What is Bitcoin Mining? Everything you need to know
What is Bitcoin Mining? Bitcoin mining is the process of creating new Bitcoins by solving extremely complicated math problems that verify transactions in the currency.
It is a required part of the development and maintenance of the blockchain ledger and is also how the network confirms new transactions. The process of Bitcoin mining involves employing advanced technology to tackle a very challenging computational arithmetic problem.
When a Bitcoin is successfully mined, the miner receives a predetermined amount of Bitcoin.
Bitcoin mining is time-consuming, expensive, and hardly ever profitable. However, because miners are compensated for their efforts with Bitcoins, mining has a compelling allure for several individuals who are intrigued by cryptocurrencies. This could be the case because business people, like gold prospectors in California in 1849, perceive mining as a source of free money. And why not try it out if users enjoy using technology?
The Bitcoin reward that the Bitcoin miners earn serves as a perk to encourage participation in the core goal of Bitcoin mining, which is to legalize and oversee Bitcoin transactions and ensure their legitimacy.
Bitcoin is a decentralized coin, which means it doesn’t rely on a centralized power like a national bank or government to monitor its regulation. This is because many individuals from around the world undertake these tasks.
What we are going to learn?
Using the underlying blockchain technology, Bitcoin is the first decentralized digital currency that permits peer-to-peer transactions without the use of any middlemen like brokers, governments, banks, or agents. Regardless of country, anyone on the network may send Bitcoins to another user on the network; all you need to do is create an account on the network, deposit some bitcoins into it, and you’ll be able to send the Bitcoins.
How are bitcoins added to an account? You may either mine coins or buy them online.
Blockchain, the technology that underpins numerous cryptocurrencies, drives Bitcoin. A blockchain is a distributed ledger of all network transactions. A block and chain are formed by joining sets of authorized transactions. Consider it as a lengthy public record that performs something like a continuous receipt. The method used to add a new block to the chain is known as Bitcoin mining.
How Bitcoin Mining Works?
Bitcoin miners will have to resolve incredibly difficult mathematical calculations that demand the application of powerful computers and massive amounts of power in order to properly add a block. Bitcoin miners should be the first ones to discover the right or nearest response to the query in order to finish the Bitcoin mining process. The process of guessing the correct number (hash) is known as proof of work. By quickly and randomly generating however many guesses as they can, Bitcoin miners attempt to predict the objective hash, which needs a lot of processing power. More and more Bitcoin miners joining the network just makes things harder.
Application-specific integrated circuits, or ASICs, the necessary computer systems, typically cost thousands of dollars. ASICs use a significant quantity of power, which has come under condemnation from environmental organizations and reduces miners’ capacity to profit.
A miner will be rewarded with 6.25 Bitcoins if they can securely add a block to the network. Every 210,000 blocks, or about every 4 years, the award value is reduced in half. 6.25 Bitcoins were worth $125,000 as of September 2022, when the price of one Bitcoin was about $20,000.
Bitcoin Mining Rewards since 2009
- Bitcoin Mining Reward History: 2009 to 2012 (before halvening) – 50 BTC reward per block
- Bitcoin Mining Reward History: 2012 to 2016 (before halvening) – 12.5 BTC reward per block
- Bitcoin Mining Reward History: 2016 to 2020 (before halvening) – 6.25 BTC reward per block
- Bitcoin Mining Reward History: 2020 to 2024 (before halvening) – 3.125 BTC reward per block
Why does Bitcoin Need Miners?
The computational labor that nodes in the network perform in the hopes of obtaining additional new tokens is referred to as Bitcoin Mining. In truth, Bitcoin miners are effectively being compensated for acting as auditors. They are responsible for examining the authenticity of Bitcoin transactions.
Double payment is the illegal use of the same Bitcoin coin twice in the same or different locations by the users. This is however not a problem with cash, supposedly if you hand someone over a $100 bill and ask them to buy a bottle of tequila you no longer possess that $100.
Assume you had one $20 bill that was genuine and one $20 bill that was a fake. Someone who took the time to check the unique identifiers of both banknotes would notice that they were identical numbers, indicating that either of these had to be phony if you attempted to use both the actual and counterfeit ones. Similar work is done by blockchain miners, who verify payments to ensure users didn’t attempt to pay the very same Bitcoin repeatedly unintentionally.
How does Bitcoin Mining Confirm Transactions?
Bitcoin mining plays a critical role in verifying and authenticating transactions made on the Bitcoin blockchain in addition to adding fresh Bitcoin to circulation. This is significant because no one body, be it a government, court, bank, or anyone else, decides which trades are legitimate and which ones are not. Rather, the Bitcoin mining process uses PoW (proof of work) to establish a decentralized consensus.
What You Need for Bitcoin Mining?
Earlier in Bitcoin’s development, it was possible for users to contest for blocks using a standard home computer, but that is not possible anymore. The complexity of mining Bitcoin grows with time.
The Bitcoin network seeks to have one block generated per 10 minutes or so in order to guarantee that the blockchain operates without a hitch and can process and validate transactions. However, if 1,000,000 mining rigs are engaged in a race to address the hash issue, then they will probably do so more quickly than if just 10 rigs are involved. Because of this, Bitcoin is made to assess and modify the mining challenge every 2,016 blocks, or about every two weeks.
The degree of mining difficulty rises as more processing power is used to mine Bitcoins in order to maintain a steady rate of block generation. The complexity level decreases as computational power diminishes. A home computer mining for Bitcoin will very definitely discover nothing at the current network size.
Is Bitcoin Mining Actually Profitable?
It varies. Due to the expensive initial equipment expenses as well as continuous power bills, it is uncertain if Bitcoin miners’ efforts would become economical even if they are successful. The Congressional Research Service published a research in 2019 that claimed that one ASIC may consume as much power as 500,000 PlayStation 3 systems.
The amount of computer power needed has risen along with the complexity and difficulty of mining Bitcoin. The Cambridge Bitcoin Power Consumption Index estimates that Bitcoin mining uses more than 94 terawatt-hours of electricity annually than most other nations. By August 2023, it would take 10 years for an average American home to mine just one Bitcoin.
Starting a mining pool is one method to split some of the hefty mining costs. Pools let miners combine resources to increase their productivity, but as pooled resources also mean divided rewards, the potential payoff is lower while using a pool. It might be challenging to estimate your pay because of the fluctuation of the value of Bitcoin.
What are Bitcoin Mining Pools?
The bitcoin mining incentives are given to the miner who resolves the problem first, and the likelihood that a miner will find the answer is based on their share of the network’s overall Bitcoin mining capacity.
There is extremely little probability for participants with a tiny share of the mining power to find the next block independently. For example, a several thousand dollar mining device would only account for less than 0.001% of Bitcoin’s mining capacity. It might take a long time for the Bitcoin miners to locate a block with such a low likelihood of doing so, and things become more challenging as the complexity increases. The Bitcoin miner might never get their investments back. Mining pools are the solution to this issue.
Third parties run mining pools, which direct teams of miners. Miners are able to receive a consistent supply of Bitcoin from the moment they turn on their miners by cooperating in pooling and splitting the rewards between all members. On Blockchain.info, statistics on a few of the mining pools are available.
How to get started with Bitcoin Mining?
Here are 3 basic steps to get you started with Bitcoin Mining
You need to create a Bitcoin wallet to store your Bitcoins securely which you’ll get in return for mining. You can store them digitally or offline. There are a lot of Bitcoin wallets available to choose from, Coinbase Wallet, Trust Wallet, Ledger and Trezor are some of the crowd favorites.
The most costly item on the list required for Bitcoin mining is the computer hardware. Bitcoin mining requires high end cpu and gpu for computing complex math problems. Since the components are of high caliber, the electricity required to run these are also very high. These systems can run upwards of $10,000.
Since mining became famous, there are a lot of choices available in the market. Most of these softwares are free to download and are available on both Mac and windows. Once the software is set up and connected to the hardware, there’s nothing between you and Bitcoin mining.
Disadvantages of Bitcoin Mining
Price Volatility of Bitcoin
Bitcoin is known for its volatility. There’s a lot of fluctuation in the Bitcoin market. In the last 12 months, Bitcoin reached an all time high of $69,000 and now is trading for less than $20,000. These factors make it difficult for the Bitcoin miners to access their rewards and plan out the financials.
There are very few governments in the world which have accepted and officially recognized Bitcoin or cryptocurrency in general. There’s always a fear of the government banning cryptocurrency and all the operations associated with it. For example, China outlawed Bitcoin and all the other cryptocurrency in August 2021.
The powerful computers which mine Bitcoin require a lot of energy to compute the problem and hence draws a lot of power. Even though the efficiency of the computer chips have increased dramatically over the years, but the number of the systems are outpacing the technology. Therefore, a lot of people are concerned about the environmental impact and carbon footprint left behind by Bitcoin mining.
Some miners are looking for alternatives like using geothermal and hydro power generated electricity, which does not burn fossil fuels to get electricity. Hence reducing the carbon foot print.
Is Bitcoin Mining Legal?
This question’s answer depends completely on your location. Every country has its own rules and recognizes the cryptocurrency differently. If you’re living in China, Bitcoin is completely banned and no operations related to crypto are allowed.
Since 2018 a lot of countries have banned Bitcoin mining. Bangladesh, Qatar, Dominican Republic and Vietnam are a few to name. Apart from these countries, Bitcoin mining is regarded as legal in other parts of the globe.
My Final Thoughts on Bitcoin Mining
As prices of cryptocurrencies and Bitcoin in particular have skyrocketed in recent years, it’s understandable that interest in mining has picked up as well. But for most people, the prospects for Bitcoin mining are not good due to its complex nature and high costs.
While the term Bitcoin Mining sounds very fancy and looks simple, in reality it’s a very tedious process. Bitcoin mining requires a huge upfront investment to set up the mining rig and the environment. The volatility of Bitcoin adds to the complexity of this equation. And one should also understand that Bitcoin is a speculative asset and it can’t be compared to something like gold.
Can Bitcoin mining be done on a phone?
No, Bitcoin mining requires a lot of computing power and mobile hardware can’t handle such intense tasks.
What is hashing in Bitcoin Mining?
Hashing is simply the raw horse power of your hardware. It is a measure of how fast your system is able to process data from the blockchain.
What is MH/s, GH/s in Bitcoin Mining?
These abbreviations stand for the hashing power that your miner is generating. MH/s stands for megahash per second and GH/s stands for gigahash per second.
Should a college student start Bitcoin Mining as a passive income?
As mentioned above, it is very expensive to run a mining rig. It is not a viable option for passive income.
How to sell the Bitcoins that you got from Bitcoin mining?
Easy, the Bitcoins you got from mining will be transferred to your Bitcoin wallet. You can decide whether to hold it, sell it or stake it.
What is proof of work in Bitcoin Mining?
The process of guessing the correct number (hash) is known as proof of work.
Video: Inside of the Largest Bitcoin Mining Site & How it works
Here’s a youtube video on how the inside of the Largest Bitcoin Mining site looks like
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