Considering that the Bitcoin cryptocurrency is a virtual entity in itself, Bitcoin mining is bound to involve some digital digging instead of an actual shovel. This is a process performed on Bitcoin’s platform, the blockchain, with the defined purpose of verifying, storing, and securing transactions.
At the same time, efforts put forward to reach this goal are awarded by the creation of new Bitcoins—Bitcoin mining in its fundamental context. As miners used to dig gold coins out from the ground and bring them to light, so does a skilled Bitcoin miner bring these cryptocoins to life.
Bitcoin Mining: A Historical Overview
This unique process of “digging for Bitcoin” has existed for as long as the cryptocurrency itself. After all, it is essential to its entire function and transaction verification, but above all, for new coin creation.
To illustrate, let’s go back to 2008, when founder (or founders) of Bitcoin, Satoshi Nakamoto, first released the cryptocurrency on its unique blockchain platform. This marked the beginning of an operation that came to be known as mining Bitcoin, ultimately purposed to sustain the entire system, as well as the currency.
Back then, the first coins that actually put the system to practice were created by the original block in the blockchain, known as the genesis block. Once released onto the free trade market, they marked the beginning of the cryptocurrency era. Thereafter, each following payment performed with these initial coins brought about the process of generating new ones. Now that we’ve sparked your interest, it’s time to get into the detailed mechanics of it all.
Bitcoin Mining Explained: Key Functions
In order to start from scratch, one is best introduced to the matter of Bitcoin mining through its primary functions. As mentioned in the introduction above, this process serves to validate the Bitcoin transactions on the blockchain. Simply put, if Sally wants to send 3 BTC to John, she would do so by entering John’s e-wallet address and sending the money across the blockchain.
These cryptocoins are supposed to reach their recipient, but will do so only if the transaction is confirmed via Bitcoin mining. Various amounts will require a different number of confirmations, but it is best to stick with about six on average to maintain the standard high security and transaction validity. This process practically embeds the transaction on the last block in the chain.
At the same time, the required multiple-user verification system ensures the transaction’s security. Simply put, the more miners “defending” the process of BTC transfer, the less opportunity for interference and malicious copying and double spending.
In this regard, the matter of what is Bitcoin mining ultimately leads interested parties to understand the concept of double spending and proper storage. Practically, Bitcoin mining stores the transactions performed simultaneously on a given block in the chain, thus creating a trace of their final destination. Hence, no one Bitcoin owner could copy their coins and pay for one thing, and then another using the same funds.
Ultimately, as a reward for their contribution, Bitcoin miners are rewarded with a piece of the pie—a specific amount of coin—as illustrated in the following paragraph.
How to Start Bitcoin Mining
Anyone interested in owning some Bitcoins should first be aware of the full investment needed for the specific process. In this regard, it’s important to account for all the alternative ways of obtaining the cryptocurrency.
For one, interested miners can also get some Bitcoins by exchanging them for their fiat currency on the numerous exchange platforms online. You will need to deposit funds in dollars, euros, pounds, or any other widespread legal tender—as opposed to the Bitcoin mining free-of-charge nature that practically awards you a specific amount of coins.
Otherwise, interested Bitcoin owners can use other cryptocurrency, such as Ether or Litecoin, to obtain Bitcoin via an exchange. Ultimately, they can even get paid in Bitcoin by playing video games or working on the multiple platforms available online. However, for those who still prefer mining their way to some Bitcoins, the process of doing so is explained below.
How Does Bitcoin Mining Work?
Mining a cryptocurrency is much like digging inside a gold mine—you basically discover and unveil a hidden treasure to the world. The only difference is that, instead of natural forces, it is humans who are doing the creative work of producing this valuable material.
For this purpose, they need specific materials, starting with the appropriate hardware and software, adding in the specific know-how of the process’s mechanics and its constituents. Ultimately, miners should be made aware of the appropriate gains, and the expense they would be exposed to, so as to calculate the risk and gain factor.
Bitcoin Mining Hardware
When Bitcoin was first released, the blockchain was much less saturated with the so-called nodes. These are the computing machines connected on the blockchain that verify transactions, and a small portion of them perform the specific operation of mining Bitcoins. The latter additionally aim to complete the block on the blockchain by processing its specific hash, more on this is explained below.
Once Bitcoin started attracting greater interest, miners needed special computing devices with greater processing power that could handle the increased traffic. Nowadays, miners can choose between a GPU (Graphics Processing Unit) or ASIC (Application Specific Integrated Circuit), which can cost hundreds of dollars. Some miners may even choose to buy individual graphic cards in addition to their devices, to boost their processing speed.
Bitcoin Mining Software
The GPU and ASIC devices mentioned above require miners to install the Bitcoin software, available online for free, so as to connect to the blockchain. Here, miners will be able to use their computing power to generate solutions to the much-spoken-about mathematical puzzle within the mining process.
Nevertheless, Bitcoin miners further need a different kind of software, an e-wallet that serves to store, send, and receive Bitcoin across the blockchain. Other than downloadable software, they can opt for a hardware solution, or even some cloud-based e-wallet Bitcoin storage.
How Do You Mine Bitcoin in Practice?
Once you have all these tools in place, you’re ready to mine some Bitcoins. Practically, you are in charge of verifying transactions—the more transactions you manage to process, the higher the possibility for your mining process to win over the rest and earn you some newly created Bitcoins—12.5 BTC, specifically.
Transactions are verified and incorporated on the latest block of the entire blockchain every 10 minutes, meaning you are able to win 12.5 BTC about five or six times in the course of a single hour. Nevertheless, in order to do so, you would need to get the exact hash of the newly created block. This “hash” is in fact the block’s unique digital fingerprint: a 64-bit hexadecimal number.
What Is a 64-bit Hexadecimal Number?
Before moving forward with the procedure, Bitcoin miners need to know this number’s role in the Bitcoin generator process. It is the block’s hash, with a structure indicated in its name—“hexa” means 6 and “deca” means 10. The decimal number system everyone is aware of gives each digit in a specific number a choice of 10 specific values from 0 to 9, while the hexadecimal provides 16 choices. Aside from the aforementioned values, it provides the possibility for digits to take the form of the letters a, b, c, d, e, and f, valued 11, 12, 13, 14, 15, and 16, respectively.
How does this number solve the puzzle?
The mysterious BTC mining puzzle is in fact a string of many wild guesses of the block’s hash. Imagine you ask your friends to guess a number from 1 to 50, or at least one lower in value. This is much the same, only with a global pool of amiable miners doing the guessing and a referential target hash of a much wider value range.
Just imagining the proportions of all the probable answers is hard work, which is why the actual mining process only requires the nodes to guess the right “nonce,” which will generate a valid hash. This nonce, understandably, is a much smaller 32-bit number, as opposed to the 265-bit hexadecimal one. As a term, it’s short for “number only used once,” as each nonce is attributed to verifying each specific hash and, ultimately, each block in the blockchain.
Bitcoin Mining Difficulty Metric
The process of mining Bitcoin ultimately comes down to some guesswork, only at a higher difficulty level. This is evident right from the start: the target hash, which is not the regular decimal number everyone is used to seeing, but a hexadecimal one. What’s more, this number always starts with 0s, whose number is also included in the guesswork, as miners need to guess if there are 13 or 15 zeros so as to guess a lower number for the digit after this sequence of zeros. This is the only way to generate a hash with a value lower than or equal to the target one.
Bitcoin mining has evidently become largely complex over the years. Nowadays, this difficulty is a metric that could help people determine if they actually want to take up mining. It is calculated as a relation between the current difficulty of creating a valid block in the blockchain in relation to the easiest it can get. This “ratio” is recalculated every 2,016 blocks, with an average of a single block being yielded every 10 minutes. Ultimately, better processing capacities have evened out with the massive increase in miners, resulting in a sustainable difficulty level.
Is Bitcoin Mining Profitable?
Naturally, once you are aware of the whole investment that is Bitcoin mining, most interested miners ask themselves the same question. While some consider the currency to be profitable on its own, the fact you are awarded free Bitcoin out of nowhere is definitely a plus. Nevertheless, the expenses that would ultimately get you there can get rather hard to handle.
Prior to purchasing any computing device and setting up your spot with the Bitcoin blockchain software, interested miners need to consider the proper workspace. Bitcoin mining computer devices require a constant power supply, which can accrue quite the electricity bill. In fact, a day’s work of Bitcoin mining can result in your special device spending as much as a single household would in a month. With rising electricity prices, and concern for the environmental fingerprint of nuclear and power plants, this is hardly a permanent solution.
Interested miners will further need to account for the workspace’s size. It needs to fit many fans and ventilators that will keep the air cool and fresh and prevent your Bitcoin mining machine from overheating.
Considering the equipment cost, as well as certain recurring expenses, the profitability decreases drastically. Once you factor in the probability of actually getting the hash first and mining some Bitcoin, miners finally end up with an estimate of their venture’s profitability, in realistic proportions.
In the end, miners are left with their own coins they can later trade on exchange sites for other currencies.
For the purpose of increasing their chances of profit, most miners tend to orient themselves to Bitcoin mining pools. These are groups of numerous nodes, i.e. miners, that are working together to combine their processing power for the purpose of finding the valid nonce sooner than individual miners would.
Shared computing power means shared reward, with a much higher probability of hitting the right solution. This turned such “consolidated” miners into making a business out of mining pools, with some offering cloud pools, and others leasing entire halls and warehouses to equip themselves properly. All in all, it comes down to personal choice—whether you are doing it for the mining or the money, the Bitcoins, and what fee you can pay for it.
- Is it legal to mine for Bitcoins?
Mining for Bitcoins is just one of the things you can do with the cryptocurrency. This process alone requires miners to purchase the necessary equipment and download the software before mining any Bitcoins, but even owning them through any of the aforementioned options is legally debatable due to specific legislation in certain countries.
Nowadays, Bitcoin is arguably the leading cryptocurrency of choice, and its popularity has earned it enough credibility to obtain legal status across numerous jurisdictions. Still, it is advisable to check with local authorities prior to engaging in any Bitcoin transactions and operations.
- Can I use my computer to mine Bitcoins?
With today’s rate of an ever-increasing number of interested miners, it is virtually impossible to mine any cryptocoins using your home computer device. This is due to a lack of the necessary processing power to handle current transaction traffic rates. With so many occurring at the same time and with varying values, the lag time would not allow you to verify a significant number of transactions and be the first to generate the nonce, i.e. hash, closest to the target one.
- How many Bitcoins are there left to be mined?
With a limited sum, capped at 21 million Bitcoin, permitted to exist at any moment, so far there are somewhere over 3 million Bitcoins left to be mined using this process. For greater system sustainability, the number of Bitcoins mined each time someone guesses the right hash has been proportionately decreasing. What was once 50 BTC has halved to 25 BTC, and most recently 12.5 BTC, as an award for mining Bitcoins, but it is set to decrease by 50% by the year 2020/2021, and continue in the same trend.
- Conclusively, what is the most important function of Bitcoin mining?
The beginning of this article listed verification, security, and storage as its primary functions. Nevertheless, this was later complemented with the main drive to perform such a lengthy and power-consuming operation. This is the actual reward calculated in Bitcoin, given to the miner that manages to reach the ultimate goal—generating a 64-bit hexadecimal number. Other than this individualistic point of view, there is also the more general, universal benefit of the process of Bitcoin mining: the actual creation of Bitcoin.