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Bitcoin Mining

The process of digitally adding transaction records to the blockchain

What is Bitcoin Mining?

Bitcoin mining refers to the process of digitally adding transaction records to the blockchain, which is a publicly distributed ledger holding the history of every bitcoin transaction. Mining is a record-keeping process executed through immense computing power. Each Bitcoin miner around the world contributes to a decentralized peer-to-peer network to ensure the payment network is trustworthy and secure.

 

Bitcoin Mining

 

To securely add to the blockchain ledger, Bitcoin mining computers solve complex mathematical problems. When a solution is found, the latest block of confirmed transactions is added as the next link in the blockchain.

As an incentive to mine and contribute to the network, the miner who solved the problem is rewarded a block of Bitcoin.

 

Summary

  • Bitcoin mining involves powerful computers attempting to solve the complex mathematical problems of the Bitcoin algorithm.
  • Solving these problems helps keep the blockchain ledger and network secure trustworthy.
  • All Bitcoin miners contribute to this process. The miner who successfully solves a mathematical problem is awarded Bitcoin.

 

Basics of Bitcoin Mining

There are three ways to acquire Bitcoin:

  1. Purchase them on an exchange
  2. Receive them in exchange for goods and services
  3. Mine new Bitcoin

 

The process of discovering new Bitcoin is described as mining because it resembles the process of mining for any other resource. With gold mining, miners search and dig through the earth in hopes of striking gold.

With Bitcoin, miners attempt to find Bitcoin through solving complex mathematical problems. Blockchain is the technology that the cryptocurrency is built on. It is a ledger that is publicly distributed and records every Bitcoin transaction.

It is literally a digital chain of blocks. Each block contains a group of Bitcoin transaction information. Miners add to the blockchain by using computer processing power to solve complex mathematical problems. Solving the problems will result in the block being successfully added to the chain. The miner who correctly solves the problem is awarded Bitcoin.

The above forms the basis of the complex process of Bitcoin mining. It helps keep the payment network secure and trustworthy. The network is built on a peer-to-peer network, meaning that every single miner across the globe is contributing their computing power to maintain the network, confirm its transactions, and keep them secure.

 

10 Minutes per Block

Satoshi Nakamoto, the creator of Bitcoin, designed the Bitcoin network to allow for a block to be mined every 10 minutes. To maintain this 10-minute pace, the difficulty of the mathematical problems adjust automatically.

When there are more miners and more computing power attempting to mine, the level of difficulty will increase. When there are fewer miners and less computing power, the level of difficulty will decrease.

 

Evolution of Mining

At the beginning stages of Bitcoin in the early 2000s, individuals interested in Bitcoin mining were able to do so using their personal computers. As its popularity increased, so did the difficulty of mining.

To accommodate the growing level of difficulty, more computer processing power was required. Soon, miners used gaming computers to attempt to mine Bitcoin. The process repeated, and the mining difficulty and amount of computing power required increased.

Eventually, computers and chips were created for the sole purpose of mining Bitcoin. Today, it requires efficient hardware – those with strong computing abilities and energy efficiency.

Solving the Bitcoin algorithm to add to the blockchain and receiving Bitcoin requires an immense amount of electricity. Keeping electricity costs low is key to making Bitcoin mining profitable and sustainable.

 

Block Reward

The block reward is how much Bitcoin is rewarded for each block that is solved and added to the blockchain. The block reward is designed to “halve” for every 2,016 blocks mined. It is called the “halving” process and happens every four years.

The most recent halving happened in May 2020. Below are the historical block rewards, dating back to 2012:

  • 2012: 25.00 BTC
  • 2016: 12.50 BTC
  • 2020: 6.25 BTC

It means that in 2020, for every block a miner solves, they will receive 6.25 Bitcoins. The halving will continue until the last block and coin are mined. With each block of Bitcoin being mined in 10 minutes, the last coin is predicted to be mined in 2140.

 

Genius Design and Incentive

With the blockchain, the network is served by the entire global community of miners. Each contributes to confirming the legitimacy of each transaction. As an incentive to contribute, miners are awarded for their services with a block.

 

Why Mine Bitcoin?

Bitcoin offers a disrupting technology in the blockchain. The currency itself is decentralized, allowing transactions to happen globally without government restrictions and delays. Miners of Bitcoin see value in the decentralization of cryptocurrency.

With the latest mining technology, Bitcoin mining can be broken down to determine a stream of income based on the output of mining rigs (computers). The following are the important factors to Bitcoin mining profitability:

 

Computing hardware

Miners need to own the latest hardware to compete with the increasing requirements for successful mining. Equipment can become obsolete in a matter of years. They need mining-specific hardware, which can be costly. The latest ASIC mining rigs cost over $1,500 per computer.

 

Power costs

Power will be the main operating expense. Electricity is charged per kilowatt-hour (kWh). Profitability for mining can float from $0.03 – $0.08 per kWh. A shift in a few cents can make all the difference for mining profitability. It is imperative that a miner can use power at the lowest possible cost.

 

Bitcoin price

The price of Bitcoin is important in mining because miners receive a certain amount of Bitcoin when they correctly solve math problems. If the current

Bitcoin block reward is 6.25 coins; you will want those coins to be worth as much as possible. If you receive 6.25 coins and the price of Bitcoin is $5,000, your mining operation will likely be unprofitable. If the price is $12,000 a coin, your mining operation may operate at healthy profitability.

 

The right mixture of the elements above makes mining an attractive venture. If the variables are all favorable, miners can scale up operations and mine profitably.

The other attractive reason to mine Bitcoin is its potential as an investment. Believers of Bitcoin predict the price can shoot far past $100,000 per coin (price is around $10,000 in 2020).

With a finite amount of Bitcoin available to mine, the demand will edge higher as the reservoir of available coins to mine shrinks. If Bitcoin becomes more adopted for use as currency, it will add to the demand.

 

Requirements to Begin Mining Bitcoin

To start mining bitcoin, the following are required:

  1. Competitive mining computers (rigs)
  2. Low-cost power supply
  3. Mining software
  4. Mining pool membership

 

Mining Pools

The idea of Bitcoin mining pools rose to tackle the issue of rising mining difficulty. A group of miners pools their computing power together to mine for Bitcoin collectively. If the pool successfully solves a block, all miners in the pool will be allocated Bitcoin in proportion to how much computing power they contributed.

The odds of one single mining rig receiving a block reward are low, but those odds skyrocket when you pool together thousands of rigs. Mining pools are now considered essential to getting any shot of successfully mining Bitcoin.

 

Related Readings

CFI is the official provider of the global Certified Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:

  • Cryptocurrency
  • Altcoin Guide
  • Ethereum
  • Mining Asset Valuation Techniques

Financial Analyst Certification

Become a certified Financial Modeling and Valuation Analyst (FMVA)® by completing CFI’s online financial modeling classes and training program!