What is Bitcoin mining & How Does It Work?
What is Bitcoin?
Bitcoin mining is done on high computational systems that create new bitcoins by solving extremely complicated math problems. Bitcoin is open source (decentralized cryptocurrency) where no one owns it, but everyone can be a part of the system or the network. The transaction occurs between peer-to-peer. It comes with the unique facility of fast transactions between traders all over the world and requires very low processing fees. It is a safe, secure, and easy way for all transactions. But how does bitcoin help you earn? Well, you can earn through bitcoin by selling it at a higher price to the buyer. Another method to earn through this chain is to mine bitcoin. It has gained worldwide popularity because of its vicious price swings.
What is Bitcoin Mining?
Bitcoins enter the circle through the mining process. Bitcoin mining is done on high computational systems that create new bitcoins by solving extremely complicated math problems. The process is getting more complex as more and more bitcoins are being mined. As soon as a bitcoin is mined the miner receives a certain amount of bitcoin. One computer solves a problem, and the answer goes to the next mining machine to start the cycle again. Many investors are unable to resist the magnetic appeal of mining as they may get a huge reward for all their hard work with crypto tokens. Some may even call these pennies from heaven. At the same time, we cannot overlook the fact that bitcoin mining is painstaking. It requires a lot of effort to get incentive rewards. This keeps users engaged and they legitimize and regulate the bitcoin transactions to ensure their tangibility.
You can earn from bitcoin mining without having to invest your money directly in it. After completing the blocks of verified transactions, which are added to the blockchain, the bitcoin miners will get a bitcoin as a reward. But to receive this reward bitcoin miners will have to solve that mathematical problem before anyone else does. So, bitcoin mining is highly dependent on the overall power and efficiency of the computing rig. So, to set up a mining system you would need computer hardware such as an ASIC (application-specific integrated circuit) or a GPU (graphics processing unit). You can also get individual graphics cards in a low-cost way (especially for Ethereum)
Why Miners are so important for Bitcoin?
Mining is the record-keeping service that ensures the validity of the block chains. They verify the legitimacy of Bitcoin transactions. It helps prevent the problem of Double spending. Double-spending means there is a chance that a Bitcoin owner may create a copy of the digital token and trade it while keeping the original one. It simply refers to spending the same bitcoin twice. So, bitcoin miners are doing computational work that lumps in the system.
For example, if you use a copy (fake bill) of an original bill and you want to use both of these, someone can easily detect the fake bill as both bills have the same serial numbers. This is what blockchain miners are doing. They check the transactions to validate their legitimacy.
How is Bitcoin mining performed?
To mine a bitcoin, you will be asked to solve a complex math problem. Hash is the term used for “guessing the correct numbers” and you would be making random guesses about the target hash. It is a competition between miners where in order to win a reward, you must be the first one to conclude the most accurate answer. It can be costly as the process requires high computing power. The complexity of Bitcoin mining increases as more miners joins the network. A single Bitcoin block can contain only 1 MB (megabyte) of data; a limit set by Satoshi Nakamoto. But some Bitcoin miners speculate that by increasing the block size to accommodate more data, it would be easier for the bitcoin system to analyze and validate transactions more promptly.
Is blockchain mining profitable?
The computer hardware needed for computational work can be extremely costly and may consume a vast proportion of electricity. For example, ASIC mentioned earlier in the article, can cost up to $10000. Which makes many miners doubt its profitability. If a miner successfully adds a block to the blockchain, he will receive a reward of 6.25 Bitcoins. Currently, according to Sep 2022 stats, 6.25 bitcoins have a total worth of about $124,000. Even if a miner does that successfully he would be rewarded only if he is the first one to reach the final and most accurate results. If you want to know if Bitcoin mining is profitable, the straightforward answer to this question is that “It depends” (on the above-mentioned things).
In 2009, when Bitcoin was first mined, mining a single block could get you 50 BTC. Till 2020, this reward was reduced to 6.25 BTC.
Today, in Oct 2022, the price of Bitcoin is more than $19,000 per bitcoin (daily swings in prices are too wild). Knowing the price of a bitcoin may seem like a handsome reward for all the hard work of mining.
Bitcoin Mining can be beneficial for you:
We already discussed that mining is an important process that prevents scams and double spending of bitcoin and supports the system.
- Apart from this, this also serves as the only source of new bitcoins being added to the circulation. Basically, miners are mining cryptocurrency.
- Miners are given a numeric problem to be solved. The first miner to obtain the right answer or the closest one will earn bitcoin rewards. This is known as Pow (proof-of-work). Miners have to immerse in the Pow activity and find the right answer to the problem. Basically, it is guesswork where they try to come up with a hash (64-digit hexadecimal number) that is identical to or less than the targeted hash.
- The difficulty of Bitcoin miners does not lie in the complexity of the problem but in the competition to be the first miner to solve this problem. The level of difficulty is inferred by the number of possible solutions to that problem. It is also important to note that the number of possible outcomes only increases with the increase in the number of miners in the mining network. Moreover, there are trillions of possible solutions to a single problem. All these things can make Bitcoin mining awfully strenuous.
“Hash rate” is a term used to indicate the speed of guests made per unit second. It is measured in giga hashes per second or GH/s and tetra hashes per second or TH/s. Successful miners have a very high hash rate.
- PoW requires the miners to find the nonce which is used just for once.
- New blocks are coming into being through the mining process. Without miners, the existing bitcoin network would still prevail and be usable but new Bitcoins won’t be added to it.
- Bitcoin also gives its miners the voting power. known as Bitcoin Improvement protocol (BIP). So, they get to vote whenever major changes are made in the Bitcoin network protocol.
- Miners can influence the prominent decisions such as forking. The more power you gain, the more votes you can cast for such matters.
What are the risks involved?
Price volatility is a major risk in bitcoin mining. Miners become uncertain about the profit of the outcome after investing so much in the process. It makes it difficult for them to visualize the reward and profit for their hard work.
Is bitcoin mining legal?
Many governments are suspicious of all decentralized cryptocurrencies while very few governments have allowed their citizens to mine and trade cryptocurrencies.
According to Library of Congress, crypto currency trade is completely banned in nine countries namely: Morocco, Pakistan, Egypt, Iraq, Bolivia, Nepal, Algeria, U.A.E. and Vietnam.
Looking for the best mining software?
There are a lot of different mining software available which are totally free to use. This software run on both Windows and Mac Computers.
Can you mine bitcoin on your iPhone?
If you are planning to mine bitcoin on your iPhone, you should know that bitcoin mining, today, requires high quality computing systems and electricity to be useful. Mining on mobile can’t get you any financial benefit even if it is a part of a mining pool.
Mining pools: Looking at the competition, miners with a small percentage of mining power can foresee their narrow chances to win. They may even be unable to recover their investments. So they become part of a mining pool. These mining pools are governed by third parties. The purpose of a mining pool is to coordinate groups of miners. These miners work together in a group and share the rewards among all participants. This ensures their steady flow of bitcoin in the process of mining.
Bitcoin mining has an alluring outlook, but it is not everyone’s cup of tea. Mining can be difficult, expensive, and time consuming when it comes to doing it for earning. Also, keep the impact of tax policies and other regulations of your country on Bitcoin into considerations. Bitcoin mining can be a great source of income when done efficiently.