Bitcoin Mining – Everything You Need to Know
The modern Gold Rush is Bitcoin BTC mining. It does not involve pickaxes or pans though. We are not looking for actual nuggets of gold. Bitcoin mining is about trying to obtain digital gold.
Bitcoin mining involves using high-power computers to solve insanely complex maths problems. Like gold prospecting, there is a huge amount of work and luck to try to solve these math problems. Yes, we were not kidding about how hard the maths are. The first one to solve the maths problem is rewarded with the gold – Bitcoin.
The process of mining is not just producing more Bitcoin which can go into circulation. That complex maths problem is actually a cryptographical signature which guarantees the integrity of recent transactions. It’s a bounty for those on the network to prove and confirm the trustworthiness of the Bitcoin blockchain.
I know some of this may not make sense to you, especially if you are new to Bitcoin mining. However, in this article, we will go over everything you need to know about Bitcoin mining. Let’s start off easy and ask ourselves, what is bitcoin and why does it need mining?
What is Bitcoin and Why Does It Need Mining?
Let’s have a look at a fiat currency like the United States Dollar. People have a lot of confidence in the US Dollar as it has backing from the Federal Reserve. The Federal Reserve is a central bank which controls and regulates the production of new printings of the dollar. It also cracks down on counterfeits dollars and makes sure these do not affect real dollars. The fact that this central authority does not frivolously create more money and it legitimises the dollars as real money with worth is whey there is so much trust for the US Dollar.
Bitcoin does not have a central authority like the Federal Bank, but something much more revolutionary. The bitcoin has the Blockchain. The Blockchain is a decentralised, and self-regulating ledger of every Bitcoin transaction. Decentralisation means that it is not in one central place, like a bank. It actually exists as a copy on every computer in the Bitcoin Blockchain’s network. Because everyone has a copy, there is no way for a malicious user to create a fraudulent transaction.
Mining plays a bit role in this function. A batch of transactions is put together into a block as the next link in the chain of the Blockchain. The miners are the ones to fully verify these transactions. Each time a block is fully verified, it is added to the blockchain as the truthful ledger entry of these transactions. The miner who does the verification receives a reward of a sum of new Bitcoin which can then enter circulation. The Blockchain acts as the Federal Reserve in this sense. It both legitimises the worth of Bitcoin by making sure they cannot be counterfeit transactions and regulates the introduction of new money into the system, just like the Federal Reserve does for the US Dollar. This is why Bitcoin can garner as much trust as it had currently.
How Does Bitcoin Mining Work?
For a Bitcoin miner to earn the reward for verifying transactions, they need to do two things. First of all, they have to verify 1 megabyte worth of transactions for the block. This could be several thousand transactions. That’s the trivial part.
Bitcoin is one of a new type of asset which we call cryptocurrencies. The crypto part of this refers to the cryptographic security of the technology. The block is transformed into a specific 46-digit hexadecimal number that we call a hash using cryptographic algorithms which is near impossible to reverse engineer. This is the complex mathematics problem that miners are attempting to resolve. They need to show proof of work for solving it also. It is so difficult to work out that many miners produce a huge number of possible hashes and try as many as possible hoping to get the right one first. A machine that a miner builds for mining could produce hashes at a rate of between thousands to millions of hashes a second. With so many different combinations, it is a big gamble to try to be the first to produce the correct hash.
As computers get better and the number of miners changes, the difficulty of cracking the hash will change. The blockchain will adjust the difficulty every 2014 blocks so that the time it takes to solve each block remains as close to 10 minutes as possible. If more miners enter the market, the difficulty will go up. If fewer miners are on the market, the difficulty will go down.
When they obtain the right hash and the verification, the miner is awarded 12.5 BTC. This reward is halved every 210000 blocks which are roughly 4 years. The current award should shift to 6.25 BTC in the middle of 2020. With the halving, Bitcoin has a theoretical limit of 21 million total tokens. The maximum limit makes Bitcoin more valuable over time because of scarcity. This will also make them more costly to mine.
How Can You Compete With The Miners?
Now that we know how this works, the real question is how viable is it for us to start mining Bitcoin ourselves. Currently, miners use special computers which uses a design specifically for mining. These could cost up to R50000, not to mention the cost of electricity to run them. These are not guaranteed to make a profit even. With so many people trying to mine, it becomes a large gamble to mine yourself.
A mining pool is a group of miners who combine their resources together and splits the mined bitcoin between its participants. This type of group has become the dominant group that has successfully mined. Joining and contributing to a good mining pool may be the only way to mine profitably currently but it still means you need to get your own mining rig.