Bitcoin Mining: What it is, how it works and how it starts

Bitcoin mining is the process of creating new Bitcoin by solving very complex mathematical problems that validate transactions in currency. Once Bitcoin is mined successfully, the miners will receive a pre-determined amount of Bitcoin.

Bitcoin is one of the most popular types of cryptocurrencies and is a digital exchange medium that exists only online. Bitcoin runs on a decentralized computer network or on a distributed ledger to track transactions in cryptocurrency. When a computer on the network validates and processes the transaction, a new Bitcoin is created or mined. These networked computers, or miners, process transactions in exchange for Bitcoin payments.

It is understandable that interest in mining has also recovered as cryptocurrency and Bitcoin prices have skyrocketed in recent years. Minors are currently earning 3.125 Bitcoin (approximately $334,375 as of mid-June 2025) to successfully verify the new blocks on the Bitcoin blockchain. However, for most people, the outlook for Bitcoin mining is not good due to its complex nature and high cost.

Below are the basics of how Bitcoin mining works, as well as some important risks to keep in mind.

How bitcoin mining works

Bitcoin is powered by blockchain, the technology behind many cryptocurrencies. A blockchain is a distributed ledger for all transactions across the entire network. Groups of approved transactions together form blocks, and computers (called miners) within the network join together to create a chain. Think of it as a long public record that acts like a long-term receipt. Bitcoin mining is the process of adding blocks to a chain.

Bitcoin Miner forms a block in the blockchain by selecting transactions from a group of unconfirmed transactions called Mempools. Before adding blocks firmly to the blockchain, miners need to solve what is called the Proof of Work puzzle by guessing the numbers (also known as non-CE). This number is combined with the data in the block and processed via a function called SHA-256.

Ultimate Goal: Create a block hash. This is code with enough reading zeros to be less than or equal to the target hash of the network. The target hash determines how difficult it is to solve a puzzle.

Remember that the block hash must be less than the target hash. The only way to win is to roll numbers equal to some numbers given first, think of them like a dice game. That number is primarily made with zeros, so to win, you need a very crazy rare roll (hash with a ton of zero before that). In this example, the “FFFF” in the target hash represents a non-zero number, and the block hash is less than the target hash, so we solve the puzzle.

If you’re wondering if this process requires a lot of computing power, you’re right. Miners use a very powerful computer called ASICs to make billions (or trillions) of speculations about which non-capabilities work. A computer costs up to $10,000. Additionally, ASICs consume a huge amount of electricity. This has attracted criticism from environmental groups and limits the profitability of miners. Technically, however, you can mine Bitcoin on a MacBook Pro for example, but unfortunately, it doesn’t reach that far, as it doesn’t have enough computing power.

If the miner is able to successfully add blocks to the blockchain, you will receive 3.125 bitcoins. The compensation amount is reduced by half every four years, or by every 210,000 blocks. As of mid-June 2025, Bitcoin had traded for around $107,000, earning 3.125 Bitcoin, worth $334,375.

The risks of bitcoin mining

• Regulations: Few governments accept cryptocurrencies such as Bitcoin, and the currency operates outside the control of the government, making it more likely that many governments are seen as skeptical. As the government did in 2021, there is a risk that the government could completely outlaw the mining of Bitcoin or cryptocurrency, citing an increase in financial risk and speculative transactions.
• Price Volatility: Bitcoin prices have fluctuated widely since its introduction in 2009. Since January 2023, Bitcoin has recently traded for under $18,000 and over $110,000. This type of volatility makes it difficult for miners to know if their rewards outweigh the high costs of mining.

How to start bitcoin mining

Here are the basic components you need to start mining Bitcoin:

Bitcoin mining statistics

• According to Cambridge Bitcoin’s Power Consumption Index, Bitcoin uses 184.4 terawatts of electricity each year.
• Bitcoin prices have been extremely volatile over time. In 2020, it traded at a low price of $4,107, reaching an all-time high of $111,970 in May 2025.
• According to the Cambridge Power Consumption Index, the US (37.8%), mainland China (21.1%) and Kazakhstan (13.2%) were the largest Bitcoin miners as of December 2021.

Taxes on Bitcoin Mining

It is important to remember how taxes affect Bitcoin mining. The IRS aims to crack down on owners and cryptocurrency traders as asset prices have risen in recent years. Important tax considerations to keep in mind for Bitcoin mining are:

• Are you a business? If Bitcoin mining is your business, you may be able to deduct any expenses incurred for tax purposes. Earnings become the value of Bitcoin you earn. However, if mining is a hobby for you, it’s unlikely to deduct costs.
• Mined Bitcoin is income. If you can minify Bitcoin or other cryptocurrencies, the fair market value of the currency at the time of receipt is taxed at the normal income rate.
• Capital gains. If you sell Bitcoin at the price above the location you received it, it qualifies as capital gains.

Check out Bankrate’s Cryptocurrency Tax Guide to learn about basic tax rules such as Bitcoin, Ethereum and more.

Is Bitcoin mining beneficial?

it depends. Even if Bitcoin Miners are successful, it is not clear that their efforts will make a profit due to the advance costs of the equipment and ongoing power costs.

According to the University of Cambridge Bitcoin Power Consumption Index, Bitcoin Mining uses more electricity than Poland, a country of 36.7 million.

As the difficulty and complexity of Bitcoin mining increased, so did the computing power needed. According to the Cambridge Index, Bitcoin mining consumes approximately 184.4 terawatts of electricity each year.

One way to share some of the high costs of mining is to participate in a mining pool. Pools allow miners to share resources and add more functionality, but shared resources mean shared rewards, resulting in less potential payments when working through the pool. The volatility of Bitcoin prices makes it difficult to know exactly how much you are working.

Conclusion

Bitcoin mining sounds attractive, but the reality is that it is difficult and expensive to actually make a profit. The extreme volatility of Bitcoin prices adds more uncertainty to the equation.

Keep in mind that Bitcoin itself is a speculative asset with no intrinsic value. That is, it generates nothing for the owner and is not pinned to anything like gold. Your profit is based on selling it to others at a higher price, and that price may not be enough for you to make a profit.

– Bank Rate Logan Jacoby I contributed to updating this article.