What is bitcoin mining?
Bitcoin mining is the process by which new bitcoins are introduced into circulation, but it is also a critical component of the maintenance and development of the blockchain network.
The operation is performed using highly advanced computers that solve very complex computational problems.
Cryptocurrency mining is tedious, expensive, and intermittently rewarding.
However, mining has an appeal for many investors interested in cryptocurrency due to the fact that miners are rewarded for their work using cryptocurrencies.
This may be because businessmen view mining as a gift from nowhere, like the California gold prospectors in 1849.
And if you are inclined to modern technologies, why not do so?
But before you invest time and equipment, read this guide to see if mining is really right for you.
We will mainly focus on Bitcoin being the most popular and valuable of all the other cryptocurrencies.
New Gold Rush:
The primary goal of many bitcoin mining operations is the potential for a bitcoin reward.
However, you definitely do not have to be a miner to own bitcoin, as you can also buy cryptocurrencies using fiat currencies, and you can trade them on an exchange like Binance.
You can even earn it by shopping, posting blog posts on platforms that pay users in cryptocurrency, or even setting up marketing accounts offering cryptocurrency payment.
Steemit is a notable example of crypto-rewarding platforms, where users and bloggers can benefit by paying them with a special cryptocurrency called STEEM.
STEEM can then be traded elsewhere for bitcoin.
The bitcoin reward that miners receive is an incentive for people to help with the primary purpose of mining, which is to legalize and monitor bitcoin transactions, and ensure their authenticity.
Since these responsibilities are spread among many users around the world, Bitcoin is a “decentralized” cryptocurrency, or one that does not depend on any central authority such as a central bank or government to oversee its regulation.
How to mine bitcoin:
Miners get paid for their work as auditors.
They do the work of verifying the legitimacy of Bitcoin transactions.
This agreement aims to maintain the honesty of Bitcoin users’ transactions and was designed by Bitcoin founder, Satoshi Nakamoto.
By verifying transactions, miners help prevent the “double-spending problem.”
Double spending is a scenario in which a bitcoin owner illegally spends the same bitcoin twice.
With physical currency, that's not a problem: once you hand someone a $10 bill for a cup of coffee, you don't have $10 anymore, so there's no risk of using the same $10 bill to buy it again.
While there is a possibility of making fake money, it is not quite the same as spending the same dollar literally twice.
With digital currency, there is a risk that the owner can make a copy of the digital currency and send it to a merchant or other party while keeping the original.
Let's say you have one $20 bill and a counterfeit $20 coin.
If you were to try to spend both the real and the fake bill, the person who bothered to look at the two serial numbers of the bills would see that they were the same, so one of them must be fake.
What a bitcoin miner does is similar in that they check transactions to ensure that users have not illegally tried to spend the same bitcoin twice.
This isn't a perfect analogy but we'll go over to explain it in more detail below.
Once miners verify 1 megabyte (megabyte) worth of bitcoin transactions, known as a “block,” those miners are eligible to be rewarded with an amount of bitcoin.
The 1MB limit has been set by Satoshi Nakamoto, which is controversial, as some miners believe that the block size must be increased to accommodate more data, effectively meaning the Bitcoin network can process and verify transactions more quickly.
Note that validating 1 MB of transactions makes a miner eligible to earn bitcoins, but not everyone who verifies transactions will be paid.
1MB of transactions could theoretically be as small as a single transaction (although this is not at all common) or several thousand.
It depends on how much data the transactions consume.
After all that work verifying transactions, maybe miners aren't getting any bitcoins for it?
This is correct.
To earn bitcoins, two conditions must be met, effort submitted and luck, where:
1) Approximately 1MB worth of transactions should be verified, that's the easy part.
2) You must be the first miner to arrive at the correct answer, or the closest answer to a numerical question, this process is also known as Proof of Work.
What is meant by the correct answer to a numerical problem?
The good news: There are no advanced arithmetic or arithmetic operations.
You may have heard that miners solve difficult math problems, which is not entirely true.
What they actually do is try to be the first miner to come up with a 64-digit hexadecimal number ("hash") less than or equal to the target hash.
It's basically speculative work.
The bad news: It's guesswork, but with the total number of possible guesses for each of these problems in the trillions, it's pretty hard work.
In order to solve a problem first, miners need a great deal of computing power.
To mine successfully, you need to have a high “hash rate”, which is measured in terms of megahashes per second (MH/s), gigahashes per second (GH/s), and terahashes per second (TH/s).
This is a very large number of fragmentsE.
If you want to estimate how much bitcoins you can mine using your mining hardware hash rate, Cryptocompare offers a handy calculator.
Bitcoin mining and trading:
In addition to supporting the pockets of miners and the Bitcoin ecosystem, mining serves another vital purpose, as it is the only way to release a new digital currency for trading.
In other words, it is the miners who do the minting.
For example, as of May 2021, there were about 18.7 million bitcoins in circulation.
Regardless of which cryptocurrencies were minted via the formation block (the first block, created by founder Satoshi Nakamoto), every single one of these bitcoins appeared due to miners.
In the absence of miners, bitcoin as a network will still be present and usable, but there will be no additional bitcoins.
There will eventually come a time when bitcoin mining will end, according to the bitcoin protocol, as the total number of bitcoins will be set at 21 million bitcoins.
However, due to the declining rate of Bitcoin “mined” over time, the final Bitcoin will not be in circulation until around the year 2140.
This does not mean that transaction verification will be stopped.
Miners will continue to verify transactions and will be charged a fee to do so in order to maintain the integrity of the Bitcoin network.
Regardless of the short-term bitcoin return, being a miner can give you the power to “vote” when changes to the bitcoin network protocol are proposed.
In other words, miners have a degree of influence over the decision-making process in matters such as splits and upgrades.
How much does a miner earn?
Bitcoin mining rewards are halved every four years.
When bitcoins were first mined in 2009, mining one block would earn you 50 bitcoins.
In 2012, this was halved to 25 bitcoins.
By 2016, this had halved again to 12.5 bitcoins.
On May 11, 2020, the reward halved again to 6.25 BTC.
In November of 2020, the price of bitcoin was around $17,900 per bitcoin, which means you would earn $111,875 (6.25 x 17,900) for completing the block, which is not a bad incentive to solve the complex hash problem detailed above.
If you want to accurately track when these forks occur, you can refer to the Bitcoin Clock, which updates this information in real time.
Interestingly, the market price of Bitcoin, throughout its history, has tended to align closely with the decline of the new coins that have been traded.
This low rate of inflation has increased scarcity and the price has historically risen with it.
If you are interested in knowing how many blocks have been mined so far, there are several sites, including Blockchain.info, that will give you this information in real time.
What do I need to mine Bitcoin?
Although individuals early in the history of Bitcoin might have been able to compete for blocks using a regular home computer, this is no longer the case.
The reason for this is the difficulty of mining Bitcoin which changes over time.
In order to ensure the smooth functioning of the blockchain and its ability to process and verify transactions, the Bitcoin network aims to produce one block every 10 minutes or so.
However, if there are a million rigs vying to solve the hashing problem, you will likely reach a solution faster than a scenario where 10 rigs are working on the same problem.
For this reason, Bitcoin is designed to assess and adjust mining difficulty every 2016 blocks, or roughly every two weeks.
When there is more computing power collectively working to mine for bitcoins, the mining difficulty level increases in order to keep block production at a constant rate.
Less computing power means lower level of difficulty.
To get a feel for the amount of computing power, when Bitcoin was launched in 2009, the initial difficulty level was one.
As of the past few months the figure has exceeded 13 trillion.
All of this means that in order to mine competitively, miners must now invest in powerful computer hardware such as a GPU (graphics processing unit) or more realistically using hardware (ASIC).
The value of such devices can range from $500 to tens of thousands.
Some miners, especially Ethereum miners, buy single graphics cards (GPUs) as a low-cost way to pool their mining operations together and get some mining profits.
Explain to me the process of mining bitcoins as if I were five years old:
It can be difficult to understand the ins and outs of bitcoin mining as it is.
Consider this illustration of how the hash problem works:
Tell three friends that you are thinking of a number between one and 100, write that number on a piece of paper and seal it in an envelope.
Friends don't have to guess the exact number; They just have to be the first person to guess which number is less than or equal to the number you're thinking of.
There is no limit to the number of guesses they get.
Let's say you think of the number 19.
If the friend guesses A 21, they lose because 21 > 19.
If the friend guesses B 16 and the friend guesses C 12, then both theoretically come up with workable answers, because 16 < 19 and 12 < 19.
There is no "extra credit" for friend A, even though A's answer was closer to the target answer of 19.
Now imagine that you are asking a guess question for what you are thinking, but instead of just three friends thousands of people and instead of the number 1 - 100 you can expand the field further and choose a 64-digit number.
Now you see that it will be very difficult to guess the correct answer.
In bitcoin simultaneous answers occur frequently, but at the end of the day, there can only be one winning answer.
when tWith multiple simultaneous answers equal to or below the target number, the Bitcoin network will decide with a simple majority - 51% - which return operator should reward.
Usually the miner is the one who does most of the work or in other words, the person who verifies the most transactions.
Then the losing block becomes an “orphan block”.
Orphan blocks are those that have not been added to the blockchain.
Miners who successfully solve the hashing problem but do not verify most transactions are not rewarded.
What are coin mining pools?
Mining rewards are paid to the miner who discovers a solution to a puzzle first, and the probability that the participant will be the person who discovers the solution is equal to the portion of the total mining power on the network.
Participants with a small percentage of mining power have very little chance of discovering the next block on their own.
For example, a mining card that can be purchased for $2,000 represents less than 0.001% of the network's mining power.
With such a small chance of finding the next block, it may be a long time before a miner finds a block, and the constant mining difficulty makes things worse.
A miner may never get his investment back.
The answer to this problem is participation in mining pools.
Mining pools are operated by third parties and coordinate groups of miners.
By working together in a group and sharing the payments among all participants, miners can have a steady flow of bitcoin starting from the day they enter the mining pool.
Statistics about some mining pools can be found on “Blockchain.info”.
Mining risks are often financial and regulatory risks.
As mentioned, Bitcoin mining is generally a financial risk.
One can make every effort to purchase mining equipment worth hundreds or thousands of dollars while not getting any return on their investment.
However, these risks can be mitigated by joining mining pools.
If you are considering mining and live in a restricted area, you should reconsider it.
It may also be a good idea to research your country's regulations and general sentiment toward cryptocurrency before investing in mining equipment.
An additional potential risk from the growth of Bitcoin mining (and other Proof of Work systems as well) is the increased power usage required by the computer systems that run mining algorithms.
Therefore, it must first be calculated correctly, both in terms of the cost of equipment and in terms of the cost of electricity and the legal regulations in the country, and then proceed with the process.