Cryptocurrency mining, or Bitcoin mining, is the process of verifying transactions and adding them to the blockchain ledger. It is done by using sophisticated hardware to solve a complex mathematical problem. The miner who solves the problem first is rewarded with a block of bitcoins. The process is energy-intensive and can be costly, but it is also essential for the maintenance and development of the blockchain.
The legality of cryptocurrency mining depends on its geographical location, as some countries have banned it due to its potential to threaten the dominance of fiat currencies. Cryptographic mining involves grouping individual transactions into 'blocks' and linking them together through a decentralized peer-to-peer network. Each block has a 'hash value', which is a kind of control number for the transactions made. This control number contains the individual hash values of the current transaction as well as the hash values of the previous transaction.
To generate this hash value, a conventional computer can be used, which performs a cryptographic function, also known as 'hash function (SHA25)'. This makes it impossible to manipulate transactions, as any subsequent change within the chain would be easily detected and is not mathematically possible. In order to estimate how much bitcoin can be mined with the hash rate of your mining equipment, there are web resources that offer useful calculators. Miners who successfully solve the hash problem but have not verified the most transactions are not rewarded with bitcoin.
This is because miners who have done the most work or verified the most transactions get credit for completing that block and receive the reward of 6.25 BTC. The miners make guesses by randomly generating as many nonces as possible, as fast as possible. A nonce is a number that is only used once and is key to generating 64-bit hexadecimal numbers. The miner whose nonce generates a hash that is less than or equal to the target hash gets credit for completing that block and gets the reward of 6.25 BTC.
At current difficulty levels, the odds of finding the winning value for a single hash are one in tens of trillions. This makes it difficult for individual miners to be profitable with their own mining equipment. Miners must also take into account the large amount of electrical power used by their mining equipment to generate large amounts of nonces in search of a solution. The risks associated with mining include financial risk and regulatory risk.
As mentioned, Bitcoin mining is not profitable for most individual miners at present due to high costs associated with equipment and electricity consumption. It is important to research your country's regulations and general sentiment towards cryptocurrency before investing in mining equipment, as some countries have banned it due to its potential to threaten fiat currencies and government control over financial markets. The acquisition of cryptocurrencies as an investment or livelihood is generally not a taxable event for the person acquiring them, but if they are acquired through 'mining activities of a commercial nature', then income tax may be applicable at the time they are earned. There are also concerns about the environmental impact and carbon footprint of Bitcoin mining due to its increasing energy use requirements.