Bitcoin mining explained: What it is, how it works, and why it matters

Here’s where BTC miners use special BTC mining machines to solve cryptographic puzzles and add a new transaction block to the chain. As a reward, the miner receives newly generated bitcoins. To control supply and avoid inflation, the Bitcoin network reduces the block reward every four years via bitcoin halving. This event often draws investor attention and significantly impacts bitcoin price movements. This is built into the protocol and will continue until it reaches the maximum supply of 21 million BTC.

Since no central authorities are involved, bitcoin mining is a way of reaching a final agreement across the network. It keeps things fair, secure, and decentralised - exactly how Bitcoin was meant to work.

Why is mining important to the Bitcoin network?

Bitcoin mining does more than just release new coins into circulation; it:

• Keeps the network safe: Mining helps protect the Bitcoin blockchain from tampering. Since thousands of BTC miners are competing to solve the puzzles successfully, altering a block is nearly impossible.
• Prevents double-spending: BTC miners verify every transaction before it gets added to the blockchain, making sure the coins being used haven't already been spent.
• Distributes rewards fairly: BTC miners earn new bitcoins and transaction fees for their work. This built-in reward system doesn’t rely on any single authority to pay out.
• Supports a decentralised system: Since anyone with the proper hardware can mine Bitcoin, it gives everyone a fair shot at participating and earning, without being restricted to large corporations or wealthy individuals alone.

How does Bitcoin mining actually work?

Now that we know what bitcoin mining is, let’s see how it works:

Proof-of-Work (PoW) consensus mechanism

Bitcoin runs on a system called Proof-of-Work (PoW). This simply means that BTC miners have to prove they’ve done a certain amount of computational work before their block of transactions is accepted by the network. It's like a digital race where miners compete to solve a task, and only the first one across the finish line gets the reward.

Solving cryptographic puzzles

To solve the complex cryptographic problems, each BTC miner tries to find a special number used only once, called a nonce. This nonce, when combined with the block’s data, produces a hash that meets Bitcoin’s difficulty target. These puzzles aren’t solved with just knowledge or luck - they need extensive processing power from BTC mining machines.

Mining difficulty and hash rate

Bitcoin mining becomes more difficult over time. As more miners join the network, Bitcoin automatically adjusts the difficulty to keep block creation steady. The hash rate (how fast miners or computers can solve equations) reflects the strength of the overall network.

New block creation and verification process

Once a miner solves the puzzle, their block is added to the blockchain. Other BTC miners then verify to make sure everything is valid and not tampered with. This prevents fake transactions and keeps the chain secure.

Rewards earned

The first miner to solve the puzzle and get their block accepted earns newly minted bitcoins as rewards. This is how new BTC enters circulation. In April 2024, the block rewards dropped from 6.25 BTC to 3.125 BTC after the halving.

What tools do you need to start Bitcoin mining?

To start bitcoin mining, you’ll need a high-speed internet connection and:

• Mining hardware: A powerful BTC mining machine, like an ASIC (application-specific integrated circuit) or a high-end GPU (graphics processing unit), is required. ASICs are far more efficient and faster than GPUs, but also more expensive.
• Mining software: It connects your hardware to the blockchain network and handles tasks like hash generation and transaction validation.
• Mining pools: Instead of solo mining, most BTC miners join mining pools, which are operated by third parties. They coordinate with other miners, combine efforts, and split rewards.

Is crypto mining taxed in India?

Yes, bitcoin mining, or any other crypto mining, is taxed in India. Tax depends on whether it's treated as a business activity or a personal source of income.

Earning BTC or altcoins via mining is taxed at a 30 percent rate under Section 115BBH. You can’t claim deductions for electricity, internet, or hardware. For tax purposes, the acquisition cost is considered zero when you later sell the mined BTC.

If you hold bitcoin (including mined ones) and sell later based on its market price, any gain obtained is taxed under capital gains at 30 percent.

If you sell your mined BTC on an exchange, the buyer will deduct a 1% TDS during the sale. You can claim this TDS while filing your returns.

If someone pays you in crypto for services or products, it’s considered business income and is taxed accordingly.

When filing income tax returns, all crypto activity must be mentioned under Schedule VDA (virtual digital assets).

FAQs

How many BTCs are already mined?

So far, around 19.86 million BTC have been mined out of the 21 million total supply, leaving less than 1.2 million BTC yet to be introduced into circulation.

How long does it take to mine 1 BTC?

On average, it can take around 10 minutes or less to mine 1 BTC. But, depending on the BTC mining machine setup, it can also take several days or weeks.

What are the downsides of crypto mining?

Crypto mining requires high amounts of electricity, contributes to carbon emissions, increases e-waste, and requires expensive hardware. On average, every bitcoin transaction produces around 140 grams of e-waste.