What is Bitcoin Mining?
Bitcoin mining is the process of generating new bitcoins. However, it is also crucial for the development and maintenance of the blockchain ledger. This is done using highly sophisticated computers that can solve very complex mathematical problems.
A New Gold Rush
Many miners are attracted by the possibility of earning Bitcoin. To own tokens of cryptocurrency, you don’t necessarily have to be a miner. You can buy cryptocurrency using fiat currency. You can trade it on Bitstamp with another crypto (e.g. using Ethereum or NEO for Bitcoin). You can even earn it by shopping on platforms that pay in cryptocurrency or setting up interest-earning accounts.
An example of a crypto blog platform is Steemit, which is kind of like Medium except that users can reward bloggers by paying them in a proprietary cryptocurrency called STEEM. The STEEM can then also be traded for Bitcoin.
Miners get a Bitcoin reward as an incentive to help them fulfill their primary purpose: to legitimize and supervise Bitcoin transactions to ensure their validity. These responsibilities are distributed among many users around the globe, making Bitcoin a “decentralized” cryptocurrency. It does not depend on any central authority such as a central bank, government, or central bank to regulate it.
How To Mine Bitcoins?
As auditors, miners get paid. They verify the legitimacy of Bitcoin transactions. This convention is meant to keep Bitcoin users honest and was conceived by Bitcoin’s founder, Satoshi Nakamoto. By verifying transactions, miners are helping to prevent the “double-spending problem.”
Double spending refers to a situation in which a Bitcoin owner illegally spends the same Bitcoin twice. This is not an issue with physical currency. If you give someone $20 to buy vodka, it’s gone.
You can’t use the $20 bill to purchase lotto tickets next door. Although counterfeit cash is possible, it’s not the same as spending exactly the same dollar twice. However, the digital currency has the potential to be copied and sent to a merchant or other party.
Let’s suppose you had one $20 bill and one $20 counterfeit. If you tried to spend the counterfeit bill as well as the legitimate $20 bill, the person who looked at the serial numbers of both bills would find that they were identical, so one had to be false.
The job of a Bitcoin miner is similar to this: they verify transactions to ensure that no one has attempted to spend the same bitcoin twice. We’ll discuss this in greater detail below.
Once miners have verified 1 MB (megabyte) worth of Bitcoin transactions, known as a “block,” those miners are eligible to be rewarded with a number of bitcoins (more about the bitcoin reward below as well). Satoshi Nakamoto set the 1MB limit. This is controversial because some miners feel that the block size should increase to allow for more data. In effect, this would mean that the bitcoin network can process and verify more transactions faster.
Not everyone who verifies transactions will be paid, but verifying 1MB of them makes a coin miner qualified to earn bitcoin.
One transaction can be as small as 1MB, though this isn’t very common. Or several thousand. It all depends on how many transactions are involved.
“So, after all the work of verifying transactions, it is possible that I may still not receive any bitcoin for it?”
It is true. You must meet two conditions in order to earn bitcoins. The first is a matter of effort, the second is luck.
- Verify transactions worth 1MB. This is the hard part.
- To find the correct answer or closest answer to a numeric problem, you must be the first miner. This process is also known as proof of work.
“What does it mean to have the right answer to a numerical problem?”
Good news! There is no need for advanced math or computation. It may seem like miners solve difficult math problems, but that’s not true. They are actually trying to become the first miner ever to create a 64-digit Hexadecimal number (a “Hash””) that is less or equal to the target have. It is essentially guesswork.
The bad news is: Although it is guesswork, the number of possible solutions to each problem is on the order of trillions. This makes it incredibly difficult work. Miners require a lot of computing power to solve a problem quickly. You need a high “hash rate” to mine efficiently. This is measured in mega hashes (MH/s), Giga hashes (GH/s), and tera hashes (TH/s).
This is a lot of hashes.
If you want to estimate how much bitcoin you could mine with your mining rig’s hash rate, the site Crypto compare offers a helpful calculator.
Mining and Bitcoin Circulation
Mining is not only a way to make money and support the Bitcoin ecosystem but it also serves a vital purpose. It is the only way that new cryptocurrency can be released into circulation. Miners, in other words, “mining” currency. For example, as of Nov. 2020, there were around 18.5 million bitcoins in circulation.
Miners are responsible for all the bitcoins created, except the ones that were minted using the genesis block. This block was created by Satoshi Nakamoto, founder of Bitcoin. Bitcoin would not exist without miners. However, it would be usable and would continue to be used. Bitcoin mining will end eventually. According to the Bitcoin Protocol, there will be 21 million bitcoins.
The final bitcoin will not be distributed until the year 2140 due to the fact that the “mining” rate for bitcoin is decreasing over time. However, transactions will still be verified. To maintain the integrity of Bitcoin’s network, miners will continue verifying transactions and will receive fees.
Apart from the immediate Bitcoin payoff, coin miners can have “voting” power when there are changes to the Bitcoin network protocol. In other words, miners have a degree of influence on the decision-making process on such matters as forking.
How Much Does a Miner Make Money?
Every four years, the rewards for Bitcoin mining get reduced by half. Bitcoin was first mined in 2009. One block of bitcoin would earn you 50 BTC. This was reduced to just 25 BTC in 2012 when it was halved. In 2016, the reward was reduced to 12.5 BTC. The reward was halved to 6.25 BTC on May 11, 2020. The price of Bitcoin in November 2020 was $17,900. This means that you would earn $111,000. A good incentive to solve the complex hash problem described above.
If you want to keep track of precisely when these halves will occur, you can consult the Bitcoin Clock, which updates this information in real-time. The market price for Bitcoin has, over its history, been closely related to the decrease in new coins. This has led to scarcity, and the price of Bitcoin has risen in line with it.
If you are interested in seeing how many blocks have been mined thus far, there are several sites, including Blockchain.info, that will give you that information in real-time.
What Do I Need to Mine Bitcoins?
Bitcoin was not created in a way that allows individuals to compete with regular computers for blocks. This is because the difficulty of mining Bitcoin changes over time.
The Bitcoin network strives to produce one block every 10 minutes to ensure that the blockchain functions smoothly and can process and verify transactions. But if one million mining machines are competing to solve the same hash problem, it’s likely that they will find a solution quicker than if 10 mining machines are trying to do the same thing. Bitcoin’s algorithm is to adjust the difficulty of mining approximately every two weeks. It does this by evaluating and adjusting every 2,016 blocks.
To maintain stable block production, there must be more computing power available to mine bitcoins. This means that mining becomes more difficult. The difficulty level drops if there is less computing power. For a better understanding of how much computing power is required, the initial difficulty level for Bitcoin was one when it launched in 2009. It is now more than 13 trillion as of November 2019.
This is all to say that miners need to invest in high-end computer equipment to be competitive in mining. This equipment can cost anywhere from $500 to tens of thousands of dollars. As a low-cost option to build mining operations, some miners, especially Ethereum miners, buy individual graphics cards (GPUs).
Below is an image of a homemade, makeshift mining machine.
Graphic cards are rectangular blocks that have whirring fans. The sandwich twist-ties that hold the graphic cards to the pole are visible. This is not the most efficient method of mining, but many miners do it for the challenge and fun.
The “Explain it Like I’m Five” Version
It can be confusing to grasp the intricacies of Bitcoin mining. Let’s take an example of how the hash problems work. I tell my friends I have a number between 1 and 100. I then write it on a piece of paper and seal it with an envelope. My friends don’t have to guess exactly what number it is; they can just guess any number that is smaller or greater than the one I am thinking about. 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 is their disadvantage. If Friend A guesses 16, and Friend C guesses 12, they both theoretically arrive at viable answers because of 1619 and 1219. Even though B’s answer was closer than the target answer of 19, there is no “extra credit”. Imagine that I ask three friends the question “guess what number” but they don’t know I am asking them. I also don’t think of numbers between 1 and 100. Instead, I am asking millions of potential miners to guess the 64-digit hexadecimal number. It’s not easy to guess the correct answer.
If both B and C answer simultaneously, the ELI5 analogy is broken.
While simultaneous answers are common in Bitcoin terms, in the end, there can be only one winner. Multiple simultaneous answers that are equal or lower than the target number will be accepted by the Bitcoin network. The simple majority (-51%) will determine which miner to honor.
It is usually the miner with the highest number of transactions verified or who has done the most work. The losing block then becomes an “orphan block.” Orphan blocks are blocks that have not been added to the blockchain. Bitcoin is not awarded to miners who solve the hash problem and haven’t verified all transactions.
What is a “64-Digit Hexadecimal number”?
Here’s an example:
0000000000000000057fcc708cf0130d95e27c5819203e9f967ac56e4df598ee
The above number has 64 digits. It is easy enough to comprehend so far. You probably noticed that this number does not only consist of numbers but also letters from the alphabet. What is the reason for this?
Let’s look at the word “hexadecimal” to understand the function of these letters in the middle numbers.
You probably know that we use the decimal system. It is base 10. This means that each digit in a multi-digit number can have 10 possible values, from zero to nine.
“Hexadecimal” on the other side means base 16. “Hexadecimal” comes from the Greek words for six and “deca”, from the Greek for 10. Each digit in a hexadecimal system has 16 options. Our numeric system offers only 10 ways to represent numbers (zero through nine). This is why you need to stick letters in, specifically letters A, B, C, D, E, and F.
You don’t need to calculate the 64-digit number (the hash) if you’re mining Bitcoin. I repeat: A hash’s total value is not necessary.
What does “64-digit Hexadecimal Numbers” have to do Bitcoin mining?
Do you remember the ELI5 analogy where I wrote the number 19 on a piece of paper and sealed it in an envelope?
In Bitcoin mining terms, that metaphorical undisclosed number in the envelope is called the target hash.
With their huge computers and hundreds of cooling fans, miners are guessing at the target hash. Miners make these guesses by randomly generating as many “nonces” as possible, as fast as possible. Nonce stands for “number not used once” and is key to creating these 64-bit hexadecimal numbers. A nonce in Bitcoin mining is 32 bits long. This is much smaller than the hash which is 256 bits. The reward for successfully completing a block is 6.25 BTC. Credit is given to the first miner whose hash generates less than or equals the target hash.
You could theoretically achieve the same result by rolling a 16-sided dice 64 times to get random numbers. But why would you want that?
This screenshot, taken from Blockchain.info, may help you to quickly put all of this information together. This is a summary of what happened during block #490163’s mining. The nonce which generated the “winning hash” was 731511405. The top image shows the target hash. “Relayed By Antpool” refers to the fact that this block was completed and signed by AntPool.
As you see here, their contribution to the Bitcoin community is that they confirmed 1768 transactions for this block. If you really want to see all 1768 of those transactions for this block, go to this page and scroll down to the heading “Transactions.”
“So how can I guess at the target hash?”
All target hashes start with zeros, at least eight zeros, and as high as 63 zeros.
The Bitcoin Protocol has a maximum target but no minimum target. This number cannot be exceeded.
00000000ffff0000000000000000000000000000000000000000000000000000
These are some examples of random hashes, along with the criteria to determine if they will result in success for the miner.
“How can I increase my chances of correctly guessing the target hash before anyone else?”
You’d have to get a fast-mining rig, or, more realistically, join a mining pool–a group of coin miners who combine their computing power and split the mined Bitcoin. Mining pools are similar to Powerball clubs, where members purchase lottery tickets in bulk and agree to share any winnings. Pools are more efficient at mining blocks than individual miners, which is why there are a large number of them.
It’s essentially a numbers game. It is impossible to predict the pattern or make predictions based on past target hashes. The difficulty level of the most recent block at the time of writing is about 17.59 trillion, meaning that the chance of any given nonce producing a hash below the target is one in 17.59 trillion. These are not great odds for anyone working alone, even with a powerful mining rig.
How do I determine if Bitcoin is profitable?
Miners must also consider the cost of expensive equipment in order to solve a hash problem. It is also important to consider the large amount of electricity required for mining rigs to generate nonces. As of writing, Bitcoin mining is not profitable for most miners. The site Crypto compare offers a helpful calculator that allows you to plug in numbers such as your hash speed and electricity costs to estimate the costs and benefits.
Is Bitcoin Mining Legal?
Your geographic location is the most important factor in determining whether Bitcoin mining is legal. Bitcoin’s existence can jeopardize the dominance and control of fiat currencies in the financial markets. Bitcoin is therefore illegal in certain countries.
Bitcoin mining and ownership are legal in many countries. Some examples of places where it is illegal are Algeria, Egypt, Morocco, Bolivia, Ecuador, Nepal, and Pakistan.4 Overall, Bitcoin use and mining are legal across much of the globe.
Risks of Mining
Mining has both regulatory and financial risks. Bitcoin mining and all mining is subject to financial risk. You could spend hundreds of thousands of dollars on mining equipment and not see any return. This risk can be minimized by joining a mining pool. You should consider reconsidering mining if you live in an area where it is illegal. Before you invest in cryptocurrency mining equipment, it is a smart idea to investigate the regulations and sentiments of your country.
The increased energy consumption of the computers that run the mining algorithms is another potential danger from Bitcoin mining. ASIC chips have a higher efficiency than microchips, but the network’s growth is far more rapid than technological advancement. There are therefore concerns about the impact of Bitcoin mining on the environment and its carbon footprint.
However, there are ways to reduce this negative externality. These include using carbon offset credits and looking for cleaner, greener energy sources for mining operations, such as solar or geothermal. Switching to less energy-intensive consensus mechanisms like proof-of-stake (PoS), which Ethereum is planning to do, is another strategy; however, PoS comes with its own set of drawbacks and inefficiencies.