What is Bitcoin Mining?

Posted on June 09, 2020 in Articles, Digital Assets 101, Opinions
What is Bitcoin Mining?
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Bitcoin is one of the first cryptocurrencies in the market and has stayed on top ever since. At the time of writing, BTC currently has a value hovering around $9,000. Demand is growing, which historically has led to higher prices. With all this interest, you might be wondering, how do you get Bitcoin and where does BTC originate from? There are only a few ways you can obtain Bitcoin. For example, you could buy them from an exchange, get paid in BTC for goods and services, or obtain a reward through mining Bitcoin using a group of computers.

With new coins being mined every day, the miners receive BTC in return. However, Bitcoin mining is not a simple task. It requires specialized hardware and increased power input. So far, more than 18.5 million bitcoins have already been mined [1].

What’s the Difference Between Bitcoin and Fiat Currency?

Bitcoin emerged through the global financial crisis of 2008 after Satoshi Nakamoto published a white paper about a peer-to-peer decentralized digital currency.

Any fiat currency in the world is generally owned and managed by the appropriate government. Only the government or the central bank has the right to produce more notes and coins and regulate them to the public. Any other individual or company providing the currency violates the law and is liable to criminal punishment.

Bitcoin being a decentralized currency is not under the control of any entity or government, it is run entirely by the people. Anyone willing can mine the cryptocurrency and earn rewards for it.

Bitcoin is built on an encrypted blockchain, and no one can change the way it works. There are events such as Bitcoin Halving coded into the blockchain that occurs after every 210,000 bitcoins are mined. It happens automatically, and no one entity or individual can change this.

There can only be 21 million bitcoins in existence, whereas there can be an unlimited supply of fiat currency. The origin of Bitcoin and its founders are still a mystery. Satoshi Nakamoto can be the alias of an individual or an entity that founded Bitcoin.

Bitcoin’s market depends on the supply and demand of the coin rather than traditional markets where the price depends on the market and its regulations. Meaning in theory, if there is a financial crisis, the fiat currency may take a hit, but the price of 1 BTC should not be affected.

How Does Bitcoin Mining Work?

Bitcoin allows its users to mine new coins and earn rewards in BTC for it. It can be mined using application-specific integrated circuits (ASIC) or graphics processing unit (GPU). These machines solve complex hashes, and upon doing so, a new bitcoin block is found, and the miners receive a reward for it.

Currently, after the recent Bitcoin Halving, the reward for mining one block of bitcoin is 6.25 BTC. The rewards halve after every 210,000 blocks of bitcoin are mined and hence the name Bitcoin Halving.

A block of bitcoin contains hashes that store the hashes of previous blocks as well as the transaction details. A hash in the Bitcoin blockchain is a fixed-length of a unique sequence of random digits that may contain data of any size. Every hash is unique, so one cannot look at the hash and guess the data it contains.

When understanding the complex nature of a hash, consider this analogy, each Bitcoin hash is like asking someone to flip a coin 160 times and writing down either heads or tails. No two ways will ever be the same. There are too many variables. With the case of heads or tails on a coin, there are only two variables. However, with numbers and letters the possibilities are endless for a 160 character Bitcoin hash.

Mining provides an incentive to miners and investors to help the cryptocurrency to produce new coins and also monitor the network and the blockchain.

Miners help validate the previous Bitcoin transactions. Once they verify 1 MB worth of the bitcoin transactions, they will be eligible for a reward of 6.25 BTC currently (this reward amount halves every four years). Satoshi Nakamoto, the founder of Bitcoin, made a limit of 1 MB for each block. Some miners have argued that the block limit is not enough to verify more transactions and make the bitcoin network more efficient.

Even if a miner verifies 1 MB of transactions, he may not receive any BTC. The other condition is that the miners have to be the first to arrive at the right answer of the numeric puzzle, and this process is known as Proof of Work (PoW). So to earn the rewards, you need your mining rigs to work hard and also be the fastest.

Without miners, the Bitcoin network would still exist and be running. However, there will not be any new coins coming into circulation. Based on the current rate of mining, we can expect the mining of Bitcoin to occur in 2140. After this time, no more new Bitcoins will be created.

If you are a successful miner, you do have a ‘vote’ that influences some decisions, such as forking.

Should You Mine Bitcoin?

When Bitcoin was first released in 2009, a miner would earn 50 BTC per block. By 2012, the rewards were at 25 BTC per block. After the Bitcoin halving in 2016, the rewards halved again to 12.5 BTC.

Currently, in 2020, the rewards for mining are only 6.25 BTC. With a market price of $9K, the reward a miner will receive would be $56,250.

Initially, in the beginning, Bitcoin was mined using CPUs, but GPUs have since replaced them. If you want to begin mining, you have to spend at least $3,000 to set up a proper mining rig, and this price can go even as high as $10,000 for ASIC machines. The highest ongoing cost of entry is the electricity bill that will shoot up due to these systems churning through power every second of the day and night.

Back in 2012 through to 2016, Bitcoin mining was profitable when the rewards were high. All those miners who saved up their coins might have made huge profits when the BTC price rose to $19K in 2017. As the rewards went down, many miners stopped mining, and corporate or mining pools took over. There are fewer individual miners as the rewards are not compensating enough for the cost of the rig and electricity consumption.

There is also a difficulty rate that is associated with mining bitcoin, and this is a variable that changes every two weeks. It reduces the chances of an individual miner being able to solve the hash problem and earn bitcoin.

In the initial days, the difficulty was at 1, but in May 2020, the difficulty is at 16 trillion [2]. So you can see how high the challenge has become.

Bitcoin mining can still be profitable for some individual miners. You can use various online profitability calculators to decide whether bitcoin mining will be beneficial for you based on the cost of power, efficiency, time for mining, and the value of BTC.

If setting up your rig and mining seems non-profitable for you, you can always join a mining pool. A mining pool is generally a group of miners working together to share the rewards. It reduces investment and provides better returns. Even though the rewards do get split between the participants, the combined processing power provides a higher probability of completing the hashing first.

If you feel that you can make the initial investment and work with the level of difficulty as well as the volatile market of Bitcoin, then Bitcoin mining can be profitable in the long term.

Bitcoin mining has helped Bitcoin to stay alive all these years. Miners not only help to regulate new coins, but they also help verify previous transactions block by block.

Each 1 MB worth of transactions verified makes the miner eligible for the reward (currently 6.25 BTC per block mined). However, being a new individual miner seems to be less profitable than before with the increased difficulty rate and initial investment.

[1] – https://www.investopedia.com/tech/what-happens-bitcoin-after-21-million-mined/

[2] – https://www.coindesk.com/meet-brian-klein-cryptos-own-high-stakes-trial-attorney