Mining is a crucial procedure in the Bitcoin network, which is responsible for introducing new Bitcoins into circulation, validating transactions, creating new blocks without a central authority, and ensuring the security of the entire Bitcoin network.

Quick Facts about Bitcoin Mining

• Mining keeps the Bitcoin network operational by creating new blocks and verifying the transactions.
• Miners use dedicated hardware to solve complex mathematical puzzles and verify transactions in the process. They are rewarded with Bitcoin for their efforts, contributing only their computational power, not money.
• Mining is energy-intensive and has faced criticism for its environmental impact.

Want to know more about Bitcoin mining? Or is Bitcoin mining legal in India

Read the blog till the end to get a brief overview of Bitcoin mining.

Before we get into the details, here’s a basic question – What is Bitcoin?

About Bitcoin

Bitcoin is a groundbreaking digital currency that functions without intermediaries, including banks, governments, agents, or brokers. Individuals can send Bitcoins directly to one another, regardless of their location. To use Bitcoin, simply create an account on a reputable crypto exchange and purchase Bitcoins, which can be acquired online or through mining.

Yes, to have Bitcoins in your wallet, you can mine them apart from buying them. Let’s see what the process is and how it works.

What is Bitcoin Mining?

Bitcoin mining is basically the process of verifying new transactions and adding them to Bitcoin’s public ledger, thereby introducing new Bitcoins into circulation.

Like mining precious metals like gold and silver, Bitcoins can be mined by solving complicated mathematical puzzles generated by Bitcoin’s algorithm.

Mining is conducted using advanced hardware that solves these puzzles. The first computer to solve a puzzle receives the next block of Bitcoins, and the cycle repeats.

Miners are incentivized to validate and monitor Bitcoin transactions, ensuring their legitimacy.

The Bitcoin blockchain employs Proof-of-Work (PoW), a cryptographic proof in which a prover demonstrates to a verifier that a statement is true without revealing additional information. This process verifies transactions, effectively paying miners for their auditing work.

Steps Involved in Bitcoin Mining

Step 1: Setup mining hardware

To mine Bitcoin, you require a powerful computer system known as an ASIC (Application Specific Integrated Circuit). You can buy them from online retailers or directly from manufacturers.

Consider your area’s electricity costs, as these machines consume significant power. Choosing a location with low electricity rates can help reduce power bills.

Consider buying a used ASIC from a reputable source if you are on a budget.

A dedicated high-speed internet connection with minimal latency to nearby mining pools is also crucial.

Step 2: Create a Bitcoin wallet

Create a Bitcoin wallet to validate a Bitcoin block. Using a separate wallet for mining activities is advisable rather than the same one used for investments. Many miners also set up a hard wallet for added security.

Step 3: Configure your equipment

After setting up the hardware and wallet, configure the mining software. This step needs some technical knowledge, so you may need to do research. Linking multiple rigs can be complex but manageable.

If you lack command-line expertise, consider a mining device with a GUI (Graphic User Interface) for easier configuration.

Step 4: Join a mining pool 

Due to high competition, joining a mining pool—a group of miners combining their computing power—is beneficial. While you’ll pay the pool operator and receive slightly lower rewards, the reward frequency is more consistent than solo mining.

Step 5: Start mining

The final step is downloading a local copy of the blockchain you want to mine. Your setup is ready to mine Bitcoins. Regularly check that your rig is operating correctly.

Beyond that, there’s little to do on your end as the mining process runs continuously.

What do Miners do?

• Confirm Transactions

Bitcoin miners are essential for confirming and validating transactions. A new block is created and added to the blockchain when a miner generates a hash below the current target. When Bitcoin is sent from one address to another, the transaction is broadcast to the network and awaits confirmation in the mempool. Upon finding a new block, miners include as many transactions as possible, and nodes worldwide verify the new block, confirming its transactions.

Due to block capacity limits, only a particular number of transactions per block can be confirmed. Typically, exchanges and services require up to six confirmations for any transaction to be considered ‘final.’

• Secure the Network

Bitcoin miners secure the network through Proof-of-Work, making it costly and impractical for attackers to alter past transactions. The energy miners use to find new blocks is measured in hash rate, reflecting the network’s security at any moment.

An attacker aiming to undermine Bitcoin would need to execute a double-spend attack, rendering the initial transaction invalid and damaging Bitcoin’s reputation as an immutable payment system. When transactions are included in a block accepted by the network, they are recorded by every participant, preventing double spending and solving a problem that has plagued previous attempts at creating secure decentralized payment systems.

To double-spend a transaction, an attacker would have to control the majority of the network’s hash rate and reverse all subsequent blocks after the target transaction, an almost impossible feat. This high level of security ensures the integrity and reliability of the Bitcoin network.

• Release New Coins

Bitcoin miners introduce new coins into circulation as a reward for creating new blocks. One of Bitcoin’s key features is its fixed monetary policy, which directly relates to mining. The number of bitcoins created and those remaining to be minted are always known. The total supply is capped at just under 21 million bitcoins.

Satoshi Nakamoto designed Bitcoin with a through the block reward mechanism. For every 210,000 blocks, the reward for mining a new block is halved. Initially, miners received 50 BTC per block, then 25 BTC, and currently, 6.25 BTC per block. This halving process ensures a controlled supply, with the last bitcoin expected to be mined around 2130.

Bitcoin Mining Rewards Over the Years

Here is a table illustrating how Bitcoin mining rewards have changed over the past decade following each “halving” event, with prices rounded to the nearest dollar.

Date	Reward post-halving	Bitcoin Price on the Halving Day
July 9, 2016	12.5 BTC	$651
May 11, 2020	6.25 BTC	$8,602
April 19, 2024	3.125 BTC	$63,844
2028?	1.5625 BTC	???

What are the Risks of Bitcoin Mining?

Bitcoin mining carries various associated risks, including:

• Environmental Impact: Mining consumes significant electricity, leading to over 65 megatons of CO2 emissions annually. This often draws operations to regions with cheaper electricity.
• Price Volatility: Bitcoin’s value is highly volatile, making it difficult for miners to predict earnings, especially with fluctuating reward values.
• Profit Uncertainty: Factors such as the type and cost of mining equipment, Bitcoin’s price volatility, reward rate changes, and electricity expenses contribute to uncertainty, with no guarantee of covering operating costs.
• Regulatory Risks: The evolving crypto regulations, including taxation and potential mining bans in certain countries, create regulatory uncertainties.
• Security Threats: Miners face risks like crypto-jacking, where systems are hijacked to mine Bitcoin without consent, and phishing scams targeting miners through fake mining pools and software.

Is Bitcoin Mining Profitable?

While Bitcoin mining may seem profitable, is it truly so? Satoshi Nakamoto designed Bitcoin mining in a way that as the mining network’s power increases, solving mathematical problems becomes more challenging. Therefore, the difficulty adjusts according to the combined mining power of the entire network.

In simpler terms, the more miners compete, the tougher the puzzle becomes to solve. This design ensures stability and regulates the flow of new Bitcoins to manage inflation. The mining difficulty is set to ensure, on average, a new block is added every ten minutes.

Now that we have a fair idea of Bitcoin mining, let’s see if it is legal in India.

Is Bitcoin Mining Legal in India?

In India, there are currently no regulations or statutes prohibiting individuals from engaging in Bitcoin or cryptocurrency mining. Therefore, individuals are at liberty to participate in crypto-mining activities if they choose to do so. However, it’s important to note that under the Indian Income Tax Act of 1961, any income or profits derived from mining are subject to taxation.

Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.