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How Does Bitcoin Mining Work?

By Motley Fool Staff - Apr 8, 2021 at 7:47AM

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What does it mean to "mine" a digital currency?

Bitcoin (BTC -1.66%) can be bought through an exchange, or it can be received as payment for goods or services. It can also be created through a process known as "mining." In this Fool Live video clip, recorded on March 18, senior analyst John Rotonti and Motley Fool Deutschland lead analyst Bernd Schmid discuss what Bitcoin mining is and how it works. 

John Rotonti: You have Bitcoin miners which are verifying the transaction so my follow-up is, how do you mine Bitcoin, what is happening?

Bernd Schmid: That's great. Yeah. Miners are essentially the integral part of this network of computers, so they're part of this network. How it works, is a miner, they earn money, essentially they earn Bitcoin by validating transactions and adding them to the blockchain. But how it works is you or I, whoever wants to create the transactions, we're sending this essentially to this network. The miners are collecting all these new transactions and then they are trying to create this new block. This trying to create a new block is actually quite a difficult thing. Essentially what you need to do to create this new block, a valid block. You need to solve a puzzle, a mathematical puzzle, and the miners are specialized to solve this puzzle essentially. You're creating all these new transactions, let's say it's 1,000 transactions. You're trying to solve this mathematical puzzle, which is very specific and once you have solved it, you can say, "Oh, great, I've got the solution here." The solution, you are sending it to the network and then all the other miners they can validate, like is the solution the correct one. This validation process, it's very easy. If you can see in an instant, by a simple calculation whether this solution that this miner claims to have found, is the correct one for the transaction you wanted to validate or not. If everybody essentially agrees, yes, this is the correct solution then this block is added to the blockchain, you have extended the blockchain and the miner who has successfully solved this puzzle. Will get the reward, which has new Bitcoins being created. Currently, exactly 6.25 Bitcoin.

Rotonti: Question that just came to my mind. You may or may not know the answer to this. Are there public companies that are Bitcoin miners? Can I buy stock in a Bitcoin miner?

Schmid: Theoretically, you could actually do it yourself. You can buy a piece of hardware, you can even run it on your laptop. This actually worked up until a couple of years. Ten years ago, Bitcoin was still in the beginning. It was created around 2009, I think beginning 2009 if I'm not mistaken. It was still very easy to solve this puzzle. But what essentially happens, the difficulty of this puzzle-solving algorithm or the difficulty of the puzzle, it's adjusted based on how many people want to try to solve this puzzle. Of course, since you get that, I mentioned that you get six Bitcoin or 6.25 Bitcoin, which right now has a value of more than $300,000. You can imagine that everybody would like to have this and solve the puzzle. Of course, people try to extend the hardware. You buy as much hardware as you can afford and think it's still economic to do that, and this is essentially what is happening. So yes, there are actually public companies, they're buying a lot of hardware and they're participating in this mining process. I have to admit I don't remember the name. I know there's a Canadian company. You can look it up, which is a pure Bitcoin mining company. You can buy shares in it.

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