Bitcoin has had quite a great start this year.
Less than 2months after breaking the $30k barrier for the first time, the crypto giant literally doubled the price, hitting a new high of $60k this week.
Every time bitcoin is claimed to be dead, it somehow surges back, with the help of bullish investors, and tweets by tech titans.
At this point in time, almost everyone has heard of bitcoin, but some are still not quite sure of how it is created. Well for starters they are not created but mined.
It is not a physical object like our cash, gold bar and stuff. It is not stored in plastic cards, but it exists digitally somewhere in a vast digital empire until someone mines them out.
In this guide, I’ll tell you everything about the mining process of cryptocurrency’s most popular coin.
Bitcoin Has A Few Similarities With Gold
· Finite Supply: As said by the creator of the bitcoin, there can only be 21m bitcoins mined.
· They Must Be Mined: The only way to release bitcoin into circulation is through the work of a digital miner
Digging a little deeper we find out that bitcoin was created in the wake of the financial crisis in 2008 by a group of pioneers associated with Satoshi Nakamoto.
Satoshi’s goal was to create a decentralised that wasn’t Controlled/owned by middlemen. Satoshi states the benefits as.
· It is democratic: Unlike physical money where a central authority like a banker manages all your transactions, bitcoin is mined, circulated and audited by hundreds of thousands of users.
· Hard To Manipulate: Government agencies can’t intercede by doing things like increasing volume or annoy with interest rates.
· Global: Someone in Chennai can instantly trade bitcoin with someone across the world say New York at low cost.
The backbone of this concept is Blockchain, where the record of all transactions is stored. Now lets breakdown the facts and help everyone who is new to tech can easily understand.
First, let's start with Blockchain.
Consider blockchain as a train. The train consists of all transactions(bitcoin transactions). Each time a trade is made through a crypto platform the details of the transaction are programmed and broadcasted along with other transactions to a vast number of users called miners.
A group of transactions are combined together to form a block, a bunch of blocks are bundled and added to a cart. Each block is given a hash value to unify them. The block is then distributed to all other miners in the network and then once verified the cart is added to the train(blockchain). Only one cart can be added to a train at a given time, on average its takes up to 10minutes to verify and add the cart to a train.
The Main Function Of Bitcoin Miners:
· They literally act as the printing press for bitcoin: Adding new bitcoins into the train is one way of releasing the new bitcoins into market
· They are the auditors of bitcoin: Through the process of mining, they verify whether the transaction on the train was a legit one or not.
By solving and adding the block to the chain the bitcoin miner is been rewarded with a set of bitcoins.
Back when bitcoins worth was less than $50, the reward was 50BTC. It was more of a game for developers, earning 50BTC from their bed who says no. But there were still some restrictions. The reward will be cut in half every time 210k new blocks were added to the train.
Now miners receive 6.25BTC for every block they mine. They are also allowed to keep the transaction fees from the trades in the blocks they have mined, which is around $20.
Today there are ~1million miners around the world competing to add a block to the train. Combined they can get a reward of about $1b per month.
As said above bitcoin miners have to solve computational problems in order to add a new cart to a train and receive his reward. In simple terms, a miner should have a computer that runs through trillions and trillions of hexadecimal number combinations until it ejects out an acceptable 64-character code. This code keeps the blockchain/train secure.
The difficulty of this problem is that, As more bitcoin miners join the network to compete and solve the problem, the problem becomes harder to solve, thus requiring even more computing power.
But a decade ago this wasn’t what it is now, it was easy to mine using a simple Pentium processor since people didn’t have the awareness of what a bitcoin actually is. But now as mining became a universal process people began using powerful hardware like GPU’s, FPGA’s and dedicated mining machines.
The volume of miners on a network — and the random nature of number generation has made adding a block like winning a lottery.
People interested in mining Bitcoins should consider the cost of hardware and more importantly, the cost of the electricity required to run the machine against the slim odds of winning a reward.
In no cases operation alone is no longer a viable option if you are determined to mine bitcoins.
Let’s say you bought an old ASIC machine Antminer s9 (~$400 on eBay) and set it up in your basement. According to bitcoin mining calculators, it would likely take you ~200 years to generate a block.
And while sitting around waiting for that to happen, you'd be spending ~$3.50 per day on electricity just for the one machine. On yearly basis, you'd be spending $1.3k.
For this reason, today’s bitcoin mining process is dominated by 2 groups:
Mining pools: Groups of individual miners who combine their computing power, then divide any rewards fairly, based on how much computing power each person contributed
Around 66% of the world’s cryptocurrency mining happens in China, where cheap hardware makes mining operations economically possible.
Each factory in Dalian which is considered to be the Bitcoin capital of china on an average mines 500< bitcoins each month and utilizes <3k ASIC machines and spends $1m< only on electricity.
On average one bitcoin costs like $5k just to mine.
Bitcoin miners consume 121.4 TWh of electricity each year to sustain their operation. That amount of electricity is more than enough to power 24 nuclear power plants for an entire year.
Of course, the banking sector isn’t any better.
It has been estimated that the world’s banks collectively consume at least 100 TWh of power each year.
Eventually, though, the power used by miners will actually doesn't matter.
Roughly 18.6m of the 21m bitcoins have been mined. At the current rate, it is projected that we'll reach the cap by 2140.
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