The Bitcoin Mining System: Technical Functionality and Economic Reality

Bitcoin mining is the foundation of the decentralized network – but what is really behind it? With a growth rate of over 386% and daily earnings of more than 50 million euros for Bitcoin miners worldwide, it is not only a technical phenomenon but also a highly complex economic system. Those who want to understand the network cannot ignore mining.

The Core: How does Bitcoin mining work in practice?

Imagine: A decentralized network of computers must agree on which transactions are valid. No one is at the center – there is no bank, no administrator. Instead, miners take on this role. They collect transactions, verify their validity, and bundle them into blocks that are added to the blockchain.

This process works according to a fixed scheme: A miner must solve a complex mathematical puzzle – more precisely, find a cryptographic hash that meets certain conditions. The first to do so can add the block and receives a reward in the form of newly created Bitcoins plus transaction fees.

Practical example:

• Lena wants to send Paul 1 Bitcoin
• This transaction is sent to the network
• Miners collect this and other transactions
• They start a race: Who finds the valid hash first?
• The first miner, (e.g., Lisa), solves the puzzle
• The block is added to the blockchain
• Lena and Paul are connected, the transaction is final

Why is mining necessary: Security through decentralization

Bitcoin mining solves a fundamental problem: How can thousands of independent computers simultaneously maintain the same digital ledger without a central authority?

The answer lies in economic incentives. Miners are motivated by rewards to secure the system. At the same time, the high computational power required for an attack makes manipulation practically impossible. An attacker would need to control over 50% of the entire network’s computational power – an astronomically expensive undertaking.

The network adjusts itself: If more miners participate, the difficulty of the puzzles increases. If fewer are active, it decreases. This ensures that a new block is found approximately every 10 minutes – regardless of how many miners are working at any given time.

The technology behind it: Proof of Work and SHA-256

At the heart of the system is the SHA-256 puzzle. Miners must find a number (Nonce) that, combined with the transaction data, produces a hash starting with a certain number of zeros, e.g., (00000abcd1234).

The process:

1. Transaction data are packed into a block
2. An initial hash is calculated – it does not meet the criteria
3. The Nonce is iteratively changed
4. For each new Nonce, a new hash is generated
5. Only when the hash meets the requirements is the puzzle solved

The elegance lies in the asymmetry: Solving the puzzle requires enormous computational effort. But verifying the solution is trivial – every computer in the network can validate in milliseconds whether a hash is correct.

Bitcoin’s hash rate indicates the total computational power of the network. It has risen from under 2 EH/s in 2016 to over 800 EH/s by January 2025 – an exponential growth reflecting the rising Bitcoin price.

Block rewards: How miners earn

The reward for solving a block consists of two components:

1. New Bitcoins (Block Subsidy): This is the main reward. It represents newly created Bitcoins entering circulation. This amount is not constant – it halves at regular intervals.

2. Transaction fees: Users pay voluntary fees to prioritize their transactions. These go entirely to the miner of the block.

The Halving: The built-in scarcity

The Bitcoin network is designed with a cap of 21 million Bitcoins. To reach this, a halving occurs approximately every four years – the block reward is halved:

• Genesis Block (2009): 50 BTC per block
• First halving (November 2012): 25 BTC
• Second halving (July 2016): 12.5 BTC
• Third halving (May 2020): 6.25 BTC
• Fourth halving (April 2024): 3.125 BTC

The next halving is expected to occur in 2028. According to current calculations, all 21 million Bitcoins will be mined around the year 2140.

The halving serves two functions: It prevents inflation and ensures that scarcity is maintained over time. With fewer new Bitcoins entering circulation, the existing supply theoretically becomes more valuable.

Difficulty adjustment: The self-regulating system

Mining difficulty adjusts automatically – approximately every 2,016 blocks (about every two weeks). The network checks how long it took to generate these blocks. The goal: an average of 10 minutes per block.

• Faster than 10 minutes? → Difficulty increases
• Slower than 10 minutes? → Difficulty decreases

This adjustment is proportional to the deviation, not linear. Large changes in the network’s hash rate lead to noticeable fluctuations in difficulty.

Bitcoin mining today: Hardware, pools, and profitability

The early days when mining on a regular PC was possible are over. Today, specialized ASIC miners (Application-Specific Integrated Circuits) dominate the field. An Antminer S19 Pro costs between 2,000 and 5,000 USD and consumes about 3,250 watts.

Solo mining vs. mining pools

Solo mining: A single miner competes against the entire network. The chances of winning are minimal – an average miner would have to wait years to find a block.

Mining pools: Multiple miners combine their computational power. The block reward is distributed proportionally to the contributed hash rate. Large pools like F2Pool or Slush Pool charge fees (e.g., 2.5% with PPS structure) but offer regular payouts.

Cloud mining

Some providers rent out computing capacity in large data centers. However, profits are often minimal after deducting maintenance, energy costs, and fees. Additionally, scams are common in this area – caution is advised.

Practical profitability: The Germany scenario

Profitability depends heavily on electricity prices. An example with German conditions:

Assumptions:

• Electricity price: 0.2827 €/kWh
• Hardware: Antminer S19 Pro (3,250 W, 110 TH/s)
• Bitcoin price: 100,000 €

Daily calculation:

• Power consumption: 3,250 W × 24 h = 78 kWh
• Electricity costs: 78 kWh × 0.2827 € = 22.05 €
• Bitcoin production: ~0.00022197 BTC
• Revenue: 0.00022197 BTC × 100,000 € = 22.20 €
• Profit: 0.15 € per day

In Germany, mining with high electricity prices is hardly profitable. Without considering hardware purchase, cooling, and maintenance, there is practically nothing left.

Different in countries with cheaper energy: Kuwait (0.03 USD/kWh), Uzbekistan, or Venezuela offer significantly better opportunities. For large mining operations, location is crucial.

Energy consumption and environmental impact

The Bitcoin network consumes about 100–120 terawatt-hours (TWh) annually – some estimates go up to 150–170 TWh. This is comparable to the electricity consumption of a medium-sized country like Argentina.

A nuanced view is important: about one-third to 40% of the electricity used for mining already comes from renewable sources. Many mining farms rely on solar and wind power, which increasingly is also regulated. The pure CO₂ footprint is therefore not fully comparable to the total energy consumption.

Requirements for Bitcoin mining today

Anyone serious about entering mining needs:

1. Capital: For ASIC hardware and operational costs
2. Location know-how: Research electricity prices, plan infrastructure
3. Technical understanding: Pool management, wallet security, hardware optimization
4. Risk management: Account for difficulty increases, price volatility, hardware obsolescence

Blind entry without basic knowledge is not recommended. Read reviews of pool providers, understand all fees, run scenarios – this is the basis for an informed decision.

Conclusion: Mining as a mature ecosystem

From a nerd activity on a home computer, Bitcoin mining has developed into an industrial system. Hash puzzles, difficulty adjustment, halving cycles, and decentralized network coordination work seamlessly together.

The system is robust because it is secured by mathematics and economic incentives – not trust. For individuals, mining is now difficult but not impossible: mining pools offer a lower entry point. For professional operations with cheap energy and modern ASICs, it remains a lucrative business.

The future will show how mining develops with decreasing block rewards and transaction fees – but the technical foundation has been stable for 16 years.

Frequently Asked Questions about Bitcoin mining

Is Bitcoin mining legal? In most countries yes. However, restrictions like in China, where private mining was heavily regulated, apply. Check local regulations.

Is mining still worth it? It depends on location, electricity prices, and your strategy. Difficult in Germany, but quite possible in energy-rich regions.

Why is mining becoming more difficult? Difficulty adjusts to the total network hash rate. With more miners, requirements increase automatically – so the average block time remains constant at 10 minutes.