A look at what it means to mine your bitcoins!
A look at what it means to mine your bitcoins!
Bitcoins! The cryptocurrency everyone knows about, talks about, owns or wants to own. A recent surge in the interest towards traditional money alternatives and cryptocurrency has led everyone to be aware of the premier cryptocurrency - Bitcoin.
There are two ways to obtain Bitcoin. The simpler method is to invest in cryptocurrency exchanges. One can open a wallet based account with these exchanges and buy the cryptocurrency of their choice. An investor may then decide to hold, sell or buy in order to trade cryptocurrency. The second and more complex method is mining.
Mining is the process of creating new cryptocurrency coins by solving extremely complicated mathematical problems. Mining is also an integral component of maintaining a blockchain ledger that legitimizes new transactions. This is important in the absence of a central authority in play that could verify and act upon invalid transactions or stop the counterfeiting. The mining process thus achieves a decentralized consensus through proof of work.
When a miner obtains Bitcoins by mining, there is no conversion of fiat currency to cryptocurrency. Miners, however, incur operating costs.
When someone invests or trades in cryptocurrency, the details of these transactions are lodged on a public ledger, called the blockchain. The transaction however is only complete after a miner verifies it as legitimate and makes an entry on the blockchain.
Miners are in a race against each other to solve a problem. Rewards are paid to miners who discover a solution to a complex hashing puzzle. The first to do so gets to add a block to the blockchain. The miner gets 6.25 bitcoins as a reward for their efforts. With each successful transaction, new coins enter into circulation, thus completing the mining process.
The verification of these newly minted coins as legitimate is achieved by repeating the entire process again.
Miners try to come up with a 64-digit hexadecimal number otherwise known as a hash that is less than or equal to the target hash. While the mathematical efficiency required to achieve the same is subjective, coming up with a hash involves a lot of guesswork. Mining difficulty is raised as the number of miners trying to guess this hash increases.
The Bitcoin network aims to have one block added to its blockchain around every 10 minutes, to ensure a smooth operation. The more miners that join in to solve the problem the sooner a solution is found. This is why to stabilize the block production rate Bitcoin evaluates the difficulty of mining after every 2016 block, which is roughly two weeks.
To earn Bitcoins a miner needs to be the first to offer the solution. To add to their efficiency miners require specialized computer hardware that offers a high hash rate. This hardware, also known as application-specific integrated circuits (ASIC) or a graphics processing unit (GPU) , became a part of a mining rig.
With increasing competition, it has become almost impossible to engage in mining using a home-based computer setup. The hardware essential for mining rigs is highly specialized and expensive. It consumes high amounts of electricity, in a way limiting the profitability of miners.
The reward amount is revised and cut in half every 210,000 blocks or around 4 years. Due to the volatility of Bitcoin’s market price, it is impossible for a miner to estimate his profits.
Mining is an extremely time and energy-consuming task. Sure, the rewards are worth the efforts but the probability to win these makes mining a difficult choice for investors. Regardless of the way one decides to obtain Bitcoins, owning a stake in the first cryptocurrency is definitely exhilarating.
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