“What is Bitcoin mining?!”. This is a question we receive all the time – but before we go into the specifics of bitcoin mining, we need to start with the basics.
First of All… What Is Bitcoin?
Bitcoin is a decentralised digital currency that allows peer-to-peer transfers without the need of a bank, government, agency or broker. Bitcoin is made possible by blockchain technology. Anyone on the Bitcoin network can transfer Bitcoins to anyone else on the network, regardless of location or time – all that is needed is an account on the Bitcoin network and some Bitcoins.
Bitcoin is considered by many to be favourable to traditional currencies, because it has lower transaction fees, allows for peer-to-peer transfer, is decentralised, has no intermediaries and is highly secure. All Bitcoin trading information is available in a public ledger, so it is impossible to counterfeit or hack the transactions.
What Is a Blockchain?
Blockchain is a publicly distributed ledger system that records transactions in chronological order. Any transaction or record that is added to the blockchain is there permanently – it can’t be modified, which means that transactions are transparent and safe from hacking. A ‘block’ is the smallest unit of a blockchain – it is like a container that stores all of the details of the transaction. To understand what Bitcoin mining is, you have to understand the three main concepts that relate to Bitcoin:
- Blockchain has a public distributed ledger – this is a record of all transitions that occur in the blockchain network, from all over the world. The validation of these translations is done by Bitcoin users.
- Blockchain prevents unauthorised access – Blockchain uses a function that ensures that all blocks are secure. These blocks are digitally signed, and cannot be altered once they are created.
- Blockchain has proof of work – in Bitcoin mining, miners validate transactions by using their computers to solve difficult mathematical puzzles called ‘proof of work’.
What Is Bitcoin Mining?
Bitcoin mining is the process by which Bitcoin transactions are validated. This Bitcoin mining process is required to get more Bitcoins into circulation, and it is the way the Bitcoin network confirms new transactions. Bitcoin mining is an essential element of Bitcoin’s ledger maintenance and development process. The ‘mining’ is conducted using sophisticated hardware that solves extremely complex computational maths problems. The first computer to solve the problem receives the next block of Bitcoins (a ‘block’ is a piece of information on a blockchain, where information is stored and encrypted) and the process starts again. In return for their efforts, miners are rewarded with Bitcoin.
Anyone with the right equipment can be a Bitcoin miner – but the process is slow, expensive and only sporadically rewarding. This doesn’t put people off though, because miners are incentivized for their efforts. If a miner successfully mines a block of Bitcoin, they receive 6.25 Bitcoins as a reward. This amount halves every four years or so. In April 2022, Bitcoin was trading at around $55,000, which means 6.25 Bitcoins are worth around $350,000.
Why Do Bitcoins Need to Be Mined?
Overall, Bitcoin mining serves two purposes – it generates Bitcoin and validates transactions on the Bitcoin network, ensuring that they are trustworthy. Bitcoin is based on full digital records, which means there is the risk of counterfeiting, duplicating or double-spending the same coin more than once. Mining fixes these problems because it makes it very expensive and resource-heavy to hack the network. Basically, it is more cost-effective to mine Bitcoin than it is to attempt to undermine it.
What Equipment Does Bitcoin Mining Require?
The equipment required to mine Bitcoin is:
- A wallet – this is where any Bitcoin that is earned will be stored. It is an encrypted online wallet where people can store, transfer and accept Bitcoin (or other cryptocurrencies) payments.
- Mining software – Bitcoin miners also require mining software. There are lots of different providers of this software – many are free and can run on Mac or Windows computers. Once this software is connected to the hardware we’ll talk about below, a miner can start mining Bitcoin.
- Computer equipment – the hardware required to mine Bitcoin is the most expensive part. Miners need a very powerful computer that uses a large sum of energy to mine Bitcoin. This hardware can cost more than $10,000.
What Are the Risks of Bitcoin Mining?
Bitcoin mining isn’t for everyone – it comes with risks, including price volatility and regulations. In the past year alone, Bitcoin has traded for as little as $40,000 and as much as $90,000. This volatility means that it is difficult for miners to know if their rewards will outweigh the expensive cost of mining. In terms of regulations, few governments have embraced cryptocurrencies like Bitcoin because the currencies operate outside of government control. This means there is the risk of governments outlawing the mining of Bitcoin or cryptocurrencies on a whole. Another important thing to remember when mining Bitcoin is the impact that taxes can have on the process. Any mined Bitcoin is income – if a miner successfully receives payment, it needs to be declared and will be taxed as income.
Got Questions About Bitcoin Mining?
Bitcoin mining certainly isn’t for anyone, and we strongly encourage anyone to research Bitcoin thoroughly before making any decisions about mining it or purchasing/trading it. If you have any questions about Bitcoin mining, don’t hesitate to get in touch – our friendly and knowledgeable staff are here to help.