What is Bitcoin Mining?

Four years ago, a new asset class called Bitcoin exploded. Since then, an entire sector has developed around cryptocurrency and the process of Bitcoin mining.

Bitcoin mining industry

While bitcoin and the idea of ​​a social cryptocurrency have existed for nearly two decades, bitcoin didn’t really attract much attention until 2017.

That year, investors around the world began buying up the cryptocurrency, and institutional investors followed suit. Since then, a whole network and infrastructure has built up around Bitcoin and other cryptocurrencies.

With the growth and development of the infrastructure required to support cryptocurrency, the value of Bitcoin has also increased as more and more investors and institutions have embraced the idea of ​​decentralized currency.

Photographer: André François McKenzie | Source: Unsplash

While investors worldwide trade Bitcoin and buy products, few really understand the infrastructure that supports the cryptocurrency and the Bitcoin mining process.

The history of Bitcoin

The first real mention and concept of a so-called cryptocurrency was published in 1998. Wei Dai of the Cypherpunks mailing list suggested the idea of ​​a new form of money that uses cryptography to control its creation. It took a decade for this idea to catch on and become a workable idea.

The first Bitcoin specification was published on a cryptography mailing list by Satoshi Nakamoto in 2009. This author left the project in 2010 without revealing much about himself. To this day there is speculation about the true identity of this individual.

A common misconception is that Nakamoto is the core architect of Bitcoin. As a result, that person controls the network. That’s not the case. All users of the cryptocurrency are responsible for its success. An individual cannot influence or develop it alone.

Bitcoin can only function correctly with a full consensus among all users, which means that all users have a strong incentive to protect the consensus and ensure its longevity.

For most users, Bitcoin is nothing more than a mobile app or computer program. However, behind the scenes, the technology that supports the asset is incredibly powerful. The core of this technology is the Bitcoin mining network.

The bitcoin network

The Bitcoin network shares a public ledger called the “blockchain”. This ledger contains every processed transaction so that the user’s computer can check the validity of each transaction. Digital signatures that correspond to addresses confirm the authenticity of every transaction. This means that users have full control over sending bitcoins from their own addresses.

The blockchain network offers cryptocurrency payments several advantages over traditional payments. Bitcoin transactions are secure, irreversible and do not contain any sensitive personal information. Transactions are also reversible. It is impossible for users to force unwanted or unnoticed changes.

In addition, all bitcoin money supply information is available on the blockchain itself, so anyone can review and use it in real time. Due to the cryptographic encryption of the data can be completely trusted.

As mentioned above, one of the most attractive features of Bitcoin is the fact that it is not controlled by any single government or institution. As a result, no individual, company, or government can choose to create new bitcoins.

Bitcoin mining is the process that creates the cryptocurrency and it is resource intensive to control the number of bitcoins in circulation.

The Bitcoin Mining Process

The process starts with the blockchain, which is where all Bitcoin transactions are recorded. Every time a trade is made through a cryptocurrency trading platform, the transaction details are sent to bitcoin miners. The miners compete for the mining crypto, but they are also there to reliably review and record every transaction made.

Miners try to analyze the transactions and add the next block to the chain. To do this, they bundle transactions into so-called “blocks”. You then need to solve a math problem called “proof of work” that assigns an identification code to the block. This code is known as a “hash”.

Proof of work is a process that ensures that creating the information for a new block is difficult and time consuming. It requires computing power, a lot of energy and time. The processing of the proof of work takes about 10 minutes. The victorious miner receives the block.

Bitcoin mining energy intensity

The fact that miners need so much energy to solve these problems is starting to attract significant negative publicity.

It’s unclear exactly how much energy Bitcoin consumes, but one study estimates that the total energy consumption of Bitcoin is between 40 and 445 annualized terawatt hours (TWh), with a central estimate of around 130 TWh. This roughly corresponds to the electricity consumption in the Netherlands. In comparison, Google only uses 12.4 TWh each year.

And the bigger the Bitcoin network gets, the more electricity it will use.

The proof-of-work concept means that as the number of miners increases, the puzzle becomes more difficult and more computing power is required. Adding new blocks to the blockchain is the only way to get new bitcoin into circulation.

When bitcoin mining first started, the reward was 50 bitcoin. But as dictated by the creator of the coin, the reward is cut in half every time 210,000 new blocks are added to the chain – or roughly every four years. Today the reward is 6.25 Bitcoin for each block.

arms race

It is estimated that there are more than 1 million bitcoin miners in operation today, all competing for the next block to be added to the chain every 10 minutes. This has started a bit of a Bitcoin arms race, with companies around the world spending increasing amounts of money to develop faster chips and faster mining machines.

It also uses enormous amounts of energy. Energy consumption is growing every day and in regions where it probably shouldn’t, such as China, where there is a large volume of coal-fired power plant capacity for bitcoin mining.

It remains to be seen how long the tech industry can track returns from Bitcoin mining. With so many machines competing for ever lower returns, mining becomes a lottery.

However, as the price of Bitcoin increases almost daily, so does the potential payout. However, the rising cost of mining equipment is engulfing the potential returns.

Rising costs

Every single miner wants to find the next block, which means it has to be bigger and faster than this competition. This is driving the demand for faster and more advanced mining equipment.

It also leads to a significant amount of fraud in the industry. Buying high quality Bitcoin mining equipment has always been risky. Buying a good quality bitcoin mining rig can cost several thousand dollars if you can find one. Most retailers are consistently sold out and new inventory is being bought almost immediately.

Another option is to mine Bitcoin in the cloud. This requires less capital and space upfront, but is also riskier. Fraud is widespread in the industry.

The process of mining bitcoin ensures that bitcoin remains trustworthy and reliable. However, in order to make money, it becomes more and more difficult for the average person. The mining arms race has driven up the price of equipment while reducing the chances of success.

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