What Is Bitcoin Mining?
Once you’ve begun learning about bitcoin, one of your first questions will probably be, what is bitcoin mining? You hear a lot about it but everyone just assumes you know what that means. Put frankly, bitcoin mining is the process of verifying and recording the transactions that were made during a set period time in what is referred to as a block. Breaking down these transactions results in something called a hash. The first miner(s) to complete a block and create its corresponding hash are rewarded with an amount of bitcoins.
Let me explain it in further detail. So we know that bitcoin is based on a mathematical equation. Bitcoin mining is the process of breaking down those equations. To do this, a person or group of people use something called an ASIC (Application-Specific Integrated Circuit) to confirm and record a block. The newest block is then added to a list of blocks, called the blockchain. The blockchain is an all-encompassing ledger of every bitcoin transaction that has ever been made.
In order to keep the blockchain from being altered by hackers, miners create something called a hash with every block that is mined. When miners are confirming all of the transactions within a block, they are systematically breaking down every bit of it, creating a simplified formula that is representative of the transaction contained in that block and how they affect the blockchain as a whole. Each hash is unique to its block, and once it is made, cannot be changed.
So the hash acts as a seal on a mined block. The way it works is that it combined the hash from the previous block with the data mined from the current block to create a unique signature that can’t be altered. So if someone goes in a few days later and tries to input a fake transaction into an already mined block in order to commit fraud, all anyone would need to do is look at the hash to see that they don’t match up. The fake transaction would then be taken care of, and the ledger would be balanced once again.
Bitcoins can only be created through mining. There will only ever be 21 million bitcoins in circulation. This is the maximum amount that can be mined from the system. Those that are already in circulation can be bought, traded, and sold, but the only way to create new bitcoins is by mining a block.
Satoshi Nakamoto set the system up this way for several reasons. Miners not only keep the ledger in check, they also keep the blockchain safe from hackers. To keep miners happy and continuing their work, they are rewarded by bitcoins. These bitcoins are created once a block has been successfully stored.
He also set the system up to continuously half the value of the block reward, so that bitcoins will slowly be released over a period of time, rather than completely mined in just a couple of decades. Every four years or 210,000 blocks, the number of bitcoins being released will be cut in half. Nakamoto set up an entire growth scale for bitcoins, and the last one won’t be mined until 2140.
How much a block reward is can be determined by what era you’re in. In 2017, miners are still in Era 3 of the bitcoin block reward system. Satoshi Nakamoto set up this reward system as a way to distribute and create new BTC over a period of time. The stretch that period of time, the reward is cut in half for every 210,000 blocks that are mined. The first Block era was mined for 50 bitcoins per block. This was in 2009 when bitcoin was first created.
In November 2012, it was cut in half for the first time, bringing the reward down to 25 BTC per block. This began the second era of mining. July 2016 saw the next halving, bringing the reward down to 12.5 BTC per block. The great thing about Nakamoto’s reward system is that you will always know when the next reward cut is coming, so you can prepare for it. Based on the reward payout for block mining, the total amount of bitcoins distributed in a single day is 1800.
You may be wondering what bitcoin’s supply growth is. The whole basis of BTC as a currency is that there will never be more than 21 million in existence. But the creator of bitcoin, Satoshi Nakamoto, didn’t want to release all the bitcoins at once. Instead, he decided to have them released through a steadily decreasing amount, based on a set schedule. This is shown through a model called bitcoins supply growth.
Satoshi Nakamoto’s plan for bitcoin to be released steadily over time is based on an incentivized reward system. For every block that is mined, the miner receives a number of bitcoins for their services. This is how new bitcoins are created and how the mining process continues.
So, we know that bitcoins are created through the process called mining and that approximately 144 blocks are mined every day. We also know that after 210,000 blocks are mined, the reward per block mined is cut in half. Based on this trajectory, it would take 4 years to reach 210,000 blocks mined. The period in which it takes 210,000 blocks to be mined is called an era.
In 2017, we are still only in Era 3. Based on the 144 blocks/day schedule, it will take 34 eras to reach the 21 million BTC ceiling. Era 34 is expected to come around in the year 2140, so long as the 144 blocks per day, 210,000 blocks per 4 years trajectory remains the same. To date, about 16,227,288 bitcoins have been mined.
Now, based on this trajectory, the block mining reward will become exponentially smaller, meaning in a handful of decades, the reward itself won’t be enough to incentivize the expensive process of mining. That’s where BTC transaction fees come into play. Currently, they are very low because mining rewards are still high. But as the mining reward falls, the transaction fee will rise to help boost what a miner will be receiving. It balances the system.
Technically yes, anyone can mine bitcoins. But the equipment and overhead cost of what is needed to mine bitcoins make it a very expensive endeavor. Miners use something called an ASIC – an Application-Specific Integrated Circuit. The cost of an ASIC plus the high electricity bills racked up by mining bitcoins can be extremely hard to overcome, in terms of profitability. That’s why many miners join a pool, so that their hash creation rate is faster, increasing their chances to earn more BTC.
The possible rewards of mining bitcoin are quite lucrative. As of right now, if you finish a block, you receive 12.5 bitcoins as your reward. That’s worth a little more than $13,000 at the moment. But it’s a race, and some days may be much more profitable than others. With how much money will have to be put into mining materials, this is not something you can just decide to do on a whim. ReviewBitcoin.com wants you to understand you’ll need to be dedicated and really have a deep understanding of what bitcoin mining is.