What’s the first thing you think about when you hear about bitcoin mining? Digging it out of the ground with a shovel?
The name mining probably does sound unusual, especially for someone who is not familiar with the crypto world. So read this article to get a better understanding of what exactly bitcoin mining is and why people are mining cryptocurrencies.
What is bitcoin mining?
Banks operate in a way where remittances, deposits, or any movement of money are recorded in their central system (or their transaction book). In addition, the account also records the balance of accounts and related financial products (deposits, loans, etc.).
The transaction book and the transactions themselves are protected by various systems and protocols to ensure security and to prevent abuse. This transaction book is owned by the bank and each individual customer can only access information about their own assets.
With cryptocurrencies and trading, this part is covered (or replaced) by mining – a process where computers connected to a network carry out the process of “crypto mining”, meaning that they essentially:
- process all remittances on the network,
- safeguard the network,
- ensure the consensus and coordination of all participants in the system.
That’s right – the participants. In the case of a bank this is managed by a central unit, but with cryptocurrencies, there are tens of thousands of miners involved. Each of them confirms and checks the transactions. This ensures that chances of manipulation are virtually non-existent.
Cryptocurrencies mining is similar to the activity of a central database, but in the case of bitcoin mining, this is a completely decentralized network. This ensures that there isn’t a single individual person or entity that could have control over the bitcoin transactions.
The term mining is suitable as it is the process in which new bitcoins are formed. So you see where the connection with gold mining comes from.
Another parallel with gold is that there’s a limited amount of bitcoins that can ever be mined: no more than 21 Mio coins. As of early 2018, more than 17 Mio bitcoins have already been mined, but the last one is expected to be mined in 2140.
How to mine bitcoin?
Good question. Is it enough to turn on the computer and wait for the cash flow?
Bitcoin mining can in principle be handled by anyone. On a specialized computer, you run the dedicated mining software which monitors new transactions on the Bitcoin network and performs tasks for validating and processing said transactions.
The main motivation for bitcoin miners is to receive monetary compensation for lending out their processing power (the word “monetary” might be a bit controversial as a lot of bitcoin believers are trying to move away from the regular monetary system). They are rewarded with new bitcoins that are created according to predetermined rules. All transactions that are carried out in a given period are called blocks. Miners confirm these blocks and essentially write them into the main transaction book, called the blockchain.
The more miners join the network, the more difficult it becomes to make a profit for each of them as the network automatically increases the complexity or difficulty of work to create new blocks. As a result, the average time to add a new block to the blockchain hovers around the 10 minutes mark. As a consequence, bitcoin mining is a very competitive work.
The possibility of canceling past transactions is rapidly decreasing when adding new blocks to the blockchain.
Energy consumption for bitcoin mining
Before deciding to use your computer 24/7 for mining, you should also consider the costs. As with any other payment system, the cryptocurrencies mining also comes with a price. In this case, it comes mainly in the form of power consumption since the hardware has to work continuously at maximum load.
Of course, there is also the cost of the hardware itself, but the return on investment period is generally the same, regardless of how much you invest in the beginning.
The text is informative in nature and does not count as an investment recommendation. It does not express the personal opinion of the author or service. Any investment or trading is risky, past returns are not a guarantee for future returns – risk only those assets that you can afford to lose.
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