Bitcoin Mining: Simple Explanation
Bitcoin mining is solving complex mathematical problems by special computers, called excavators, while the calculations are done in the Proof of Work (POW) system.
The result of mining is new Bitcoin units extracted and new Blockchain blocks in the network created.
Introduction to Bitcoin Mining
Bitcoin mining is taking a diamond pickaxe, heading to the mine, and hitting the wall back-and-forth, until you find a Bitcoin, right? ⛏️
Well.
It’s actually the exact opposite to what you’d imagine.
Key Points
💡 BTC mining is extracting new Bitcoin units by solving complex, mathematical problems.
💡 The name ‘mining’ has nothing to do with an actual mine or miners.
💡 The process of mining is one crucial to the existence of Bitcoin’s network, its security, and maintenance. Without mining, Bitcoin’s network might as well not exist.
💡 The mathematical calculations stand as a POW = Proof of Work. Meaning that the POW ensures that the operations within the network are correct. For example, ensuring that you cannot double-spend the same assets (undo your transactions) or add more assets to your address than you actually own.
What Is Bitcoin Mining?
Bitcoin mining is solving complex mathematical problems by special computers, called excavators, while the calculations are done in the Proof of Work (POW) system.
The result of mining is new Bitcoin units extracted and new blockchain blocks in the network created.
Bitcoin’s network is built precisely on blockchain, which, in a sweet summary, is an interconnected ledger of blocks that contain data and summary of the previous block, making it virtually impossible to mess with the data on any of the blocks.
If you feel like blockchain is still this mysterious creature, read our dedicated article explaining blockchain simply and showing you real examples of this technology. 👀
Who Are Miners & How Do They Mine?
Miners are the people and companies who take care of mining Bitcoin.
In summary: their work is basically constant search for the hashing function’s (SHA256) solution.
The SHA256 (hashing) function — is basically a text signature that’s for the most part unique and exactly 256-bit big. SHA stands for Secure Hash Algorithms that have been designed by the NSA (United States National Security Agency) and first published in 2001. SHA-256 is a part of the SHA-2 family of six hash functions, and is computed using eight 32-bit words.
The solution — hash — is very difficult to be found, however, once found, checking whether or not it’s correct is the easy part.
Miners compete against each other in who’s going to get to the finishing line and find the solution for the specific problem first. 🏎️
Why?
Because the one who does it first, receives a reward. And the reward is a specified amount of BTC and a part of the transaction fees later on. 🏆
But solving the problem is not enough to win the reward.
The miner who found the hash and solved it, must present it to other nodes. Once other nodes check it and approve the solution. Then, a new block can be created in the network, and the reward can be collected.
Mind you, even though the process of verifying a solved hash by other nodes seems time-consuming, it’s actually pretty swift.
From Computers, Through Graphic Cards, To Excavators
In theory, anyone could mine BTC.
In practice, mining grew to such a significant size that it’s mostly handled by dedicated companies.
At the beginning, all you needed to start mining Bitcoin was your regular, crusty-dusty computer.
However, as of now, regular computers do not have the computing power to complete the required calculations. And of course, you could try to mine with your computer, but it’s pretty pointless when taking into account the computers and machines the big mining companies have.
Once the regular computers started to be insufficient in mining, graphic cards came to save the day.
And now, we’ve come to the point where whole excavators are created specifically for the mining process.
A mining excavator is basically a set of multiple graphic cards of special kind, working on Application-Specific Integrated Circuit (ASIC).
ASIC excavators are very efficient and are great at solving hash functions. But other than solving mining problems, they’re not really useful in any other way.
A Whole Ass Business
This brings us to a conclusion that mining evolved to be a whole ass business.
There are companies with huge shop floors, big staff, and quite some machinery. The staff checks on the machinery, removes any possible faults, and makes sure everything’s running smoothly.
The machinery itself is a pretty big financial investment too.
But, besides just the machinery or the staff’s costs, we also have to take into account renting or purchasing a proper place where we can get our machinery and people to operate at. And finally, the dreaded electricity costs, which for the process of mining are pretty dang huge.
That goes to show that a lone wolf miner doesn’t really stand a chance with the big mining companies now.
However, a miner with an actual excavator can share the computing power of their machinery with the big company, and basically, earn by participating in the process. The reward is then proportional to the computing power said miner shares.
Mining Difficulty
We also have to mention the term difficulty.
Mining difficulty or simply difficulty is exactly what you’re thinking. It’s the difficulty of the problem for which you need to find the solution in order to mine new Bitcoins.
The most interesting part is that mining difficulty is pre-stipulated and changes in a given period, usually every 2016 blocks created, which is roughly two weeks.
Mining difficulty helps maintain the 10-minute period in which a new block is mined. That is why, we can also say that it’s basically a recalculation or reevaluation of mining’s difficulty level.
Difficulty is calculated on the basis of the collective computing power of the whole network of miners. If the computing power rises, that is, more people are connecting their computers or machines for mining, miners are then able to mine new blocks quicker than the 10-minute period we’ve mentioned. In such a case, the difficulty is put higher to simply maintain a steady 10-minute mining interval.
Now, should the collective computing power go down — meaning, miners disconnect their machines or computers from mining, the difficulty is lowered.
Higher difficulty also means more machinery and excavators needed for the big companies to find the solution to the hash function.
So, overall, mining difficulty is there to make the process of mining a stable and reliable one.
How Higher Mining Difficulty May Affect BTC’s Price?
Mining’s difficulty can also be one of the factors that affect BTC’s price.
How you may ask?
Well, basically, the higher the difficulty, the more machinery needed, the higher the electricity and other associated mining costs, which may lead to the need for more advanced machinery and more resources to stay competitive.
The point is that the higher the costs for miners to bear, the less likely they might be to sell their BTC on low prices. As a reminder, miners receive BTC units as part of the rewards they get for mining.
Long term, such a situation may cause BTC’s price to go higher.
But as always, we have to remember that there are many other factors that affect BTC’s price.
Creating New Blocks + More On Rewards
All this may make you think that mining BTC is basically illogical. It seems expensive and exhaustive for miners.
But.
Miners still connect more and more machines and computers to join the mining process. And that is because of the rewards, we’ve briefly mentioned, that they receive.
The rewards for miners are made of:
- stipulated amount of BTC per each new block created
- all the transactional fees that occur in the network
It’s worth underlining that the rewards for miners do not come from the BTCs already in circulation, but from the newly mined ones.
The reward for mining a new block in BTC’s network now sits at 6.25 BTC. Thus, with every 10 minutes when a new block is created, a new 6.25 BTC joins the network.
What’s also crucial to note in the topic of rewards for mining is the oh-so-awaited halving.
A Bit About Halving
Halving is an event in which the reward for mining new BTC is cut in half. It’s been coded into the network and happens exactly every 210 000 blocks mined, which takes roughly 4 years.
The next halving event takes place between April/May of 2024 cutting the reward for miners from 6.25 to 3.125 BTC per every new block mined.
If you’re curious to read more about halving, take a dive into our dedicated article on the topic. After all, mining and halving are best read as a duo.
Final Thoughts On Bitcoin Mining: Will It Be Worth It?
You may now be wondering whether mining Bitcoin will be worth it as the time goes on, and the reward for mining gets smaller and smaller.
Especially after the very last halving event that will occur when the amount of BTC in circulation reaches the stipulated 21 million, and there will simply be no reward for miners at all. Reaching the 21 million BTC issued is presumed to happen around 2140.
The theory is that Bitcoin will be commonly used by then, meaning that miners will still have the purpose of supporting the network to simply gain the fees that they get from transactions and operations.
Basically, despite the fact that there will be no reward in the form of BTC roughly every 10 minutes when new blocks are created, miners can still earn a lot through fees.
🔗 Useful Link
As always, let’s end this article with something useful.
https://mempool.space — here, you can check all the information on Bitcoin’s network, including the amount of unconfirmed transactions, current fees for different priorities, or current mining difficulty.