Bitcoin Mining: How does it work?

BITCOIN MINING

What Do I know About Bitcoin Mining?

Bitcoin mining: This is said to be the way by which new bitcoins are created and released into circulation and  it is also an important component in the development and maintenance of the ‘blockchain ledger’. This process is done by  making use of complex maths and computer science ( For blockchain solutions).

CRYPTOCURRENCY mining is slow, tiring and the reward is almost neglectable. However, mining has an attractive pull to many investors that are interested in the cryptocurrency market just for the fact that miners will be rewarded for their work with crypto tokens. This might be because just like California gold prospectors in 1849, entrepreneurs see mining as heaven’s penny . So why not do it, if you are inclined technologically.

But before you put in your time and equipment, take your time to read and have a clear understanding of mining to see if it’s what you can venture into. Our focus will be primarily on Bitcoin. (In the concept of cryptocurrency we will be using “Bitcoin” instead of cryptocurrency and “bitcoin” when we’re talking about the quantity of different tokens).

KEY POINTS TO NOTE

  • When you are mining, you  earn cryptocurrency without having to pay for it.
  • When bitcoin miners complete blocks of verified transfer they get  Bitcoin as a reward, these transferred blocks are then added to the blockchain.  
  • Miners who provide    solutions to complex hashing puzzles first are given Bitcoin tokens as reward, the probability of a particular miner to provide the solution is related to the total number of mining power on the network.
  • To set up a mining rig, you will be needing an application-specific integrated circuit (ASIC) or a graphics processing unit ( GPU).

A New Gold Rush

The main pull for many miners is the prospect of being rewarded with Bitcoin. However, you don’t have to be a miner to get cryptocurrency tokens. You can make use of fiat currency to buy cryptocurrency token. you can trade it ( Fiat currency ) on an exchange like Bitstamp using another crypto (for instance, using NEO or Ethere to buy Bitcoin); you also can earn it by setting up interest-earning crypto accounts or publishing blog posts on platforms for users in who pay cryptocurrency.

For instance, Steemit is a  crypto blog platform, it is a kind of a ‘Medium’ where users can reward bloggers  in proprietary cryptocurrency  known as “STEEM”. It can then be traded for Bitcoin.

The incentive miners receive as rewards motivates them to help in the primary aim of mining: to monitor Bitcoin transfer, ensuring that they are valid. These are the duties of all users across the world. Bitcoin cryptocurrency does not rely on any central authority or a government body to oversee its regulations.

How to Mine Bitcoins

Miners receive payment for their work as auditors. Their work is to make sure that Bitcoin transfer is verified and legitimate. This convention is to make sure that Bitcoin users are honest, it was put in place by Bitcoin’s founder, Satoshi Nakamoto. Miners help to make sure that there is no ‘double spending problem’ by verifying transactions.  

Double spending is a situation whereby a Bitcoin owner illegally spends the same bitcoin twice. With daily used currency, this is not a problem: immediately you hand someone a $1 bill to buy a bottle of water, it’s no more with you, so there’s no issue of you spending that same $1 bill to buy train tickets elsewhere.

Even though there is a chance of counterfeit cash being made, it is different from  spending the same dollar the second time. However, with digital currency, “there is the risk of a holder making a copy of a digital token and sending it to a user but withholding the original for use of it the second time.”

When there are two of the same dollar bill you check to make sure that they don’t have the same serial number. It’s the same with what Bitcoin miners do.  They monitor transactions to ensure that no  Bitcoin is spent twice.

Immediately a miner verifies 1 megabyte (mb) worth of Bitcoin transfer, called “block,” that miner is eligible to receive a quantity of bitcoins (more about the bitcoin reward below ). The one ‘mb’ per data rule was made by Satoshi Nakamoto, but most miners believe the block size should be increased to house more data, so that it may effortlessly process and confirm  Bitcoin transactions quickly..

Note; verifying a MB worth of transfer gives a coin miner eligibility to earn bitcoin, not everyone who verifies transactions will get paid out ( if the condition is not met).

One ‘mb’ of transactions can be as small as one thousand (though it’s not common) or more. This depends on the amount of data the transaction takes.

“does it mean after all the time and effort I have spent, I may still not obtain any bitcoin?”

of the truth, you may eventually not profit any Bitcoin cryptocurrency. To profit, you must satisfy these two major conditions;

  • a. A Matter of effort. 
  • b. A matter of luck:

You must verify one MB worth of transactions. It is the easy part.

You must be the first miner to get the right answer, or closest solution, to a numeric problem. This process is said to be ‘proof of work’.

bitcoin mining

“What do I understand by, ‘to get the accurate answer to a numeric issue’?”

The beautiful news is that it doesn’t need advanced math or complex computerizing. You may have heard that miners need to  solve difficult mathematical problems “that’s not exactly how it is”. What happens is the race against time, trying to come up with a 64-digit hexadecimal number (a “hash”) that is less than or equal to the target hash first. It’s mainly guesswork.

The not so great news is that,  It may be guesswork, but with so many possible guesses for each of these problems being more than  trillions, it’s still hard work. To be the first to get a solution, miners need a strong computing power. To mine successfully, you require a  have a high “hash rate,” hash rate is calculated in terahashes per second (TH/s), megahashes per second (MH/s) and gigahashes per second (GH/s) 

That is a lot of hashes.

To find out the amount of bitcoin you can probably mine with your mining rig’s hash rate,  Cryptocompare offers a helpful calculator.

Mining and Bitcoin Circulation

Plus lining the pockets of miners and supporting the Bitcoin ecosystem, mining still serves an important purpose and which is! It is the only way to create new Bitcoin into circulation. That is to say, miners are basically “minting” currency. For instance, as of Nov. 2020, there were about 18.5 million bitcoins in circulation(Source: Coin Market)

Beside the coins minted through the very first block, which was created by the founder Satoshi Nakamoto, every other Bitcoins that came into being were because of miners. If there are no miners, the Bitcoin network would still be in existence and will be usable, however, we can’t have new bitcoins. Although, there will  come a time when Bitcoin mining ends; as per the Bitcoin Protocol, the total number of bitcoins will stop at 21 million. (Bitcoin.org FAQ).

But the rate at which bitcoin “mined” has been decreasing over time, in the year 2140 that’s when the last bitcoin will be released. It does not mean that transactions will no longer be verified. Miners will still verify transactions and be  paid fees for doing so in order to preserve the Bitcoin network’s integrity.

 Minus the short-term gain, mining bitcoin can grants you voting power when new ideas are about to be put in place in the Bitcoin network protocol. That is to say that miners have a little bit of influence in the decision making process on matters like forking.

How Much can a Miner Earn

Rewards for Bitcoin  mining are reduced by 1/2 every 4 years. The first time Bitcoin was first mined in the year 2009, mining one block earned you 50 BTC. In the year 2012, it was halved to 25 BTC. By 2016, this was 1/2 again to 12.5 BTC. On May 11th, of 2020, the reward was again halved  to 6.25 BTC. Bitcoin was about $17,900 per bitcoin during the month of November of 2020, which indicates you will be making $111,875 (6.25 x 17,900) for completing a block.(Source: BlockChain.com). Not a bad profit to solve that complex hash problem.

To get first-hand information of when these halvings will take place, you should consult the Bitcoin Clock, it gives you accurate updates on it. However, it’s quite interesting to know that the market value of Bitcoin has, all through its history, tends to correspond closely to the reduction of new coins released into circulation. The value rose due to the inflation  rate reduced and increase in scarcity. 

If you want to know how many blocks that have been mined since the beginning up to this moment, there are lots of sites, including Blockchain.info, will give you that info in real-time.

What Do I Really Need to Mine Bitcoin?

Even though it is said that in the early history of Bitcoin individuals may have been able to compete for blocks with a regular at-home computer,  it’s no more that way. The reason is that the difficulty of mining Bitcoin changes with time.

To make sure that blockchain and its ability to process and verify transfers runs smoothly, the Bitcoin network aims to produce a block every 10 minutes or so. However, if a combined one million bitcoin mining rigs are attempting to solve the hash issue, they are going to likely get result faster than in a case where few bitcoin mining rigs like 10 mining rigs are running on the same problem. For this purpose, Bitcoin analyses and alters the difficulty level of mining for each 2,016 blocks, or about every 2 weeks.

More collectively computing power working to mine for bitcoins increases the difficulty level of mining so that block production can be kept at a stable rate. Less computing power leads to a decrease in difficulty level. To see how much computing power is involved, when Bitcoin was launched in the year 2009, its initial difficulty level was one. As of Nov of 2019, it was more than 13 trillion.

That is to say, for Bitcoin miners to mine competitively, they must now invest in powerful computer equipment like an application-specific integrated circuit (ASIC) or GPU (graphics processing unit). These run from $500 to the tens of thousands. Certain miners, mostly Ethereum miners who purchase individual graphics cards (GPUs) as a cost-effective way to cobble mining processes.

The following photo below displays a home-made CRYPTO mining machine. 

TO FURTHER SIMPLIFY IT,

The workings of Bitcoin mining can be difficult to explain. Take this simple example as an explanatory example of how the hash problem works: I tell 5 friends that I’m thinking of a number between one and 70, and I write that number on a piece of paper and put it in a safe. They are not required to predict the exact number; any one of them could be the first to predict any number that is below or equal to the number I have entered in the safe. The number of guesses anyone can predict has no limit.

Let’s say I’m assuming the number 7. If a friend should guess 10, they lose because 10 is greater than 7. If another Associate (2) predicted 5 and Associate (3) predicted 1, then they’ve both apparently arrived at likely answers, because of 5 less than 7 and 1 less than 7. There is no “extra reward” for Friend (2), even though (2)’s answer was closer to the target answer of 7. Just think about the fact that if I ask the “guess what number I’m thinking of” game, but I’m not asking just 5 friends, and I’m thinking of a number between one and one hundred. Nevertheless, I’m asking thousands of potential miners and I am considering a 64-digit hexadecimal number.  You guess that it’s going to be really hard to guess the right answer.

If both (2) and (3) answer simultaneously, then the ELI5 analogy will break down.

In Bitcoin, concurrent answers happen frequently, but at the end of of everything, we can only have one answer that is winning. In a case where two or more answers are received at the same time, that are equal to or below  the correct number, the Bitcoin network will be determine by a simplistic majority —51%—which miner to honour.

Actually, it is the miner who has done more work or, in other words, the one that verifies more transactions. The block that is lost now becomes an “orphan block.”

 Orphan blocks; these are blocks not added to the blockchain. 

Miners who have also provided solutions to the hash problem but have ‘fewer verified’ transactions are not rewarded with bitcoin.

Lets Explain the “64-Digit Hexadecimal Number”

Take this as an example of such a number: 

0000000000000000052fcc708cf0130d74e27c5819203e9f967ac56e4df596ee

The number up there has 64 digits. Easy to understand so far. As you probably have noticed, that number consists not just of numeric figures, but also of the alphabet. And why is that?

To get a clear insight what these letters are doing in the middle of numbers, let’s unravel the word “hexadecimal.”

As we all know, when we use the “decimal” system, it means it is in base 10. This means every digit of a multi-digit number has 10 possibilities, zero to nine.

“Hexadecimal,” simply translated, says base 16, as “hex” is obtained from the Greek word for six and “deca” is obtained from the Greek word for 10. In the hexadecimal system, each digit has 16 possible outcomes. But the numerical system we  use only offers 10 possible ways of representing numbers (zero to nine). That’s why you have to put letters in, specified letters are; b, c, d, e, and f. 

If you are mining Bitcoin, you don’t have to calculate the total value of the hash. I repeat: You don’t have to calculate the total value of a hash. 

So, what is the correlation between the “64-digit hexadecimal numbers” and  Bitcoin mining? 

Back to the ELI5 analogy, where I wrote the number 7 on a piece of paper and put it in a safe?

In Bitcoin mining terms, the metaphorical secret number in the safe is called the target hash.

The miners make use of those huge computers with dozens of cooling fans to guess the target hash. Miners do make some of these assumptions by randomly creating so many “nonces” as quick as possible and as swift as possible. nonce can be referred to as the “number only used once,” and these nonces are the key things in generating these 64-bit hexadecimal numbers we have been discussing. In Bitcoin mining, a nonce is 32 bits in size; it is so much smaller than the hash, which is 256 bits.

Any one mining bitcoin whose nonce is the 1st to produce a hash that is below or just equal to the expected hash is rewarded for successfully completing that particular block and the reward is 6.25 Bitcoins.

You may also accomplish the same purpose by casting a 16-sided die 64(sixty-four) times to generate random numbers, but why would anyone want to do that?

The screenshot below, gotten from the Blockchain.info site, might help you understand all this information at a glance. It is a recap of all that occurred during the mining of block #490163. 731511405was the  nonce that generated the “winning” hash. The target hash is seen on the top. The phrase “Relayed by Antpool” implies that this particular block was successfully achieved by AntPool, one of the very thriving mining pools (see more details about mining pools below).

Based on the image below, the contribution they made to the Bitcoin world is that they confirmed 1768 transactions for this block. But if you desire to see all 1768 of those transactions they did confirm for that block, then visit this particular page and page down to “Transactions.”

“So how can I guess the target hash?”

All the target hashes begin with the number zero, the least is eight zeros and the high is 63 zeros. 

It doesn’t matter how small a target is, but there is a limit to the maximum target set by the Bitcoin Protocol. No target can be longer than this number:

000000000000000ffff000000000000000000000000000000000000000000000

These ones are random (arbitrary) hashes and the foundations for them to lead to success for any miner:

Note: These are made-up hashes.

“How to  increase my opportunities of presuming the target hash before anyone else does?”

  • You have to get a very fast mining rig,
  •  or, better still, joining a mining pool; they are a group of coin miners who add their computing power and share the mined Bitcoin. Mining pools are like those Powerful organizations whose members work very hard to get and share the profits amongst themselves. A really large number of blocks are mined by pools instead of individual miners.

That is to say, it’s basically just a number game. You can’t give a prediction based on past target hashes. Recently, the difficulty level of blocks at the time of writing is around 17.57 trillion, that means the probability of any given nonce producing a hash below the target is one in 17.57 trillion. Not great odds if you’re working alone, even if you have a really powerful mining rig.

“How to Find Out if Bitcoin will be a lucrative undertaking for you or not?”

 Aside from examining the costs associated with high-priced tools that is needed, for you to stand any prospect of resolving a hash problem. They must also consider the needed amount of electrical power mining rigs employed in delivering large amounts of nonces in a quest for a solution. As a result, Bitcoin mining is mainly not profitable for most individual bitcoin miners. The site Cryptocompare gives a valuable calculator that will allow you to plug in numbers such as;

  • your hash speed  and
  • electricity costs. To give a rough idea of you profiting or yes.
(Source: Cryptocompare)

What Are Coin Mining Pools?

Reward is given to the miner who gives a solution to the puzzle first and the chance of a miner discovering the solution first, is directly proportional to the number (strength) of Bitcoin network’s mining power. 

Crpto Miners with a small portion of mining power stand a small chance of finding the next block by themselves. Now, for example, a mining card that one can get for a couple of thousand dollars would represent less than 0.0002% of the network’s mining power. With such small chance of finding another block, it might take so much time before such a miner finds a block, plus the stress of finding it makes it even more detrimental. Suxch a miner might never be able to profit from that investment. The way out of this problem is mining pools. 

Mining pools are opened by third parties and coordinate a group of miners. They work as a team in a pool, then share the gains amongst themselves, miners can get a regular flow of bitcoin from the day they become miners. Statistics of some mining pools are found on Blockchain.info.

“I have done the math. Forget mining. Is there a less tiring means to profit from cryptocurrencies?”

As I have previously said, the most effortless way to get a Bitcoin is; 

to just buy it on one of the popular exchanges. Or

You can make use of leverage called the “pickaxe strategy.” (This is based on the past when California gold rush in 1849, the smart investment was not to mine for gold, but instead to create the pickaxes that is used for mining).

To make it simple, invest in the corporations that produce those pickaxes. Based on the “cryptocurrency” context, the pickaxe is equal to companies that fabricate equipment used in Bitcoin mining. You should think of looking into corporations that make ASICs or GPUs bitcoin mining equipment. 

Is Bitcoin Mining Legal?

The legality of Bitcoin mining depends on your geographic location (country). The idea of Bitcoin  threatens the rule of daily used currencies and the financial market is controlled by the government. For this reason, Bitcoin is termed illegal in certain places.

Bitcoin ownership and mining are legal in more places than it is not. Some places where Bitcoin is illegal are; Algeria, Egypt, Morocco, Bolivia, Ecuador, Nepal, and Pakistan (source: CLICK HERE). Nevertheless, the use of Bitcoin and mining are legal across most of the globe.

Risks of Mining 

The risks in mining are usually that of financial risk and a regulatory one. It is an established fact that, Bitcoin mining, plus mining in general, is a huge financial risk. One can experience the struggle of purchasing hundreds(100s) or thousands (1000s) of UNITED STATES dollars value of mining equipment only to get no profit on their expenditure. Based on all of these, this uncertainty can be controlled by being a part of  Bitcoin mining pools. If you are thinking of mining and living in a place where Bitcoin is not approved by the govt you should rethink. It is also good if you examine the laws and overall attitude towards crypto-currency in your country or locality before investing your money in bitcoin mining equipment.

Additional potential risk from the growth of Bitcoin mining  is the increasing energy usage required by the computer systems running the mining algorithms (the proof of work system). Even though the efficacy of microchips has drastically improved, for the ASIC chips, the growth of the network in itself is outdoing technological advancement. Based on this, there are some thoughts about the environmental consequence and carbon footprint of mining Bitcoin.

However, there are efforts to manage this externality by seeking cleaner and green energy sources for mining operations (such as geothermal or solar), as well as making use of carbon offset credits. Turning to less energy-intensive consensus tools for example proof-of-stake (PoS), of which Ethereum is planning to do, that’s a different strategy; notwithstanding, PoS comes with its personal set of incompetence and disadvantages.

ARTICLE SOURCES

  1. https://coinmarketcap.com/
  2. Bitcoin. “FAQ.” Accessed Sept. 23, 2019. 
  3. Blockchain. “Market Price (USD).” Accessed Sept. 181 2021.
  4. https://www.loc.gov/law/help/cryptocurrency/cryptocurrency-world-survey.pdf

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