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Cryptocurrency for Beginners

How does Bitcoin Mining work? For Dummies [2024*]

3 min read
Lots of people around the world run the Bitcoin software on their computers to verify the Bitcoin transaction of other users.Bitcoin miners earn Bitcoins as incentive to verify these transactions and power the blockchain payment network.

How does Bitcoin Mining WORK? For dummies

In very simple terms, Bitcoin Mining is a payment gateway made up of thousands of computers around the world which compete to solve a puzzle first in exchange for Bitcoin as reward.

Therefore, each time some one sends Bitcoin to another person anywhere around the world, the Bitcoin miner will verify, validate this transaction and get Bitcoin as incentive.

 

How does Bitcoin Mining WORK?

  1. Each time someone sends Bitcoin to another person anywhere around the world…
  2. Sender enters Bitcoin Wallet address, amount of BTC, then Send
  3. His transactions are bundled up into a batch with other Bitcoin Transaction.
  4. Then Broken up into encrypted pieces
  5. The miner then race to solve the puzzle first
  6. The pieces are then added back together to create a new encryption to create a new block.
  7. This new block is added to rest of the chain of blocks on the blockchain
  8. And the recipient receives his/her Bitcoin in their BTC wallet.

 

Proof of work

Bitcoin mining is the process of creating brand new Bitcoins by verifying bitcoin transactions.

Bitcoin miners around the world verify transactions to earn Bitcoins as rewards.

The way the Bitcoin algorithm is set up, is that the more people enter the system, the more the puzzle becomes more difficult to solve.

Bitcoin has an inbuilt difficulty regulator which is called the “proof-of-work”, meaning the more people/computers enter to mine, the harder it will be to solve issue and more efficient tools will be needed.

Mining is what powers the Bitcoin payment gateway also known as the Bitcoin Blockchain.

Bitcoin is not only a currency and a bank, but also a payment gateway.

Therefore transactions need to be verified and validated.

 

Why is Bitcoin mining so important?

The mining power of miners  is what keeps network running.

Bitcoin is not owned by a government nor does it have a central bank to print out new money whenever it pleases.

Bitcoin mining is the process of “unlocking” new Bitcoins into the market by users verifying transactions.

Mining is also the incentive for the Bitcoin miners who verify the transaction.

This ecosystem is what powers the blockchain.

 

What if Bitcoin Miners did not exist?

If all the miners decide to stop mining Bitcoin, then Bitcoin transfers would not stop taking place and the network would stop working.

What’s so innovative about it?

The biggest problem with government controlled traditional paper money is that it is printed out of thin air.

Inflation rises as money is printed by the central banks, this results in the standard of living decreases as “money”  loses value.

Bitcoin mining is proof that the Bitcoin was not created out of thin air and required electricity to make.

 

Limited supply creates a scarcity

There are only 21 million Bitcoins which can ever be created

To unlock the Bitcoins, each one needs to be mined.

This is the opposite of traditional money which the governments increase in supply during difficult times.

Bitcoin on the other hand increases is value as demand increases.

For this reason, Bitcoin is considered deflationary.

 

Globally Decentralized transaction verification

Bitcoin mining is also forcing banks to review their international wire transfer fees as you can send millions o dollars worth of Bitcoin to any one  around the world within minutes for only a few cents worth of transactions fees.

 

Then why do governments keep banning Bitcoin mining?

While anyone can theoretically start mining Bitcoins from anywhere around the world.

China and states around the US have banned Bitcoin mining BECAUSE it requires a lot of energy and causes energy prices to soar.

As Bitcoin becomes more mainstream, so has Bitcoin mining.

But this comes at a cost on local energy companies and consequently on regular households as power costs surge.

 

Can you mine Bitcoin from a computer nowadays?

In 2008, it was possible to mine Bitcoin from a simple computer as there were only a few transactions as well as miners

However, these days, if you attempt to mine Bitcoin on your laptop, it would most likely damage your computer.

You would be competing against enormous several football fields of mining farms .

A simple laptop would not be able to handle downloading the Bitcoin blockchain and  blow it up within minutes.

 

Bitcoin’s algorithm is designed in a way that the more people try to verify the transaction first (to earn Bitcoin rewards) the more powerful the computer is required.

 

GPU Miners

As the mining difficulty increased, the miners started using GPUs to mine.

However, with the Bitcoin halvings and new incoming miners, the GPU miners also became obsolete.

New specialized and efficient mining equipment called ASIC Miners were introduced.

 

ASICs Miners

ASIC stands for Application-Specific Integrated Circuit.

ASIC Miners are specialized equipment created for the sole purpose of mining cryptocurrency.

 

ASIC Miners require some heavy investments and come at a risk:

  • An ASIC Miner cost around $1500 excluding shipping
  • They are very loud so you would need to put it in an isolated area.
  • They generate a lot of heat and therefore not recommended in warm climates.
  • They consume of lot of energy have been banned in many countries for this reason.

Another risk that many people do not realize when getting into Bitcoin is that they are competing with large mining farms in China and their revenue will be from transaction fees rather than reward blocks.

This is an important factor to consider simply because during bear markets, there are not enough transactions to make it worthwhile.

In 2018, we saw dozens of Youtubers document their loss and quit Bitcoin Mining all together.

 

How do bitcoin miners mine bitcoin specifically?

As established above, mining Bitcoin on a basic computer is unrealistic and on a gpu not profitable unless you live in a country with ridiculously cheap electricity.

However, Antminers are usually plug-and-play along with some slight power customization.

 

SoloMining vs Minepool

Because the chance of success is too low for individual miners, Bitcoin miners team up to share computing power and therefore increase their chances of rewards.

However, not all Minepools have the same conditions and reward systems.

Cloud mining

Because of all the risks involved in buying the hardware to mine Bitcoin, some people have turned to Cloud mining.

Cloudmining basically refers to renting out mining equipment from cloud mining companies such as Genesis Mining and Hashflare.

 

Bitcoin Mining Farms

Bitcoin mining requires energy and the only way for it to be profitable is mine Bitcoin large scale.

Greenidge, previously a coal-fired electrical power plant that has converted to natural gas which also supplies electrical power to New York State’s residents, is now one of the largest Bitcoin mining facilities uses over 20 megawatts (MW) of power to mine Bitcoin.

 

Do all cryptocurrencies need to be mined?

The great news is that not all cryptocurrencies need to be mined.

Some cryptocurrencies can be generated in one batch in a process called minting. 

The theory was that minted tokens required less resources to create that Bitcoin and therefore more environmentally friendly.

Minted tokens would also allow founders to control the supply to reduce volatility.

 

What are the advantages of non-minable cryptocurrencies?

Most of the non-minable cryptocurrencies are on the Ethereum Blockchain (a.k.a ERC20 tokens).

These ERC-20 are which catapulted the blockchain crowdfunding market by allowing companies to seeking funding from all over the world by issuing these tokens.

This is changing the landscape of the once exclusive IPO funding.

 

What are the problems of non-minable cryptocurrencies?

And the biggest problems investors are complaining about are that the transaction fees (a.k.a gas fees) are too high when then the prices go up.

This is because for the price of a token to increase, the demand has to increase but this results in an increase in transaction fees for the token.

 

The Future of Bitcoin Mining

Many environmentalists complain that that Bitcoin mining farms are too taxing on the environment on top of being very noisy.

Whereas Bitcoin maximalists counter that argument saying that most most bitcoin mining operations are solar run.

 

CONCLUSION

Bitcoin mining requires energy and the only way for it to be profitable is mine Bitcoin large scale.

Only 21 Million Bitcoins can ever be created and at the time of writing, 18.5 million Bitcoins have been mined so far.

 

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