What is Bitcoin Mining and How Does It Work?

Bitcoin mining has become a very exciting field, and it is getting more and more competitive with cryptocurrency’s popularity on the rise. It is getting increasingly difficult for miners to secure more coins since they are halving block rewards every four years. 

This article will explain what Bitcoin mining is about and why mining pools are essential in that process. We shall also have a sneak peek into the future of Bitcoin mining and how it influences the people involved.

Why Mine Bitcoins?

Bitcoin’s reward system reduces its supply by halving every four years. Moreover, miners are encouraged to mine as many bitcoins as possible due to the decreasing number of coins being produced. 

This was triggered in 2009 with a reward of 50 BTC per block and then experienced halvings in 2012 to 25 BTC, 2016 to 12.5 BTC, and then to 6.25 BTC on May 11, 2020. The next halving event that happened again in April 2024 was 3.125 BTC. This decrease in rewards will lead to high rivalry among miners.

As Bitcoin’s price soars, reaching over $70,000 on March 8, 2024, the worth of these rewards becomes greater and greater. On the contrary, when the reward approached zero and eventually ended around 2140, miners became financially dependent on transaction fees alone to keep their operations going. The transition between mining rewards based on work competition and those purely based on decentralization could be a major factor resulting in shifting the dynamics of Bitcoin mining.

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Requirements for Bitcoin Mining

To mine bitcoin, first of all, you need to buy the application-Specific Integrated circuit (ASIC) or graphic processing unit (GPU). These devices are designed to perform concrete computations necessary for the extraction quickly and efficiently.

Dedicating a large amount of money to acquire a top-notch GPU that might cost several thousand dollars would generate only a meager part of the overall mining power. 

This is no more than 0.001% of the entire mining power of the network. Since the network has an enormous capacity to compute and miners are competing for a very limited amount of rewards, mining it via a single GPU in the home can even take forever. 

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This is because it might be that the cryptocurrency cannot be mined successfully. In light of this, most miners are usually on the lookout for mining pools, as further discussed below.

Join a Mining Pool

It does not matter if you mine Bitcoin alone because the odds of successfully mining a block, and, in return, earning rewards are too small for the individual’s estimation. 

On the other hand, many miners with less sophisticated rigs often join mining pools to increase their chances of rewards.

The Process of Mining

Mining consists of a multi-phase process. The gist of the whole thing is that the miners trivially keep track of some data in the form of addresses and amounts, which are then registered in a block on the blockchain.

Accordingly, each block is then followed by some supplementary information, which is hashed by the use of a Cryptographic process known as hash. The product of this algorithm is a 64-digit number, presented in hexadecimal format, also called a hash.

Here’s an example of a hash: 

0000000000000000057fcc708cf0130d95e27c5819203e9f967ac56e4df598ee

This has 64 characters, constituting both numbers and letters. However, letters seem a bit unnatural at first, but this is because the numbering system has hexadecimal numbers in it.

In our present decimal system, drawn from factors of 100, each digit can represent any value from zero to ninety-nine. On the other hand, in computing science, the decimal system is changed to base 10, which includes numbers starting from zero to nine.

Also Read: What is Bitcoin Halving and How Is It Done?

This term is, however, equivalent to that of “hexadecimal,” which is a base-16 numbering system. The word “hex” comes from the Greek “hex,” meaning six, and “deca,” meaning ten. In hexadecimal notation, a single digit has the capacity to represent sixteen probability.

This is because our common base numeric system is incapable of offering more than ten different symbols (zero through nine) so to make up for this shortcoming, additional characters are used. Therefore, we use letters for numbers other than 15; namely, A, B, C, D, E, and F.

Source: Investopedia

Bitcoin Future Supply Schedule

Surprisingly, even though there has been a drop in block rewards, bitcoin miners have still enjoyed a consistent rise in bitcoin prices in the years that follow, helping them plan their earnings. Even though performance in the past is not in any way a guarantee of future success, the holders of the current mining system in the internet space find something reassuring in the community’s full support. 

Ethereum, on the other hand, is planning to move away from mining. The favourable market for miners gives room to think of the improved probability of profitability.

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Mining, as such, is a competitive business, and yet a relatively easy operation to start. In Bitcoin’s early days, those enthusiastic miners could start mining without downloading sophisticated software on their computers. Contrary to the remarkable changes taking place concerning the landscape, making up a Bitcoin miner seems to be simpler than imagined.

Source: Cointelegraph

Wrapping Up

Bitcoin mining can be a challenging as well as an exciting field. Along with the diminishing of the rewards, miners are using new technologies and strategies to be able to make money. Despite all these problems, the mining community remains strong since it provides the necessary groundwork for Bitcoin and cryptocurrencies to function in a decentralized fashion. 

Looking forward, the future of Bitcoin mining holds both promise and uncertainty, but one thing is for sure: it will certainly remain a vital part of the development of cryptocurrencies.

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