To start with; Bitcoin is a digital currency called cryptocurrency invented in the year 2009 as a way of sending and receiving money (peer-to-peer) with no third party control or regulations such as Central Banks and the Government. However, transactions in Bitcoin and its validity are left under the control of millions of computer users called “Bitcoin Miners”. Which is why this post is written – to enlighten readers on the popular speculations and questions often asked – How Does Bitcoin Mining Work?
What is Bitcoin Mining?
When a subject about going into Cryptocurrency mining is raised a lot of people view it as something only the tech-savvy ventures into, giving off the perception as to Bitcoin mining to be rocket science. In the real sense, one who is technologically experience in a way can venture into Bitcoin mining. This is not to say, cryptocurrency mining is easy. It has its own difficulty and cost, nevertheless, it’s highly rewarding. Bitcoin Miners are rewarded with a percentage of crypto tokens as well as the transaction fees from Bitcoin holders in the process of sending and receiving crypto through blockchain.
Quite honestly, crypto miners make millions mining cryptocurrency, just over a decade cryptocurrency was introduced as a global currency, yet they’re already millions of crypto miners making a huge living from mining crypto. That said, before you get carried away by the rewards, to take a delve into crypto mining, it’s important to know that it requires work, time, and at start cash to purchase the equipment or technological tools needed.
Why Bitcoin Mining Rewards?
First, Bitcoin miners are the ones that oversee, monitor, and validation the legitimacy of bitcoin transactions, they exist in form of a security guard or police who oversee the affairs of coin holders and make sure there is no security breach or fraudulent activities throughout the bitcoin networks and Blockchain in exchange for Bitcoins token. So, the reward (Bitcoin token in BTC) given to bitcoin miners is an incentive to attract more miners to keep the currency and its transactions safe. In a nutshell, the miners play the role of Banks and the government but not in the sense of third-party control over the currency as it is as decentralized currency but in making sure it’s transactions are going on the way it should.
How does Bitcoin Mining Process Work?
In the right terminology, Bitcoin mining is a process that takes a combination of hardware and software systems. The network is secured by miners. Though machines in the Bitcoin network represent each miner. Miners use different types of hardware over time to mine blocks of Bitcoin. Bitcoin mining is the process of adding transaction records to Bitcoin’s public ledger of past transactions or blockchain.
A transaction is only considered to be valid when it is signed by the sender. Mining is done by the miners who are watching Bitcoin transaction continuously and trying to verify it, in such a way that in the average of 10 minutes, a new block of a transaction is added to the blockchain in the network
Types of Bitcoin Mining Hardware
They have popularly used hardware for Bitcoin mining, each hardware mining has to deal with low proﬁt, excess heat, and high electricity cost. Of recent, the introduction of Cloud mining gave solutions to these problems since it does not have to deal with excess heat or high electricity cost, but with few other limitations to deal with. The miner (hardware) uses its processing power to solve the hassles of transactions and broadcast on the network.
- CPU mining.
- GPU mining (Graphics Processing Unit)
- FPGA mining.
- ASIC mining (Application-specific Integrated Circuit).
A block is only considered valid when it has proof of work. The miner who mines the block gets a reward. The new Bitcoins are obtained by miners as a reward and also the transaction fee obtained from all the transactions included in the block. This motivates the miners to continuously compete in the race for ﬁnding a valid block to mine.
When we talk about the miner’s reward that is not to say, it’s the only means one can acquire cryptocurrency token or address. They are still other ways you can acquire crypto; fiat currency, exchange it for other cryptos, let’s say you have a bitcoin, you can exchange for Ethereum, you can as be paid with cryptocurrency online in the event you work for sites or companies that pay with cryptocurrency, and a lot other ways.
What Does Bitcoin Miners Do?
In Bitcoin, there what is called double-spending; double spending is the use of previously transacted bitcoin to initiate other transactions. Take for instance a sender of a Bitcoin sends a particular BTC amount as a token, and the sender makes a copy of the same Bitcoin token and sends it to another buyer or receiver whereas the token has been transacted or sold to the first customer in the first place. So, what MINERS do is to verify previously sent Bitcoin token to make sure it’s not sent again (Double-Spending).
The need for Bitcoin miners is paramount because without miners fraudulent activities and false transactions will continue to take place. Making cryptocurrency a high vulnerable digital currency, which by now would have been a thing of the past.
Bitcoin Miners holds spenders or coin owners accountable and forces honest and transparency across the bitcoin network and blockchain. In other words, you can call bitcoin miners the internal bitcoin auditors.
Bitcoin Mining Explained Conventionally
Take for instance two-dollar paper; one is the original $10 while the other is the counterfeit of the same $10. If someone goes to a coffee shop to buy two cups of coffee sold for $10 each, and the cashier looks at the dollar or the bill serial number and discovers that one of the $10 dollar bills or the paper is a counterfeit or false $10. As Bitcoin miners, they use a distributed consensus system to analyze the validity of the transactions to be sure the Bitcoin Sender or owner is not using that same bitcoin twice, thereby making the second transaction invalid and false.
How Miners Get Rewarded – Block and Blockchain
The blockchain is one of the best inventions of the 21st century. Technically, blockchain is a time-stamped series of an immutable record of data that is managed by a cluster of computers not owned by any single entity. Each of these records of data, called as a block is secured and bound to each other using cryptographic functions
A block of the transaction is equivalent to 1 MB. When a Miner verifies a block of Bitcoin transactions, he is rewarded with a set quantity of Bitcoin. This measure was set by the Bitcoin founder Satoshi Nakamoto. Though of recent, miners were canvassing for an increase in the size of a block which in turn will speed up the rate at which a block is verified, thereby resulting in verifying more blocks which means more pay and lesser efforts in their task.
Things to note, A miner gets rewarded or earns a certain quantity of coin when he verifies 1 MB worth of transactions by coin owners called a block. Though a few cases, I MB worth of transactions is equivalent to a transaction which is tied to the data consumed on the transaction.
You have to be clear, that not every verified transaction makes you eligible for a reward or payment. As they are rules, procedures, and processes that if passed, you are guaranteed miners reward. Here are the general theoretical conditions you have to meet to be eligible for a reward is divided into two: To be eligible for reward or pay as a coin miner, you will have to mine a 1MB worth of coin transactions, secondly, you will have to be the first miner who delivered the accurate result for the block verification otherwise called “Proof of Work”.
6 The job of Bitcoin Miners
A lot of people when they first heard about bitcoin mining never considered again because of the semi-tell that it requires lots of mathematical computation and algorithms. Infant says that mining is like solving puzzles by identifying a numerical combination best fit for your target.
In a way, that’s true but a half-truth. In a simple term before I list the 6 work of a miner; the competition is just about being the first to arrive at a hexadecimal 64-digit number that is less or equal to a target hash. Though the work or task isn’t an easy one considering the high hash rate which is in megahashes(MH/s) per second, and gigahashes (GH/s) per second down to terahashes(TH/s) per second that is required to arrive at the accurate answer but not arriving but being the first among millions of other miners verifying the same added block to come up with a target.
The Work of a Bitcoin Miner – 6 Task a Cryptocurrency Miner Must Master
- Miner has to listen for the transactions that are broadcast on the network. They must verify those transactions by checking the correctness of the signatures and also the outputs that have been spent before or not. This is done to mitigate the double-spend problem.
- Before joining the network, miners must have all the previous blocks that are part of the blockchain. They listen for the new blocks that are broadcast on the network. Then they must validate each block that is received by validating each transaction in the block. They also have to check whether the clock has valid nonce or not.
- Once the miners have the latest copy of the blockchain, they can begin building their own blocks. To do this, the miner group transactions that are heard into a new block which extends the most recent block.
- Now miners have to find a nonce that makes the block valid. This is one of the crucial steps during mining which requires much work.
- Assume that the block is accepted after finding a nonce. There is no guarantee that the block will be part of the consensus chain even if the block is accepted. If the other miners accept the same block and start mining on top of it, then the block will be a part of the consensus chain .
- If all the miners accepted the block and added to the part of the consensus chain, then the miner who worked on finding the nonce for that particular block will get rewarded. The block reward as of now is 12.5 Bitcoins. In addition to that, if any of the transactions in the block contained transaction fees, the miner collects those transaction fees too.
Tips: For new miners who are still on the process of mastering how to estimate how much each hash rate mined can pay, you will need to visit www.cryptocompare.com for news on cryptocurrency as well as calculate the amount of cryptocurrency. It’s a goof crypto site. You would love it.
Bitcoin Mining –How Bitcoin Circulation Work
We have said earlier that becoming a bitcoin miner comes with a reward of about 12.5 BTC to each 1MB worth of transactions mined. However, miners are not only helping checkmating bitcoin transactions but also, help in circulating Bitcoin; bringing new bitcoins into circulation. In a nutshell, miners bring new Coin to the market.
How Bitcoin Mining Contribute to Bitcoin Circulation
Currently, according to statistics, by the first quarter of 2020, they are 18.3 million Bitcoin (BTC) in circulation. Which about 85% of the entire Bitcoin Estimated at about 21 million. And this quantity of Bitcoin came into circulation through coin miners with exception to the first bitcoin released through Genesis Block by the founder Satoshi Nakamoto.
If miners stop mining, there will still be Bitcoin in circulation; the already or existing bitcoin on the blockchain network or market, but they won’t be furthermore minting of new Bitcoin which will result to a shortage of Bitcoin and increase Demand thereby hiking the Price of one BTC.
What Will Happen After the 21 Million Bitcoin Is Mined?
Let’s face the fact, in the event of no Coin miners, Bitcoin as a cryptocurrency system or network would still continue to circulate or be transacted. However, no new Bitcoin will be introduced into the Network. But here is the fear of some miners or people who are considering joining the mining gig. It’s estimated that a total of 21 million Bitcoin is the only number that is meant to be introduced in the Bitcoin Network. Currently, 18.3 million of that amount or quantity is already in circulation.
Question: What happens when the total 21 million Bitcoin is mined, what will be the fate of miners and the Network or the digital currency?
Answer: truth is, a time will come when the 21 million BTC is mined. But the beauty thereof is, that won’t be anytime soon. As there is a quantity of Bitcoin mined with a period of time. Infant, by calculation the last mined Bitcoin will be by 2140. What we don’t know is if there will be a new proposed release amount made by after the last 21 million is mined.
However, that doesn’t mean, the lower the left mined amount the lower the rewards of miners, Yes, in a way it’s true, but miners reward or pay in the quantity of 12.5 BTC is just one-way miners earn, other ways are, miners also earn from the transactions fees deducted from each Bitcoin transactions done on the blockchain or network.
More so, being a Bitcoin miner gives you power over decisions, actions, changes, and regulations if any, that would be proposed in the future. Just like early said no one controls Bitcoin. Is controlled by each user but truth is, there will come a time where miners will have an upper hand on what becomes the fate of the use of Bitcoin. Some of which decision effect is when it comes to forking.
Before we progress let’s explain a bit what the bitcoin miners reward is and how it’s controlled.
How Much Does a Bitcoin Miner Earn?
The reward for Bitcoin mining is decreasing with the number of Bitcoins mined. The total number of Bitcoin that can be mined is limited to 21 Million. The reward decreases by half after every successful 210,000 blocks mined. The time period of mining 210,000 blocks is around four years. In the present date, the reward is 12.5 Bitcoins.
Initially, the reward for mining the Bitcoin was 50 Bitcoin as when Bitcoin was introduced in 2009 till 2012 and was later brought down to 25 BTC in the year 2016, 4 years later. Currently, the mining reward is brought down to 12.5 BTC, as 2020, which finally will be brought down to 6.25 BTC in 2024. Apart from the reward that miners get from mining, they also receive an amount called – transaction fee for every successful addition of transaction in the blockchain. Generally, the transaction fee is 1% of the block reward.
Note: The process of bringing down the miner’s reward in a period of 4 years is called “Bitcoin Halving”.
Tips: For Bitcoin investors who would want to keep an eye on when the next Bitcoin halvings will take place, as well as the quantity of Bitcoin blocks mined so far, I will recommend you visit www.blobkchain.info and https://www.bitcoinblockhalf.com for more information and Bitcoin updates.
Let’s go a bit back into history, But I will share major booms or changes in the price of Bitcoin in the international market. Let’s start with the launch of Bitcoin in January 2009. As of January 2009 to March 2009, there was no exchanges or market where Bitcoin was accepted, users who got interested were just fans of cryptography who were sending bitcoins for hobby purposes representing low or no value.
To see how crypto was despised, in March of 2010, a coin user named “SmokeTooMuch” auctioned 10,000 BTC for $50 (cumulatively), but no buyer was found. After that, come the first rising of the exchange rate of 0.003 to the unquantified amount of BTC, as a result of the first Bitcoin site started name Bitcoinmarket.com. The pride kept rising till what we know today as 1 BTC to $9237.66.
How Much Bitcoin Miners Earn Relative to One Bitcoin Block Mined
Let’s backdate to November of 2019, In November 2019, the price of1 Bitcoin (1 BTC) had risen to $9,300, that is to say, a Miner who mines a complete block worth of transaction and gets rewarded with 12.5 BTC converting that to dollar equivalent will “12.5 x 9,300” which sums up to around $115470.75.and converting that to the current price of Bitcoin, check how much that is.
Bitcoin Mining Tools
When Bitcoin mining was introduced back in 2019, miners mined bitcoin with home computers and that was rolling on well because the mining process as then wasn’t tedious and demanding as it is today. To create a balance in the blockchain network and Bitcoin transaction an estimate of one block is to be mined every 10 minutes and to do that requires more miners as well as equipment and tools that will make a speculation of the 65 hexadecimal Bitcoin token faster.
To mine, a block requires lots of computing power and electricity consumption cost. Which why some hardware companies ventured into developing spate hardware for mining bitcoin. Here the Bitcoin mining hardware and it has evolved as Bitcoin mining increased. As of when Bitcoin was introduced in 2009, the difficulty level of mining a block was 1 but currently, the difficulty level is 13 trillion that’s a big gap. The difficulty of Bitcoin mining changes every 2016 blocks. The time to mine 2016 blocks of Bitcoin is around two weeks.
Since millions of miners have joined the gig the need for competitive mining became paramount as the reward goes to the first miner who came up with the accurate numerical solution to the block mined. That necessitated the need for high performing hardware for speed and accuracy.
Tools Needed for Mining – Mining Hardware
Hardware is required to mine Bitcoins, different types of hardware are used by miners over time to mine blocks of Bitcoin. Originally Bitcoin mining was done by CPU and over the year’s hardware changed to GPU, FPGA, and ASIC.
Central Processing Units (CPUs) were used as mining hardware during the early stage of Bitcoin mining. It is considered as the first generation of Bitcoin mining. CPU mining was as simple as running code. The code search nonces in a linear fashion then compute SHA-256 in software and check if the result is a valid block. On a high-end desktop PC, the computation is about 20 million hashes per second (MH/s). At that speed, it would take several years on average to find a valid block. Which is why this method or hardware for mining became obsolete.
GPU mining is considered as the second generation of Bitcoin mining. GPU mining started because of the low computation power of CPU mining. GPU mining performed better than CPU mining but could not cope up with the increasing difficulty rate over time. There are drawbacks to GPU mining which are overheating and high level of hardware utilization during the mining process.
FPGA mining is considered as the third generation of Bitcoin mining. After the first implementation of Bitcoin mining came out in Verilog, several miners switched from GPU mining to FPGA mining. The computation power of FPGA mining was much better than GPA mining during that time. Later on, the number of miners increased which increased the difficulty of the network. Due to the increase in the difficulty of mining the blocks, FPGA mining could not satisfy the expectations. Which necessitated ASIC mining.
ASIC mining is the fourth generation of Bitcoin mining. Mining today is dominated by Bitcoin ASICs. These ASIC chips are designed, built, and optimized for the sole purpose of mining Bitcoins. There are some big vendors who produce ASIC mining hardware and sell it to Bitcoin miners. Some of the examples of ASIC mining hardware that are used today are Antminer S9, Terminator T3, Dragonmint T1, etc. which are sold online in eCommerce sites like Amazon for a few dollars.
Some people after they have come to this point might withdraw seeing the effort the time and the startup capital it takes to become a crypto miner. Sincerely, speaking 50% of miners who venture into cryptocurrency mining like Bitcoin, Ethereum, and other cryptos, hardly, recover their investment capital after trying a couple of times and couldn’t solve a block.
Notwithstanding, the solution to that is pool mining which I’m going to briefly explain. The above-explained method of mining where miners acquire their own mining tools, equipment, or hardware and start mining independently is called solo mining. But here is both in detail.
Solo Mining Cryptocurrency
Solo mining refers to the mining of Bitcoin by an individual using their hardware resources and working independently. Since solo mining refers to individual mining, it requires a lot of resources in terms of hardware to compete with other miners and get the mining reward for solving the block. The reward is high if collected by the miner alone and can get much profit if the miner has good hardware resources. The main drawback of solo mining is that it may take years for solo miners to generate a valid block due to the limited hardware resource. Before the introduction of pool mining in 2011, all the miners were solo miners.
Pool Mining Cryptocurrency
Pool mining is a way for miners to pool their resources together to obtain steady payouts. Each pool uses one unique ID to mine Bitcoins. In pool mining, all the miners combine their hardware resources so that they have high power and the mining can be much faster than solo mining. A pool assigns a lower difficulty value to each of its members. It becomes easier for each miner in a pool to solve the hash problem and proof of work.
Each pool miner submits their own work by presenting the hash value under the pool target value (called shares) to the pool for verification. If a share is under network target value, a block is claimed by the pool, and pool operators will distribute reward to every pool miners. The most popular payout in pool mining is “Pay-per-share”. You can check some of the statistics published by the mining pool on www.blockchaininfo.com.
Bitcoin Transaction – How Sending and Receiving Bitcoin Works
A Bitcoin transaction is a signed section of data that is transmitted to the network and, if valid, ends up in a block in the blockchain. The idea of a Bitcoin transaction is to transfer ownership of an amount of Bitcoin to a Bitcoin address. When you send Bitcoin, a single data structure, namely a Bitcoin transaction, is created by your wallet client and then broadcast to the network.
Bitcoin nodes on the network will communicate and rebroadcast the transaction, and if the operation is valid, nodes will include it in the block they are mining. Usually, within 10-20 mins, the transaction will be included, along with other transactions, in a block in the blockchain. At this position, the receiver is able to see the transaction amount in their wallet.
Key Points to Note When Transacting Bitcoin
- A Sender sends Bitcoin amount to an address connected to the Bitcoin wallet.
- Bitcoin amount received is locked to the receiving address – which is connected to a Bitcoin wallet.
- Each time Bitcoin is spent, the amount spent will always come from funds earlier received and currently present in the Bitcoin wallet.
- Addresses receive Bitcoin, but they do not send Bitcoin – Bitcoin is sent from a wallet
Bitcoin Address Token – Bitcoin 64-Digit Hexadecimal Number – Bitcoin Storage in Bitcoin Wallet Accounting Form of Bitcoin Address
An example of Bitcoin the 64-Digit Hexadecimal Number is shown below. The number contains both letters and alphabet. In a way, it’s difficult to understand the number combination except with the eye of an expert. Your knowledge of numbers in collage tells that decimals are binary numbers in base 10. Which means that each number has a possibly 10. (from 0-9).
But in this scenario, we are dealing with Hexa, which means (16) which simply means that in a hexadecimal system of numbering, each number combination has a possibility of 16 digits. But the global numerical numbering only allows a count from (0-9) which is why the need to insert letters in-between the numbers found in the hexadecimal is important. (from a-f).
Don’t be scared, as miners, you don’t go about calculating the whole of the 64 hexadecimal numbers, all you need to look for is that target hash. The need for the hardware component assemble together even down to the cloud mining is to guess what the target hash is. The miner who would first discover it goes with the 12.5 BTC reward.
Mining Target Harsh
A target hash is a 256-bit number that all miners share. The target directly affects the difficulty of the Bitcoin network: the lower the target, the harder it is to discover a block. After every hash, the number is compared with the target value which is 256- bit value, if this is less than or equal to the target value, then the miner who sends the number gets rewarded. Otherwise, the nonce gets increased, and the process is repeated.
Here the fast miners have a higher chance of winning, but the process is random, and the slower miners also have chances to win. The target value is re-calculated after every successful 2016 mined block it takes around 14 days to mine 2016 blocks.
Guessing at Target Hash
The Bitcoin protocol sets a maximum target, it’s important for all miners to know that all target hashes start with 8 zeros and must contain up to 63 zeros.
How to Guess at the Target Hash before Other Miners
The fastest and easiest way to get at target hash is through a combined force of power. The power here is a combined hardware or computer and a shared mining Bitcoin. This will increase your chances of guessing the right target hash and doing it faster. My advice is to join a mining pool and share rewards made from mined blocks.
Is Mining Bitcoin A Worthy Venture?
With the fact that new miners are faced with the cost of acquiring mining hardware, tools or equipment, followed by the effort needed to guess a target hash plus the power supply or electricity needed to generate enough nonces commensurate to the solution, we can actually say, that venturing into Coin mining is at the start not profitable except one joins a mining pool.
Alternatively, you can actually invest in companies focused on developing mining hardware, that way, you can make a lot of money. Without having to spend time and effort and still not be assured of making headway. But will all, invest in cryptocurrency, you might even consider buying and selling of cryptocurrency such as Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC), Ripple (XRP), Bitcoin Cash, Zcash (ZEC), Stellar lumen (XLM), Ethereum Classic, Cardona (ADA), Bitcoin Cash (BCH), EOS, Bitcoin SV, Okex, Chainlink, etc.