What is bitcoin mining?
Bitcoin mining is the interaction by which new Bitcoins are placed into the flow, however, it is likewise a critical component in the support and improvement of the blockchain record. Mining is done with very sophisticated computers that solve very complex computational mathematical problems.
Mining cryptocurrencies is labor-intensive and expensive, and the rewards are sporadic. Nevertheless, mining is attractive to many investors interested in cryptocurrencies. This is because miners are rewarded with cryptocurrency tokens for their work. This may be because entrepreneurs see mining as something that falls from the sky, like digging for gold in California in 1849. Besides, if you have the technical know-how, why not give it a try?
But before you invest your time and equipment, read this guide to find out if mining is really for you. We’re going to focus primarily on Bitcoin (hereafter we’ll use “Bitcoin” to refer to the network and cryptocurrency as a concept, and “Bitcoin” to refer to the number of individual tokens).
- Mining is a great way to earn cryptocurrencies without having to spend money.
- Bitcoin miners receive bitcoins as a reward for completing “blocks” of verified transactions that are added to the blockchain.
- Mining rewards are paid to the first miner to find the solution to a complex hash puzzle, and the probability of a participant finding the solution is related to a portion of the network’s total mining output.
- A graphics processing unit (GPU) or application-specific integrated circuit (ASIC) is needed to assemble a mining rig.
How Bitcoin is mined
Miners are paid to act as verifiers. They are responsible for verifying the legitimacy of Bitcoin transactions. This was invented by Satoshi Nakamoto, the founder of Bitcoin, and is a practice to keep Bitcoin users honest. By verifying transactions, miners help avoid the “double-spending problem”.
Double-spending is the unauthorised use of the same Bitcoin twice by its owner. If you give someone a $20 note to buy a bottle of vodka, you no longer have that note in your possession, so there is no risk of using the same $20 note to buy a lottery ticket at the next house. There is a possibility of counterfeit notes being made, but it is not something that literally uses the same dollar twice. Nonetheless, on account of an advanced money, Investopedia’s word reference clarifies that “there is a danger that the holder could make a duplicate of the computerized token and send it to a vendor or other individual while keeping the first.”
Bitcoin mining and distribution
In addition to miners’ pockets and supporting the Bitcoin ecosystem, mining serves another important purpose. It’s the only way to get new cryptocurrencies into circulation. In other words, the miners “coin” the currency. For example, as of November 2020, there are about 18.5 million bitcoins in circulation1.
With the exception of the coins minted on the Genesis block, the first block created by founder Satoshi Nakamoto, all of these Bitcoins have been made possible by the existence of miners. Without miners, Bitcoin can exist and be used as a network, but there will be no rise of Bitcoin. According to the Bitcoin protocol, the total number of Bitcoins is limited to 21 million2.
However, the rate at which Bitcoins are minted will decrease over time, so it is likely that Bitcoins will not finally be in circulation until around 2140. However, since the rate of Bitcoin “mining” will decrease over time, Bitcoin will not be in circulation until around 2140. Miners will continue to verify transactions to maintain the integrity of the Bitcoin network and will receive a fee for doing so.
Apart from the short-term bitcoin rewards, being a bitcoin miner also gives you a “vote” when changes are proposed to the bitcoin network protocol. In other words, miners have some influence over the decision-making process, including forks.
What does it take to mine Bitcoin?
In the early days of Bitcoin history, an individual might have been able to compete for blocks on a normal home computer, but that is no longer the case. The reason is that the difficulty of Bitcoin mining changes over time.
To ensure the smooth functioning of the blockchain and its ability to process and verify transactions, the Bitcoin network aims to generate a block every 10 minutes or so. However, when a million mining teams are competing to solve a hashing problem, they can arrive at a solution faster than in a scenario where 10 mining teams are working on the same problem. For this reason, Bitcoin is designed to evaluate and adjust the mining difficulty every 2,016 blocks, or roughly every fortnight.
When a lot of computing power is working intensively on Bitcoin mining, the mining difficulty is increased to stabilise block production. On the other hand, when the computing power is low, the mining difficulty decreases. To give you an idea of how much computing power is needed: When bitcoin was launched in 2009, the initial difficulty level was 1. As of November 2019, it has exceeded 13 trillion.
All of this means that in order to mine competitively, miners have had to invest in powerful computer hardware such as GPUs (Graphics Processing Units) or, more realistically, ASICs (Application Specific Integrated Circuits). These devices can range from $500 to tens of thousands of dollars. Some Ethereum miners primarily buy standalone graphics processing units (GPUs) to perform their mining tasks at a lower cost.
The photo below shows a home-built mining machine. The graphics card is a rectangular block with a fan spinning around it. The graphics card is attached to a metal post with a sandwich flange. It is probably not the most efficient way to mine and many miners do it not only for the money but also for the fun and challenge.