Bitcoin mining can seem like a highly complex system to get your head around at times. There are many factors to take in when getting into the industry, and many people are put off by the complexity of it. Some of the terminology is new to most people, and of course the profitability of mining Bitcoin.
If you are interested and you’re not sure, allow me to clear up some of the mining process and how it works. I’ll explain some of the mining jargon that should give you a good foundation to start after reading.
Bitcoin a Decentralized Money
Bitcoin as a digital money isn’t revolutionary. There were many attempts before it, and we can go back as far as the 1980s when a digital payments system was created in the Netherlands to allow facilitate a safe payment method for truck drivers, who were getting caught up in late night robberies.
Then we had the DigiCash attempt that introduced cryptography to digital money, but again this attempt ultimately failed. There have been several others since, and they all failed because they had two major flaws: centralized and/or double spending problem.
On 3rd January 2009 Satoshi Nalamoto gave Bitcoin to the world. A true decentralized, peer-to-peer digital money, that combatted the double spend problem with a timestamp mechanism.
Basically, every transaction that takes place on the Bitcoin ledger is validated by miners and nodes, who all have to be in unison for the transactions to be added into the block and the block to be added to the blockchain. This is known as proof of work (PoW).
PoW must have the miners and nodes processing the information picked up by the network. They are the ones validating and securing everything, and without them Bitcoin couldn’t work.
PoW and Mining
PoW is the way of ensuring that every new block took a lot of processing power, money, and hard work to create. Every transaction is hashed and put into blocks, which is added to the blockchain every 10 minutes or so. For every block, there is a mining block reward of 12.5 BTC, soon to be halved after the Bitcoin halving event in May 2020.
PoW is based on Bitcoin’s hashing algorithm SHA-256, which is a one-way cryptographic function that converts an input into a string with a fixed number of symbols. Basically, this means the transactions are cryptographically secured and because the hashing algorithm keeps working, it’s extremely difficult to reverse.
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With the SHA-256 algorithm, each block is cryptographically tied to the next one. Each block includes a version of Bitcoin core protocol, a timestamp, a previous block’s hash, a Merkle root, which is a hash of all the previous block’s transactions, a difficulty target based on the SHA-256 algorithm, and a nonce, which together with the difficulty target is used by miners to create a new block.
How it works: Miners run hash function through the block header of an existing block and compare it to the difficulty target. If the hash is lower or equal to the difficulty target, a new block is created and the miner who creates it, wins the block reward.
Mining Difficulty and Hashrate
The mining difficulty rate adjusts to meet the hashrate. In essence, the higher the hashrate goes (more miners) the more difficult it gets to process the data, and the lower it gets the easier it is to process the data. But why does the difficulty have to change?
Hashrate is how many hashes a computer can do in a second. Back in the early days of Bitcoin you could mine on your laptop, but as it’s become more lucrative CPU is now incapable of competing against some GPU and ASICs mining rigs that are built especially to mine Bitcoin and other cryptocurrencies. The next instalment of ASICs mining rigs are expected to be able to hash between 80-110 TH/s.
So as these powerful mining rigs pump up or even slow down the hashrate of Bitcoin the mining difficulty automatically adjusts. To maintain a level of difficulty, each block should take on average 10 minutes to mine.
Bitcoin’s difficulty adjustment is coded into the Bitcoin core protocol and is designed to adjust every 2016 blocks, which is approximately every two weeks. If the mining of new blocks has sped up up the difficulty is set higher – making mining more difficult, whereas if it slowed down the difficulty would be eased.
Bitcoin mining can seem daunting to the layman. The terminology is new and it can be technical at times, but there are plenty of online courses, great books, and information on the Internet.
Remember before you get into mining Bitcoin or any other cryptocurrency is to do your own research, not just about how to mine, but also on the equipment. You need to factor in the costs of the equipment, which is expensive, and of course the cost of electricity.
At today’s prices, mining Bitcoin profitability is roughly break-even, depending on your location and electricity costs. But even in the climate of fear that coronavirus is being used as an excuse for, I don’t believe we will see these cheap Bitcoin prices for too long.
Author: Tommy Limpitlaw