How does Bitcoin mining work?

Dear Crypto-Enthusiasts,


Cryptocurrency mining is expensive but well rewarding in a long-term and an attractive move for many investors interested in cryptos. If you have the power to act and the power to fund that business, why do you not do it? It is like digging the mountain for gold. No one believes that you will find gold in that mountain. But when you find it, everyone said that you were lucky. Well, before you invest your time and buy expensive equipment, make research to see whether mining is really the right move for you.

We will focus our article primarily on Bitcoin.

Why must I mine?

You can earn cryptos by mining, without having to put down money for it. It is not necessary to be a miner to own cryptos.  You can also buy cryptos using currency (USD, EUR, JPY, etc.). You can trade it on an exchange like Bitstamp using other cryptos like using Bitcoin to buy Ethereum. You even can earn it by playing video games or by publishing blogposts on platforms that pay its users in cryptos.
Mining has an additional purpose. It is the only way to increase the supply of new cryptos. There are currently more than 17 million Bitcoin in circulation (since April 2018). Without miners, Bitcoin wouldn’t be usable and there would never be any additional coin. There will come a time when Bitcoin mining ends, the number of Bitcoin is capped at 21 million coins.

How much can a miner earn from mining Bitcoin?

Miners help creating so called "blocks" of data for the Bitcoin-Blockchain. The reward for completing a block is 12.5 Bitcoin. Let’s assume that the price is $7,000 per Bitcoin, this means you'd earn 12.5 x $7,000 = $87,500.
When Bitcoin was first mined in 2009, mining one block would earn you 50 BTC. In 2012, this was halved to 25 BTC. in 2016, this was halved to the current level of 12.5 BTC. In 2020 or so, the reward size will be halved again to 6.25 BTC.

How many blocks have been mined so far?

Several sites, including Blockchain.info, will give you that information in real time. Currently there are over 170,000 blocks, as of June 2018.

What are miners doing that's so important that they get free Bitcoin?

They are doing the work of verifying previous Bitcoin transactions. This convention is meant to keep Bitcoin users honest. By verifying transactions, miners are helping to prevent the "double-spending problem."
Double spending means, that a Bitcoin user is illegal spending the same money twice. With physical currency, this isn't an issue. On the other hand, with digital currency, there is a risk someone makes a copy of the digital token and transfers it to another party while keeping the original.
Let's say you had one legit $20 and one good photocopy of that same $20. If someone was to try to spend both the real bill and the fake one, someone who check both bills’ serial numbers would see that they were the same number and thus one of them had to be an illegal copy. Bitcoin miners are keeping track of every transaction, forming a block of data (including every transaction within an approximate time of 10 minutes) and adding it to the Bitcoin blockchain.

To earn Bitcoin, you need to meet two conditions:

1) You must verify ~1MB worth of transactions.
2) You must be the first miner to arrive at the right answer to a numeric problem.

What do you mean, "the right answer to a numeric problem"?

No advanced math is involved. You may have heard that miners are solving difficult mathematical problems. That's not true. What they're doing is trying to be the first miner to come up with a 64-digit hexadecimal number (a "hash") that is less than or equal to the target hash.
Because it's guesswork, you need a lot of computing power to get there first. To mine successfully, you need to have a high "hash rate," which is measured in terms of megahashes per second (MH/s) and gigahashes per second (GH/s).

What equipment do I need to mine?

Either a GPU (graphics processing unit) miner or an application-specific integrated circuit (ASIC) miner. These can cost from $500 to thousands of dollars. Some miners buy individual graphics cards as a low-cost way. There are even people acquiring equipment worth millions of dollars and forming a business out of mining. Since mining is an energy intensive process, this usually takes places in countries with low costs of energy (e.g. Venezuela) and/or countries with a cold climate to save on electricity for cooling the equipment (e.g. Iceland). Other factors are political stability, legal issues and tax systems.

What is a "64-digit hexadecimal number"?

Well, this is one:
0000000000000000057fcc708cf0130d95e27c5819203e9f967ac56e4df598ee

What do "64-digit hexadecimal numbers" have to do with Bitcoin mining?

In Bitcoin mining terms, that metaphorical undisclosed number in the envelope is called the target hash.
Miners are trying to guess at the target hash with those huge computers and dozens of cooling fans. Miners make these guesses by randomly generating as many guesses as possible, as fast as they can. The first miner whose guess generates a hash that is less than or equal to the target hash is awarded credit for completing that block and is awarded with the 12.5 BTC.

How do I maximize my chances of guessing the target hash before anyone else does?

You'd have to get fast mining equipment or, the most common strategy, join a mining pool. That is a group of miners who combine their computing power and split the reward. A huge number of blocks are mined by pools rather than by individual miners. Because it is just a numbers game. You cannot guess the pattern based on previous target hashes.

How do I decide whether Bitcoin will be profitable for me?

The site “Cryptocompare” offers a helpful calculator that allows you to plug in numbers such as your hash speed, electricity costs etc. to estimate the profitability.

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All the best,

Christos Kolokythas

and

Janis Ruhnau
President