The Basics of Mining Coins
The cryptocurrency craze is going strong, and mining coins like Bitcoin is one way to get in on the action. But mining is not as simple as it sounds, and it’s more energy-intensive than many people realize. That’s because creating new Bitcoins involves solving complex mathematical puzzles, verifying transactions on a blockchain network and adding them to the ledger, which is referred to as “mining.”
To do this, miners take a block of pending transaction data and run it through a cryptographic function that produces an output of a fixed size, known as a hash. The hash serves as the block identifier for that particular block. Each time a miner finds a hash, they are awarded a prize, which is a combination of newly minted Bitcoins and transaction fees. The more computing power that went into guessing the hash, the higher the reward. Because there is no single computer in the world with enough computing power to solve all the problems at once, miners team up, forming so-called mining pools to share resources. They compete against other mining pools to be the first to find a hash.
Each block that is successfully validated and added to the blockchain contains a specific number of new Bitcoins, which are called a “mining reward.” The value of this amount fluctuates as the Bitcoin price does, but in general it equals about 6.25 BTC per block mined.
There is also a second benefit to Bitcoin mining: it makes the blockchain more secure. Because cryptocurrencies are entirely digital records, there’s always the risk that they could be copied, counterfeited or double-spent (i.e. spent twice by the same person). Mining reduces this risk by making it expensive and resource-intensive to attempt these kinds of attacks.
If you receive any Bitcoin or other cryptocurrencies as a mining reward, be sure to properly store them. Because their value is so volatile, they can easily lose all of their worth in a matter of hours. In addition, any Bitcoin or other cryptocurrency you sell at a profit is considered income and will be taxed at ordinary rates. Visit Bankrate’s guide to learn more about taxes on cryptocurrencies.