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Understanding Bitcoin Mining and How It Works!
With the cryptocurrency fever catching on, there’s also a sharp increase in mining activity around the world. Bitcoin mining, in the simplest of words, is the process by which new Bitcoins are generated. However, there’s more to mining than what this statement expresses. Let us take a look at the process of mining, how it works, as well as the impact of Bitcoin mining on the environment.
To understand Bitcoin mining, let us first understand that currencies such as Bitcoin are often called ‘Digital Gold’. Bitcoins are finite in number. Only 21 Million Bitcoins can ever exist. Out of these 21 Million, 16.8 Million of them have been ‘mined’. Bitcoins are similar to gold because gold too, is finite in quantity, and has to be mined. Interestingly, the word ‘mining’ was never referred in the early days of Bitcoins. Mining came around with the rise of various forums and communities – and became a word that caught on.
How Does Mining Work?
In simple words, Mining is the process of generating new Bitcoins by using computational power to solve complex mathematical equations. It is by solving these equations and algorithms that new cryptocurrencies are generated. After successfully solving these complex equation, miners are given a ‘reward’ for their effort – as mining activities tend to consume a lot of electricity and mining equipment can be quite expensive. This reward, at the moment is 12.5 Bitcoins per block solved.
Each of these blocks that need to be solved contain transaction data that is encrypted with cryptographic hash functions. Multiple miners tend to compete for solving each block. However, the reward goes to the miner or the set of miners who work together to solve the block the fastest. The reward per block gets reduced every four years (or every 210,000 blocks). It is expected that the reward will be halved to 6.25 Bitcoins per block on 31st May, 2020.
In the past, you could have mined Bitcoins using your CPU. However, with time GPUs became the norm. GPUs too, are now outdated for Bitcoin mining. The latest hardware that can be used for Mining Bitcoins are the ASIC devices. These devices tend to consume a lot of power but offer a much better and faster return when compared to GPUs. ASIC devices also generate a lot of heat and need to be kept cool. This is why Bitcoin mining is thriving in Canada and Iceland – nations which have a cold climate round the year! Cryptocurrencies such as Ethereum use a different mining protocol which does not allow the use of ASIC devices at all.
Mining is basically the process of bringing computers to a consensus. When multiple miners verify that the transaction is legit, it is only then that the transaction is approved on the Bitcoin blockchain – making the transfer successful. There are a number of mining algorithms.
A single ASIC device will take a long time to mine for Bitcoins. Hence, a number of miners usually come together and join cryptocurrency mining pools where they pool-in their resources and mine together. The rewards are then shared between each miner based on their contribution to the mining process.
Is Bitcoin Mining Profitable?
The profitability of mining operations tends to increase or decreased based on the current Bitcoin prices. Given the mercurial nature of Bitcoin prices, it can never be stated for sure about how much return are you likely to get. However, using tools such as BTC mining calculators, it is possible to determine the profitability of mining operations.
There are two kinds of costs associated with Bitcoin mining operations.
A fixed cost – which is a one-time investment of buying the ASIC miners and wiring it up.
The second type of cost associated with Bitcoin mining is a variable cost. Electricity costs, which includes the cost incurred by the electricity consumed by the ASIC device, as well as the cost of keeping the equipment cool is a major, monthly expense.
However, given the fact that cryptocurrency prices tend to rise suddenly, Bitcoin mining has been a very profitable operation so far. Profitability of the operations depends upon the price of electricity in the country the mining operation is being carried out. Mining for cryptocurrencies in countries such as Algeria and Venezuela is significantly lower because of their cheap electricity prices.
Cryptocurrency mining, however, has a negative impact on the environment. While mining does generate money for the miners, it is damaging to the environment because of the amount of energy it consumes. Estimates indicate that by 2020, mining operations around the world will consume as much electricity as the entire planet does in a year! There is a strong need for environment friendly mining algorithms. However, mining continues to thrive despite the environmental risks.
Author Bio: Prince Kapoor is Independent Marketing Analyst and Blogger. While not working, you can find him in gym or giving random health advises to his colleagues which no one agrees on :D. If you too want some of his advises (on health or on marketing), reach him out at @imprincekapur