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What is Mining Bitcoin? All You Need to Know

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2nd Sep, 2021
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What is Mining Bitcoin? All You Need to Know

Bitcoin has emerged as quite the rage among modern investors ever since its introduction in 2009. Given that bitcoin has a simple operating process and investors need not be gizmos or tech freaks to understand how it works, bitcoin has a diverse crowd of buyers, including technology experts, high-end investors, and the common folks. One can easily transfer bitcoins to someone from any corner of the globe by creating an account on the Bitcoin network. 

Today, we’ll deep dive into the subject to understand bitcoin mining.

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What are Bitcoins?

Bitcoin is a decentralized digital cryptocurrency that is generated, distributed, traded, and stacked with the help of a ledger system, called a blockchain. The cryptocurrency was introduced in January 2009 by a pseudonymous Satoshi Nakamoto. Bitcoin is the first virtual currency to make a wave and become hugely popular by offering low transaction charges compared to conventional online payment modes.

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What is Bitcoin Mining?

Bitcoin mining is a process that facilitates the entry of new bitcoins into the market circulation by solving highly complex computational math problems using high-end and sophisticated computers. The process is excruciating and expensive but has attracted many investors as they are rewarded with crypto tokens that have a huge value. 

  • Mining yields cryptocurrency without the need for an investment at the miners’ end.
  • Miners get rewarded in the form of bitcoins after completing huge blocks of verified transactions. These bitcoins get accumulated in the blockchain. 
  • Rewards are administered to miners who come up with solutions to complex problems.
  • To set up a mining rig, a graphics processing unit (GPU).or an application-specific integrated circuit (ASIC) will be required.

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How to earn Bitcoins?

The primary reason people engage in mining is the reward they receive in the form of Bitcoins. However, mining is not a one-stop destination for owning tokens of cryptocurrency.

  • You can purchase bitcoins by trading with conventional currencies.
  • You can trade them on an exchange platform like BitStamp with another cryptocurrency like Ethereum or NEO. 
  • Some online platforms and shopping portals give away bitcoins as a reward for blog posts and shopping.
  • Crypto blog platforms like Steemit act as intermediate channels where users compensate bloggers with a proprietary cryptocurrency known as STEEM, which can be traded for Bitcoins.

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How are Bitcoin Transactions Regulated?

Regulating and scrutinizing Bitcoins is a complex task as the currency is decentralized and cannot depend on any government or a Central Bank for management. Hence, the miners are well rewarded to encourage them to perform the dual role of mining and management. In addition, they work as auditors by scrutinizing Bitcoin transactions and putting an end to the double-spending problem.

What is double-spending?

It is a unique problem exclusively related to digital currencies where duping digital information is performed rather easily by blockchain savvy individuals. This results in the same Bitcoin being used twice by the owner. 

Bitcoin miners scrutinize every transaction to see if any Bitcoin has been used twice. When miners complete the verification of 1 MB worth transactions, also known as a Block, they are compensated with a certain number of Bitcoins. These 1 MB transactions can be single or multiple depending upon the size of the data used by the transaction.

This 1 MB limit was decided by Satoshi Nakamoto and has been a topic of controversy ever since. Why? Miners feel the block size is too small given the amount of time and effort it takes to verify the complex transactions.  

Not everyone who verifies transactions will be compensated. This depends on two factors:

  1. The primary condition of completing 1MB data worth Bitcoin transactions.
  2. Only the first miner to come up with the correct solution to a complex problem will be rewarded. This is called Proof of work. 

Proof of Work (PoW) is a system that demands a considerable amount of effort to investigate the malicious use of computers like delivering spam mails or fake services. The technique was adapted to digital currencies by Hal Finney in 2004. Bitcoin is the first elaborate application of Finney’s PoW concept. 

Mining and Circulation of Bitcoins

Mining not only fills the pockets of miners but also facilitates the release of new cryptocurrencies for circulation. Mining is the only way to release new Bitcoins. As per coinmarketcap.com, around 18.5 million bitcoins were in circulation in November 2020.

The first set of Bitcoins were mined from the mother block (genesis block) – the first block developed by the founder. Every single Bitcoin mined from the genesis block was circulated with the help of miners. Without these miners, the original Bitcoins would have only been a functional network where bringing in new ones for transactions would not have been possible. Also, experts believe that mining Bitcoins will eventually end owing to the reduction in the rates of mined currencies, and there may not be any Bitcoin circulation until 2140.

However, the scrutiny of transactions by miners will continue for the sake of paying miners and keeping the Bitcoin network intact.

Apart from the compensation, miners are also given the power to vote whenever a proposal is made in the Bitcoin Network. Miners have the power to influence any change in the Bitcoin software protocol. This process is known as forking.

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Requirements of Bitcoin Mining

Earlier, one could mine bitcoins using a regular computer at home. Unfortunately, this is no longer feasible as the complexity of Bitcoin mining has changed over time. 

  • To ensure hassle-free blockchain functioning and transaction verifications, the network proposes to have a block generated every 10 mins. 
  • Bitcoin has a unique design of evaluating and fine-tuning the difficulty of mining every two weeks or after generating 2016 blocks. This is done to facilitate more mining rigs to compete for one hash puzzle to achieve results much faster. 
  • The difficulty level of mining increases when more rigs compete for Bitcoin mining to stabilize block production. 
  • To have a better mining possibility, the miners should have a powerful and sophisticated computer unit like a GPU or an ASIC, the cost of which can range between $500 to $10,000. So, some miners use individual graphic cards and perform mining operations. 

Is Mining Bitcoins Profitable?

Miners must consider a lot of factors before plunging into Bitcoin mining. While mining equipment and their power consumption are exorbitant, the rewards are highly lucrative. This is what draws a huge number of miners to the Bitcoin network. The possibility of a miner solving a hash puzzle first is directly proportional to the mining power on the network. Miners with a higher percentage of mining power have a better chance of solving a block independently. 

What is a Mining Pool?

Miners with low mining power may not be able to solve a block on their own, thereby suffering a loss. Mining pools can solve this issue. 

Mining pools are operated and managed by third parties. The pool contains a group of miners coordinated by third parties. Miners share the expenses and the profits among themselves. The possibility of a pool solving a block is higher than an individual miner solving it. The flow of bitcoins in a mining pool is steady and starts when the miners are activated. 

Risks of Mining Bitcoin

  1. Financial and legal risks are the primary issues faced in mining Bitcoin. As mentioned earlier, the equipment used is costly, resulting in a severe monetary loss if not rewarded. 
  2. Bitcoins are banned in certain countries. So, miners should consider their location and its legal stand on Bitcoin before taking a plunge.
  3. The mining process impacts the environment as the equipment consumes a lot of electrical energy and leaves carbon footprints.

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That’s all we have mining bitcoin for now. 

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Rohit Sharma

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Rohit Sharma is the Program Director for the UpGrad-IIIT Bangalore, PG Diploma Data Analytics Program.
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Frequently Asked Questions (FAQs)

1What is Bitcoin?

Bitcoin is a borderless, decentralized and open-source digital currency. It was invented by Satoshi Nakamoto, a person/group of people whose identity is still unknown. When you use Bitcoin, there is no need to rely on any central authority. This currency is a form of digital currency, created and held electronically. No one controls it. Bitcoins are not printed, like dollars or euros - they are produced by people, and increasingly businesses, running computers all around the world, using software that solves mathematical problems.

2How to mine Bitcoin?

Mining Bitcoins requires two things, hardware and software. Hardware includes the actual hardware necessary to mine the Bitcoins and can be one of two types of devices, a CPU miner or a GPU miner. The software necessary to mine Bitcoins can be downloaded from the Bitcoin software repository. The software necessary to send Bitcoins to your wallet is also available from the download repository. The mathematical problems get harder and harder as more Bitcoins are mined. There are various Bitcoin mining software available, but it is a good idea to join a 'mining pool' whereby you combine your resources with those of others and share the profits.

3How much time will it take to make profit from Bitcoin mining?

You can mine Bitcoins with a regular computer but this will be too slow and you will probably spend more on electricity than you will earn mining. You will also need a specialized mining rig with a high-end graphics card and at least 64GB of RAM. The mining rig will cost you $3000 to $5000, but it will be more profitable than mining on a regular computer if you have cheap electricity. The more serious issue is the electricity consumption. At current exchange rates, 1 Bitcoin is worth $1000. So, you can make over $100 a day with a mining rig. If you are paying average US electricity prices of 10 cents per kilowatt hour, it will take you 4 months to recover the cost of the mining rig and then you're only making $83 a day. In other words, if you have cheap electricity it will take you 1 year to pay back the cost of the rig and then start making a profit.

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