The term ‘Bitcoin mining’ will almost certainly be synonymous to anyone who has at least a casual interest in crypto and crypto trading. To put it simply, it’s the process of issuing new Bitcoins on the blockchain. But of course, it’s a bit more complicated than that. Let’s take a look at the process of Bitcoin mining.
At first glance, the actual term of ‘Bitcoin mining’ may seem somewhat confusing. Although it may seem completely different from the traditional concept of mining, in reality, it has the same function. Just as with digging for say – gold, it requires exertion (in this case, the exertion of Bitcoin mining software), to ‘unearth’ the commodity. Also, as with gold, there is a finite supply, which will eventually run out (it is estimated the last Bitcoin will be mined in 2140, so quite a while off yet!).
What is Bitcoin mining?
Bitcoin mining is the process during which miners resolve a complex mathematical problem in order to confirm a block of transactions on the blockchain. This is called Proof of Work (PoW). After validating a new block, a miner will receive a reward in the form of new Bitcoins being created and a transaction fee (mining fee) for every transaction processed in the said block. These mining fees act as an incentive for a miner to include a transaction in a block. Once this happens, the transaction is then confirmed. As miners want to maximize their income, transactions with higher fees will be confirmed more quickly. Unconfirmed transactions lie in the ‘mempool’ until they are confirmed. The below chart demonstrates the size of the mempool in the week December 5 – 12, 2019.
To solve a mathematical problem as part of the mining process is actually so complex, that there is an incredibly remote (estimated) 1 in 13 trillion chance for a computer to do so. That is why enormous machines – that’s basically what they are – are needed to solve them. Unsurprisingly, these machines use huge amounts of energy, and this is something that has sparked environmental concerns, although there are moves afoot to try and combat this. This topic is explored in the article ‘Bitcoin Mining: At What Cost to the Environment?’
Bitcoin mining validates the transactions as on the Bitcoin blockchain, as there is no central authority or intermediary, such as banks, to validate and record transactions. This is done in Bitcoin’s case through a network of computers called nodes, which run the Bitcoin program and are programmed to follow a set of rules. If these set of rules are followed, the nodes will accept and validate transactions from other nodes on the Bitcoin network, and then relay them to other nodes. Nodes are located all around the world, and there are even plans being made to launch nodes into space ‘in case of a terrestrial failure of the Bitcoin network.’
What is the reward for miners?
As explained in the article ‘The Bitcoin Halving: 200 Days To Go’, the current reward for miners is 12.5 Bitcoins. However, in May 2020 (the estimated time for the next halving), the reward will be halved to 6.25 coins. There is much speculation as to how this will affect Bitcoin’s price, something also explored in the article. The mined Bitcoins still account for the majority of the earnings for the miners. However, in the future, when most of the Bitcoins have been mined, the mining fees will become the highest earner for the miners.
A new block is created and approved approximately every 10 minutes (although with the increased hash rates of Bitcoin networks, in 2019 this has reduced to around nine and half minutes), meaning that every day about 144 blocks are approved. This means around 1800 Bitcoins are mined every day. Of course, this will reduce to around 900 when the next halving occurs in 2020.
To be profitable a Bitcoin miner, it probably comes as no surprise that the set-up costs are rather substantial. In the United States, costs have been estimated to be around $6,000 for one Bitcoin, and with the cost of a Bitcoin hovering just above $7,100 as of December 12, 2019, it isn’t really worth it to do so in the United States or most of the western world. That is why most Bitcoin mining takes place in areas of the world where electricity costs are lower, such as China, where most Bitcoin mining still occurs despite rumors of recent crackdowns. Also, to combat costs, most Bitcoin mining is done by mining pools (groups of miners) rather than individuals.
This is another term you may well have heard of, but what does it actually mean, and why is it important when it comes to Bitcoin mining?
The hash rate essentially measures how many times the Bitcoin network attempts to solve the complex puzzles in the mining process every second. As every Bitcoin is mined, the block of the verified transaction must be ‘hashed’ before being added to the other blocks – i.e. the blockchain. The below chart demonstrates the hash rate of the Bitcoin network from December 2018 – December 2019. As you can see, the hash rate has gradually increased over the last year or so, hitting record highs.
The hash rate is a good indicator of the health of the Bitcoin network. The higher the hash rate, the better the security of the network, as more resources would be needed to conduct a “51-percent attack”, which is a hypothetical scenario where a group of miners take over more than half of the network’s hash rate. If this happened, miners would be able to prevent new transactions from receiving confirmations, and reverse transactions made on the network while they were in control, meaning they could theoretically spend Bitcoins twice. Although this sounds apocalyptic, there is no need for concern. The sheer vast scale of Bitcoin mining around the world makes such an attack incredibly unlikely, and this likelihood becomes even more remote as the hash rate of the Bitcoin network increases.