How Does Bitcoin Mining Work In 2024?

Bitcoin being the most valuable cryptocurrency in the market, there’s always a growing fascination around Bitcoin mining – and for good reasons. As of 2024, the overall market size of crypto mining is over $2.4billion, with Bitcoin taking the largest share. In fact, miners are currently mining an average of $600million Bitcoins per month. So, it’s certainly one of the most sought-after and rewarding activities in the crypto industry today.

For beginners, Bitcoin mining can be a difficult and often complex process to comprehend. In this article, we’ll provide a detailed guide to the mining process behind the largest cryptocurrency in the world. What is Bitcoin mining and how does it work? Let’s find out.

Key takeaways

• How does mining Bitcoin work? Bitcoin mining involves solving complex mathematical puzzles to validate transactions and add them to the blockchain. Miners use powerful computers to perform this work, earning new bitcoins as a reward.
• Key risks include high energy costs, hardware obsolescence, market volatility, and regulatory challenges. Additionally, the 2024 halving has reduced block rewards, potentially squeezing profit margins even further.
• In 2024, mined bitcoins are taxed as income when received, and as capital gains when sold in most countries.

The basics of Bitcoin explained

Bitcoin operates on a peer-to-peer network, allowing users to send and receive payments without intermediaries. Here’s how it works:

• Transactions: BTC transactions are recorded on a public blockchain. For Bitcoin, this blockchain is called the Bitcoin network.
• Decentralized Network: The Bitcoin network consists of a decentralized collection of nodes, each storing a complete copy of the blockchain. These nodes validate transactions and blocks to ensure adherence to Bitcoin’s protocol. This decentralized structure makes Bitcoin resistant to censorship and attacks.
• Consensus mechanism: Changes to the Bitcoin protocol require consensus among a majority of the network’s participants, ensuring both stability and security.

Think of the Bitcoin network as a large, shared notebook that everyone can see and write in, but no one can alter what’s already written.

Each person has a special pen with unique ink that allows them to write in this notebook. When you want to send money (Bitcoins) to someone, you write it in this notebook.

Everyone else in the network checks to make sure the transaction is correct before it’s permanently added to the blockchain.

Who are miners?

• These are individuals (or groups) that compete to solve a complex puzzle to earn a reward.
• Once a miner solves the puzzle, the transaction is locked into the notebook (blockchain).
• Afterward, everyone updates their copy of the notebook, ensuring agreement on ownership without needing a central authority.

How Bitcoin mining works

Bitcoin mining is the process by which new Bitcoins are created and transactions are verified on the Bitcoin network. It works as follows:

1. Transaction collection: Miners gather transactions that users broadcast to the network. These transactions are bundled into a group called a ‘block’.
2. Solving a puzzle: Miners compete to solve a complex mathematical puzzle. This puzzle is based on a cryptographic hash function, which takes the transaction data in the block and transforms it into a fixed-length string of numbers and letters. The goal is to find a hash value that meets certain criteria, which involves a lot of trial and error.
3. Proof of work: The first miner to solve the puzzle announces it to the network. Other miners verify the solution to ensure it meets the required criteria. This solution is known as the proof of work (PoW).
4. Adding to the blockchain: Once verified, the block is added to the blockchain, which is the public ledger of all transactions. The successful miner is rewarded with a certain number of new bitcoins, as well as any transaction fees from the transactions in the block.
5. Difficulty adjustment: The difficulty of the puzzle adjusts automatically every 2,016 blocks (roughly every two weeks) to ensure that new blocks are added approximately every 10 minutes, regardless of the total computing power of the network.

Is Bitcoin mining profitable?

Bitcoin mining profitability in 2024 depends on several key factors:

1. Electricity costs: Mining is energy-intensive. Miners with access to cheap electricity can reduce operational costs, making mining more profitable. High electricity costs can quickly erode profits.
2. Bitcoin price: The token’s price directly impacts mining profitability. If the price is high, the value of mined bitcoins increases, making it more profitable. Conversely, if the price drops, profitability declines.
3. Mining difficulty: As more miners join the network, the difficulty of solving the cryptographic puzzles increases. Higher difficulty means more computational power (and therefore more electricity) is required to mine the same amount of Bitcoin.
4. Hardware efficiency: The type of hardware used significantly affects profitability. More efficient mining hardware, which performs more calculations per watt of power consumed, can make mining more profitable. Miners who invest in the latest ASIC (Application-Specific Integrated Circuit) miners have a better chance of being profitable.
5. Block rewards and halving: Every four years, the Bitcoin network undergoes a ‘halving’, where the reward for mining a block is cut in half. The next halving is expected in 2028, reducing the reward from 3.125 to 1.5625 Bitcoins per block. This will directly impact mining profitability unless offset by a significant increase in Bitcoin’s price or reduced competition among miners.
6. Market competition: Mining is highly competitive. Larger operations with economies of scale have an advantage over smaller, individual miners.

Given these factors, mining in 2024 can be profitable, but it depends heavily on operational efficiency, Bitcoin’s market price, and the cost of electricity. Smaller miners may find it challenging to remain profitable without low-cost electricity and the latest mining hardware.

How to Mine Bitcoin in 2024 – Step by Step

Step 1 – Set Up Your Hardware

Start by acquiring an ASIC miner, such as the Antminer S19 Pro, which offers high efficiency and performance for Bitcoin mining. Ensure your location has sufficient power capacity and cooling to handle the high energy and heat produced by these devices.

While ASIC miners are the most efficient hardware for Bitcoin mining, GPU mining (Graphics Processing Units) is another option, although it is less common for Bitcoin specifically due to its lower efficiency. GPUs are still widely used for mining other cryptocurrencies, such as Ethereum (prior to its shift to proof-of-stake), as they are more versatile and can handle a wider range of tasks.

If you opt for GPU mining, you’ll need to set up a rig with multiple GPUs, such as NVIDIA or AMD cards, along with proper cooling and power management. While this method might be less efficient for Bitcoin, it could still be a learning opportunity for those interested in mining on a smaller scale or experimenting with other cryptocurrencies

Step 2 – Download the Necessary Software

Install Bitcoin mining software that’s compatible with your hardware. Popular options include CGMiner and EasyMiner, which help connect your mining rig to the Bitcoin network or a mining pool. Make sure the software is regularly updated for security and performance.

Step 3 – Prepare a Compatible Wallet

Set up a Bitcoin wallet to store your mining rewards securely. Software wallets like Electrum or hardware wallets like Ledger are popular choices. Make sure to keep your private keys safe by securely storing your seed phrase.

Step 4 – Join a Mining Pool or Stay Solo

Joining a good mining pool, such as Braiins Pool or F2Pool, increases your chances of receiving mining rewards by combining your efforts with other miners. Solo mining offers full rewards but is riskier and less likely to yield returns

Step 5 – Start Mining

Once your hardware, software, and wallet are set up, you can start mining. Monitor your equipment’s hash rate, electricity usage, and temperature to ensure everything is running smoothly and efficiently.

Opt for Cloud Mining (Optional)

If managing hardware is not for you, consider cloud mining, where you rent mining power from a provider. Research reputable providers and select a contract that fits your needs, then sit back and monitor your earnings remotely.

Some popular cloud mining platforms include:

1. StormGain: Known for its user-friendly interface, StormGain offers cloud mining without requiring upfront investment in hardware. It’s a good option for beginners, and it integrates mining with its exchange platform.
2. Hashing24: This platform has been providing cloud mining services since 2016 and offers contracts for Bitcoin mining with data centers in locations such as Iceland and Georgia. It’s favored for its transparency and history in the market.
3. Binance Cloud Mining: Binance, one of the largest cryptocurrency exchanges, also offers cloud mining services. Users can rent hash power directly from Binance’s mining pools, which provides a seamless integration with their exchange

Risks of Bitcoin mining

High initial costs 

Setting up a mining operation requires substantial investment in specialized hardware (ASIC miners), cooling systems, and reliable power infrastructure. These costs can be prohibitive, especially if the price of Bitcoin declines.

Energy consumption

Bitcoin mining is energy-intensive, leading to high electricity costs. Miners operating in regions with expensive electricity may find their profit margins squeezed or even eliminated.

Market volatility 

The price of Bitcoin is highly volatile. A sudden drop in Bitcoin’s value can render mining unprofitable, especially for those with high operational costs.

Hardware obsolescence

Mining hardware rapidly becomes outdated as more efficient models are released. Continuous investment in newer hardware is necessary to remain competitive, leading to increased operational costs.

Regulatory risks

Governments worldwide are increasingly scrutinizing Bitcoin mining due to its environmental impact and financial implications. Regulatory changes, such as increased taxes or outright bans, could severely impact the viability of mining operations.

Halving events 

Every four years, Bitcoin undergoes a ‘halving’, reducing the block reward by half. This event reduces miners’ income unless the price of Bitcoin rises significantly to compensate for the reduced rewards. The most recent Bitcoin halving occurred on 19 April 2024. During this event, the block reward for miners was reduced from 6.25 Bitcoins to 3.125 Bitcoins per block.

Network difficulty 

As more miners join the network, the difficulty of mining increases. Higher difficulty requires more computational power, raising operational costs and making it harder to mine new bitcoins.

Security risks

Mining operations are targets for cyberattacks, including ransomware and DDoS attacks. Physical theft of mining equipment is also a risk, especially in regions with less stringent security.

Environmental impact 

The environmental footprint of Bitcoin mining, due to its high energy consumption, is increasingly criticized. This could lead to further regulatory pressures or public backlash, particularly in regions facing energy shortages.

Liquidity risks

Selling large amounts of mined Bitcoin without affecting the market price can be challenging, particularly in low-liquidity environments. Miners may struggle to convert their earnings into fiat currency at favorable rates.

Taxes on Bitcoin mining

United States 

As of 2024, Bitcoin mining in the United States faces a complex and evolving taxation policy. The IRS treats mined Bitcoins as income, meaning the fair market value of the coins on the day they are received must be reported as ordinary income. This income is subject to federal income tax, which varies based on your total income and filing status.

For those mining as a hobby, the income must be reported on Form 1040, Schedule 1, under ‘Other Income’. However, hobby miners cannot deduct expenses like electricity or equipment costs.

Additionally, miners are subject to capital gains tax when they sell or exchange their mined bitcoins. This results in a double taxation scenario: first as income when the Bitcoin is mined, and then as a capital gain or loss when the bitcoin is sold.

A significant development in 2024 is the proposed 30% excise tax on cryptocurrency mining energy costs. This tax, part of the Biden administration’s fiscal policy, is aimed at curbing the environmental impact of energy-intensive proof-of-work mining, like that used for Bitcoin. The tax would be implemented gradually over three years, starting with a 10% levy. If enacted, this could significantly increase operational costs for miners in the US, potentially making mining less profitable and encouraging some operations to relocate abroad to avoid the tax.

Canada

In Canada, Bitcoin mining is generally treated as a business activity. Income earned from mining is subject to income tax. Miners must report the fair market value of the cryptocurrency at the time it is mined as business income. Expenses related to mining, such as electricity, equipment, and other operational costs, can be deducted. If the cryptocurrency is later sold or exchanged, any capital gains are also subject to tax.

Germany

Germany provides a somewhat favorable tax environment for Bitcoin miners. If individuals hold their mined bitcoins for more than one year before selling, the profits are tax-exempt. However, if the bitcoins are sold within a year, the profits are taxed as income. For businesses, mined cryptocurrencies are treated as income, and the associated expenses are deductible.

Russia

Russia treats cryptocurrency mining as a taxable business activity. Miners are required to report their earnings as income and are subject to business taxes. The Russian government is also exploring additional regulations, which could include stricter taxation and potentially higher tax rates for mining activities, reflecting the country’s cautious approach to cryptocurrencies.

El Salvador

El Salvador, the first country to adopt Bitcoin as legal tender, offers a very favorable environment for Bitcoin miners. The country has stated that there will be no taxes on Bitcoin-related activities, including mining, in an effort to attract cryptocurrency investment and infrastructure.

United Kingdom

In the UK, Bitcoin mining income is subject to income tax. If mining is conducted as a business, miners can deduct related expenses. Additionally, when mined Bitcoins are sold, the capital gains tax applies. The UK’s tax authority, HMRC, has issued detailed guidance on how to report and pay taxes on cryptocurrency activities.

Bitcoin mining statistics 

• Hash Rate: The global Bitcoin network’s hash rate reached approximately 450 EH/s (exahashes per second) in early 2024]. This represents a significant increase from previous years, indicating a growing investment in mining infrastructure despite the reduction in block rewards following the April 2024 halving.
• Electricity Consumption: Bitcoin mining is estimated to consume around 135 TWh (terawatt-hours) annually as of 2024. This level of consumption puts Bitcoin’s energy usage on par with that of medium-sized countries, such as Argentina or Norway. The energy debate continues to be a focal point for policymakers and environmentalists.
• Mining Revenue: After the April 2024 halving, Bitcoin miners are earning approximately $20m per day from block rewards and transaction fees combined. This is a drop from previous years due to the halving, which reduced the block reward from 6.25 BTC to 3.125 BTC.
• Geographic Distribution: Kazakhstan, the United States, and Russia remain top locations for Bitcoin mining, accounting for over 50% of the global hash rate combined. The United States leads with around 37% of the global hash rate, followed by Kazakhstan and Russia.
• Environmental Impact: In response to growing environmental concerns, an estimated 60% of Bitcoin mining operations are now powered by renewable energy sources. However, the environmental impact of mining remains a contentious issue, particularly in regions relying on coal-fired power plants.

Frequently Asked Questions

1. 01.

   What is Bitcoin mining?

   

   Bitcoin mining is the process of using powerful computers to solve complex mathematical problems that validate and add transactions to the Bitcoin blockchain. Miners compete to solve these puzzles, and the first to solve each one is rewarded with new bitcoins. This process secures the Bitcoin network and ensures the integrity of the blockchain.

2. 02.

   Is Bitcoin mining profitable?

   

   Bitcoin mining can be profitable, but it depends on several factors, including the price of Bitcoin, the cost of electricity, the efficiency of mining hardware, and regulatory conditions. The 2024 halving reduced block rewards, which may impact profitability, especially for miners with high operational costs. However, miners with access to cheap electricity and efficient hardware may still find it profitable.