What Is Bitcoin Mining? And How Does It Work?

When you hear the word mining, your first thought probably goes to miners wearing dirty overalls and helmets with flashlights on them carrying pickaxes and shovels into dark tunnels in a quest to strike gold.

But there’s a new “gold rush” happening that replaces pickaxes and shovels with powerful computers and advanced software programs. And instead of mining for gold nuggets, this new crop of miners is trying to unearth a new kind of commodity that you can’t see or touch: Bitcoin.

Bitcoin mining has captured the imagination of thousands of folks with dreams of making a fortune overnight, very much like the wave of travelers flocking to California in the 1800s to dig up gold. It’s a frenzy that has gone from a few folks with computers in their basements to warehouses filled with computers as far as the eye can see in an attempt to mine for bitcoins—the most popular and widely accepted form of cryptocurrency in the market today.   

But how do you “mine” for something that only exists in the digital realm? Here’s what bitcoin mining is, how it works, and whether or not it’s worth your time (and money).  

What Is Bitcoin Mining?

Bitcoin mining is the process of creating new bitcoins by solving complex math problems meant to confirm that transactions made with bitcoins are legit. Don’t worry: You don’t have to do any actual math yourself with a calculator or anything like that—your computer does all the work for you. 

Bitcoin mining basically does two things. First, it releases new bitcoins into the market (and it is the only way that new bitcoins are created). And second, bitcoin mining helps make the Bitcoin payment network more trustworthy, with thousands of computers working to validate transactions made with bitcoins to prevent fraud and double spending. (We know—this is a lot to digest. Keep reading, this will make more sense in a second!)

How Does Bitcoin Mining Work?

Let’s back up for a second. Before we can really dive into bitcoin mining, we need to cover some Bitcoin basics first. It’s a completely digital currency, which means there are no actual paper bills or metal coins involved. Instead, everything is done over the internet and bitcoins are worth whatever people are willing to pay for them.

One of the biggest fears surrounding digital currencies like Bitcoin is that someone can hypothetically “copy” a bitcoin and send it to someone else while still holding onto the original bitcoin. This is called double spending, and it’s something you have to worry about with any virtual currency. 

How does a cryptocurrency like Bitcoin, which isn’t regulated by or tied to any government, fight against the risks of cybercrime and fraud to create a safe and secure network? That’s where bitcoin mining comes in.

You see, Bitcoin is powered by something called blockchain technology. A blockchain is basically a digital record of transactions that is copied and passed around across the entire network of computer systems on the blockchain. This makes it extremely difficult to change, hack, or cheat the system—because everyone in the network has access to the ledger and can see if something doesn’t match up.

Just think of the blockchain as a really, really big book. This book contains every transaction ever made with bitcoins, and each page in that book represents a “block” of transactions made with bitcoin.

Market chaos, inflation, your future—work with a pro to navigate this stuff.

Bitcoin mining is just a way to make sure that the transactions on a new page are legitimate. If they are, that page is added to the book. So if you think about it, bitcoin mining is really bitcoin transaction verification (but that sounds even less fun than mining—which doesn’t really sound fun at all).

Bitcoin miners add blocks of the transactions to the blockchain by using specialized computers to solve math puzzles that help confirm whether or not a block of transactions is valid. These computers perform millions of calculations at lightning speed to try and quickly solve those math puzzles through a process of trial and error. It’s basically a race between your computer and thousands of other bitcoin mining computers around the world to solve the puzzle first.

When a block gets added to the chain and the new bitcoins are rewarded to the miner who solved the puzzle first, the process then starts again.

What’s the Reward for Successfully Mining Bitcoins?

If you’re the first to solve the puzzle, congratulations! For successfully adding a new block of transactions to the blockchain, you get rewarded with some newly created bitcoins—also known as a block reward. If you successfully mined bitcoin today, you would receive 6.25 bitcoins as your block reward.

(Side note: The reward for successfully mining bitcoin gets cut in half after 210,000 blocks are added to the blockchain, or roughly every four years. In 2024, the reward for mining bitcoin will be chopped down to 3.125 bitcoins.)

But there’s a limit to how many bitcoins can exist. There’s a maximum of 21 million bitcoins that will ever exist. Right now, there are about 19 million bitcoins in existence—meaning there are roughly 2 million bitcoins left to be mined.

Once that 21 million mark is reached, no more bitcoins can be created . . . which means bitcoin miners will rely on transaction fees instead of block rewards for profits. But experts say the last bitcoin probably won’t be mined until the year 2140 . . . so there’s plenty of time to figure out what comes next.¹

Why Bitcoin Mining Isn’t Worth It

The price of Bitcoin reached all-time highs in 2021, almost hitting $69,000 per bitcoin in early November.² So if someone successfully adds a block of transactions to the blockchain and gets 6.25 bitcoins as a reward at around that price, those bitcoins would be worth almost $431,000!  

Sounds great, right? But the bad news is that bitcoin is so expensive, complex and time-consuming that you’re better off staying away from it altogether. Here’s why you shouldn’t quit your day job to become a bitcoin miner.

1. Bitcoin prices are very unpredictable.

The price of Bitcoin is more up and down than the Tower of Terror at Disney World—with the price rising and falling by thousands of dollars in a matter of days. Just how volatile is Bitcoin?

In October 2021, Bitcoin made headlines by crossing the $66,000 per coin threshold.³ Bitcoin owners were feeling pretty good at that point! Fast forward to one week later, and the price tumbled back down to under $58,500 per bitcoin, an 11% drop.⁴ That means in seven days the value of Bitcoin lost $7,000 in value. And that’s just a typical week in the life of a Bitcoin owner.

All this means one simple thing: You never really know what your bitcoins will be worth if you ever wind up successfully mining for them (and that is a very big if). And then there’s the risk of everyone waking up one morning and suddenly agreeing that Bitcoin is worth as much as Monopoly money . . . if that happens, that’s the ballgame—and you’ll be left with nothing for all your efforts. Do not pass “Go” and do not collect $200. 

1. The competition for bitcoin mining is fierce.

As time goes on, it’s going to get more and more difficult to successfully mine for Bitcoin (and the reward for successfully mining Bitcoin will become smaller and smaller). That’s because there will be more miners getting in on the hunt to compete for the next block reward.

In fact, it’s harder to mine for bitcoin today than it has ever been—with mining difficulty reaching an all-time high of 25 trillion back in May 2021.⁵ Translation? That means it is insanely more difficult than ever to successfully mine for bitcoins because there are more and more miners trying to get in on the action and it will take a ton of computing power just to keep up with them.

You’ll be going up against firms that have built warehouses filled with thousands of computers that are mining for Bitcoin all day, every day. If you’re trying to compete with them with a single mining computer in your basement, good luck with that! You probably have a better chance of winning the lottery and then getting hit by lightning on the way to pick up your prize than successfully mining bitcoins.

2. Bitcoin mining is very expensive, complex and time-consuming.

That’s mostly by design. You need a specific kind of computer hardware that is known as “application-specific integrated circuits” (or ASICs) and those puppies can cost anywhere from $2,000 to $14,000 each—maybe more.⁶

These computers also require massive amounts of energy to operate (upsetting many environmentalists in the process), which can rack up your electric bill and cut your profits. Fun fact, if Bitcoin was a country made up of bitcoin miners, it would consume more electricity than Argentina (yes, the country) as a whole!⁷

The Proven Way to Building Wealth

Building wealth is a marathon—not a sprint. And bitcoin mining is just the latest in the long line of get-rich-quick schemes that will more than likely leave you broke and broken.

Most millionaires in America today didn’t build their seven-figure net worth by rolling the dice on risky investments they didn’t understand or pouring money into a long shot. Here are three things they did do:

• They invested money into their 401(k)s and IRAs consistently month after month, year after year. We recommend investing 15% of your gross income into tax-advantaged retirement accounts.
• They diversified their retirement portfolios with mutual funds, which spread their investments across dozens or even hundreds of different company stocks.
• They live on less than they make and avoided debt like the plague. It’s not rocket science!    

Dave Ramsey’s new book, Baby Steps Millionaires: How  Ordinary People Built Extraordinary Wealth—and How You Can Too, will show you the proven path that millions of Americans have taken to become millionaires—and how you can become one too!

Talk With a Financial Advisor

If you’re ready to get started on the path to building wealth the right way, get in touch with one of our SmartVestor Pros. Working with a qualified financial advisor can give you the confidence and guidance you need to save and invest for the future you’ve always dreamed of.

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This article provides general guidelines about investing topics. Your situation may be unique. To discuss a plan for your situation, connect with a SmartVestor Pro. Ramsey Solutions is a paid, non-client promoter of participating Pros.