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The Lowdown on Bitcoin Mining

January 26, 2018

Bitcoin mining is indeed a thing. It is a pursuit that many look to undertake in order to make real serious money and get in on the growing cryptocurrency. But these days it is way less profitable than it might have been in the early years of Bitcoin, which hit the world in 2008.

Understanding how Bitcoin mining works is a nice pastime, but don’t get any hopes up about making a profit as an individual. These days, large mining consortiums are the only entities with enough computing power and electrical power to be able to make a Bitcoin mining operation profitable.

What is Bitcoin mining? Well, it helps to understand that Bitcoin is a currency based on a blockchain. In order for Bitcoin transactions to take place, a block must be added on to the chain of transactions. That happens with many computers at once solving a cryptographic puzzle, which helps create a block in the blockchain. Mining is the only way to create new Bitcoin and release it into circulation. Bitcoin is not like other forms of fiat currency, which requires its backing by government power. The US dollar only has its value because of the full backing of the American government. So only the US government can print new dollars and put them into circulation.

Bitcoin needs the cooperation of many networks of computers in order to work. As a reward for serving on that network, a computer operator that helps completes transactions can be rewarded with a Bitcoin. Or a portion of a Bitcoin. That is the crux of Bitcoin mining.

Now, at some point in the future, Bitcoin mining is going to end. Right now, there are 16 million Bitcoin in circulation. But the Bitcoin blockchain is capped at 21 million. According to the protocol written by Satoshi Nakamoto, there can only be 21 million Bitcoin. Once that number is reached, there is no more Bitcoin mining.

Currently the reward to completing a block in the blockchain is 12.5 Bitcoin. The problem, as stated above, is that it requires a whole heck of a lot of computing power to mine Bitcoin.

The simplest way to look at it is that miners are auditing transactions on the blockchain network. Their value as authenticators is rewarded with more Bitcoin. Bitcoin mining helps to mitigate the potential problem of double spending. With digital currency, there is always the potential for a bad actor to copy a digital token like Bitcoin and try to transact with that. Bitcoin mining can catch that bad act and make sure that it does not go thru as a legit transaction. Thus, they are auditors.

When Bitcoin mining, you need to be able to verify 1 MB worth of transactions in order to be eligible to get 12.5 Bitcoin. You might not get that Bitcoin. Because you need to be the very first miner to show that you solved the problem that verifies that transaction or transactions You need to show proof of work.

Bitcoin mining is complicated, but it is certainly worth understanding if you want to be a better Bitcoin owner. There is not substituted in investing for understanding exactly the business you are in.

Filed Under: Business

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