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How does Bitcoin Mining work?
Bitcoins act like cash, but they are mined like gold. So how does someone get into the current bitcoin mining rush?
If properly done and one is willing to take the investment risk, you could wind up with a few bitcoins of your own. For your information, bitcoins currently have an average weekly price of over $4000 on the largest bitcoin exchange.
Learn here how it’s done.
How many bitcoins are there?
When the algorithm was created under the pseudonym Satoshi Nakamoto, which in Japanese is a common a name. These individual(s) set a finite limit on the number of bitcoins that will ever exist: 21 million.
Since 2009, the number of bitcoins mined has skyrocketed. Therefore, the system was set up easy to mine in the beginning, and harder as we approach that 21 millionth bitcoin. At the current rate of creation, the final bitcoin will be mined in the year 2140.
What exactly is Bitcoin mining?
There are 3 primary ways to obtain bitcoins. First, buying bitcoin on an exchange. Second accepting them for goods and services, and the third way is mining new bitcoin. “Mining Bitcoin” is lingo for the discovery of new bitcoins. Also, this is just like finding gold. In summary, it’s simply the verification of bitcoin transactions.
For example, John buys a car from Sam with a bitcoin. In order to make sure his bitcoin is a genuine bitcoin, miners begin to verify the transaction.
It’s not just one transaction that individuals are trying to verify, it’s many. All the transactions are gathered into boxes with a virtual padlock on them and they are called “block chains.”
Bitcoin Miners run a software to find the key that will open that padlock or “block chain”. Once their computer finds this, the box pops open and the transactions are verified. For finding that “block chain key”, the miner gets a reward of newly generated bitcoins. It can be used to explore any transaction made between any bitcoin addresses, at any point on the network. Whenever a new block of transactions is created, it is added to the blockchain, creating an increasingly lengthy list of all the transactions that ever took place on the bitcoin network. A constantly updated copy of the block is given to everyone who participates, so that they know what is going on.
But a general ledger has to be trusted. Also, all of this is held digitally. We must be sure that the blockchain stays intact, and is never tampered with? This is where the Bitcoin miners come in. (See more about blockchains here).
Miners work begins Here…
When a block of transactions is created, miners start the process. They take the information in the block, and apply a mathematical formula to it, turning it into something else. This is a far shorter, seemingly random sequence of letters and numbers known as a hash. This hash is stored along with the block, at the end of the block chain at that point in time.
Hashes have some interesting properties. It’s easy to produce a hash from a collection of data like a bitcoin block, but it’s practically impossible to work out what the data was just by looking at the hash. In addition, while it is very easy to produce a hash from a large amount of data, each hash is unique. Hence, if you change just one character in a bitcoin block, its hash will change completely.
Miners don’t just use the transactions in a block to generate a hash. Also, some other pieces of data are used. One of these pieces of data is the hash of the last block stored in the block chain.
Because each block’s hash is produced using the hash of the block before it, it becomes a digital version of a wax seal. It confirms that this block, and every block after it. This is legitimate, because if you tampered with it, everyone would know.
Can you create fake transactions?
If you tried to create a fake transaction by changing a block that had already been stored in the blockchain, that block’s hash would change. If someone checked the block’s authenticity by running the hashing function on it, they’d find that the hash was different from the one already stored along with that block in the blockchain. The block would be instantly spotted as a fake and not work.
Because each block’s hash is used to help produce the hash of the next block in the chain, tampering with a block would also make the subsequent block’s hash wrong too. That would continue all the way down the chain, throwing everything out of whack.
How many combinations/attempts does it take to find the key…
The current number of attempts it takes to find the correct key is around 1,789,546,951.05, according to Blockchain.info.
Despite that many attempts, the bitcoin reward is given out about every 10 minutes. In 2017, the bitcoin reward for verifying transactions is 12.5 new bitcoins and will continue to do so for four years.
When mining began, regular off-the-shelf PCs were fast enough to generate bitcoins. That’s the way the system was set up to be easier to mine in the beginning, harder to mine as more bitcoins are generated. Therefore, miners have had to move on to faster hardware in order to keep generating new bitcoins. Today, application-specific integrated circuits (ASIC) are being used. Programmer language aside, all this means is that the hardware is designed for one specific task—in this case bitcoin mining.
Can I mine on my own?
New faster hardware is being created by various mining start-ups at a rapid rate and the price tag for a full mining rig that is capable of discovering new bitcoins on its own currently costs in the ballpark of $12,000.
There is a way around such a hefty investment: joining mining pools. Check out my page on Computta! Pools are a collective group of bitcoin miners from around the globe who literally pool their computer power together to mine bitcoin. Popular sites such as Slush’s Pool allow small-time miners to receive percentages of bitcoins when they add their computer power to the group.
The faster your computer can mine and the more power it is contributing to the pool. Hence, the larger percentage of bitcoins received. Bitcoins can be broken down into eight decimal points.
Joining a pool means you can also use cheaper hardware. The other way you could lose money when it comes to mining is power consumption. Currently, profits outweigh money spent on the energy needed to mine. Again, that could quickly change due to the volatile price of bitcoin.
“It’s time sensitive, like a yo-yo”, said Jeff Garzik, a Bitcoin developer for the payment processor BitPay. It’s not mining or investors that are causing the radical highs and lows in the currency’s value, it’s the media, he said. “Bitcoin’s price tends to follow media cycles, not hardware or mining. The difficulty in mining is not the highest correlation in bitcoin value.”
—By Anthony Volastro, CNBC Segment Producer