How Bitcoin Mining Works
Anytime you hear about mining, you are likely to imagine heavy machines digging into the earth’s surface looking for precious metals. It then gets complicated to imagine the same mining applying to Bitcoin, given it’s a digital asset.
Well, the thought of regular mining is not too far-fetched when it comes to Bitcoin mining. It still involves the use of heavy machines, however, in the form of computational power.
For a transaction to be successful in the Bitcoin network (/learn/bitcoin/what-is-the-lightning-network), all the nodes must approve it. Nodes are powerful computers that run the Bitcoin mining software to validate transactions. For a transaction to go through, all the nodes in the system must verify it. This secures the system from the possibility of double-spend and other fraud possibilities. The process is responsible for the security and development of the network and public ledger.
Bitcoin mining is also the process through which new Bitcoin currencies enter into circulation. Some nodes in the Bitcoin network act as miners. They add new blocks into the network by solving complex computational arithmetic puzzles.
Solving a puzzle involves finding a number used together with the data from the nodes and passed through a hash function, then giving a certain result. The various nodes work separately to randomly guess the possible number. The one who finds the number is the victor and gets rewarded in the form of Bitcoin cryptocurrencies.
Processing a single block can take around 10 minutes. It however favors the most powerful nodes. Higher processing power increases your chances of guessing more numbers hence a higher possibility of finding the right one.
Bitcoin mining is such a costly and demanding task. You need the most powerful computers and spend a lot of time-solving arithmetic puzzles. All this without guaranteed rewards. However, more miners still swear by Bitcoin mining as various nodes keep joining the system. The reason lies in their importance in the network and the possible rewards. This brings us to the next topic on mining and circulation.
Mining and Bitcoin Circulation
The Bitcoin network depends on nodes to verify transactions, secure the network, and introduce new blocks to the network. Nobody would be willing to do this for free once they have understood how Bitcoin mining works. Instead, there is a need for incentives. For Bitcoin, it provides rewards for every new block a node introduces in the system.
At the time of Bitcoin’s release, a miner would earn 50BTC for every block it introduced in the network. This would encourage most computers to join the system even before Bitcoin became valuable. However, with time BTC becomes more stable and valuable, thus a need to reduce the rewards.
Bitcoin halving is the means to reduce the miner earnings. It involves reducing the miner rewards by half. In the Bitcoin network, the halving happens after every 210,000 blocks are mined. This happens to be around every four years. It will keep on until all the 21million Bitcoin coins are mined.
The first Bitcoin halving occurred in 2012 with the rewards reducing to 25BTC for every block mined. There have since been other halvings in 2016 and 2020 reducing the rewards to 12.5BTC and the current 6.25BTC for every mined block.
Bitcoin halving has proven an ideal way to manage Bitcoin circulation. Bitcoin, like other assets, depends on demand and supply for value. A constant high reward would attract many miners to increase Bitcoin supply, thus reducing demand and value. However, as the rewards reduce the mining level remains the same limiting the possibility of oversupply.
Also, there is always concern about what happens when the rewards get to zero. Well, Bitcoin still needs the miners. The possible option is to rely on transaction fees for rewards for the miners to keep verifying transactions. Even though the transaction fees are currently part of the eradication process, they only account for a smaller amount of rewards. This explains why if you look into what is Bitcoin payment, you realise it’s one of the most affordable payment options.
Setting up a Bitcoin miner
Now that you have established how to mine Bitcoins, the next aspect is to learn who to get started on Bitcoin mining.
The first step to start Bitcoin mining is to source for Bitcoin mining hardware. To find the right hardware, you have to understand its hash rate and energy consumption. The hash rate is the number of calculations the hardware can solve within a minute in trying to solve the computational puzzle. A higher hash rate increases your chances of solving the puzzle, hence unlocking the block for the rewards.
Energy consumption is another essential consideration when setting up a miner. To run the miner requires a high-energy supply, which costs a lot of money. You however don’t want to spend all your money on the power supply. The process can easily become unsustainable.
Once you know what to look for in a Bitcoin miner, you can proceed to choose your mining hardware. There are various Bitcoin mining hardware options; GPUs, FPGAs, and ASICs. The effectiveness of the mining hardware is based on how many Bitcoins have been mined.
In the earlier days, Bitcoin mining was quite easy. You only needed your personal computer to get started. This GPU mining has since become too slow as several high-powered computers join Bitcoin mining. While you can improve the power by including a graphic card with graphical processing units, it might still not be enough.
The other mining hardware option is the Field Programmable Gate Array (FPGA) where various integrated circuits are configured for Bitcoin mining. They are an improvement on the GPUs, however, not of the strongest output.
The most functional Bitcoin mining hardware is the Application Specific Integrated Circuit (ASIC). The ASIC machines are specially made to mine Bitcoin at the highest speeds while consuming less power. The only concern however is that they are expensive to purchase and operate. The investment though in most cases is worth it, given the possibility of returns.
Once you have your mining hardware, the next step is to pair it with Bitcoin mining software.
Bitcoin Mining Pools
Bitcoin mining is set such that the more active miners participate, the harder it becomes to discover new blocks. Given the lucrative nature of Bitcoin mining, several computers keep joining the network. You thus need high computational power, which is hard to achieve by an individual computer. That is where the mining pool comes in.
A mining pool is where various miners work together to increase their mining power. The miners combine their computational resources to increase the processing power for the high energy needed for Bitcoin mining. They share the resources like the Bitcoin mining software, just as they do the related costs and risks. In the case of a successful block, every miner shares the reward based on their input in the system.
The mining pool coordinates all the interactions of the pool members. It manages the pool member hashes, records the output of each member, manages the pool member hashes, and assigns the rewards to every member based on their output.
There are various means to share block rewards after successful verification. Two of the most popular are Pay-per-share (PPS) and full pay-per-share (FPPS). The PPS model allows instant payout for the miners based on the accepted shares from their computers. For FPPS, the mining rewards come together with the transaction fees accumulated over the verification period.
The mining pool has proven as one of the worthy ways to join the Bitcoin mining system. It allows you to participate in helping the Bitcoin network thrive, even with the relatively smaller computational power you might have. The mining pool also increases your chances of successfully finding a block, especially in the PoS system.
Still, various concerns come with joining a mining pool. Expect to experience downtime and network issues from time to time given the various computers involved in the network. The other concern is the possibility of a shady network. Some mining pools only recruit the miners for the computational power but never remit any rewards.
Is Bitcoin mining legal?
Yes, Bitcoin mining is legal in most countries around the globe. Still, there is space for different views based on geographical location. While most countries accept Bitcoin mining, some ban all the crypto-related activities, mining included. China for example has recently banned Bitcoin and all related activities.
What are the Bitcoin mining environmental concerns?
The high-energy consumption of Bitcoin mining is a major concern. Studies have shown Bitcoin mining consumes the same power in a year as the whole of Argentina. However, there have been claims that most of the energy used in Bitcoin mining comes from renewable energy sources.
What are some of the risks in Bitcoin mining?
Bitcoin mining comes with various risks like malware dangers. To find more computing powers, some miners can infiltrate other computers. They can either use phishing techniques or run malicious codes on visitor computers. There are also the reduced computer performance risks and the high electricity and computing costs.