What is Bitcoin Mining and How Does it Work?

What is bitcoin mining and how does it work?

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What is Bitcoin Mining and How Does it Work?

Bitcoin mining does seems crazy!

Computers mining for a virtual coin that does not exist in the physical world? Is it real money or just fake hype!?

Well, there are much more to the story than just that!

This video is a short version explaining what Bitcoin and Blockchain is all about. To get a full understanding of Bitcoin, keep reading below… might take a while thou as there are a lot to explain.

What is Bitcoin Mining?

Bitcoin mining is the backbone of the Bitcoin network and what makes it possible and safe. When you make a payment from your wallet address to any other wallet, the transaction is sent to every server and computer world around who runs the Bitcoin (node) software.

Miners pick up this transaction still unconfirmed and make a complex calculation to validate the transaction hash and put it in the next free block created every 10 minutes to lock it down for good in the records.

What is Bitcoin Mining Actually Helping Doing?

So what is the point with Bitcoin mining? This is something I are being asked everyday!

There are many parts and functions of Bitcoin mining and I will go though them here.

  1. Creating new bitcoins
  2. Confirming transactions
  3. Security

Mining Is Used to create new Bitcoins

mining

Traditional currencies like the dollar or euro are issued and controlled by central banks. The central bank can issue new money any anytime based on what they think will improve the economy and the country’s decision.

Bitcoin is very different.

Miners are rewarded new bitcoins every 10 minutes when a new block is created. Which miners get this reward is the one who solves the final puzzle of the block. Typical this will be a miner with a lot of hashing power. We get back to that…

The reward rate is set in the code itself, so miners cannot cheat the system or create bitcoins out of thin air. They have to use their computing power to generate new bitcoins.

Miners Confirm Transactions

What is Bitcoin Mining and How Does it Work?

Miners include transactions sent on the Bitcoin network in the blocks.

A transaction can only be considered secure and final once it is included in a block and confirmed by many miners.

But why?

Because only then, the transaction is final and cannot be altered, but are forever buried down in the blocks for eternity.

This is also the reason why many online services only accept payment as final when the transaction reached its 1-6+ confirmations.

0Payment with 0 confirmations can still be reversed! Wait for at least one.

1One confirmation is enough for small Bitcoin payments less than $1,000.

3Enough for payments $1,000 – $10,000. Most exchanges require 3 confirmations for deposits.

6Enough for large payments between $10,000 – $1,000,000. Six is standard for most transactions to be considered secure.

Is Bitcoin really safe then?

Now you ask yourself, how safe is Bitcoin since more than one confirmation is needed. Can someone cancel/revert the transfer?

In principle, Yes they can!

When a transaction is still unconfirmed or has few confirmations, someone with illicit intentions could try to make a double-spending or even revert the transaction.

Really!…, How?

Double spending or cheat someone thinking they were getting paid!

This is just as an example. There are many ways computer skilled people could go around this, but the principle is the same.

Sample double spending: You could run your wallet software identical on 2 different computers then send a payment to (someone/something you bought) from one computer, and payment to another of your own wallet addresses.

Both transfers are broadcast to the Bitcoin blockchain network as unconfirmed and picked up by miners at some point. The clever person trying this would have made sure each wallet send to two different locations spreading the transactions from different directions.

But the most important part is which transfer gets mined and finally confirmed! If the transfer they sent to their own wallet address confirms first, then this transaction is the final and real one while the other transfer simply disappears from the records as never happen.

Now, if this was you waiting for a payment from someone with illicit intentions, they might already foul you to believe you got the money with a valid yet unconfirmed transaction and gave them whatever in return for the deal.

Following you find the transaction disappears from the blockchain completely and the balance you saw in your wallet (unconfirmed) disappeared again. At this point, you realize you just got scammed.

THIS IS IMPORTANT AND WHY YOU WAIT FOR MINIMUM 1-6 CONFIRMATION

So once again, wait the confirmations before finalize a deal.

How safe is 0 – 5 confirmations in reality?

As the above sample, we assume the hacker broadcasts 2 transactions from a cloned wallet to two different locations. So, in reality, different miners could start mining both transactions same time without knowing this, Yet!

Fortunately, the Bitcoin code is clever and know how to deal with this type of hack. this why Bitcoin is undeniable SAFE to use.

Fortunately, the Bitcoin code is clever and know how to deal with this type of hack. This is why Bitcoin is an undeniable SAFE to use.

Two transactions using the same exact coins (dual-spending) cannot exist on the blockchain same time. So the software simply picks the one that is oldest AND with most confirmations and store as final in the blockchain. The other transactions vanish as the nodes around the world get the update and final the block.

So you see, you can fool a company or person by double-spending the same money but you cannot cheat the blockchain. And this is exactly why you WAIT for the final confirmations.

Miners Secure the Network

What is Bitcoin Mining and How Does it Work?

Miners secure the Bitcoin network by making it difficult to attack, alter or stop.

The more miners that mine, the more secure the network are.

The only way to reverse Bitcoin transactions is to have more than 51% of the networks total hashing power what is by today’s large number of miners not possible. Distributed hashing power spread among many different miners keeps Bitcoin secure and safe.

The more miners, the more safe.

Still, there is fear that some mining pools someday will get this 51% of the total hashing power that would be a danger for Bitcoin blockchain. However, the Bitcoin society is aware of this danger and would collective not let this happen by forcing together resources. This is in no way anyone’s interest to let some pool control the blockchain.

Top list of Bitcoin mining pools and shares.

As of current date April 2020 you can see the share parts of each largest mining pools and none of them are even close to the 51% hashing power.

What is Bitcoin Mining and How Does it Work?

I think the largest pool seen to this date as I recall, had a shared part of 23% back in 2019. So still far from anything that can threaten the safety of the Bitcoin blockchain.

How to Mine Bitcoins

What is Bitcoin Mining and How Does it Work?

Do you actually want to try mining bitcoins?

Well, you can do it. However, it’s not profitable for most people as mining is a highly specialized industry.

Most Bitcoin mining is done in large warehouses where there is cheap electricity.

To be real:

bitcoin-mining-facility

Most people should NOT mine bitcoins today.

Most Bitcoin mining is specialized and the warehouses look something like this:

That’s who you’re up against! It’s simply too expensive and you are unlikely to turn a profit.

However:

For hobby mining, I’ll show you some steps you can take to get started mining Bitcoins right now.

Step #1: Get Bitcoin Mining Hardware

You won’t be able to mine without an ASIC-miner.

An application-specific integrated circuit (ASIC) miner is a device with a chip that is designed for the sole purpose of mining digital currency. Generally, each ASIC miner is constructed to mine a specific digital currency. So, a Bitcoin ASIC using algorithm SHA-256 miner can only mine Bitcoin.

Don’t even try mining Bitcoins on your home desktop or laptop computer! You will earn less than one penny per year and will waste money on electricity.

Today’s ASIC machines deliver a size of up to 110Th (Terahertz) of mining power and can be bought for a whupping 2,600 USD at the Bitmain website. That is not a small investment to make and you need it running nonstop for 2 years before it’s paid back unless the Bitcoin price starts to accelerate up again on levels as back in December 2017 where we hit 20,000 USD for a single Bitcoin.

Did I mention the ASIC-miner eats a lot of electric power you also pay…

Step #2: Select a Mining Pool

Once you get your mining hardware, you need to select a mining pool. Without a mining pool, you would only receive a mining payout if you found a block on your own what is literally impossible since you will be against the whole world of miners. This is called solo mining.

I don’t recommend this because your hardware’s hash rate is very unlikely to be anywhere near enough to find a block solo mining ever.

How do mining pools help?

By joining a mining pool you share your hash rate with the pools contributing to a higher total hashing rate for the pool. Once the pool finds a block you get a payout based on the percent of hashing rate you contributed to the pool.

If you contributed 0.001% of the pools hash rate, you’d get .000125 bitcoins out of the current 12.5 bitcoin block reward. The larger mining pool the more often you get paid BUT the more you also share with the others.

Some mining pools will only pay from the block rewards while others will pay both the block rewards AND the transaction fee. In common to all, they will all charge you 1-3% in pool fee from what you final gets.

Step #3: Get Bitcoin Mining Software

Before ASIC came you needed to install Bitcoin mining software on your computer to actually hook your mining hardware into your desired mining pool.

Today all ASIC mining machines are already installed with the software to set up mining pool details. Literally this means you just plug in the power cable and the LAN network cable and you’re up running already.

To set up the ASIC you enter the machine software in a browser on your home network and put in the pool account details. The payment address where you receive reward payment is mostly done from your mining-pool account. Else it will be part of the pool details, but the mining pool you choose will instruct you for this.

If you don’t have a Bitcoin wallet or address learn how to get one here.

Step #4: Is Bitcoin Mining Legal in your Country? Make Sure!

This won’t be much of an issue in MOST countries with just some few have restrictions on cryptocurrency and mining.

You should consult with your local government for further assistance in determining whether Bitcoin mining is legal and the tax implications of doing the activity.

Like other businesses, you can usually write off your expenses that made your operation profitable, like electricity and hardware costs.

Step #5: Is Bitcoin Mining Profitable for You?

Do you understand what you need to do to get started?

You should run some calculations and see if Bitcoin mining will actually be profitable for you. You can use a Bitcoin mining calculator to get a rough idea.

Consider including your investment to buy the ASIC hardware, the cost of electricity at your place, and the tax in your country.

And lastly, it’s important to know that price and global hashing power change all the time and not to your advance, so you need to take this into consideration that the mining reward gets less and less contrary BTC price (maybe) increase. As a finger rule, it said each month you get a 10% lower reward month by month.

When mining started back in 2009.

When Satoshi released Bitcoin, he intended it to be mined on computer CPUs. Little could he know those enterprising coders would discover they could get more hashing power from graphic cards and wrote mining software to allow this.

Once again GPUs was then surpassed in turn by ASICs (Application Specific Integrated Circuits) to take over what is now today standard.

As with GPU and ASIC-mining, Satoshi apparently failed to anticipate the emergence of mining pools.

Luckily the code he wrote adjusts itself every 14 days to adjust for the increasing hashing power by increasing the difficulty level solving the blocks. This, by the way, works absolutely perfectly and ensures the blockchain is running steady and smooth.

On the down-side you and I can now not do this a a single person as intended by Satoshi Nakamoto.

Mining Difficulty

If only 21 million Bitcoins will ever be created, why has the mining reward of Bitcoin not accelerated with the rising power of mining hardware?

The mining reward is regulated by Difficulty Level, an algorithm that adjusts the difficulty of the Proof of Work problem in accordance with how quickly blocks are solved within a certain time frame (roughly every 2 weeks or 2016 blocks).

Difficulty rises and falls with deployed hashing power to keep the average time between blocks at around 10 minutes.

Block Reward Halving

Satoshi designed Bitcoin such that the block reward, which miners automatically receive for solving a block, is halved every 210,000 blocks (or roughly 4 years).

As Bitcoin’s price has risen substantially (and is expected to keep rising over time), mining remains a profitable endeavor despite the falling block reward… at least for those miners on the bleeding edge of mining hardware with access to low-cost electricity.

Is Bitcoin Mining a Waste of Electricity?

What is Bitcoin Mining and How Does it Work?

Yes it is, but compared to what?

The media constantly says Bitcoin mining is a waste of electricity. In that case, everything is as you have to compare instances one with another.

You can say Bitcoin mining consumes the same much power than a middle small town with 5 million citizens.

That seems as an overload of wasted electricity. Yes but still, compared to what?

The ocean cruise-liners use same energy with larger carbon emissions footprint from only 10 large cruise-ships.

or

Compared to the carbon emissions from just the cars of PayPal’s employees as they commute to work, Bitcoin’s environmental impact is negligible.

As Bitcoin could easily replace PayPal, credit card companies, banks, and the bureaucrats who regulate them all, it begs the question:

Isn’t traditional finance a waste?

Not just of electricity, but of money, time and human resources, not to mention the fact that only a few control any traditional finances whereof Bitcoin NOBODY control.

Continue reading Part 2, What is Bitcoin mining?

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