What is mining and how can you mine bitcoins?

You may have heard of it: Bitcoin mining. But what is it, and how does it work? It sounds complicated, but it is not. So, if we leave out the difficult words, what can we tell you about Bitcoin mining and how it works?

What is Bitcoin Mining?

When you hear the word Bitcoin mining you will quickly think of “Creating new Bitcoins”, but actually that is not the right description. The name is a bit of a stretch. The essence of mining is processing transactions in blocks. The miners also receive the reward in the form of Bitcoins and secure the network. But what is a miner? More on that later.

A decentralized network

First, let’s go to the decentralized network. This is another difficult word, but it actually means nothing more than a network that is not controlled by any government or other central party. The network surrounding Bitcoins and other cryptocurrencies is decentralized. It allows you to receive, send and manage money. Very convenient!

The network is very simple. Say you want to pay a friend some money because you bought something from him, and you want to do it in Bitcoins. You simply open your wallet, scan his QR code and send the Bitcoins you want to give. The transaction is processed immediately, without the intervention of a bank or anything else. Your friend receives his money directly in the wallet.

Now let’s look at this with a transaction through the bank. Through the app of your bank you can also send money rapidly, that’s true. But it’s a bit slower. You are sending it from bank to bank, instead of from person to person like with Bitcoin wallets. If you both have the same bank it will be there almost immediately, but if your friend has a different bank it can take a few days. Or what about a bank abroad? Then it takes even longer. You are then dependent on the bank and its working methods.

Who controls the transactions?

When you transfer an amount through a bank, the bank checks the transaction. Nowadays, much of the process is automated, but the bank is still the one that approves and records the transactions. For example, if you make a transaction above a certain amount, a report is often sent to the tax authorities to prevent fraud.

The decentralized network is the one that controls the transfer of Bitcoins. This network is made up of a network of computers, all of which process your transaction. Each node in this network has its copy of the entire transaction history of that one bitcoin. Therefore, all transactions are processed by all those computers connected to the network and processed into blocks.

These blocks of transactions are all in a chronological order starting with old and ending with new transactions. This creates a chain of blocks of transactions. This is called a blockchain. A chain of blocks.

Through transactions, blocks and blockchain, we come back to mining and its miners. Miners are the workers who put Bitcoin transactions into blocks in the blockchain. Do you still keep up with us?

Miners and their blocks

We now know what miners are, but how does mining work in practice? You would think that anyone can just add blocks to the blockchain. In fact, they can. To add a transaction, your computer must guess the correct solution to the puzzle. The faster the computer can do this, the more solutions it can provide per second.

Each computer wants to guess the solutions as quickly as possible in order to add a block to the blockchain. To achieve this, the computer processes all the information from all the transactions and puts it into a block. Then it runs it through an algorithm. The answer that comes through the algorithm must be correct. Only when this is the case can a miner add the block. To be able to do all this, the computer needs computing power. In other words: you must be able to prove that the equipment you want to use for mining has done its job. When this happens we talk about Proof of Work.

The remuneration of miners

A good computer is expensive, and so is computer power. You also need energy to run your computer. This too must be paid on a monthly basis. This is why miners receive a reward in the form of Bitcoins. For the miners, this is the motivation to carry out their work. The reward varies but can be as much as 12.5 bitcoins per transaction block. This can add up quite nicely. The Bitcoins they receive for this are new Bitcoins. A miner also receives all the transaction fees for the individual transactions.

The remuneration for mining does not always remain the same. The reward is halved every 4 years. This process is called Bitcoin block halving.

Miners secure the network

The Bitcoin code contains a lot of information. For example, this information includes a code that allows a block to be added every 10 minutes. If we look at the network today, it consists of thousands of miners. To ensure that this mining continues for 10 minutes, the degree of difficulty must be increased. If this would not happen, the blocks will be released too quickly.

This is a hassle, but on the other hand, adjusting the level of difficulty also increases the security of the network. As an individual, it is currently virtually impossible to gain control of Bitcoins. Hackers will always try, but it is made very difficult for them. As a hacker, you need more than half of the computing power of the entire network. When there is an attack on the blockchain, we call it a 51%-attack. However, an attack is almost impossible, simply because collectively there is too much computing power.

Can you mine bitcoins yourself?

As a person, it is almost no longer profitable to mine bitcoins yourself. In the early years, this was still doable. Back then you only needed some technical knowledge about Bitcoins and a good laptop and you could mine Bitcoins. However, more and more miners are joining and, as we just mentioned, the level of difficulty is increasing. As a result, you need better equipment to be able to mine bitcoins. It is therefore now almost impossible to do this yourself. In any case, the simple laptop is no longer sufficient.

Mining pools run the show

But who performs the mining, and how does it work? A question that has a clear answer: the mining pools. The mining pools are the companies that currently control most of the Bitcoin mining.

Mining pools are companies that join forces and can therefore control the mining process. If you would like to mine bitcoins yourself, you can join a mining pool. The revenue generated by the mining pool is divided among the number of participants.

Making Profit from Bitcoin Mining

Unfortunately, because the revenue is divided among the participants, there is also a lot less bitcoin left over per person. Therefore, it is not really profitable to mine bitcoins yourself. But if you want, you can of course mine the Bitcoins to support the network.

Would you still like to make a profit from mining bitcoins? In that case, there is always a solution. One of the solutions is to mine crypto coins by using combined computing power.

Equipment for mining

If you have decided to mine bitcoins, you will, of course, need the right equipment. This can be done with advanced ASIC chips. But don’t go running to the supermarket, because they don’t sell these chips there. And you will probably miss them in your pantry too. ASIC chips are something entirely different.

The best known mining equipment comes from the factory of the Chinese company Bitmain. Every so often, this manufacturer releases new equipment that makes it possible to mine cryptocurrencies. Bitcoin and Litecoin are two of them.

Of course, this latest equipment is not cheap. To buy the equipment, you will probably have to pay a bill of over $1000. Okay, that’s a lot of money, but does this allow you to get started? No, unfortunately not; there are more costs involved. As we mentioned earlier, there is also the matter of power consumption, because your computer is running all day. (And don’t forget the night).

Moreover, the equipment produces a lot of noise and heat. So, the computer needs to be in a safe place where it can get rid of the heat and where nobody is bothered by the noise.

For every problem, of course, there is a solution. Miners are sometimes very creative. There are already stories of miners who wanted to start mining and put the computers in a tomato greenhouse. There the noise and the heat were not a problem.

Why are there miners?

Why would you want to mine? The equipment is expensive and the result is uncertain. The answer is simple, for profit of course! If you have the right equipment, your computer can find the solution to the puzzle quickly. You will then have completed the transaction correctly and will receive new Bitcoins.

As we all know by now, Bitcoins can increase in value quickly, so your wallet can be worth much more today than it was yesterday, without you having to do anything.

Cloudmining

Can you still mine when you do not possess the right equipment? Yes, you can! You can hire a cloud mining company.

If you want to get started with mining, a cloud mining company can help you. This can save you a lot of money. These companies have set up their data centres, often in countries where energy is a lot cheaper than in Europe.

It is now clear that the computers used for mining consume a lot of power, and this keeps many miners from working. The computers also become hot, due to the many calculations, and therefore need a way to cool down. If you place such a computer in a warm country, it will have to work much harder to cool down, than in a country where it is cold by default. Iceland is therefore a very popular location for cloud mining companies.

Another advantage of starting to mine through a cloud mining company is the limited knowledge that is required. Of course, you need some knowledge about Bitcoins and mining, but you still need less knowledge than if you were to do everything yourself. You don’t need to buy any equipment, install anything yourself and you don’t have to deal with the noise and heat. So, there is no need to find a solution for this either.

Before you take up with a cloud miner, it is a good idea to conduct some research. Unfortunately, there are also scammers in this market and of course you want to avoid them at all costs. Often, these are companies who promise to make returns that are too good to be true. If a company is transparent about its address and contact details, this is much more trustworthy. Also pay attention to photos of the data centre and reviews.

Auteur

Over Alex Mostert

When I was 16, I secretly bought my first stock. Since that ‘proud moment’ I have been managing trading.info for over 10 years. It is my goal to educate people about financial freedom. After my studies business administration and psychology, I decided to put all my time in developing this website. Since I love to travel, I work from all over the world. Click here to read more about trading.info! Don’t hesitate to leave a comment under this article.