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Over the past few years, there has been a growing craze for Bitcoin. People want to learn this cryptocurrency, bitcoin mining, and the mechanisms backing it to fuel their geeky minds, make profits or experiment with this emerging technology.

Bitcoin enables fast, accurate, and inexpensive money transfers across the world. It has revolutionized the modern concept of commerce and money.

However, Bitcoin is still a mystery to many. People are confused about it, its usage, and how to acquire it. And one of the biggest questions is about bitcoin mining.

So, let’s unravel the mystery!

But first, let me set the stage by defining some key concepts.

What are Bitcoin and Blockchain?

Bitcoin (BTC) is the first and the most prominent digital currency or cryptocurrency. It is sent and received between users directly on a peer-to-peer (P2P) network, with no intermediaries, central bank, or governing body.

This cryptocurrency was invented by Satoshi Nakamoto (an unknown person or a group of individuals) in 2008. Its implementation was released as open-source software in 2009, and that’s when it found its first usage. The Bitcoin transactions are validated using cryptography by network nodes and recorded in a distributed public ledger, also called the blockchain.

Bitcoin is built on blockchain technology. This immutable and shared ledger can store transactions and records chronologically on an extensive network of computers spread across the world in various places. It’s a special type of database using the distributed ledger technology that ensures no records can be tampered with, offers greater transparency of transactions, and is secure using the latest cryptography techniques like SHA-256.

Anyone on the Bitcoin network can send or receive bitcoins no matter where they are. All you need is to create an account on the network and get some BTCs by either bitcoin mining or purchasing them online. You can use bitcoins for online shopping or use them as an investment.

How Do Bitcoins Differ from Traditional Currencies?

Bitcoin Mining: Understanding the Fundamentals  Finance

Both traditional currencies and bitcoins hold a value, but they are different.

Issuance: Traditional currencies or fiat currencies are issued and regulated by the government. It can be tangible in the form of coins and notes that you can carry with you or store in your bank, or non-tangible in the case of digital payments.

Unlike traditional currencies, bitcoins are not issued by any central authority. They are non-tangible or virtual currencies that work only in their digital form.

Governance: The government bodies regulate the production of currencies, their flow and prosecute counterfeit currency usage, apart from performing other related responsibilities.

As a result, people trust printed money more. For example, the Federal Reserve (centralized bank of the US) backs the US Dollar, and The Bank of England regulates the Pound Sterling.

On the other hand, bitcoins involve no central authority to regulate bitcoins’ creation, flow, or management. Thousands of computers globally, called nodes, back these bitcoins. Nodes help validate transactions and store data about previous transactions in a public ledger that anyone can access.

Supply Limit: Fiat currencies have limitless supply, while only 21 million bitcoins can ever be created.

Transaction fees: Since payment companies process fiat currencies, their transaction involves considerable costs, even higher for international money transfers. In bitcoins, the transactions involve little to no fees as there are no intermediaries.

Security: Fiat currencies are subject to fluctuating government policies and regulations, leading to insecurities. But Bitcoin uses concepts like cryptography, decentralization, consensus, proof of work, etc., for security, adhering to no such policies.

Transaction reversal: You can cancel, reverse, or charge back fiat money. It is not possible with bitcoins. Once a transaction has occurred, it cannot be modified.

Speed: Banking transactions take days and hours to get verified and finally reflect on the recipient’s bank account. However, Bitcoin transactions are instantaneous based on the network’s speed.

You see lots of good points in Bitcoin, but how to acquire it?

Either you can buy it online, get rewarded in bitcoins for some online transactions, or perform bitcoin mining. Let’s now learn about bitcoin mining.

What Is Bitcoin Mining?

Bitcoin Mining: Understanding the Fundamentals  Finance

Bitcoin mining refers to a process of digitally validating Bitcoin transactions over the Bitcoin network. People mining bitcoins (miners) must solve complex hash puzzles encoded cryptographically to verify the blocks containing transactions. It requires powerful computing resources and power to solve these problems.

Once they are solved and transactions are verified, the block gets updated on Bitcoin’s decentralized ledger. For this effort, miners earn bitcoins. This complete process is called bitcoin mining.

Furthermore, the aim of bitcoin mining is primarily two things:

  1. To produce new bitcoins by solving complex mathematical problems
  2. To keep the Bitcoin network secure and trustworthy by verifying the transactions

How Does Bitcoin Mining Work?

The Bitcoin network is built on blockchain technology that ensures the safety of the entire ledger using cryptographic hashes and timestamps for each block that must be added chronologically.

Each block has information about verified transactions, which is added to the blockchain once it’s verified. After this, it becomes almost impossible to tamper with the transactions due to the unique capabilities of blockchain technology.

Here’s how bitcoin mining works.

#1. Setup

Before miners start bitcoin mining, they need specific tools and figure out ways to efficiently solve complex problems. Bitcoin’s creator – Satoshi Nakamoto, has designed the network so that you can mine a block every 10 minutes.

Hence, miners keep everything handy to match the pace of these 10 minutes, and this difficulty increases even more, when more miners with more computing power join to mine.

#2. Mining requirements

Mining bitcoins requires advanced tools and lots of computing resources. So, bitcoin miners suit up with these things:

Mining hardware: Hardware for mining bitcoins has changed over the years. Bitcoin miners used CPUs before using Graphics Processing Units (GPUs) with advanced graphic cards, Field Programmable Gate Array (FPGAs), or Application Specific Integrated Circuits (ASICs) for effective mining. The latter one is the most efficient in terms of consumption.

Mining pool: Miners can choose whether they want to mine solo or go for pool mining

Software and e-wallet: They need mining software like BeMine, Kryptex Miner, ECOS, etc., that can implement the defined protocols for the Bitcoin network. Miners also need an electronic wallet to collect and store their rewards as bitcoins.

#3. Transaction

When an individual sends a bitcoin to someone, it’s a transaction. These transactions are added to a block that the nodes or computers must verify to be attached to Bitcoin’s blockchain that everyone in the network can see.

In the core, there are three elements involved when someone initiates a transaction in the Bitcoin network – transaction input, output, and amount.

For each transaction as an input, the mining software creates a unique and complex cryptographic hash. Next, the software groups the transactions needed to generate a block. The grouping is represented as a Merkle tree or hash tree where each leaf node has a block’s hash, and non-leaf nodes have the hash of their child nodes.

Furthermore, a Merkle tree has the summary of every transaction in a block and is essentially a data structure. In this, the hashes of transactions are paired using the encryption SHA-256.

#4. Solving the Puzzle

Bitcoin Mining: Understanding the Fundamentals  Finance

The hash that can identify the whole Merkle tree is called the root hash or Merkle root and is stored in a block header. Block headers contain block data and attributes like the bitcoin software version, previous block’s hash, timestamp, root hash, the target, and cryptographic nonce (an arbitrary number used only once during a cryptographic communication).

Bitcoin miners use this information to solve a hash puzzle to verify a transaction. For this, they find the hash for a specified target after analyzing the difficulty level. A target is a 67-digit number stored in the block header that determines the bitcoin mining difficulty according to the total number of miners participating in the problem-solving. The difficulty is also adjusted automatically based on the time taken by miners to solve the problems in the previous 2,016 blocks.

Moreover, bitcoin miners calculate a block’s hash to solve the puzzle by adding one nonce to the target block header constantly until they get a value that is less than the target. Once they solve it, a new block is generated that goes through validation by the network nodes.

For a block to get validated, a majority of the nodes must verify the block, and it should contain proof of work (PoW). The block’s chronological chaining and PoW make the blockchain secure from modifications. Next, the block is added to the Bitcoin network.

The first miner to solve the hash problem is rewarded in bitcoin as there will be plenty of miners participating.

#5. Bitcoin Circulation

Bitcoin mining started in 2009 from Bitcoin’s genesis block to produce 50 bitcoins. Many more bitcoins have been mined since and released to circulate. However, there’s an upper limit; only 21 million bitcoins can be mined based on its source code.

Fact: By September 2021, about 18.82 million bitcoins have already been mined, which is around 89% of the total bitcoin that will ever exist.

How Is A Bitcoin Miner Rewarded?

Bitcoin Mining: Understanding the Fundamentals  Finance

When Bitcoin was released in 2009, every block miner used to be rewarded 50 bitcoins. Eventually, it was reduced to 25 bitcoins in 2012, 12.5 bitcoins in 2016, and 6.25 bitcoins in 2020. This process of splitting the block rewards into half is called Bitcoin halving. It occurs after mining every 210,000 blocks, which takes around 4 years.

This implies that miners’ reward is halved for solving the puzzle and finding a block. The advantage of bitcoin halving is that it reduces bitcoin’s inflation and circulation rate. Hence, it helps maintain the stability of bitcoin’s value. The most recent bitcoin halving took place in May 2020, and the next is expected in 2024. This process will continue till all the bitcoins are mined, roughly around 2140.

What will happen when all the 21 million bitcoins are mined?

How will the miners earn then? Well, they will earn only from the transaction fees. The miner who finds a new block gets permission from the Bitcoin network to collect transaction fees from each transaction they have added to the block.

At present, successful miners get transaction fees as well as 6.25 new bitcoins as a reward. And to claim it, a coinbase (a special transaction) is added to the block, and the miner is made the payee.

Why Mine Bitcoins?

People mine bitcoins for various reasons. While you may be drawn to it for a single cause, such as profit, love for technology, or anything else, when you start going deeper into the specifics of Bitcoin, you may find many more motivations to mine bitcoins. Let’s see the primary reasons people mine bitcoins.

Enthusiasm for New Technologies

Many people from technology backgrounds and ones with enthusiasm for technologies find Bitcoins interesting to learn. They may seek innovation, want to stay informed of emerging technologies and trends, and love experimenting. Hence, they may be naturally drawn to learn how to mine bitcoins as it combines the latest technologies like blockchain, cryptography, distributed ledger technology (DLT), peer-to-peer networking, and more.

Extending Scope of Work

Professionals in related sectors can enter into the Bitcoin world and mine bitcoins. For example, many grid computing works are similar to bitcoin mining. They are fun, allow collaboration with others to solve a problem, and are in demand.

When you mine bitcoins, you are assisting in solving a problem that involves creating a payment network and currency with no central authority.

Privacy

Bitcoin Mining: Understanding the Fundamentals  Finance

The bitcoin network offers anonymity to people. Hence, upon solving a problem and finding the block, you can earn bitcoins while being anonymous. It protects your privacy and identity as your name won’t be displayed, instead of a number. However, always be careful and not disclose your address.

Profit

Bitcoin is a currency, and when you mine it, you are rewarded. Hence, people use it for profit. However, it is challenging since bitcoin pricing frequently fluctuates while the mining process requires heavy investments.

But if you are successful in this, you can make a lot of money. At the time of writing this article, the pricing for just one bitcoin was US$59,301.40. Isn’t that worth trying?

Bitcoin Mining Concerns

Although Bitcoin offers many advantages, excitement, and profits upon successful mining, there are particular concerns. This is why it is not legalized in many countries such as Russia, China, etc. However, many countries have permissive structures to use Bitcoin like Australia, Brazil, the US, India, and the European countries.

Fact: On June 9, 2021, El Salvador became the first-ever country in the world to make Bitcoin legal. While the US dollar is still the country’s primary currency, BTC will be used for transactions where bitcoin is accepted.

Let’s look at some of the concerns regarding Bitcoin and its usage.

High Power Consumption

Bitcoin mining is an energy-intensive process, which is not only costly but a threat to the environment. The method may consume more electricity than a big city or smaller countries like Switzerland.

Decentralized

Countries govern fiat money, and there’s a reputation and accountability attached with it. However, there’s no governing body with Bitcoin. Anyone can create any number of accounts, join the network, and sell and buy bitcoins while being almost anonymous. It builds trust issues not only with users but the government.

Volatility

Currencies must be stable to support the economy, and the governments make efforts to maintain its stability. However, Bitcoin is highly volatile. No one can know when it will reach the height and when it will crash suddenly. And the market responds accordingly.

When Bitcoins start sliding, vendors might not accept them as payment. At the same time, many won’t use it as fiat money to buy commodities; instead, they will keep it as an investment, hoping it would climb.

Criminal activities

Many cybercrimes have plagued the world of Bitcoin. There are also incidents of creating fake crowdfunding investments, where people have lost millions. And nobody could be held responsible for such activities.

How to Make the Most of Bitcoin Mining?

As highlighted above, the reward systems for mining bitcoins have been reduced significantly over the years. Once all the bitcoins are mined, you can’t be rewarded in bitcoins, only through transaction fees. Also, mining bitcoins come with thousands of dollars of investments in hardware, systems, and computing resources.

At this time, figuring out how to make the most of your bitcoin mining will bring you great results. Here’s how you can do it.

#1. Choosing High-performing Hardware

The number of bitcoin miners is increasing. Therefore, you must have high-performing computer hardware that can help in superfast computation and beat the competition. It must have a high hash rate to top-notch output performance.

ASIC-based hardware is the most advanced, capable of producing hundreds of trillion hashes/second. Such advanced hardware is costly and may range in thousands of dollars.

#2. Choose the right location

Bitcoin Mining: Understanding the Fundamentals  Finance

Your location is also an important consideration for effective bitcoin mining. It’s because the cost of electricity varies from location to location, and bitcoin mining consumes lots of electricity.

Hence, choosing the right location where the electricity cost is comparatively lower would be a good option, of course, with a powerful internet connection. This can be a good reason why developed nations are great at it.

#3. Check your power consumption

Since mining bitcoins consumes very high power, the cost varies accordingly. So, check if your budget can accommodate this heavy cost not before you go ahead mining a bitcoin. In addition, you must also calculate your mining investments and determine whether your profits can cover well your electricity expenses.

#4. BTC Price

Keeping an eye for observing and tracking bitcoin pricing is essential. It’s because you are rewarded in bitcoins at present apart from the transaction fees. So, the higher the market capitalization of Bitcoin, the more your profit will be.

#5. Pool or solo

Choosing what works the best for you can also help you succeed in bitcoin mining. When you mine single-handedly, the probability of reward is lower compared to a group. Mining bitcoins in a pool with thousands of others with combined computation power reduces mining difficulty to solve a block.

Once the bitcoin miners are successful, they will receive bitcoins based on their computing power contribution. So, choose your suitable way – mining pools or a solo hustle.

Conclusion 💰

Bitcoin is a new concept, and we are still in the early stages of its usage. It allows anyone to start mining for several benefits like making huge profits, keeping the network secure, and gaining technical expertise.

The real mystery will unfold after the 21 million bitcoins are mined, and hopefully, technologies will be more advanced to counteract the concerns of Bitcoins. By the looks of its unique capabilities, Bitcoin is likely to have a promising future.

Learn more about blockchain here.