As you’re here, chances are that you’ve taken an interest into Bitcoin, as an effort to understand more about the digital currency. Today, we’ll talk about Bitcoin mining, which is practically the process by which Bitcoin is created.
To put things better into perspective, in a traditional fiat financial system, when more money is needed, governments can simply print it out and put it into circulation. However, Bitcoin is not a physical object, therefore we cannot print it. Instead, a network of computers from all around the world engages into an activity which is well-known as mining, where they mine for coins by competing with one another.
How mining takes place:
Bitcoin is popular for offering people from all around the world the possibility to make transactions of practically any sum almost instantly. However, there’s the need of a system which can keep a record of all these transactions. If such a system did not exist, it would then be impossible for people to keep track of the transactions and know who sent what. The Bitcoin system deals with this by collecting all of the transactions that have been carried out and putting them onto a list, also known as a block. Miners then proceed to confirm the transactions and write them down into a ledger, which is also known as the Blockchain (the place where you can see all transactions that have been carried out).
With this in mind, the Blockchain can be used to check and see any transactions made at any time on the network. With this in mind, whenever a new block of transactions has been created and verified by the miners, it will be added on the Blockchain, thus increasing the list of transactions that have been carried out. Those who call themselves miners also receive an updated copy of the Blockchain, so that they know whatever is going on, and to help keep the system backed up and online at all times.
However, we also have to make sure that the general ledger can be trusted, as all the information is held digitally, and people could be able to temper with it. With this in mind, when a block of transactions has been created, miners proceed to put it through a process, to make sure that it is transformed into something that cannot be tempered with or influenced. The information in the block is taken and then a mathematical formula is applied to it, which in turn, changes it into a random sequence of numbers and letters, which are also known as a hash. The hash is stored with the block, and put at the end of the Blockchain.
Chances are that you may have heard that strong computers and lots of processing power is needed to mine. Why is this? Well, the Bitcoin protocol is designed in such a way that once the transactions have been verified, and the header of the recent block has been selected and inserted into the block as new hash, the miners will have to solve something known as a Proof of Work problem. These are generally difficult mathematical problems that your computer has to solve, in order to prove that transactions have taken place. At this moment in time, solving the problem is difficult, as it requires a lot of computing power. The faster a computer is, the faster it will solve the proof of work problem and be entitled to receive 25 or more Bitcoins. With this in mind, in case you have a strong network of computers, you will be able to solve blocks and get rid of the proof of work problems much faster, which in turn, will allow you to earn a larger sum of Bitcoin from mining.
Based on this, Bitcoin mining has been intentionally designed in such a way to require lots of resources. Thanks to this, the amount of blocks that are found on a daily basis by miner usually remains steady, therefore keeping the value of the cryptocurrency at a steady amount as well. You may be wondering how miners make money. Well, they are paid any transactions fees, but also a subsidy of the newly created coins, which we have mentioned above.
The bitcoin mining industry has been proven to be incredibly profitable if done right. In fact, Chinese bitcoin mining farms have been reported to earn over $80,000 on a daily basis in Bitcoin, which is a massive amount. However, the investment to create a bitcoin farm is also huge, and not many people are willing to venture into it at this moment in time.
Let’s also keep in mind the fact that sooner or later, the process of bitcoin mining as we know it will end. This is due to the fact that the Bitcoin system has been designed in such a way to only allow a total of 21 million bitcoins to be created. Once this sum is allow, there will be no more blocks to be discovered, but the public ledger will still need to be supported. While we are unsure to what will happen when the maximum amount of Bitcoins is reached, one thing is certain: its value will become much higher!
Based on everything that has been outlined so far, Bitcoin mining is one of the underlying processes of the cryptocurrency. It’s also called like this as it resembles the mining of other commodities that we are aware of, such as gold. Just like gold, Bitcoin requires exertion, and a slow process which transforms it into currency, at a rate similar to that of gold being minded from the ground.