What is Bitcoin Mining?
Bitcoin retrieval is the process by which new bitcoins are brought into circulation, but it is also an important part of the maintenance and development of the blockchain registry. This is done with the help of very complex computers that solve very complex mathematical computational problems.
Cryptocurrency miningis labor-intensive, expensive and only sporadically profitable. Nevertheless, mining has a magnetic attraction for many investors who are attracted to cryptocurrencies, as miners are rewarded for their work with crypto tokens. This may be because entrepreneurial types see mining like the California gold miners of 1849 for loose change. And if you’re prone to technology, why not?
However, before you invest time and equipment, read this explanation to see if the results are really for you. We will mainly focus on Bitcoin (we use “bitcoin everywhere” when we refer to a network or cryptocurrency as a concept, and “bitcoin” when it comes to the number of individual tokens).
How to Mine Bitcoin
Miners are paid for their work as auditors. They check the validity of Bitcoin transactions. This convention aims to maintain the honesty of Bitcoin users and was initiated by Bitcoin founder Satoshi Nakamoto. By verifying transactions, miners help avoid the “double fee problem”.
Double spending is a scenario where a Bitcoin owner illegally spends the same Bitcoin twice. This is not a problem with physical currency: once you give someone $20 to buy a bottle of vodka, you run out of money. While there is the possibility of counterfeit money, it is not exactly the same as spending the same dollar twice. With digital currencies, as the Investopedia dictionary explains, “there is a risk that the holder may be able to make a copy of the digital token and send it to a merchant or other party, while preserving the original.”
Let’s say you have a legal $20 bill and a counterfeit $20 note. If you try to remove a real and a fake banknote, someone who has looked at the serial numbers of both bills will find that they are the same number and therefore one of them must be counterfeit. What a bitcoin miner does is similar – it checks transactions to make sure the user is not trying to illegally spend the same bitcoin twice. This isn’t a perfect analogy – we’ll explain it in more detail below.
Once miners review 1MB (megabyte) worth of Bitcoin transactions known as “blocks”, those miners are entitled to a reward of large amounts of Bitcoin (more on Bitcoin rewards below). The 1MB limit was set by Satoshi Nakamoto and is controversial as some miners believe that the block size needs to be increased to collect more data, which effectively means the Bitcoin network can process and verify transactions faster.
Note that confirming 1MB transactions entitles miners to earn bitcoins – not everyone who verifies transactions gets paid.
In theory, a 1MB transaction could be just one transaction (though this isn’t common at all) or several thousand. It depends on how much data the transaction requires.
This is true. To get bitcoins, you must meet two conditions. One is the business problem; one of them is a matter of luck:
You should review ~1MB worth of transactions. This is the easy part.
You have to be the first miner to find the correct answer or the next answer to a numerical problem. This process is also known as proof of work.
What is a coin pool?
Huge prizes are paid to the miner who first finds the solution to the puzzle, and the likelihood that the participant will be the one to find the solution is part of the total digging force on the network.
Participants with a low share of production output have very little chance of finding the next unit themselves. For example, an excavation map that one can buy for a few thousand dollars is less than 0.001% of the extraction network capacity. With very little chance of finding the next block, the miner took a long time to find the block, and the difficult climb made matters worse. Miners may never get their investment back. The answer to this problem is mining pools.
Mining pools are operated by third parties and coordinated by groups of miners. By working in the pool and dividing the payout among all participants, miners can receive a steady stream of bitcoins from the day they activate their miners. Statistics on some of the extraction pools can be seen at Blockchain.info.
“I did the math. Forget about mining. Is there an easier way to make money with cryptocurrencies?”
As mentioned above, the easiest way to get Bitcoin is to buy it on one of the many exchanges. Alternatively, you can always use a “select strategy”. This is based on the ancient view that during the California gold rush of 1849, smart investment did not seek gold, but rather made pickaxes to mine.
In modern terms, you are investing in the company that makes this choice. In the context of cryptocurrencies, the equivalent of a pickaxe is a company that makes the devices used to mine bitcoins. For example, think of companies that make ASIC devices or graphics processors.
Is digging bitcoin legal?
The legality of Bitcoin mining depends entirely on your geographic location. The bitcoin concept could threaten the dominance of fiat currencies and government control over financial markets. Because of this, Bitcoin is completely illegal in certain places.
Bitcoin ownership and mining is legal in more countries. Some examples of places where it is illegal to do so include Algeria, Egypt, Morocco, Bolivia, Ecuador, Nepal, and Pakistan.4 In general, bitcoin is legal to use and mine in much of the world.
Return risk often consists of financial and regulatory risk. As mentioned earlier, Bitcoin mining and mining in general is a financial risk. A person can go out of their way to buy mining equipment worth hundreds or thousands of dollars just to avoid a return on investment. However, this risk can be reduced by joining a mining pool. If you are considering mining and living in a Forbidden Area, you need to reconsider. It is also a good idea to research your country’s regulations and general sentiment for cryptocurrencies before investing in mining equipment.
An additional potential risk from increasing Bitcoin mining (and other proof-of-performance systems) is the increased energy consumption of the computer systems running the mining algorithms. While the efficiency of microchips in ASIC chips has increased dramatically, the growth of the network itself has outpaced technological advances. As a result, concerns have arisen about the environmental impact and carbon footprint of Bitcoin mining.
However, efforts are underway to reduce these negative externalities through the search for cleaner and environmentally friendly mining energy sources (such as geothermal or solar energy) and through the use of CO2 offsets. Ethereum’s planned move to a more energy-efficient consensus-based (PoS) mechanism is another strategy; However, PoS has its own drawbacks and inefficiencies.