What is Bitcoin Mining?
You may hear the phrase “bitcoin miners” and your thoughts turn to Western fantasies of pickaxes and dirt and making it big. It turns out that this analogy is not too far-fetched.
Bitcoin mining is done by powerful computers that solve complicated computational math problems. These problems are too complex to be solved manually and can tax even the most powerful computers.
KEY TAKEAWAYS
- Bitcoin mining is the process by which new bitcoin is created by solving a mathematical puzzle.
- Bitcoin mining is required to keep the ledger of all transactions on which Bitcoin is based.
Over the years, miners have become more sophisticated and use complex machinery to accelerate their mining operations.
Two things result from bitcoin mining. The first is that bitcoin mining produces new bitcoin when computers solve complex math problems on the Bitcoin network. This is similar to how a mining operation extracts gold from the ground. Second, the Bitcoin payment network is trusted and secure because bitcoin miners solve computational math problems.
A transaction is when someone sends a bitcoin to another person. Banks, point-of-sale systems, and physical receipts can document transactions made in-store and online. Bitcoin miners achieve the same thing by clumping transactions together in “blocks” and adding them to a public record called a blockchain. The blocks are then kept by nodes so that future verification can be done.
Part of the job of bitcoin miners is to verify that transactions added to the blockchain are correct. In particular, bitcoin miners make sure that bitcoin is not duplicated, a unique quirk of digital currencies called double-spending. Counterfeiting of printed currency is a problem. But, generally speaking, if you spend $20 in a store, the bill is in the hands of the clerk. It’s not the same story with digital currency.
It is possible to reproduce digital information quite easily. With Bitcoin and other digital currencies, there is the risk that someone can make a duplicate of their bitcoin and send it off to another party, while still keeping the original.
There are up to 300,000 transactions per day. Miners must verify each one. 2 In return, miners receive bitcoin for every block of transactions added to the blockchain.
Block reward is the amount of bitcoin that is released for each block that has been mined. The block reward is half of every 210,000 blocks or roughly every four years. It was 50 in 2009. In 2013, it was 25, in 2018 it was 12.5, and in May of 2020, it was halved to 6.25.
Bitcoin successfully doubled its mining reward, from 12.5 to 6.25 on May 11, 2020. This was the third time that Bitcoin has achieved this feat.
The system will continue to work until 2140. 3 Miners will receive fees for processing transactions, which network users will also pay. This will ensure that miners have the incentive to continue mining and maintain the network. This is because there will be more competition for them after the halvings are over.
The halving reduces the rate at which new coins can be created and lowers the supply. Investors may be concerned by this as other assets, such as gold, that have low supply can see high demand and drive prices higher. This will result in a halving of the bitcoin supply, which can have some implications for investors. Other assets with low supply, such as gold, may have high demand and push prices higher. 3
El Salvador declared Bitcoin legal tender on June 9, 2021. Any transaction that the business is able to accept cryptocurrency can be made using the cryptocurrency. El Salvador’s main currency is the U.S. Dollar.
Verifying Bitcoin transactions
Two things must happen in order for bitcoin miners who verify transactions to earn bitcoin. They must first verify 1 megabyte (MB), the worth of transactions. These transactions can be as small as one transaction, but they are often many thousand depending on how much data each transaction stores.
Second, miners must solve a complicated computational math problem in order to add transactions to the blockchain. This is also known as a proof-of-work. They are actually trying to find a 64-digit hash number, also known as a hash, which is equal to or less than the target hash. A miner’s computer generates hashes at various rates, such as megahashes per minute (MH/s), gigahashes/s (GH/s), and terahashes/s (TH/s). Depending on the unit, they guess all 64-digit numbers possible until they find a solution. It’s basically a gamble.
The difficulty level of the most recent block as of August 2020 is more than 16 trillion. The chance that a computer will produce a hash lower than the target is one in 16 trillion. This means that you have a 44,500-fold chance of winning the Powerball jackpot by buying a single ticket. Mining computer systems can generate many possible hash options. However, mining bitcoin for profit requires a lot of energy and complex computing operations.
The difficulty level is adjusted every 2,016 blocks, or roughly every two weeks, with the goal of keeping rates of mining constant.5 That is, the more miners there are competing for a solution, the more difficult the problem will become. It is also true that the opposite is true. The difficulty of mining becomes easier if computational power is removed from the network.
An analogy for Bitcoin Mining
Let’s say I tell three of my friends that I am thinking of a number between one and 100. I then write the number on a piece of paper and seal it with an envelope. My friends don’t have to guess exactly what number it is, but they do have to guess any number less or equal to mine. There is no limit on how many guesses they can make.
Let’s suppose I think of the number 19. If Friend A correctly guesses 21, they are out of luck because 21 > 19. If Friend A guesses 16, and Friend C guesses 12, they both theoretically arrive at viable answers because 16 19, and 12 19. Even though B’s answer was closer than the target answer of 19, there is no “extra credit”.
Imagine that I ask you the question “guess what number” but not just three friends. I don’t want to think of numbers between 1 and 100. Instead, I am asking millions of potential miners to guess the 64-digit hexadecimal numbers. It’s obvious that the correct answer is going to be very difficult to guess.
Bitcoin miners must not only come up with the right have but also be the first to do so.
Bitcoin mining is basically guesswork. The speed at which your computer can generate hashes will determine how accurate you are. Bitcoin mining was competitively possible on ordinary desktop computers a decade ago. However, miners discovered that graphics cards, which are often used in video games, were more efficient and began to dominate the game. In 2013, bitcoin miners started to use computers designed specifically for mining cryptocurrency as efficiently as possible, called application-specific integrated circuits (ASICs). Although they can cost several hundred dollars or tens of thousands of dollars, their efficiency in mining Bitcoin is superior.
Bitcoin mining is now so competitive that only the most current ASICs can make it profitable. The cost of energy consumed by older models of ASICs, such as desktop computers or graphics processing units (GPUs), is often greater than the revenue generated. Even with the most powerful unit, a single computer is not enough to compete against what miners refer to as mining pools.
A mining pool is a group of miners who combine their computing power and split the mined bitcoin between participants. Pools are more efficient than individual miners at mining blocks, and a large proportion of them are used to mine bitcoin. Large amounts of Bitcoin’s computing power have been contributed by mining companies and mining pools.
Bitcoin vs. Traditional Currencies
People trust printed currency. That’s because the U.S. dollar is backed by a central bank of the U.S., called the Federal Reserve. In addition to a host of other responsibilities, the Federal Reserve regulates the production of new money, and the federal government prosecutes the use of counterfeit currency.67
A central authority supports digital payments made in the U.S. Dollar. A payment processing company, such as Mastercard and Visa, processes online purchases made with your debit or credit cards. These companies not only record your transaction history but also verify that the transactions are legitimate. This is why your debit card or credit card could be suspended while you travel.
Bitcoin is not subject to central regulation. Bitcoin is instead supported by millions of computers around the globe, called nodes. The network of computers performing the same function as Visa, the Federal Reserve, and Mastercard has a few key differences. Nodes can store transaction history and verify transactions are authentic. Bitcoin nodes, unlike central authorities, are distributed around the globe and store transaction data in a public listing that anyone can access.