How does bitcoin mining work?

Insight into bitcoin mining

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Hopefully, you are all familiar with how fiat money is made. By fiat, I mean dollars, euros, pounds, etc. Government bodies print them. However, a bitcoin cannot simply be printed and the amount of bitcoins available to the world is limited to 21 million units. So, how are bitcoins “made” or “found”? The answer is mining.

What is mining?

Individuals send bitcoins to each other all the time. But all of these transactions need to be confirmed and verified. The Bitcoin Blockchain records all transactions onto blocks. These records are then confirmed by miners, who are then rewarded with bitcoins for successfully completing a block.

The Bitcoin Blockchain and miners.

The Bitcoin Blockchain can be used to see all of the bitcoin transactions that have ever occurred. Whenever a new transaction occurs, it is added to a block, over time these blocks become filled up and are added to the Blockchain. This results in a giant list of transactions on the network.

But these blocks and transactions must be secure, and more importantly, they must be immune to alterations and manipulations.

Once a block transaction is made, miners run a mathematical formula utilizing computing power (mostly GPUS, or graphics processing units, think Nvidia) to process and verify transactions. These transactions are then transformed into supposedly random sequences of letters and numbers.

These sequences are known as hashes. Completed hashes sort of travel together with Blockchain blocks.

New block hashes also contained information pertaining to previous block hashes. Essentially confirming that every hash and previous block is authentic.

Miners compete with each other for bitcoins.

So, miners pretty much compete with each other using computing power and tailored software to solve hashes and finish off blocks on the Bitcoin Blockchain. Because miners are rewarded with bitcoins for each block that they complete. This acts as an incentive for miners.

Back in 2014 when the market wasn’t saturated with miners it was possible to get 25 bitcoins for each completed block. Which at today’s rate amounts to almost $200,000 – isn’t that insane?

Today, mining is ridiculously competitive. There are mining farms out there that have thousands of computers set up solving mathematical algorithms and finishing off blocks. China currently mines the most bitcoins in the world, this is due to a few reasons. Electricity in China is dirt cheap, a lot of power and computer companies divert their energy and space towards mining to curb energy waste. Additionally, the Chinese can buy computer parts at much lower rates than their competitors.

Mining is a fiercely challenging industry that requires a lot of upfront capital investments to really make a killing. Additionally, miners are experiencing diminishing returns as more people enter the game. That’s not to say that bitcoin mining isn’t profitable. However, it will definitely be a challenge to start off and make a fortune.

Government dispositions pertaining to mining can be a little funky sometimes. There’s also a constant security threat present in mining. Afterall, you wouldn’t want somebody stealing your gear or hacking into your servers, compromising your operations.

 

 

 

 

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