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How to Mine Bitcoin – Understanding the Bitcoin Mining Algorithm

April 30, 2022 - 8 min read

Bitcoin is perhaps the most valuable virtual currency at the moment, and it’s a buzzword that we’re all familiar with. The term “mining” comes from the English word “mine” and refers to the collective usage of a network’s computational capacity.

Essentially, Bitcoin mining is the process of leveraging the majority of a computer’s processing capacity to do computational chores for the blockchain, hence contributing to the development of new blocks for the blockchain. The miner will then be compensated with a fixed sum of cryptocurrency. 

However, it appears simple when the computer operates at full speed and suddenly generates money. This is one of the reasons why so many people are interested in Bitcoin mining. As a result, a growing number of people are learning about Bitcoin mining and wanting to participate.

Mining is a Computationally Intensive Task

Producing valid blocks that add transaction data to Bitcoin’s public ledger (known as a blockchain) is known as Bitcoin mining

Payments in Bitcoin must be verified. It must be confirmed, for example, if the individual making the payment has sufficient Bitcoins. Furthermore, the new data blocks containing the current payments must be connected to the blockchain’s earlier data blocks. 

To achieve this, some mathematical problems must be solved. Anyone who performs this and confirms payments will be rewarded with Bitcoins. This is referred to as mining. Miners require not just technical knowledge but also the necessary computer equipment.

The demands on processing power are now so great that mining on the home PC is nearly impossible. Mining is now primarily in the hands of mining pools or corporations created particularly for this purpose, unlike in the early days.

The Significance of Mining Bitcoin

Why do Bitcoin units have to be mined in the first place? This is a method of issuing new coins without going via a central authority such as a national bank.

Bitcoin is mined because there is no monopolistic money production in the blockchain’s P2P network. Under a decentralized Proof-of-Work system, Bitcoin mining becomes more professional and specialized, avoiding monopoly. Finding new blocks, evaluating the data they contain, and adding them to the blockchain takes a lot of computer power. This processing power is used to produce new Bitcoins. Entire coins or subunits of BTC, known as a satoshi, are generated based on the effort done.

Theoretically, anyone can participate in Bitcoin mining. However, as mining becomes more advanced, the demands on technological equipment become greater. All Bitcoins will be mined around the year 2140. Anyone may participate, whether directly through the Bitcoin Client or indirectly through cloud mining. However, as the number of users grows, discovering the blocks becomes increasingly complex – and costly for the miner. It takes a lot of time, effort, and a lot of computational power.

Scarcity is one of Bitcoin’s most important properties. This is to prevent all 21 million BTC from being circulated too soon. So, what exactly do Bitcoin miners do? 

Mining is merely a component of the transaction confirmation process. The primary purpose of mining is to keep the ledger decentralized. A new miner decrypts the blockchain and is granted permission to update it since mining needs the use of a decryption mechanism each time.

Miners with higher computer power will, of course, succeed more frequently. However, according to the rule of probability, the same miner will not succeed every time.

Bitcoin Mining Algorithm

Each miner in the Bitcoin network must compete with other miners to be the first to solve the system’s challenge. Miners will be compensated with a Bitcoin according to the transaction fee they execute. The miner also earns a bonus for mining each Bitcoin block.

According to the Bitcoin algorithm, each new block formed during a time comprises information about recent transactions during that period, one-way encrypted information on transactions in the previous block in the blockchain, and a parameter to solve the problem.

First, a block is created to record information on new transactions that have happened over a period of time. The data is subsequently encrypted with the SHA-256 (Secure Hash Algorithm) algorithm, which converts any data into a 256-bit long output. After encryption, this result is concatenated with the encryption result of the following transaction using the SHA-256 (double hashing) technique, resulting in two hashing results for the transactions in this block. Finally, a Merkle Tree is formed as a result of this process.

These two results are concatenated and encrypted in this step to provide a final hashing result. The Merkle Root is the name given to the ultimate hashing result.

This final hashing result is combined with additional data in the block, such as the preceding block’s hash, the block initiation timestamp, and the nonce run parameter. The importance of random variables cannot be overstated. These parameters are further encrypted to create the freshly initialized block’s final hashing result. The hashing result will be a 256-bit (64-character) string at the end.

According to the Bitcoin algorithm, a new block is formed only when the miner discovers that the final hashing result is less than the goal value preserved in the blockchain system. This information is subsequently sent to other blocks in the network for confirmation. A new block is officially generated if more than 50% of the blocks in the blockchain confirm the results.

If the result is incorrect, the dynamic parameter nonce will be adjusted at random until a miner discovers a parameter that meets the system’s criterion (i.e., the hashing result is less than the system’s Target Value). Then, the miner that mines the next block will be paid with a fixed quantity of Bitcoin.

As a result, the problem that miners must solve is determining the nonce parameter that meets the system’s requirements. When the number of miners increases, the system automatically lowers the Target Value to keep the time to generate a new block at around 10 minutes.

Mining refers to the entire process of network members searching for the nonce parameter to create this legitimate hashing result to confirm the creation of new blocks or the validation of new transactions.

Bitcoin Mining: Powerful Hardware Required

Before mining Bitcoin, a miner must carefully analyze if it is lucrative to do so. To figure out which mining equipment is ideal, a miner needs to read Bitcoin mining hardware reviews. Bitcoin mining requires a computer or a graphics card, also known as GPU mining. Bitcoin mining has gotten increasingly competitive in recent years, and miners must now employ ASIC mining equipment, which are special computers configured explicitly to mine Bitcoins.

ASIC miner:

ASIC devices are specially designed devices for Bitcoin mining. These Bitcoin miners are linked to the router directly. These devices have the ability to mine at a quick and consistent rate. They can be set up using the browser. Some miners are self-contained and do not require any additional hardware.

In addition to the devices’ cost and any necessary software, there are also electrical costs to consider. Additionally, especially with Bitcoin, they’ve grown to the point that most mining takes place on a few massive server farms.

General devices:

A PC with one or more VGAs with a robust setup is another type of excavator that is highly popular and has a lot of investment. Then, install mining software on the PC and run it 24 hours a day, seven days a week, to mine Bitcoins and other cryptocurrencies. Its drawbacks include:

  • A high price.
  • High power consumption.
  • A slower processing speed than a specialized device.

However, it has the benefit of being able to mine many other virtual currencies as well.

In the early days of Bitcoin, the few people who were digging away on their home computers with a decent graphics card could do so successfully. Unfortunately, the computational capacity of today’s ordinary systems is insufficient.

Bitcoin Mining Pools

The construction of pools has been a considerable improvement in mining technology. A mining pool is a method of pooling the individual computing capacity of miners to boost the likelihood of solving issues faster.

Many miners utilize mining pools to mine Bitcoins. A miner can register an account with a mining pool to mine Bitcoins. The miner then does not mine alone but rather mines the Bitcoins with the help of other participants. The total amount of Bitcoins determined is shared among the participants. However, if numerous computers in the network mines Bitcoins, mining Bitcoins gets more complex, and the incentives grow smaller.

Cloud Mining

Bitcoin cloud mining eliminates the need to acquire gear or install specific software. Instead, an external vendor rents out all essential technical components to the miner. This is referred to as cloud mining. 

Bitcoin Mining Program

A miner must have a Bitcoin mining account installed on their computer to operate and monitor their Bitcoin mining equipment. Many mining pools, such as Bitminer, have their own software, while others do not.

For example, if the miner is using a Windows PC, the miner can utilize BFGMiner and 50Miner. The miner’s next task is to connect the mining system to a secure power supply and turn it on.

The machine will begin mining Bitcoins after it has been correctly set up.

Final Thoughts

A miner requires the right equipment to mine Bitcoin. Before mining Bitcoin, a miner must determine whether it is profitable or not. Miners must now use ASIC mining equipment, special computers set specifically to mine Bitcoins because Bitcoin mining has become increasingly competitive in recent years. The miner can begin mining after the essential hardware and software have been installed.


  1. Song, Y., & Aste, T. (2020, Oct.). The cost of bitcoin mining has never really increased. Frontiers in Blockchain.
  2. Bitcoin FAQ. Bitcoin Org.
  3. How to mine Bitcoin: A beginner’s guide to mine BTC. Cointelegraph.
  4. Rosenberg, E. (2022, Jan.). How does Bitcoin mining work?. The Balance.

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