Compared to other tokens like Ethereum or Dogecoin, Bitcoin is still the most valued cryptocurrency in circulation today. As the first truly decentralized digital currency, Bitcoin is also the most desirable cryptocurrency for crypto miners worldwide. This article will provide insight into how Bitcoins are mined, why you should mine them, and the risk factors of Bitcoin mining.
Bitcoin Mining: The Definition
Simply put, Bitcoin mining and by extension, cryptocurrency mining in general is a process of creating a new coin by solving extremely complicated mathematical problems to verify transactions using that currency. When the problems are solved and transactions verified, the miner receives an amount of bitcoin or other cryptos, depending on the mining pool. This computing process is heavily tied to the principles of blockchain ledger itself, though we'll talk about that in a separate article.
The skyrocketing price of Bitcoin and other popular tokens in recent years resulted in the rising popularity of crypto mining altogether. However, most people would feel the amount of Bitcoin rewarded for each mining cycle is too small compared to the operation's complexity and high-cost nature.
Bitcoin Don't Mine Themselves
So how does mining Bitcoin work? We've mentioned before that mining Bitcoins involves solving high-level mathematical equations to verify and validate transactions using Bitcoin and adding the new information block to the blockchain. To solve this equation, miners typically need a ridiculous amount of computing power from an equally expensive computer.
At best, 'mining' is a metaphor, as miners don't go out and 'mine' the tokens. Crypto miners' work is more closely related to auditors since their job is solely verifying and validating Bitcoin transactions' legitimacy. At the same time, the 'mined' Bitcoins are the payment for their service.
Bitcoin miners compete to solve complex problems, as the reward is 'first come, first served.' If one miner has solved one problem, other miners must solve other equally difficult equations. To solve these mathematical problems as quickly as possible, miners need as much computing power as they can squeeze out of computer hardware known as an application-specific integrated circuit (ASIC).
Most miners don't even solve the problem using some highly advanced mathematical equation. They use their ASIC(s) to make as many random guesses as possible. The first miner to arrive at the closest answer to the equation (known as hash) will be the legitimate recipient of the rewarded Bitcoin. The hash itself is a 64-digit hexadecimal number.
Reasons to Mine Bitcoin
According to an article from Investopedia, as of 2022, 6.25 BTC is rewarded for each problem solved. Convert that amount with today's rate of ~$20,000 per BTC, and a single problem solved would rake in around $125,000 to the miner. However, the main purpose of Bitcoin mining or cryptocurrency mining in general is to produce and incorporate new currency into circulation.
If we compare Bitcoins with real world currencies, mining for Bitcoin is just like printing new money. Right now, the only way we can produce new bitcoins and release them to the public is by mining them from the Bitcoin network. In fact, out of all the 21 million Bitcoins created by March 2022, only the genesis block (the first block created by Bitcoin founder Satoshi Nakamoto) did not come into existence without the miners' effort.
But would Bitcoin still exist and be usable in the total absence of miners? The answer is yes. The Bitcoin network and blockchain will exist as long as the system is not destroyed; there won't be any additional Bitcoin entering circulation. The rate of Bitcoins mined is reduced every 210,000 blocks inserted into the blockchain, which translates to about four years in human terms. Based on this overtime reduction, the last Bitcoin will be released sometime around 2140.
Aside from lining their pockets with money and minting new Bitcoins to enter circulation, miners enjoy a special privilege in the Bitcoin network protocol: voting power. The Bitcoin Improvement Protocol (BIP) allows miners, as the overseer of Bitcoin transactions, to influence the decision-making process should changes be proposed inside the system. The greater the hash power a miner possesses, the greater their influence.
What Determines Bitcoin Value? Here are the 7 Factors
Bitcoin Mining 101
"So, what should I do to prepare to start mining Bitcoins?" you may ask. Interestingly, expensive and powerful equipment should be the least of your concern. Here are the three essential things you need to start Bitcoin mining, according to this article from Bankrate:
- - Wallet. It is where you store your hard-earned Bitcoins from trading or mining your own. Crypto wallet services like Coinbase and Trezor are encrypted, so you can safely store, transfer, and accept your cryptos.
- - Mining software platform. There are hundreds of different mining software available out there. Just pick one that suits your needs and install it on your computer. Do note that if your computer is not powerful enough, make sure your software offers a pool or cloud mining option.
- - Computer. The most expensive aspect of mining Bitcoin and many other cryptocurrencies. The ideal and realistic option is buying an ASIC unit like AntMiner S9. Do remember that no matter how energy efficient ASIC units are, they still require an enormous amount of electricity.
Mining Bitcoins comes with risk factors. One of the most common is a GPU catching fire while running a mining session. However, the biggest risk is the price volatility of Bitcoins itself. In January 2022 alone, we've seen Bitcoin's price nosedive to around $35,000 in just two months after it reached its peak value of more than $67,000 in November. It plummeted to just a little over $20,000 in June 2022. This kind of volatility is challenging miners, for they're uncertain whether or not the obtained Bitcoin value will outweigh the high operational cost.
Despite experiencing a devastating drop over the last six months, the price of Bitcoin is still mouth-watering, especially to newcomers and rookie miners. While it's true that Bitcoin's value is still high, the cost of running a mining rig is often overlooked. Moreover, what most miners boast of as "an extremely difficult mathematical equation" turns out to be an over-glorified guessing game. Whether or not you still want to start your crypto mining journey after learning the truth of how Bitcoins are mined is entirely up to you.