What is bitcoin mining?
Bitcoin mining is a process involving the security and verification of transactions on the bitcoin network. Since the network is decentralized, it can be continuously updated with new data as the people around the world trade their bitcoin from wallet to wallet. Miners (people who mine bitcoin) are compensated for their work to support the official ledger of transactions that serves as the record of bitcoin ownership and trading activity. Instead of picks and shovels, these miners use computer processing power to maintain the blockchain, the ledger of all past transactions.
To keep the bitcoin safe and sounds, the miners contribute to the blockchain using their computing power. Bitcoin uses a cryptographic hashing algorithm called SHA-256 to maintain a true, unaltered record of bitcoin transactions including data from the past blocks in the chain and any new information. The design of the bitcoin blockchain is elegant, and it accounts for changes in the available processing power of the mining community. Once every 2016 blocks, the target difficulty changes for the cryptographic equation supporting the security of the blockchain. As more miners begin to use greater and greater computing power, the system adjusts to compensate.
Bitcoin miners can create a new block by finding a special number called a nonce. The nonce is the key to earning a living as a bitcoin miner. For a new block in the bitcoin blockchain to be created, a miner must find the correct nonce to meet the difficulty target and successfully hash the block content. As computing power becomes cheaper and more available, the difficulty target will increase to make sure the blockchain stays safe and sound.
How are bitcoins mined?
To mine bitcoin, there are three essential ingredients in every successful mining operation. The first is hardware – the faster, the better. Mining bitcoin involves a lot of calculations to hit the difficult target. At first, bitcoin miners would use typical CPUs that you might find inside your laptop or home computer. Then, miners turned to top-of-the-line video cards (GPUs) to take advantage of their superior parallel processing. As the difficulty target rose higher and higher, bitcoin miners moved to other chipsets such as FPGA (field programmable gate array) and finally to today’s standard, ASIC (application specific integrated circuit). The hardware may change, but it remains the most important tool for any bitcoin miner.
The second ingredient is time. Bitcoin encryption, hashing, and verifying the blockchain takes a lot of raw number-crunching. These calculations aren’t the type you could do yourself by hand – not even in a thousand lifetimes. The blockchain needs help from a vast supply of computing power to process all of the encrypting and hashing to maintain the integrity and fidelity of the network. Just like mining for gold, it takes time to do the work required to earn a reward as a bitcoin miner.
The final ingredient is power. Every computer needs a source of electric power to operate, and bitcoin mining hardware is no exception. The processors used in mining can draw a significant amount of power, especially if you are running several units at once. They also create a fair amount of heat, so it’s important to keep them cool and well within their ideal operating temperature range. Fans and other cooling methods also use power, so it’s an essential part of any bitcoin mining operation.
Why bitcoin mining?
There are many reasons to become a bitcoin miner, and each miner has a different story to tell from their experiences “in the mine shaft.” For some, bitcoin mining offers a way to offset their investments in hardware and broadband utility expenses. For others, it’s a passion project build on a love of programming and designing hardware setups. Miners may be attracted to the return on investment. Some people may even decide to support the bitcoin network for personal or political reasons by mining as an act of generosity or faith in the idea.
Most people are in it for the money, but bitcoin mining offers some miners a way to spend their time and money on an exciting new technology. Everyone involving in bitcoin mining does it for different reasons, but they all contribute in their own way to supporting the blockchain and keeping the network alive and healthy for the benefit of all. That’s the beauty of bitcoin. It’s open and available to everyone and anyone willing to support the underlying architecture of the blockchain system.
Is bitcoin mining worth it?
The concept of “worth it” will depend on a lot of different variables and what each individual miner can bring to their mining operation. A reliable and steady source of power is crucial, but it’s also important to keep your utility costs low. While there are some very small and sleek mining rigs available today, some people may not want to deal with the extra heat and noise from another computer in the house. For the average miner, the limiting factor is the upfront investment cost. Each bitcoin mining rig will cost you an initial outlay, and different units will have different productivity and payback periods. There are economies of scale in bitcoin mining, just like most production facilities or business operations. Bigger is better, but it’s going to cost you more at first.
If you can’t afford to buy your own mining rig or you prefer to leave the hardware management to someone else, it’s easy to buy into a cloud mining plan with a bitcoin mining contract instead. There are many different providers offering bitcoin mining plans to help prospective miners get into the mining game without buying all of the hardware and running it themselves.
The value of the reward for creating a new block in the bitcoin blockchain is a set amount on a declining schedule. Every 210,000 blocks, the reward is halved. As time passes, the payout for creating a new bitcoin will eventually fall to zero when last of the maximum number of bitcoins (21 million) is created. After that time, bitcoin miners will only be able to earn transaction fees for supporting the network. The date for the last bitcoin creation (and the last mining reward) is expected to fall after the year 2100.
Is bitcoin mining legal?
In most cases, it is completely legal and legitimate to mine bitcoin yourself or through a cloud mining plan. Each country has a different set of laws, but most people in North America and Europe can mine bitcoin without fear of punitive action from their state and local governments. There are countries with bitcoin mining bans in effect, and others are vague or unclear on the legality of mining bitcoin. At the time of writing, bitcoin was illegal to mine or trade in Bangladesh, Nepal, Kyrgyzstan, and Ecuador are a few notable regimes with outright bans on cryptocurrencies mining and trading. Some countries allow mining but restrict the use of their currency for purchasing bitcoin or transfers to bitcoin wallets outside of the country.
As the story of bitcoin continues to unfold, the response from governments will evolve alongside it. There are many benefits to bitcoin as a transaction tool to promote free global trade and reduce friction in the flow of payments. It can also find itself in the hands of criminals and nefarious actors hoping to hide their activity from police and tax authorities. As the general use and acceptance of bitcoin continues to grow, necessity will likely drive governments to formally legalize and regulate the use of bitcoin as a domestic and international tool of trade and commerce.