What is Bitcoin Mining and How Does Mining Work?
You’ve likely seen photos and videos on the internet of Bitcoin mining rigs of various sizes. From small workstation setups to large-scale farms built complete with independent power supply. There was even an episode of ‘Billions’ where Gordie Axelrod blew out his Prep School’s electricity with his Bitcoin mining rig.
Well, so what exactly is Bitcoin mining, and how does it work? Can you also set up a small mining operation in the comfort of your loft in downtown New York? Read on, as we provide answers to all these questions and many more.
What is the Purpose of Bitcoin Mining?
Well, first of all, it should go without saying that cryptocurrency mining is quite different from what mining traditionally is. In reality, Bitcoin mining is simply a process where powerful computers solve the complex computational problems that keep the Bitcoin network in operation, in return for tokens – Bitcoin.
Essentially, it’s like the government’s employees getting paid in Dollars, if that was the only way to mint new currency. There’s a vital difference though – while Powell and the Fed can in theory mint new currency in perpetuity, the Bitcoin supply is fixed at 21,000,000.
Primarily, Bitcoin mining facilitates transactions within the Bitcoin network. While in the fiat currency system, you have third parties like Zelle that provide the infrastructure, transactions in Bitcoin are directly peer-to-peer. However, these transactions still need infrastructure to work, and that is what Bitcoin mining operations provide.
Also, just like the third parties in the fiat system have methods for reviewing transactions and preventing fraud and duplicity, Bitcoin mining provides that capacity, by validating transactions to prevent bad actors from double-spending Bitcoin. You can go here to get the bitcoin price in aud.
How Does Bitcoin Mining Work?
Blockchain is the revolutionary new technology that powers Bitcoin and other cryptocurrencies. It is essentially an online ledger of all exchanges that occur within the network. And like a real-life ledger, all new transactions are added at the end of the previous one. In this case, transactions are lumped together to form a block which is then added to continue the chain; hence, blockchain. The process of creating and adding a block is what is rewarded with tokens, and that is what is referred to as cryptocurrency mining.
The process of solving the complex problems presented in mining involves guessing a hash code accurately. Usually, whatever computer succeeds first creates the block and receives the Bitcoin token reward. This kind of brute-force work requires high computing power and a lot of electricity. Mining is typically done using highly specialized computers known as ASICS (application-specific integrated circuits).
As we have said before, successfully solving a problem and adding a block to the chain earns the miner bitcoin tokens. This amount is halved at every 210,000 blocks created, which comes round to roughly 4 years. Today, the bounty is 6.25 Bitcoins, which you can conveniently sell for fiat cash on the best Australian exchange.
How Profitable is Bitcoin Mining?
Bitcoin mining has historically been profitable, because of the sheer number of bitcoins that are earned in the process. However, given how much the reward has reduced, while the amount of electricity required to mine it has gone up, profitability has become more dicey.
The sheer cost of the equipment required is also worth a mention. Every year, Bitcoin mining consumes an estimated 160 TWh of electricity, which is more than most countries, even highly developed ones like Norway.
Large-scale mining farms not only have to spend significant sums on the computers, but they also have to shell out some dough to build cooling mechanisms to keep the computers running. Then, they have to pay large electricity bills. Some build solar power capabilities or other generating options to produce electricity on-site.
With so many costs involved, and with so many other miners competing for the rewards, the chances of earning enough Bitcoin to break even and make a profit is less than it used to be.
How to Mine Bitcoin from Home
What are the chances that you can get in on some Bitcoin mining action from the comfort of your house? Is it a cryptocurrency investment that you should consider? Well, you would be at a significant disadvantage, compared to the big mining companies; but it is not impossible. You can also mine some Bitcoins at home, which you can exchange for fiat currency or other cryptocurrencies on crypto exchange platforms. Here’s how to get started:
1. Check Laws and Regulations
First off, you have to ensure that local regulations in your area permit Bitcoin mining in homes. These regulations are put in place to protect towns and cities from brownouts or blackouts that may occur as a result of isolated huge electricity demand from mining rigs.
Some jurisdictions have friendlier attitudes to Bitcoin mining, and as such, they have beefed up their grids to support it. You want to be sure that you live in one of those places, so you don’t get blamed for blowing out your entire town’s electricity.
2. Buy or Share Bitcoin Mining Equipment
Then, you would have to buy one or more of those ASIC computers, which tend to retail on the market for about $10,000 or higher. Also, you’d have to prepare fans or some other mechanisms to cool them off. The machines can get quite loud, so you’ll need some sort of noise insulation too. Then, using online Bitcoin mining calculators, you can estimate what your electricity usage will be.
Another common option is to pool computing power with other miners. Basically, you would be adding your computer to a small network to increase your chances of successfully mining Bitcoin. And then, the pool shares all mining proceeds.
What Happens After the Entire Amount of 21,000,000 Bitcoins is Mined?
Satoshi Nakamoto, in Bitcoin’s source code, ensured that the supply of the cryptocurrency was limited to only 21,000,000. This has the benefit of preserving the value of the coins, unlike fiat currency which can be printed to infinity.
However, while about 19.5 Million Bitcoins have already been mined, they are not expected to run out for another couple of decades. This is primarily because the reward for mining is halved at every 210,000 blocks. It’s presently 6.25, down from 50 Bitcoins at the beginning.
But, when it does get exhausted, what happens? Well, one thing that we know for sure is that Bitcoin mining will get a lot less profitable, as there will be no new Bitcoins to earn. However, miners can expect to continue to be rewarded with transaction fees.
Is Bitcoin Mining Good for You?
Bitcoin mining is a “different strokes for different folks” kind of situation. You have to do your research to be sure that it’s something that you want to do.
One thing that we know for sure, however, is that Bitcoin will continue to be a quite valuable asset in the foreseeable future. So, even if you can’t afford to set up a mining rig or you do not wish to expend so much energy, you can simply log on to the best crypto exchange in Australia right now— Independent Reserve, and begin buying and selling some Bitcoin at the best rates.
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