Bitcoin mining explained

Education Sep 07, 2020

In 2020, the Bitcoin price has surged due to the third Bitcoin halving event and a rapid growth of the DeFi sector. As the "Bitcoin mid-COVID-19 bull run” continues, Bitcoin mining remains increasingly popular among traders and miners from all around the world. So what is Bitcoin mining and why do we keep talking about it since the first BTC was mined in 2009?

What is Bitcoin Mining?

There are only three initial ways to obtain Bitcoins. Firstly, you can buy Bitcoin on a brokerage platform, like Safello, or a cryptocurrency exchange. Alternatively, you can accept BTC for products and services, as more and more businesses are integrating different non-cash payment solutions and, as a result, become more open towards Bitcoin. Finally, you can set up a Bitcoin miner and try to mine the most influential cryptocurrency on your own.

Mining is a continuous process of adding new transactions to the Bitcoin blockchain. It’s primary function is to ensure that each transaction is confirmed and every member of the Bitcoin community can access and review it anytime. Mining also plays a crucial role in verifying authentic transactions and filtering out fraudulent ones.

As its name suggests, blockchain is basically a chain of numerous blocks, which consist of a certain number of transactions made during a set amount of time. When a new block is generated, miners apply an intricate mathematical equation to turn all information stored in the block into a short and randomly generated set of digits, known as a “hash”.

All hashes have the same length and consist of a unique sequence of signs. The block itself also includes a hash to the previous block. This is how a chain of interconnected blocks is produced. If someone tries to alter any block, its hash will automatically be modified and so will all the subsequent hashes in the Bitcoin blockchain. As a result, every fraud attempt will be easily detected as the blockchain can be reviewed by anyone at any time.

Bitcoin rewards

As we have explained in “Bitcoin Halving and its Implications for the Crypto Community”, miners are responsible for verifying transactions by hashing them correctly. Simply put, to create a new block, they need to solve a complex mathematical puzzle. The process of searching for the correct numerical values requires a lot of time, energy, and computational power. But in the end, successful miners get a reward — Bitcoin. Mining is a highly competitive process which requires installing a specific software and buying expensive mining equipment. That's why many Bitcoin miners decide to collaborate by contributing hash power and thus creating a mining pool. Each member of the pool agrees to share the Bitcoin reward in accordance with the amount of power they provided. After the third Bitcoin halving, which took place in May 2020, the mining reward was cut by half to 6.25 BTC per block.

Is Bitcoin mining profitable?

Although a decade ago individual Bitcoin miners were able to complete blocks by hashing them with the help of regular CPUs, this is not the case nowadays. Considering that Bitcoin mining is currently highly industrialised and takes place in large mining pools, individual mining is not profitable anymore. To ensure a stable and effective operation of the Bitcoin blockchain, the network needs to have a new block to be created approximately every 10 minutes. At the same time, if there are several millions of miners competing to solve the hash puzzle simultaneously, the block will be produced faster if miners agree to collaborate on the same issue. What is more, the network regularly estimates and adjusts the mining complexity in accordance with the computing power involved. Thus, individual miners stand no chance of completing the block when competing with large mining pools.

Complications

According to the Cambridge Bitcoin Electricity Consumption Index, the Bitcoin network consumes 64 TWh per year, which is enough electricity to power the countries of Switzerland or Hungary. What is more, 81% of mining pools, including the largest ones Poolin, F2pool, BTC.com are located in China.

The map below visualises the average monthly hashrate distribution around the world. It indicates that China (71,70%), Russia (6,08%) and the United States (5,29%) are among the global leaders of Bitcoin mining in terms of monthly share of total hashrate with China leading the ranking by a significant margin. What is more, investments in Bitcoin mining in other geographies are still supported by large investment companies, such as Digital Currency Group (DCG).

Source: https://www.cbeci.org/mining_map

To sum up

While mining plays a crucial role in maintaining the Bitcoin ecosystem as it was originally designed by Satoshi Nakamoto, this process is also associated with numerous challenges and complications. As the Bitcoin mining difficulty will only progress with years, we recommend considering alternative ways of obtaining Bitcoin and Safello is here to help.

Olena Burutina

Writer for Safello

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