How Does Bitcoin Mining Work?

Updated April 28, 2021

Bitcoin is by far the most well-known digital currency, but because it is tracked and traded differently than fiat (government-issued) currency, it can be difficult to understand.  Where does Bitcoin come from?  How does Bitcoin mining work?

Bitcoin is not controlled by a company, a government, or an organization of any kind.  There is no central processing, no central data storage, and no centralized agency to regulate the transactions.  But just because these things are not centralized doesn’t mean they’re not important.  They are!  Data storage, data processing, and data verification are absolutely crucial, but they are done by Bitcoin users themselves.  More specifically:

• Bitcoin “rules” are built into every transaction
• Transaction data is stored on something called a blockchain
• Transactions are processed by bitcoin miners.

Because Bitcoin is becoming more popular, Bitcoin mining is more important every day.  Without miners, Bitcoin couldn’t exist.

Bitcoin mining has two purposes:

1. Create new Bitcoin to add to the worldwide supply
2. Help process transactions for Bitcoin users throughout the world

These purposes are accomplished with a Bitcoin Mining Rig.  Unlike a normal computer that must process many different kinds of tasks (from gaming to spreadsheets to photo-editing to streaming video), a mining rig does one thing over and over again.  It hashes.  It hashes and hashes and hashes again.

Bitcoin mining is the process by which new bitcoins are entered into circulation, but it is also a critical component of the maintenance and development of the blockchain ledger.

Investopedia

For that reason, rigs don’t use powerful CPUs (central processing units) that are good at multi-tasking.  They use GPUs (graphics processing units) that are designed to do one thing over and over again really fast, like show pixels on a screen.

In this case, GPUs are placed side-by-side in a rig and work together to convert transaction data into hashed transaction data, a one-way form of encryption.  Hashing can get complicated, but password storage is a very common example of how it is used.  Most systems will hash your passwords before storing them somewhere.  Once they are hashed they cannot be un-hashed again.

Hashes are stored on something called a blockchain.  Think of blockchain like a giant digital receipt.  When you complete a Bitcoin transaction (buying, selling, trading, etc.), Bitcoin mining rigs add your transaction to the Bitcoin blockchain.

With each new transaction, a mining rig will:

1. Combine transactions into a block of data
2. Hash the transaction block
3. Combine the new hash with the most recent block on the blockchain
4. Hash the combination of the blocks
5. Add the new hashed combination to the blockchain

In this way, every new block is a hash of every previous transaction, and the Bitcoin blockchain contains every Bitcoin transaction ever done.  (Fun Fact: as of the date of this article, the size of the Bitcoin blockchain is about 341 GB)

In addition to adding transactions to the blockchain, Bitcoin mining rigs also make sure the blockchain is properly maintained, that the chain is properly indexed, and that all copies of the chain around the world are the same.

For lending processing power to the Bitcoin network, rigs can earn fractions of a bitcoin as payment.  When running at full power, our rigs can typically earn $100 or more worth of Bitcoin every day.

These payments are not new bitcoin.  They are basically fees for processing transactions using existing bitcoin, similar to the fees you might incur by using a credit card.  Instead of those fees going to a credit card company, however; they are given to Bitcoin miners who use their rigs to process the transactions.

The number of Bitcoin will keep growing until around the year 2040, but it is designed to grow at a slower and slower rate.  That is because mining for newBitcoin is harder and harder to do.

In order for a bitcoin miner to be rewarded with a new bitcoin, they must do two things:

1. Verify 1 MB of bitcoin transactions
2. Be the first miner to arrive at the right answer, or closest answer, to a numeric problem

In other words, bitcoin miners have to figure out a predetermined hash.  Generally, the only way to figure out a well-executed hash is to guess, and at its core, Bitcoin mining is just elaborate guesswork.

A Bitcoin mining rig will try different character combinations over and over again until it finds a match that is less than or equal to the target hash.  This is done extremely fast.  There can be trillions of combinations required to guess a given hash, and rigs with multiple GPUs can usually process millions (or even billions) of hashes per second.

But figuring out the hash is not enough.  You also have to be the first miner to figure it out.  That requires both a lot of work (effort) and a bit of random chance (luck).  Together, the effort and the luck are what is called proof of work (PoW), and PoW provides the foundational basis for the existence of all Bitcoin.

Although you will be able to mine for new bitcoin with a rig you acquire from us, the bitcoin earned from processing transactions can provide fantastic ROI all by itself.

Even after understanding how Bitcoin mining works, it can be complicated to get a Bitcoin mining rig set up.  But our team will take of all of that.  We will install mining rig management software on your rig that acts like an operating system.  The software has a smartphone app counterpart that will allow you to manage your rig remotely.  You can earn and collect bitcoin, and distribute it to your own personal bitcoin wallet, exchange it for another currency, or transfer it somewhere else.

The hardest part of hosting a rig with Xcavate Mining is deciding what you will do with the Bitcoin you earn!