Most people want to know how mining works because they already know that Bitcoins can be earned through the mining process. But what is Bitcoin mining and how does it work?
In this article, we will discuss:
What is Bitcoin mining?
Bitcoin mining is a process of confirming Bitcoin transactions and recording them in a distributed ledger. It is the most important procedure in the entire Bitcoin network, as it protects the system, ensures that everyone is acting fairly, and introduces new Bitcoins into circulation.
Of course, no mining would take place without miners. Miners around the world keep the network decentralized, deploying their hardware and electricity to participate in the system. In turn, they are rewarded with transaction fees and newly created Bitcoins. These rewards encourage miners to do the work and cover their expenses.
While this is a gross oversimplification, this incentive system constitutes the Bitcoin network.
How does Bitcoin mining work?
Simply put, it works like this:
- Miners configure their hardware to verify Bitcoin network transactions.
- Verified transactions are grouped into a single 1MB sized block every 10 minutes.
- All computers on the network must solve a complicated cryptographic puzzle to add a new block to the blockchain Bitcoin.
- The first computer to solve the puzzle adds the block and is rewarded with Bitcoins.
Currently, once a puzzle is solved and a new block added to the blockchain, the miner receives a reward of 12,5 Bitcoins. The prize is decreasing over time – it shrinks in half every 210.000 blocks. The first miners earned 50 Bitcoins per block, while in 2020 the rate will drop to 6,25 Bitcoins. You can use sites like Bitcoin Clock to keep track of Bitcoin halving events.
Keep in mind that there will be no more than 21 million BTC created. The artificial cap is necessary to keep Bitcoin's economic system deflationary. As of now, the newly minted Bitcoins act as an incentive for miners to maintain the network, but the amount is expected to gradually decrease until all 21 million BTC are mined.
Mining can be highly profitable, especially as Bitcoin continues to appreciate in value. Miners also earn user fees paid for their transactions. However, sometimes they may not receive any rewards, as only the first miner who solves the puzzle receives the reward. Such a system encourages miners to form joint mining platforms (farms) where all members share the same block reward, thus increasing their profitability.
By 2025, 95% of all Bitcoins will be mined, while the rest will enter the market in 2140. After that period, miners will only receive transaction fees as a reward, but this should be a reward large enough to keep the network going. .
Can you mine Bitcoin?
Bitcoin is a completely open source project; thus, everyone is free to join the Bitcoin network and participate in mining. However, this does not guarantee a profit, as you have to buy special mining equipment and pay electricity bills that can be expensive. To make money from Bitcoin mining, you must buy extremely powerful computers (known as ASICs), invest in cooling and storage equipment. Due to the fierce competition among miners, it is impossible to mine with a simple PC or GPU at home.
You can find out how much you can earn using a Bitcoin mining calculator; many are available online.
You can also pay a company with equipment to mine Bitcoin for you. You sign a contract that requires you to pay them for about two years of mining, and you receive periodic payments in currency, as agreed. However, before closing this deal, you must calculate whether it is profitable enough for you.
If you think mining is too risky for you, you can also contribute by writing additions to existing Bitcoin code, creating your own apps, or simply promoting the project. Bitcoin is a community-driven project, which means everyone is welcome to learn and contribute to the network in any way possible.