What is Bitcoin Mining?
The process of verifying, storing, and securing Bitcoin transactions is bitcoin mining. Of course, there is much more to it than that. Keep in mind these two important things about Bitcoin itself before going into more about what is Bitcoin mining and how it works :
- The credit card company verifies and records the transaction when you make a payment using a credit card. Now there is no central/third party like the credit card company to verify the transaction when you make a payment using bitcoin. It is verified by Bitcoin miners instead.
- Bitcoin cannot be printed by anyone, unlike traditional money (USD, JPY, EUR, etc.), which is printed by banks. As there is no maximum limit on it, the bank can print as much money as they want with traditional currencies. But Bitcoin has a maximum limit of 21 million. This means there can only be 21 million Bitcoin ever created!
This is what Bitcoin is all about — it works without middlemen (like banks or credit card companies).
- By mining, without having to put down money for it, you can earn cryptocurrency.
- For completing “blocks” of verified transactions that are added to the blockchain, Bitcoin miners receive Bitcoin as a reward.
- The probability that a participant will be the one to discover the solution is related to the portion of the total mining power on the network
- Mining rewards are paid to the miner who discovers a solution to a complex hashing puzzle first.
- In order to set up a mining rig, you need either a GPU (graphics processing unit) or an application-specific integrated circuit (ASIC).
However, read this article to see whether mining is really for you before you invest the time and equipment. We will focus primarily on Bitcoin (throughout, we’ll use “bitcoin” when we’re referring to a number of individual tokens and “Bitcoin” when referring to the network or the cryptocurrency as a concept).
You might be thinking, why do these ‘miners’ make all this effort? Surely it’s very expensive? Well, that’s a good question. Put simply, they do it because they are paid with Bitcoin as a reward.
That’s right, Bitcoin miners are rewarded with new Bitcoin. This is the only way through which new Bitcoin can be created!
At present, there are around 18 million Bitcoins that have been mined. The reward for mining one full block (I’ll explain blocks in a moment) is set at 12.50 of Bitcoins. Remember, when all 21 million Bitcoins have been mined, no new Bitcoins can be created! Only 21 million Bitcoins can be mined in total; So, you know what Bitcoin mining is in total.
Technology Behind Bitcoin Mining?
Let’s talk about the technology and blocks involved in Bitcoin mining. You know that Bitcoin uses the blockchain, right? Well, that’s where we get the term ‘block’ from.
At the same time, Many Bitcoin transactions happen. The transactions that happen at the same time are assigned into groups, and these groups are called ‘blocks’. Bitcoin miners must verify these groups/blocks — instead of verifying them individually, they verify the transactions in groups.
When a block is verified, it gets added to a chain of blocks that have already been verified. And as a result, the technology behind Bitcoin is called the blockchain! As I explain the step-by-step process of mining Bitcoins, this will become easier to understand.
How Does Bitcoin Mining Work?
- Step 1: Imagine you want to purchase a bed and make the payment using Bitcoins. It will be around 0.046510 Bitcoin if the cost of the bed is $300, (as of writing this, that is). Other people around the world also buy things with Bitcoin, while you buy the bed.
- Step 2: The Bitcoin mining nodes (the computers) are notified about these transactions that are happening.
- Step 3: Now, your transaction must be verified by the Bitcoin miner. Till the Bitcoin miner verifies your transaction, you cannot take your bed home.
- Step 4: The first miner to solve the puzzle (let’s call this miner ‘John’), must say to the rest of the nodes that the puzzle is solved. Other miners should then check to ensure if John’s solution to the puzzle is correct.
- Step 5: Your 0.046510 Bitcoin is verified and sent when 51% of the other miners agree that John has the correct solution.
- Step 6: The Bitcoin miner completes verifying the block/group that your transaction is in. The transaction is now complete! Yay — you can take your bed home!
The person who chooses to become a miner doesn’t need to know how to solve the problems or be good at mathematics and this is one of the best things about what Bitcoin mining is. They just need Bitcoin mining software and Bitcoin mining hardware (a powerful computer).
As you can see, Bitcoin mining is not much difficult to understand. So the next big question that comes to your mind is probably something similar to ‘how do you mine Bitcoin?’ Well, let’s get right into it.
How to Start Bitcoin Mining?
Get the Bitcoin Mining Hardware
purchasing the mining hardware is the first step to start Bitcoin mining. For the success of the mining, selecting the right hardware is important. So, what is Bitcoin mining’s best hardware?
Back in 2009, When Bitcoin mining started, you could mine using basic computers — like the ones we buy from retail stores! That computer’s CPU (central processing unit) had sufficient power required to instantly solve the mathematical problem.
The miners also began using more powerful computers when Bitcoin started to become more popular. They employed faster graphic processing units (GPU) that can solve the problems much faster, which means they will win the race and be rewarded with the new Bitcoin!
When Bitcoin became even more popular, guess what happened? Miners got even faster. They started using specialized Bitcoin mining hardware called ASICs (Application Specific Integrated Circuits), instead of using CPUs and GPUs. So, you’ll need an ASIC, if you want to win the race and mine Bitcoin now.
ASICs that are developed for mining are very fast and powerful. They do not do anything other than mining.
Join a Bitcoin Mining Pool
There are two ways by which you can start Bitcoin mining. One is solo mining, to start by yourself. Another way is mining pools, to join a group of other Bitcoin miners.
So, what is the Bitcoin mining pool? Think of Bitcoin mining pools as large Bitcoin farms. Lots of miners combine the power of their Bitcoin mining hardware. They also split the Bitcoin reward that they receive.
There are two ways that you can start Bitcoin mining. One is to start by yourself, which is called solo mining. Another way is to join a group of other Bitcoin miners – these are called mining pools.
So, what is the Bitcoin mining pool? Assume Bitcoin mining pools as large Bitcoin farms. The power of their Bitcoin mining hardware is combined by lots of miners. And the reward that they receive is also split among them
Bitcoin farming (joining a mining pool) is recommended if you are a beginner. For you to choose from, there are many different pools. Only choose well-known mining pools with a good reputation and Be careful. A fee is normally charged, but it’s quite small (1-3%).
Download Bitcoin Mining Software
Without Bitcoin mining software, the hardware is useless even if You have the best mining hardware in the world. To access the Bitcoin network and the ‘database of old transactions’, Mining software is needed. If you want to join a mining pool, you need it also. Different types of Bitcoin mining software are available. There are different ones for different operating systems — like Mac OS, Windows, and Linux.
Open a Bitcoin Wallet
You can start mining Bitcoins when you have set up your Bitcoin mining hardware, downloaded your software, and joined a mining pool. But wait, So, have you thought about where will you store these Bitcoins? you’re going to be rewarded in Bitcoins, right?
Bitcoin cannot be stored in your bank account, unlike traditional money. You store them in a Bitcoin wallet instead! So, what is a Bitcoin wallet? You could lose your Bitcoin and thus you must be very careful when choosing a wallet. Numerous people have lost a lot of money just because their Bitcoin wallets got hacked.
Web wallets, software wallets, and hardware wallets are three types of Bitcoin wallets
Software wallets and Web wallets are always connected to the internet. You go to a website to use/access a web wallet. You go to an app to use/access a software wallet.
As this is the least safe option, I do not recommend using a web wallet. I recommend Exodus if you want to download a software wallet.
As Hardware wallets are not connected to the internet, they are more secure. They are real physical devices on which you can store your Bitcoin; through USB, you connect your hardware wallet to your computer.
What is a Bitcoin Mining Reward?
12.5 is the current number of Bitcoins that miners are rewarded with per block. That’s right, to solve the problem (verify the transaction) of each block, 12.5 Bitcoins are given to the first miner.
Every 4 years, this number halves. So, the reward will go down to 6.25 Bitcoin per block at some point in 2021. It’s 12.5 Bitcoins per block right now?! So, to mine a Bitcoin, how long does it take? Well, 10 minutes is taken by one block to mine. That means, in every 48 seconds, one Bitcoin is mined.
How Difficult is Bitcoin Mining?
The difficulty level of the mining also increases as more and more Bitcoin miners join the network. This simply means that the miners or mining pools with more powerful hardware will win. Also, it means that you would require to buy more expensive hardware.
How Much Does Bitcoin Mining Cost?
Let’s go through what Bitcoin mining costs? Two of the main costs involved with Bitcoin mining are:
- Hardware/computer costs: if you want to buy the best hardware available Even for beginners, the cost of Bitcoin mining hardware would be $600-$1000 and it is much more expensive.
- Electricity costs: a lot of electricity is used by Bitcoin mining. In the cost of Bitcoin mining, the cost of electricity at your location can make a huge difference. You might lose money by mining Bitcoins instead of making money if the electricity in your area is too expensive.
Remember to also think about mining pool fees — 1-3%, if you join a mining pool.
I expect that now you have a decent understanding of what it is, how it works, and how you can get started with your own Bitcoin mining. It’s clear that you can make a lot of money by mining Bitcoin, but it depends on a lot of things — most of which are out of your control (electricity costs, the price of Bitcoin, etc.).
A lot of planning and money is required for starting Bitcoin mining. – it’s the same as with trading it on an exchange, too. It may also result in huge losses, even if it could give you a big profit. Talking about losses, you should always choose reliable hardware wallets, if you want to keep your assets secure. Ledger Nano X and Trezor Model T are some of the best options.
You’re probably very positive about mining Bitcoin If your electricity costs are low. The situation’s probably quite opposite if they are high. Well, either that situation or you’re thinking about moving countries!