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What is Bitcoin mining?
Bitcoin miners are often described as the backbone of the Bitcoin network. Through the process of mining, they’re responsible for creating new Bitcoins, validating transactions and ensuring that the network remains secure.
What is a bitcoin “miner”?
A bitcoin miner really refers to a specialized computer that solves complex computational problems. Today, most mining occurs in thermally-regulated mining warehouses that have access to low-cost electricity.
It is no longer profitable to mine as an individual, unless you have access to free electricity (which college students have sometimes used to their advantage). Without joining a mining pool, it's nearly impossible to cover operating expenses as block rewards occur too infrequently due to the laws of probability.
In mining pools, cooperating miners agree to share block rewards in proportion to their contributed mining hash power.
Hash power, or the hash rate, simply refers to the speed at which a mining machine can complete an operation in the Bitcoin code. The higher the hash rate, the higher the chances of finding the next block in the blockchain and receiving a reward.
How does it all work?
Mining achieves three things:
- The issuance of new Bitcoins.
- Validating transactions on the network.
- Securing the bitcoin network.
When mining machines solve complex computational problems on the bitcoin network, it allows them to chain together blocks for transactions (hence the “blockchain”).
Unlike a central bank, which can issue new units of a currency at any time, the process of mining is what issues new Bitcoins. Miners are rewarded new bitcoins every 10 minutes. In addition to new Bitcoins, miners also receive transaction fees, which users pay to the network every time they make a transaction.
Transactions sent on the Bitcoin network are validated during the process of mining because miners include these transactions into their blocks. When a transaction is embedded in a block it becomes a secure and complete part of the Bitcoin network.
The answer to a computational problem on the Bitcoin network is called a hash. The hash of each block contains the hash of the previous block, and one of the mathematical puzzles solved by miners is called a hash function, which means finding the input to an equation given its output.
As the Bitcoin network grows, these mathematical puzzles become more complex, and so more hash power is required – which translates to more time, energy and money.
Bitcoin uses the Proof of Work (PoW) consensus algorithm. What makes the network secure is that for a block of transactions to be added to the blockchain ledger, a majority of miners need to confirm the block. A malicious miner who wants to insert invalid transactions into the blockchain would need to have more than 51% of the total hashpower, which would be extremely costly in terms of mining machinery and electricity.
PoW ensures that any action on the Bitcoin network – such as a payment being sent between two wallets – requires considerable effort to be executed. Furthermore, the complexity of computational puzzles is proportional to the number of miners. Therefore, any attack on the network would require so much computational power that it would be redundant because of the costs involved.
How miners make money
Miners are rewarded with bitcoin when they create new blocks. Most miners will sell sufficient quantities of their newly minted Bitcoin immediately back to the ecosystem to cover their costs, while the unsold balance will be kept in their treasury.
Bitcoin miners currently receive 12.5 BTC each time they successfully mine a block. By the end of May 2020 (the next Halvening) they will earn just 6.25 BTC per block. Bitcoin “halvening” refers to an event that happens at intervals of 210,000 blocks – which is roughly every 4 years – when the mining reward on the Bitcoin blockchain reduces by 50%.
Learn more about Bitcoin here.
This content is not financial advice and should not form the basis of any financial investment decisions nor be seen as a recommendation to buy or sell any good or product. Trading cryptocurrency is complex and comes with a high risk of losing money, particularly if you trade on leverage. You should carefully consider whether trading cryptocurrencies is right for you and take the time to learn how trading works and decide how much money you are prepared to lose.
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