Heard the term ‘Bitcoin Mining’ and want to know exactly what it is? Read on…
In a nutshell, Bitcoin Mining is the process of doing ‘work’ on the Bitcoin Network. This returns a reward in Bitcoin – the highly lucrative and well sought after digital currency.
Traditional Gold miners have to physically dig into the ground. They expend energy, fuel and equipment in their pursuit of the shiny precious metal.
In contrast, Bitcoin Miners have to provide computational power in the form of dedicated computers and servers to solve complex mathematical problems.
Consequently they are then rewarded in increments of Bitcoin.
Let’s dig a little deeper and explain that concept further…
It all comes back to ‘Blockchain’, the technology which Bitcoin is built upon.
Essentially (and in very layman’s terms)… Blockchain is like a big digital ledger, a record of transactions, all compiled into sections called ‘blocks’. Each block can contain a huge number of transaction records. Furthermore, as time goes on and more transactions are made, new blocks are added and the ‘Blockchain’ increases in size.
That’s all well and good, but we need to verify that a transaction did occur as people say it did. We need to know that the said amount of Bitcoin was in fact sent from one Bitcoin wallet and received by another. The Bitcoin network confirms this by using what’s called a ‘Proof of Work’.
Essentially a network of peer ‘nodes’ (dedicated servers) all compare their copy of the Bitcoin ledger and perform mathematical computations to confirm the transaction occurred.
Bitcoin Mining is effectively this process of proving and updating the Bitcoin ledger, but it is very computationally expensive. However the reward is currently greater than the cost. The first Bitcoin Miner(s) to successfully ‘solve’ the latest block on the Blockchain, are rewarded with Bitcoin.
In return for the time and effort spent on mining (it can consume very large amounts of costly electricity to keep these servers running), the Bitcoin network rewards these nodes, with a newly minted amount of Bitcoin.
Huge computational effort
Over time as the Bitcoin ledger has increased in size and the volume of transactions has increased, the computing power required to ‘solve a block’ on the chain has increased. The level of computational effort required has also been in part imposed by the Bitcoin developers themselves.
The Bitcoin level of computational difficulty required to mine Bitcoin has been ramped up over time, to throttle and maintain a steady supply of new Bitcoin. However there is a limit on the total number of Bitcoins which will ever be minted and released into circulation.
Only around 21 million Bitcoins will ever be minted. This is a hard limit (or protocol) set in place by the Bitcoin community of developers and written into it’s core codebase. We currently we have approx. 16.4 million Bitcoins in circulation as of mid 2017.
21 million Bitcoins might not sound like a lot when you think of how many Billions or Trillions of Dollars, Euros or Pounds exist in the world today. However since it is a digital asset, Bitcoin can also be divided up into many decimal places. Typically Bitcoin might be written to 8 decimal places, such as 0.00000001BTC. In fact that same smallest common denomination is more commonly known as 1 Satoshi, named after Satoshi Yakamoto, the pseudonym of the original creator(s) of Bitcoin.
Bitcoin Mining Pools
Members of the Bitcoin community who run and maintain these Bitcoin mining servers are known as “Bitcoin Miners”. Typically they will group and pool their server resources to compound their processing power and increase their chances of ‘winning’ more Bitcoin. The groups of Bitcoin Miners and their clusters of servers are commonly referred to as “Bitcoin Mining Pools”.
Bitcoin Mining is very big business and lucrative for those who can achieve it at scale. The value of Bitcoin has seen huge leaps in recently times. Consequently, mining Bitcoin has become the domain of very well funded firms. Firms who often build dedicated server farms full of the highest specification servers for this sole purpose.
For the average Joe, it is no longer regarded as feasible or economical to compete and hope to win any significant sum of Bitcoin. Mining Bitcoin using just your desktop computer at home is no longer an attractive proposition for most everyday enthusiasts.
For those of us who don’t have the technical skill or resources to mine it at skill, our options for making the most of the Bitcoin opportunity might lie in either: