How Bitcoin Mining Works?

by | May 4, 2021

Disclaimer: Posts on the HyperTrader blog and associated HyperLinq websites are for educational and informational purposes only. These posts should not be taken as financial advice, nor are they meant to be viewed as trading advice. HyperLinq Inc. or the authors take no responsibility for any damages or losses.

As per the definition, Bitcoin mining is a process of verifying and updating the distributed ledger, keeping track of all the transactions. In exchange for doing this work, miners are rewarded with newly minted Bitcoins with every single block of transactions. In essence, Bitcoin miners facilitate Bitcoin transactions across people by updating the ledger with every new transaction.

Even though it might sound like a great idea for passive income to make money with Bitcoin mining considering one Bitcoin is currently worth around $60k. Unfortunately, Bitcoin mining is not as easy as it sounds. It involves a complicated process of acquiring the right appliances along with taking care of electricity costs, a stable internet connection, and few other things.

Therefore, today, we won’t be discussing Bitcoin mining as a prospect for passive income but understanding the technicalities of it. Before we start, I’d suggest you have a look at our explainer – “Explaining Bitcoin To Your Grandma,” to understand the working of Bitcoin in a simple language. So, let’s get started with understanding how Bitcoin works:

Understanding Bitcoin Mining

Confirming a Block of Transactions

Let’s say Veronica wants to transfer 0.1 BTC to Socrates. Once she hits the transfer button, a transaction of 0.1 BTC is created and sent to the Mempool queue on the blockchain, where all the unconfirmed transactions are pending to be executed.

Now, all the miners will select a bunch of unconfirmed transactions from the mempool and try to validate them by solving a complex mathematical proof. This is where the race starts. The miner who will solve this mathematical proof first will validate this block of transactions and earn rewards.

Once a miner validates a block of transactions, the rest of the miners will verify this piece of information. If the rest of the network reaches a consensus on the validity of this block, it is accepted in the blockchain, and the miners will start the race to mine the next block. In case if two or more miners validate the same block in almost the same time, the block with the longest chain will be accepted in the blockchain.

Mining Reward

Now that the given block of transactions is confirmed, including the one where Veronica transferred 0.1 BTC to Socrates. The ledger or database will be updated by deducting 0.1 BTC from Veronica’s wallet and adding it to Socrates’s wallet.

In exchange for using their resources such as electricity and the cost of mining appliances, miners currently earn 6.25 Bitcoin for every block of transaction. The mining reward keeps halving every four years, it started with 50 Bitcoins per block in 2009, and the Bitcoin network has already gone through three halving cycles. The next Bitcoin halving will occur sometime in the year 2024.

Transaction Fee

Apart from 6.25 newly minted Bitcoins, miners also receive transaction fees as their mining reward. That means either Veronica or Socrates has to bear the cost of the transaction in the form of a fee. For example, if the current transaction fee is around 0.0003 BTC, Socrates will receive only 0.0997 BTC. (Deducting the transaction fee of 0.0003 BTC from the transaction amount of 0.1 BTC)

It’s worth noting that the transaction fee fluctuates depending upon the network congestion. As the Bitcoin blockchain allows only 1 MB of data per block; thus miners are more likely to choose a bunch of transactions with higher transaction fees. Due to the block size limit and difficulty rate, the Bitcoin blockchain can process only up to seven transactions per second.

Conclusion

So, that’s all for today, hope you understood the working behind the curtains when you make a Bitcoin transaction. Here are few other beginner articles you might want to have a look at:

Head of Content Marketing @ HyperLinq. His love for Chai and mountains precedes everything. Often wonders about things like, "why $1 earned through leverage feels 100x better than $1 earned selling your time?"
Head of Content Marketing @ HyperLinq. His love for Chai and mountains precedes everything. Often wonders about things like, "why $1 earned through leverage feels 100x better than $1 earned selling your time?"

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