How does Bitcoin mining work?

You may have heard about crypto mining in some form by now. But if you’re reading this thinking ​“what actually is it?” and ​“what are its consequences?” you’re in luck.

Bitcoin mining is like OG mining – coal and that – but online. The process has similarities: you have to get equipment (an ASIC miner computer, very good WiFi, electricity, some fans, maybe) and then you use a lot of energy completing a task of sorts, which generates fresh new bitcoin.

Sure, it isn’t going down the mines and chipping out coal, but it is rapidly solving a complex puzzle. It’s kind of like a game of guess the number, but said number is between 0 and 64 digits (for context, a billion is a nine digit number). However, it also isn’t just a number as we typically think of it. It’s a hexadecimal number.

This is a long, old thing to explain, but it basically means that instead of there being ten different numbers we can use (like on a keyboard’s 0 – 9) there’s 16 of them. You use letters A‑F to basically represent 1.10, 1.11, up to 1.15. When you (well, your computer) gets the right number, you’re paid in brand-new bitcoins. It’s mining, but for young tech bros and not your Welsh grandad who left school at 14, essentially. It isn’t just bitcoin that’s mined. Other coins like ether are mined too, by the way. Whoever solves the block fastest gets the bitcoin.

The purpose of mining is to validate transactions, so it is an integral part of blockchain. The complex questions the computers solve are asking if the money (token, etc) has been sent and received by specific wallets, and whether the wallet sending the crypto does have the funds in place. It’s sort of like a bank teller, someone who makes sure the contract is sound and that nothing bounces. When the first miner solves everything, other miners then validate the findings, which is how it becomes pretty hard to commit fraud on blockchain.

In theory! It’s very profitable when you’ve bought the equipment (not cheap). When you’ve bought the equipment, you just let it tick over, wait for it to pay itself off and then bring you passive bucks (minus electricity bills). Back in 2018, a bitcoin miner told the BBC his profit margin was about 75 per cent (£0.75 for every £1 earned). So, you know, very good.

In May 2021, Biaheza, a YouTuber, decided to try and mine bitcoin for a week – he started seeing around $60 – 85 of income per day on a fairly modest set-up. This would be upwards of £21,900 a year (gross, not net profit) if you had the computers running 365 days a year.

The financial risk is only really dependent on the cryptocurrency plummeting in value. The upside is that if the coin is doing well, you could earn even more. Although you’re up against warehouses full of computers, so making big money isn’t so easy from home, as these huge computers are both going to beat you to solving puzzles and mine a lot more than you can.

There’s a big environmental toil with crypto. We’ve written a little on that here and it’s pretty concerning, for sure. However, the argument crypto-enthusiasts mention is the vast carbon footprint of mining metals for physical coins, along with that of running banks, physical vaults and the rest of the financial world. They say that when you compare crypto to paper currency, it isn’t as bad as it seems when looking at it alone. There’s also green initiatives taking place in crypto, which do things like reward miners for using green energy. SolarCoin is an example.

Certain countries have other issues with mining, like China, which has recently cracked down on Bitcoin miners. This is mainly because it’s a coin that could disrupt the state currency and economic growth, so it’s more of a challenge against cryptocurrency in general than specifically bitcoin mining.

Bitcoin just happens to be the biggest cryptocoin by a long way, making it a priority for the Chinese Government to stop people from mining it. The crackdown did cause concern for the crypto world, knocking off about half of bitcoin’s value at one point. This is because, despite crypto’s whole thing being that it is a decentralised currency, well over half of all bitcoin is currently mined in China.

Speak to a Financial Conduct Authority registered financial adviser before taking financial advice, and think carefully before making any decision.