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Yahoo Finance’s Zack Guzman breaks down the process of bitcoin mining.
Video Transcript
AKIKO FUJITA: In this week’s Crypto Corner, Zack is diving into Bitcoin mining. How does it work, and how profitable is it?
ZACK GUZMAN: Bitcoin has been called digital gold. And much like gold, new Bitcoin is created through a process called mining. But how does it all work? Let’s dig into that in today’s Crypto Corner. Like gold miners, Bitcoin miners do all the hard work and they are rewarded for it. They’re the ones confirming all the transactions on the Bitcoin network. And unlike the traditional financial system, which leans on centralized institutions like banks to record transactions, Bitcoin leans on miners who listen and record every time Bitcoin is sent from one account to another.
For example, instead of Chase Bank recording a $10 payment from your bank account to pay for your Chipotle order, a Bitcoin miner might verify and record you sending $10 worth of Bitcoin to a friend. Now, every 10 minutes, a set of those transactions gets compiled into what’s called a block. And one lucky miner gets rewarded for adding a block to that running chain of those blocks called the blockchain.
As of 2021, the block reward for miners amounts to about 6.25 Bitcoin per block or more than $200,000. Now that’s not bad if you’re the only miner out there. But in reality, there are a lot of miners running a lot of nodes or computers, listening for each of those transactions. And all of them are competing against each other for that same block reward roughly every 10 minutes.
Through trial and error, a miner wins by being the first to solve a complex equation or hash function based on the data recorded in any given block. In order to increase their chances, miners might team up together to form so-called mining pools to combine their computing power and agree to divvy up block rewards if they win.
As part of its original code, which limits the amount of Bitcoin ever created to just 21 million, the block reward for miners is cut in half roughly every 210,000 blocks or every four years in what’s called a halving. The last halving, which took place in May 2020, saw the reward for miners cut from 12 and 1/2 Bitcoin to 6 and 1/4. The next in spring 2024, we’ll see that dropped again to 3.125 and so on and so forth until it approaches 0, and miners rely solely on transaction fees.
But as the last decade of Bitcoin’s existence has proven, the structure works to ensure a decentralized global network powered by the smallest of miners with just one computer to larger mining pools with thousands.
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