Most people know that Bitcoin is a digital currency that unlike standard money like the dollar or euro, isn’t issued, controlled or backed by a government. However, what most people don’t know is that bitcoins are discovered through a complex process commonly known as mining. What is bitcoin mining you ask? Our article will present all the information you need to answer that question yourself and more. We will start with a short history of the currency and its specific traits, continue to the specifics of the mining process and end with what you need to start your own mining operation.

The Specifics of Bitcoin

Bitcoin is a digital payment system based on mathematical proof. The infamous and unknown Satoshi Nakamoto was the creator of the currency. He developed the algorithm and software that led to the creation of the first bitcoins. The same protocols are used in the current day for the discovery of new bitcoin.

Characteristics:

  • Limited amount: the Bitcoin protocol only allows for 21 million bitcoins to exist. There are currently 12 million in circulation.
  • Decentralized: the cryptocurrency isn’t controlled by a government or other institution. Instead,  individual users of the software discover the bitcoins.
  • Transparent: a general ledger stores all the Bitcoin transaction form the network.
  • Non-repudiable: with no authority backing the currency, only the other party of transaction can refund the bitcoins.
  • Mining difficulty: Bitcoins were designed to be mined more easily at the beginning and harder as the number of undiscovered bitcoins declines. At the current rate of mining, the last bitcoin will be discovered in 2140.

The following section will offer the concrete answer to what is Bitcoin mining question that we previously mentioned.

What is Bitcoin Mining?

Now that we know more about the history and specifics of Bitcoin, we can begin answering the question of what is bitcoin mining. Simply put, bitcoins are discovered using special software that solves math problems in the network of all Bitcoin users. The users who have managed to solve them receive bitcoins as payment for their work.

Transaction Blocks

But what are these math problems that require solving? Well, this is where the complicated part begins. As we have seen, Bitcoins are a decentralized currency. However, transfers of bitcoins between users are done over a peer-to-peer network. In order to keep the currency valid, the transactions must be recorded, verified and confirmed to see if the bitcoins are genuine as well as who and for what used them. All the recorded transactions that take place in a set period of time are compiled into a list. This list is formally known in the bitcoin industry as a block.

The bitcoin miners verify the block of transactions. They take the information in the block and turn it into a shorter, random sequence of letters and numbers through a mathematical formula. This sequence is known as a hash. It is stored alongside the block into a general ledger called a blockchain. At this point, the transactions were verified and confirmed. The user who found the key necessary to verify the block of transactions will receive 25 new bitcoins.  To slow the discovery of all 21 million bitcoins, the reward for verifying the transaction will halve every four years, with next reduction happening in 2017.

Blockchain

Being similar in function to an accountant’s ledge, the blockchain contains the increasingly lengthy list of legitimate transactions which happened on the bitcoin network. The blockchain is always available to all network users. This way  all participants are up to date with the latest block.

Creating a hash from the block of transactions is necessary to maintain the integrity and security of the bitcoin network. This is primarily done by the hash which acts as a unique identifier for the block of transactions stored in the blockchain. The hash also contains data from the previous block. If someone would try to tamper with a block, then it would affect the previous blocks as well, and the blockchain would become invalid. Running the hashing function on a block to test is legitimacy, would reveal the fake block immediately.

This whole process assures the security of the network and the integrity of the bitcoins.

How to Start Bitcoin Mining

Now that you know the essential aspects of what is bitcoin mining, you might want to start your own mining operation. Before you do so, there are some important things you should know.

  • Competition: Bitcoin miners compete over a limited resource and the market is currently very competitive. Most experts recommend buying bitcoins currently valued at $600. The price will most likely increase as the reward for verifying a block will halve and the mining becomes increasingly harder. Other specialists think that mining difficulty or scarcity don’t have a direct correlation with price. Instead, the price follows media cycles. Some of the best websites for buying bitcoins in the USA are Coinbase and BitQuick.
  • Software: Bitcoin mining requires at least two software applications. One acting a bitcoin wallet where a miner can deposit his earnings. The other software is the mining app itself. There a wide variety of apps on different platforms.
  • Hardware: to be competitive in bitcoin mining and actually make a profit you need a powerful machine to increase the mining speed of the software.  You can get bitcoin rewards more often with a machine that quickly processes the calculations required for creating a hash. Although the software can run on any hardware, we recommend buying an ASIC machine, designed for mining bitcoins specifically.
  • Mining pools: you want to be a more casual miner? or just don’t have the resources to invest into a high-performance machine? We recommend joining a mining pool. A mining a pool is a group of bitcoin miners who collectively work on the same block. The admin awards bitcoins proportionally to the work they have done. This allows even low-performance or cheap ASIC devices to mine for bitcoins.

Conclusion

This concludes our guide on bitcoin mining. Now you are able to answer the question of what is bitcoin mining yourself and even start your own operation. However, bitcoin mining is a risky investment. It requires an in-depth understanding of the mining process and the capacity of the software and hardware you use. Not to mention that your profits are highly dependent on the volatile price of bitcoins. In conclusion, before you undertake such an endeavor, we recommend a careful preparation and hope that our article has helped you in whatever measure.

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