What Is Bitcoin Mining: How Does It Work, Proof of Work and More | Simplilearn
At the end of March 2022, the value of bitcoin reached $43,394.80 on the exchange market. this value is an indication of good news for the cryptocurrency. Over the years, there has been such a growing interest in the bitcoin currency that its value has grown to resemble that of gold.
The future is bright for bitcoin miners and enthusiasts, and it’s a potentially rewarding venture for anyone who wants to give it a try. however, let’s first take some time to learn the basics of bitcoin mining.
Reading: Whats bitcoin mining
- The blockchain ledger continues to grow as transactions that have taken place on the network are constantly added to it.
- Transactions on the blockchain network are grouped into blocks that are linked together to form a chain of blocks, hence blockchain.
- Blockchain transactions are stored in chronological order marked by timestamps and hash functions.
- By this virtue, the records stored in the blockchain network are permanent and immutable.
There are three ways bitcoin miners can acquire bitcoins. these are:
- buy bitcoins on the exchange
- accept bitcoins in exchange for goods and services
- mine new bitcoins
Of these three, bitcoin mining is perhaps the most exciting option as it sends miners down the path of discovery. there is a warning. Bitcoin mining can be quite demanding, requiring very high computing power to solve complex mathematical equations to verify transactions and add them to the blockchain’s digital ledger.
simplilearn’s video tutorial explains the bitcoin mining process and the advantages of bitcoin over traditional fiat currencies.
what is bitcoin mining?
Bitcoin mining refers to ensuring that transactions are valid and correctly added to the bitcoin block chain using a global network of computers running bitcoin code. the mining process is also the means by which new bitcoins are created.
- the bitcoin mining process involves verifying new transactions against the bitcoin network, resulting in the production of new bitcoins.
- bitcoin mining is the process by which bitcoin transactions are digitally validated on the bitcoin network and added to the blockchain ledger.
- done by solving complex cryptographic hash puzzles to verify blocks of transactions that are updated in the decentralized ledger of the blockchain.
Solving these puzzles requires powerful computing power and sophisticated equipment. in return, miners are rewarded with bitcoin, which is then put into circulation, hence the name bitcoin mining.
also read: blockchain tutorial for beginners to advanced level
what is crypto mining?
Cryptocurrency mining is a process of creating new digital “currencies”. however, that is as far as simplicity goes. the process of recovering these coins requires solving complex puzzles, validating cryptocurrency transactions on a blockchain network, and adding them to a distributed ledger to track them down.
what is bitcoin?
bitcoin is the first decentralized digital currency that allows peer-to-peer transfers without intermediaries such as banks, governments, agents or brokers, using the underlying technology of blockchain. anyone on the network around the world can transfer bitcoins to another person on the network, regardless of their geographic location; you just need to open an account on the bitcoin network and have some bitcoins in it, and then you can transfer those bitcoins. how do you get bitcoins in your account? you can buy them online or extract them.
Bitcoin can be used for online purchases or as an investment tool. It is mainly used to buy goods and services.
advantages of bitcoin
Compared to traditional fiat currencies, assets can be transferred faster on the bitcoin network. The system also has lower transaction fees, because it is decentralized and there are no middlemen, and it is cryptographically secure: the identities of the sender and receiver are kept hidden, and transactions cannot be falsified or hacked. plus, all the information is available in a public ledger, so anyone can see the transactions.
what is the blockchain?
As mentioned, blockchain is the underlying technology of bitcoin. blockchain is a distributed public ledger in which transactions are recorded in chronological order. Any record or transaction added to the blockchain cannot be changed or altered, meaning transactions are safe from hacking. A block is the smallest unit of a blockchain and is a container that contains all the transaction details. a block has four main fields or attributes:
- previous hash: this attribute stores the hash value of the previous block, thus linking the blocks together.
- data: it is the aggregated set of transactions included in this block: the set of transactions that were mined and validated and included in the block.
- nonce: In a “proof-of-work” consensus algorithm, using bitcoin, the nonce is a random value used to vary the output of the hash value. each block is supposed to generate a hash value, and the nonce is the parameter used to generate that hash value. proof of work is the transaction verification process performed on the blockchain.
- hash: this is the value obtained by passing the previous hash value, data, and nonce through the sha-256 algorithm; is the digital signature of the block.
sha-256 is a cryptographic hash algorithm that produces a unique 256-bit alphanumeric hash value for any given input, and that is the unique feature of this cryptographic algorithm: no matter what input you provide, it will always produce a hash value of 256 bits hash.
3 blockchain concepts
To understand bitcoin mining, you must first understand the three main concepts of blockchain.
- Distributed public ledger: A distributed ledger is a record of all transactions held on the blockchain network around the world. on the network, validation of transactions is done by bitcoin users.
- sha-256: Blockchain prevents unauthorized access by using a hash function called sha-256 to ensure that blocks are keep safe. they are digitally signed. its hash value, once generated, cannot be modified. sha-256 takes an input string of any size and returns a fixed 256-bit output, and it’s a one-way function: it can’t derive the reverse of the input reverse completely from the output (what it has generated).
- proof of work: In blockchain mining, miners validate transactions by solving a difficult mathematical puzzle called proof of work. To do that, the main goal of the miner is to determine the nonce value, and that nonce value is the mathematical puzzle that miners must solve to generate a hash that is less than the network-defined goal for a particular block.
bitcoin profit and profitability of bitcoin mining
bitcoin profit is an automated crypto robot that helps trade bitcoin and other cryptocurrencies for profit. It uses an AI algorithm to identify trading opportunities in the crypto market that can automatically close and open your trade, saving you time and manual intervention during trading. He claims that around 85% of his trades are profitable under normal market conditions. however, technical knowledge is required to calculate the profit generated through the bitcoin mining process.
Talking about the real earning of bitcoin, the real earning of money, depends on the cost of aisc hardware, electricity consumption and the effectiveness of mining software. The profitability of bitcoin mining has decreased in recent times compared to previous years due to rising electricity costs, more expensive hardware, difficulty in mining due to increased competition, and declining prices. of bitcoin. Previously, bitcoin mining was started using cpus and simple ai algorithms, which made it profitable and less expensive.
bitcoin versus traditional currencies
While both bitcoin and traditional currency are similar in that they are both a store of value, they differ in many ways. first things first, bitcoin is the first and most recognized cryptocurrency, a digital currency protected by cryptography. Traditional currency, also known as fiat money, is government-issued and regulated currency.
The following table illustrates some differences between bitcoin and traditional currencies.
it is a virtual currency and can only be used in its digital form
is a physical currency in the form of bills and coins. however, we can use it both in physical and digital format
issued through mining and controlled by a decentralized distributed network of computers
issued and controlled by central government authorities, ie central banks. therefore, the traditional currency is the currency of legal tender in the country governed by the issuing authority.
governed by a consensus mechanism in which the majority rules
registered exclusively by the central bank
the value is backed by the trust of its users. the more users willing to transact with bitcoin, the more stable it becomes.
value is determined by the forces of supply and demand and is therefore vulnerable to inflation
limited to 21 million bitcoins
fiat currency has no supply limit
See also: Terras Do Kwon Could Be Planning To Dump Bitcoin To Zero | Investing.com
bitcoin transactions are validated using blockchain technology and therefore do not require an intermediary for validation
transactions involve an intermediary such as a bank or payment provider
no or minimum associated fees have been removed as intermediaries
transactions incur significant fees
transaction time and speed
transaction is almost always instant or highly dependent on network speed
transactions may take time before verification or before they are reflected in the system
the concepts of decentralization, cryptography and consensus guarantee a secure network and the security of bitcoin transactions
less secure as it can be negatively affected by fluctuations in government policies
bitcoin transactions cannot be charged back, reversed or cancelled
chargebacks, reversals and reversals are common in traditional currency transactions
how bitcoin mining works: public distributed network, pow, the 64-digit hexadecimal number (sha-256 algorithm)
Blockchain is a decentralized peer-to-peer network that has been hailed as highly secure and transparent, hence trustworthy. This is because the records in the blockchain network are protected by timestamps and cryptographic hash functions in such a way that, after being added to the ledger, it is almost impossible and impractical to alter transactions. At the core of blockchain security is the absence of centralized control.
here is a breakdown of what happens during bitcoin mining
the mining requirements
A bitcoin miner will first select their tools of the trade and set them up. these include:
- hardware gpu (graphics processing unit), ssd for crypto mining or asic (application specific integrated circuit)
- mining software
- a wallet
- preferred mining pool (if pool mining option is chosen instead of solo mining)
Once all this is configured and the system is on, it performs the mining process autonomously. any other human involvement occurs in the event of system or network failure, power outage, or regular system maintenance.
elements of a bitcoin transaction
When a transaction is initiated on the bitcoin network, three elements are involved:
- a transaction input
- a transaction output
- the amount of the transaction
For each transaction input, a bitcoin mining software generates a unique cryptographic hash puzzle that is difficult to decode. The software then groups the number of transactions required to form a block into a merkle tree.
merkle tree and sha-256 algorithm
A merkle tree is a data structure of the hashes in a block and acts as a summary of all the transactions in the block. In the merkle tree, individual transaction hashes known as transaction identifiers are repeatedly matched using the sha-256 algorithm until a single hash value identifies the entire tree. this hash is known as the merkle root or root hash.
merkle tree enables efficient verification of transactions on the bitcoin network.
the block header
The merkle root, the identifier of a merkle tree, is stored in the block header. the block header contains information about the block and includes the following components:
- the version number of the bitcoin software
- the hash of the previous block
- the merkle root (root hash)
- cryptographic nonce
- the target
This is the information miners will use to solve the hash puzzle and add a block transaction.
solving the hash puzzle
miners must solve the hash puzzle by finding the hash below a given target through the difficulty requirement. the target, stored in the header, is expressed as a 67-digit number that will determine the mining difficulty based on the number of miners competing to solve a hash function. It is important to note that this difficulty is adjusted after each 2016 block is created depending on how long it took miners in previous 2016 blocks to solve an equation. this also helps keep the speed at which transactions are added on the blockchain to 10 minutes.
To solve the hash puzzle, miners will try to calculate a block’s hash by adding a nonce to the block header repeatedly until the obtained hash value is less than the target. once a mining computer solves the puzzle, a new block is successfully created and validated on the bitcoin network after a consensus has been reached between the nodes. when a block is validated, the transactions grouped in it are verified and the block is added to the chain. as stated above, this happens every 10 minutes.
As there will be many miners (systems) competing to solve the puzzle, the first miner to get the correct hash value wins a bitcoin reward. this process allows more bitcoins to circulate.
bitcoin mining and circulation
Bitcoin’s upper supply limit of 21 million bitcoins set by its source code by satoshi nakamoto, its inventor, is puzzling. however, experts have seen it as a great advantage because the scarcity of supply creates value and a stable price for the oldest crypto.
since the genesis bitcoin block mined in 2009 with 50 bitcoins, more bitcoins have been mined and put into circulation since then. bitcoin mining ensures that transaction blocks are created and stacked in the correct order in a way that can be traced and mathematically proven. With the creation of blocks comes bitcoins as a reward, which increases the number of bitcoins in circulation.
Bitcoin’s architecture was cleverly structured so that every 10 minutes a block is discovered and a fixed bitcoin prize is offered for each block mined.
what happens if someone tries to hack the data? Blockchain, as its name suggests, is a chain of blocks; Let’s call the blocks a, b, and c. each block has solved a puzzle and generated its own hash value, which is its identifier. now suppose a person tries to manipulate block b and change the data. the data is added in the block, so if the data in the block changes, the hash value that is the digital signature of the block will also change. so it will corrupt the chain after it: the blocks before block b will be unlinked, because the previous hash value of block c will no longer be valid.
For a hacker to make the entire blockchain valid for block b that was changed, they would have to change the hash value of all blocks before block b. this would require a large amount of computing power and is almost impossible. With this method, the blockchain cannot be hacked and prevents data modification.
why mine bitcoins?
let’s be clear: people mine bitcoins primarily for profit. Other than that, people who are curious about this technology and how it works enjoy experimenting with this relatively new technology.
how to mine bitcoins?
it is suggested that bitcoin miners use mining hardware, such as ebang, antminer, minedollars, avalonminer or more, which generates new bitcoins every 10 minutes. In order to mine bitcoins, the miner is recommended to invest in a powerful configuration specifically designed to mine cryptos. Excessive or advanced computer knowledge must be possessed to operate the hardware system. then the user needs to create at least one bitcoin wallet for bitcoin mining that is safe and convenient.
once the mining hardware is configured and the bitcoin wallet is created, the miner must adopt strategies to install and configure the mining software. The miner has to apply technical knowledge to improve the mining capacity. the mining process begins after the miner downloads an electronic copy of the bitcoin block chain and clicks the start button. the miner needs to monitor the progress regularly to ensure the mining app runs smoothly. however, the miner does not need to do anything manually and can rely on the mining hardware once the mining process is started. Due to the bitcoin mining process, new blocks are added to the blockchain.
See also: Bitcoin pizza day? Laszlo Hanyecz spent 3.8 billion on pizzas in the summer of 2010 using the novel crypto – MarketWatch
Also read: 10 things you didn’t know about bitcoin
how to mine bitcoins at home?
Mining bitcoins at home is challenging and requires certain steps to achieve good results. The first step is to set up the hardware correctly and look for a strong power connection. then the person can create a mining wallet on any trading platform of his choice and join a mining pool to continue. The most important step is to install effective mining software like Awesome Miner, Easy Miner and Pionex and then insert your wallet details and mining pool information.
However, the hardware required for mining is expensive and not everyone can afford it. In addition, bitcoin mining requires a large consumption of electricity. only people who have access to low-cost electricity can afford to mine bitcoins at home. therefore, mining bitcoins at home can be profitable but it needs resources and efforts whose costs are enormous.
how to calculate bitcoin profit?
Putting aside actual bitcoin mining earnings, miners should perform a cost-benefit analysis to understand their break-even price before purchasing expensive hardware or other mining equipment.
To calculate the bitcoin profit, the amount spent on the purchase of bitcoin coins must be analyzed. the next step is to check how much 1 bitcoin costs on purchase and compare it to the current value. the differences between the current and old values will provide a clear idea about the amount of profit made.
Several factors that hinder bitcoin earnings are:
the price of electricity changes every season. electricity is consumed not only to mine bitcoins, but also to keep them from overheating and cooling down.
There is no time period for mining. Many miners mine 24/7 as they can afford the cost of mining.
Changes in the value of bitcoin are testable, which affects your bitcoin earnings and return on investment.
mining difficulties may arise due to slow computers, low voltage, or any other factor affecting efficiency.
how much does a miner earn – bitcoin halving
bitcoin halving refers to the division of block rewards in half, which means that the miners reward for discovering a block is halved. The halving exists to reduce the rate of bitcoin inflation and the rate at which new bitcoins are released into circulation, keeping the price of bitcoin stable. the halving event occurs after 210,000 blocks have been mined, which is roughly every four years. the number of bitcoins in circulation is calculated using the halving theory established by satoshi nakamoto in the bitcoin protocol.
When bitcoin was first released, the reward for each mined block was 50 bitcoins. To date, three halving events have taken place, with the block reward going from 50 since 2009, 25 since 2012, 12.5 since 2016, to the current 6.25 btc since 2020. The last halving event a the bitcoin halving took place on May 11, 2020.
As of September 2021, 18.828 million of the 21 million bitcoin limit had been mined and put into circulation, representing approximately 89.7% of all bitcoins to be mined.
the next bitcoin halving event is expected to take place in the first months of the year 2024. the halving should continue until all blocks are mined and the supply limit of 21 million is reached of bitcoin sometime in 2140. after this, bitcoin miners will only earn from transaction fees.
what do I need to mine bitcoins?
Mining must have been a lot easier in the early days of its release. As bitcoin and the blockchain concept were relatively new, mining was left to hobbyists on a path of discovery. in fact, bitcoin inventor nakamoto mined the genesis block on a basic cpu. As bitcoin continues to gain wider adoption, it has also managed to attract a great deal of interest from investors, miners, and businesses that take advantage of cryptocurrency as a form of payment for products and services. With this, mining has become a very competitive enterprise, and the hardware and software demands for bitcoin mining are also more sophisticated.
Today, bitcoin mining requires specialized tools, including:
- hardware such as gpu (graphics processing unit), ssd for crypto mining, asic (application specific integrated circuit) or the latest fpga (field programmable gate array) chips. When buying mining hardware, it is important to consider two factors, its hash rate (yield) and electricity consumption.
- mining software such as echoes, bemine, and kryptex miner
- a bitcoin wallet from which an individual makes bitcoin transactions
- preferred mining pool (if group mining option is chosen instead of solo mining)
is bitcoin mining profitable?
bitcoin mining is not profitable for all but a few individual miners due to the complicated mining process and high costs. not all miners can spend huge amounts of dollars setting up hardware. A cost-benefit analysis is performed to determine profitability. the amount of electricity consumption in kwh, the efficiency, the difficulty, the time taken to complete the mining process and the value of bitcoin are deciding factors.
The cost of configuring the hardware is very high and requires an implementation of a high level of technical expertise. all miners are not well equipped with these applications resulting in low profits for these individual miners. Because of this, miners are advised to join mining pools where a group of miners can work together. By following this approach, bitcoin miners will be able to increase their chances of getting more rewards in more bitcoins.
bitcoin mining calculator, a bitcoin profitability calculator
Calculating the profitability of bitcoin mining helps to assess the rewards and costs of mining. that can be done with the help of a bitcoin mining calculator, which requires the user to fill in the details, including the bitcoin mining hashrate, power consumption in watts, electricity cost in $/kwh, and electricity bills. maintenance fees. hashrate values are adjusted and an appropriate mining hardware device is selected from the list of asic bitcoin miners.
the bitcoin return calculator uses strategies to provide reliable and accurate return information on bitcoins. this information is crucial for miners as they make bitcoin mining decisions based on such information. miners continue the mining process only if they make a big profit and the cost of electricity consumption is low.
what does it take to run a profitable bitcoin mining company?
choice of hardware
The performance of bitcoin mining hardware is measured in terms of hash rate. current new generation asic miners produce 100 th/s (trillion hashes per second) and cost between $8,000 and $10,000. ordinary CPUs are not capable of producing such fast hash rates.
Developed nations may well have a location advantage due to low energy costs. bitcoin consumes quite a lot of energy. It was estimated that a bitcoin transaction requires approximately 1,544 kWh of energy to complete, which is equivalent to about 53 days of normal energy consumed in an average American home, which translates to an average cost of $200 for a single transaction at 13 cents per kWh. .
so finding the right location with lower electricity costs of less than 10 cents per kwh will help keep a bitcoin mining company profitable.
Bitcoin mining benefits
Essentially, bitcoin mining earnings should be able to recoup the cost of purchased mining requirements as well as electricity running costs. this is possible with efficient hardware, lower electricity costs, and by joining a reliable mining pool which we will discuss below.
Is bitcoin mining legal?
no and yes.
Although bitcoin has gained wide acceptance around the world, it remains hotly contested in some countries due to its decentralized nature and volatility and exorbitantly high energy consumption.
In countries like China, Russia, Bolivia, Algeria, and Ecuador, bitcoin trading is either restricted or outright illegal thanks to its decentralized nature, volatile value, association with criminal activities, and various other reasons. in other countries, the legal status of bitcoin is unknown.
countries in the eu such as finland, germany, france and others, as well as the united states, canada, australia and the united arab emirates, accept bitcoin and are widely traded.
only one country has adopted bitcoin as legal tender, el salvador.
look for our blockchain courses in major cities
risks and limitations
Listening to some people describe bitcoin mining, one would think that all you need to do is solve a few puzzles and you will get some easy money. but remember, if something sounds too good to be true, it probably is. bitcoin has its share of limitations and risks, such as:
- may leave security vulnerabilities that hackers can exploit
- no guarantee of success; you could end up spending a lot of money on the necessary equipment and have virtually no roi (return on investment).
- is responsible for increasing utility and computing costs.
- since bitcoin and other cryptocurrencies are volatile, even if you manage to successfully mine a respectable amount of cryptocurrency, you will still be underwater if the value suddenly drops.
- cryptocurrency is decentralized, so there are no government regulations. consequently, there are no legal protections.
- bitcoin transactions are irreversible. if you send the wrong amount or give the right amount to the wrong person, well, your options for correcting things are limited.
- and finally, regardless of how much of a buzz cryptocurrencies generate, at the end of the day , it is not widely accepted.
bitcoin mining electricity cost calculator
Bitcoin mining profitability is a complicated process as numerous factors affect the profitability of bitcoin mining. Electricity consumption is one of the main factors affecting profitability. An electricity cost calculator is used to find the amount of electricity consumption in kWh. The calculator estimates the number of kW used throughout the day. After this, the kWh cost is estimated based on the energy prices of the user’s location and then multiplied by 30 to find the monthly electricity expense. Based on these results, many miners moved to places where electricity prices were not very high.
a pickaxe strategy for bitcoin mining
During the California Gold Rush of 1849, hordes of people flocked to the West Coast to pan for gold and make their fortunes. Naturally, this was a risky proposition, as success was not guaranteed. but do you know what was a must-see hit? investing in the companies that made the pickaxes that all prospectors (both unsuccessful and successful) had to buy.
In the context of bitcoin, this means investing in the manufacturing companies that produce the hardware most often used in bitcoin mining, such as companies that make gpus or asic equipment.
bitcoin mining shares
While miners may decide to go it alone, joining a group offers immense benefits. pool mining uses pooled hardware capacity and allows miners to spread risks and energy costs while increasing their stakes of discovering a block and earning a block reward. It is also relatively less expensive to join a mining pool, since the capital requirement is spread across multiple miners. Although mining revenues are shared between miners, thus the payouts are smaller, it is stable thanks to higher profit shares.
The reward for each miner in the mining pool is calculated based on individual shared difficulty and shared time in the pool. the most powerful miners are normally assigned a higher difficulty and thus will be entitled to a higher reward ratio compared to the others. the network automatically calculates the sharing difficulty and the sharing time. however, each miner will need to submit his share records.
hope you like the article on what is bitcoin mining, in case you are new to bitcoin and blockchain and want to learn more. Enroll in simplilearn’s basic blockchain course. Do you want to get a blockchain certification that will boost your resume? check out the blockchain certification training course.
See also: Fort Worth embraces cryptocurrency, becomes first city in U.S. to mine Bitcoin | KERA News