bitcoin reward miners receive an incentive that motivates people to assist in the primary purpose of mining: legitimizing and monitoring Bitcoin transactions, ensuring their validity. As many users worldwide share these responsibilities, Bitcoin is a “decentralized” cryptocurrency or one that does not rely on any central authority, and such as a central bank or government, to oversee its regulation.

Understanding Bitcoin

Bitcoin, one of the most popular types of cryptocurrencies, is an exchanged digital medium that exists only online. Bitcoin runs on a distributed computer network or distributed ledger that tracks cryptocurrency transactions. When computers on the network validate and process transactions, new Bitcoins are created or mined.

These networked computers or miners process transactions based on bitcoin payments.

Bitcoin is powered by blockchain, the technology that powers many cryptocurrencies. Moreover, a blockchain is a decentralized record of all transactions on the network. Groups of approved transactions form a block assembled in a chain. Think of it as a long-term public record, almost like a long-term receipt. Bitcoin mining adds a block to the chain.

What is Blockchain?

As mentioned earlier, blockchain is the underlying technology of Bitcoin. Blockchain is a decentralized public ledger that records transactions in chronological order. Records of transactions added to the blockchain cannot be modified or modified. 

That is, the transaction is safe from hackers. And a block is the smallest unit of a blockchain and is a container that holds the details of all transactions. The block has four fields or primary attributes:

  • Previous Hash: This attribute stores the previous block’s hash value, which is how blocks are linked together.
  • Data: This is a set of transactions contained in this block. That is a set of transactions that are extracted, validated, and contained in the block.
  • Nonce: In the “proof of work” consensus algorithm use in Bitcoin, the nonce is a random value also use to vary the hash value output. Each block must generate a hash value and uses the nonce as the parameter to generate that hash value. Proof of work is the process of verifying transactions made on the blockchain.
  • Hash: The value obtained by passing the previous hash, data, and nonce via the SHA-256 algorithm. This is also the block’s digital signature. SHA-256 is a cryptographic hash algorithm that produces a unique 256-bit alphanumerical hash value for each input. This is a unique feature of this encryption algorithm. Always generate a 256-bit hash, regardless of what you type.

3 Blockchain concepts

To understand bitcoin mining, you first need to understand the three main blockchain concepts.

  • Public distributed ledger: A distributed ledger logs every transaction made on a global blockchain network. On the network, the validity of the transaction performed by Bitcoin users.
  • SHA-256: The blockchain uses a hash function called SHA-256 to prevent unauthorized access and keep the block safe. Digitally signed, their hash value, once generated, cannot change. SHA-256 takes an input string of any length and returns a fixed 256-bit output, and it’s a one-way function – you can’t derive the reverse of the reversed input entirely from the output (what you generated).
  • Proof of work: In bitcoin mining, miners validate transactions by solving difficult math puzzles called proof of work. To do this, the miner’s main goal is to determine the nonce value. This nonce value is a mathematical puzzle that the miner must solve to generate a hash smaller than the target defined by the network of a particular block.

How Bitcoin mining works

To successfully add blocks, Bitcoin miners compete to solve complex mathematical problems requiring expensive computers and large amounts of power. 

To complete the mining process, the miner must first find the correct or closest answer to the question. Guessing a valid number (hash) is called the Proof of Work. The miner guesses the target hash by making as many guesses as possible at random. This requires a lot of computing power. And also, the difficulty increases as more miners join the network. 

The computer hardware required is called an application-specific integrated circuit (ASIC) and can cost up to $10,000. In addition, ASICs consume large amounts of electricity, criticized by environmental groups and limit the profitability of miners.

If the miner successfully adds a block to the blockchain, he will receive 6.25 Bitcoin as a reward. The bonus amount is halved approximately every 4 years or every 210,000 blocks. In April 2022, Bitcoin was trading for about $ 40,000. That’s about $ 250,000 worth of 6.25 Bitcoin.

Crypto mining hardware: How do you start Bitcoin mining?

  • Wallet: This is where you will store any Bitcoin you earn due to your mining efforts. A wallet is an encrypted online account that allows you to store, transfer and accept Bitcoin or other cryptocurrencies. Companies like Coinbase, Trezor, and Exodus offer cryptocurrency wallet options.
  • Mining Software: There are several different mining software providers, also many of which are free to download and run on Windows and Mac computers. Also, once the software connects to the necessary hardware, you can mine Bitcoin.
  • Computer Equipment: The most prohibitive aspect of Bitcoin mining involves the hardware. You will need a powerful computer that uses a lot of electricity to mine Bitcoin successfully. It’s not uncommon for hardware costs to hover around $10,000 or more.

Crypto mining hardware: Bitcoin mining risks

  • Price volatility: Bitcoin prices have fluctuated significantly since the start of 2009. Bitcoin traded below $30,000 last year near $69,000. This volatility makes it difficult for miners to know if their rewards will outweigh the high mining costs.
  • Regulation: Few governments have adopted cryptocurrencies like Bitcoin, and many are skeptical of them because they operate outside of government control. It is always possible that the government will ban bitcoin or cryptocurrency mining as China did in 2021, citing increased financial risks and speculative trading.

Bitcoin mining taxes

It is important to remember the impact taxes can have on Bitcoin mining. The IRS has sought to crack down on cryptocurrency owners and traders as asset prices have soared in recent years. Here are the top tax considerations to keep in mind for Bitcoin mining.

Are you a company? If Bitcoin mining is your business, you can claim fees incurred for tax purposes. Earnings will be the amount of Bitcoin you earn. However, if mining is your hobby, you may be unable to deduct the fee.

Mined bitcoins are income. If you manage to mine Bitcoin or other cryptocurrencies, the fair market value of currencies taxes at normal income tax rates when you receive them.

Selling bitcoins at a higher price than you received them is a capital gain and taxed similarly to traditional assets such as stocks or bonds.

Final result

While Bitcoin mining sounds attractive, the reality is that it is difficult and expensive to be profitable. Moreover, Bitcoin’s extreme price volatility adds more uncertainty to the equation.

And remember that Bitcoin is a speculative asset with no intrinsic value, which means it generates no yield for its owner and has no connection to things like gold. Instead, your return is based on selling to someone else at a higher price that may not be enough to make a profit.