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Bitcoin mining 101: What is Bitcoin mining and how does it work?

What is mining?

As you probably already know, Bitcoins are created through something called mining. But what exactly is mining?

Mining is a process of confirming Bitcoin transactions and recording them on a distributed ledger, called blockchain. Mining is without a doubt the most important procedure of the whole Bitcoin network. It not only introduced new coins into circulation, but also makes sure that everyone in the network is acting fairly and overall secures the whole system.

To mine you need miners. All around the world, miners deploy their own hardware and electricity to participate in the system of keeping the Bitcoin network decentralized. Why? They are rewarded with fees and more importantly, fresh Bitcoins.

How does it work?

Simply put, Bitcoin mining works like this:

Hardware is put to work to start verifying Bitcoin transactions. To mine competitively, miners invest in very powerful computer equipment like a GPU (graphics processing unit) or application-specific integrated circuit (ASIC). These can run from somewhere between 500-1000 to tens and tens of thousands of dollars.

Verified transactions then get bungled into a single 1MB block every ten minutes. This limit is required for bitcoin to be decentralized. Bitcoin’s long term survival requires that full nodes are easy and cheap to run. The block size limit puts a limit on how quickly resource usage for nodes goes up. Bitcoin’s long term survival also requires that mining is decentralized, so the block size limit means blocks can propagate across the network quickly, otherwise large miners would have a disproportionate advantage.

All nodes must solve a cryptographic puzzle to add a new block to the Bitcoin blockchain. The first node to solve the puzzle adds the block to the blockchain and gets rewarded with Bitcoins. Currently, a solved puzzle (new block added to the blockchain) is worth a bounty of 6.25 Bitcoins. The prize is decreasing over time as it shrinks by half every 210,000 blocks. That means that after the next halving the bounty will be 3.125, and so on. Back in the day, the very first miners earned 50 Bitcoins per block.

There are more rules and limits. There will be no more than 21 million Bitcoin created. This limit is set to keep the Bitcoin economy system deflationary. Currently, the freshly minted BTC are there as an incentive to keep mining alive. As bounties decrease by each halving, the amount that is being mined is set to gradually decrease until all possible 21 million BTC will be mined.

Although this all means that mining will be more and more difficult and the freshly minted Bitcoins to earn will be less in time, mining can of course still be highly profitable, as Bitcoin itself continues to appreciate in value. Miners can also earn transaction fees etc.

Because of the fact that only the first solver of the puzzle gets the prize, miners are also actively forming joint mining rigs called mining farms. In a farm system, all of its members share the same reward, thus increasing their profitability. In a rather distant future, all of the Bitcoins will be mined (approx. 95% by 2025). After that there will only be transaction fees to collect for miners, but they should be enough for mining to continue to be profitable.

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To mine or not to mine?

Nowadays, it has become impossible to mine with a simple PC or a set of GPUs in home conditions. In theory, mining is still possible for anyone, but only those with specialized high-powered machinery are able to make any kind of profit by mining the cryptocurrency. Most individual miners and smaller pools will spend more money on electricity bills than is generated through mining. So, to make money mining, you have to spend a lot of money. Special mining gear is required (extremely powerful computers known as ASICs, storage and cooling) and the electricity bills will be costly as expected. 

The situation might improve in the future. ASIC mining software is still developing and reaching new highs, while new cheap and sustainable power solutions are also coming into play. That said, it is still completely free to join the Bitcoin network and participate in mining. Bitcoin is still fully open-source.

There are also companies with large sets of rigs to mine Bitcoin for people. You can sign a contract with them to pay for a period of them mining for you and receive payouts in coins. 

Mining is certainly not the only way to contribute to the network. You can also contribute by writing additions to the code, creating new applications or promoting the network. All in all, whether it’s buying, trading, mining, coding, promoting, you have to believe in Bitcoin to invest in it. Bitcoin has always been and always will be a community-driven project. 


Interested in cryptocurrency and it’s future? Keep an eye on our blog and sign up for a free account in SwipeX Cryptocurrency Exchange https://swipex.com/.

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