What Is Bitcoin Mining? A Simple Explanation

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Of the many terms involved in Bitcoin, Bitcoin mining may be the most important and the least understood by those outside of the Bitcoin community. So, let’s learn how to mine for bitcoins.
To understand how to mine for bitcoins, you first need to understand the difference between Bitcoin and more standard forms of currency. Most national currency, such as the U.S. Dollar, is issued on what’s known as a fiat basis. The U.S. Government prints money as it is needed, and that money then goes into circulation. The money has value and security because it is backed by the promise of the U.S. Government, and most often managed by the banks which are themselves federally insured. Individuals can be confident that their dollars will continue to hold value, because they are backed by the strong central authority of the U.S. Government.
Bitcoin is a little different. It is what is known as a decentralized currency, because it is neither issued nor secured by a centralized authority. Instead, new Bitcoins are created by a system run by the users, and everyone who participates in that system serves as part of the bank. While at first glance this sounds risky and unsecured, the creators of Bitcoin came up with a clever way for the users themselves to run the systems as well as provide security.

This system is Bitcoin mining.

All Bitcoin transactions need to be verified. That is what keeps them secure. With so much trading going on, this adds up to a lot of data. This data is organized by the Bitcoin system into blocks. It is these blocks that are “mined” by Bitcoin miners. The actual process of learning how to mine bitcoins involves using computers to solve complex mathematical problems that serve to do the work of verifying Bitcoin transactions.

So why would anyone actually want to do this work? That’s the clever part. A Bitcoin miner that successfully solves the math and mines a specific block is rewarded in new Bitcoins. This is how new Bitcoins are created. In a sense, new Bitcoins are created as a fee to miners for doing the work of making the entire system function. And since there is no physical commodity involved, this fee doesn’t actually cost anyone anything. No one has to give up Bitcoins for the miners to be given their new Bitcoins. The only cost to the system is that the addition of new currency can drive down the price of existing Bitcoins, causing inflation.
To keep the Bitcoin market from being flooded, the system has built in safeguards. First of all, the math problems become more difficult the more blocks are mined. This means that it takes longer bitcoin minerand requires more processing power the more mining is being done. And the reward in Bitcoins for mining a block goes down whenever 210,000 blocks are mined. When Bitcoin started in 2009 the block reward was 50 Bitcoins per block; in 2014 that number has halved to 25. Once 21 million coins have been mined the system is set to stop producing new coins.
At the beginning, individuals were able to successfully learn how to mine for bitcoins using only their home computers. As Bitcoin’s popularity has grown, mining has become more competitive, and so more and more processing power is required. Much of the current mining is done by powerful machines built by companies with the express purpose of mining Bitcoins.
However, it is still highly possible for an individual to learn how to mine for bitcoins by entering a mining pool. A mining pool is a group of users who all devote the processing power of their computers to solving blocks together. When the blocks are solved, everyone in the pool splits the reward. The only think it costs in the individual miners is electricity, time, and Internet use.

Bitcoin has come a long way in its short and complicated history, and mining is at the heart of it all. How to mine for bitcoins gets more competitive by the day, and those interested in learning how to mine bitcoin may feel intimidated to begin. But Bitcoin as a currency is still in its early days, and it was designed for the long term. The barriers for entry are still low, and the support structure for getting started is strong enough that there’s no reason not to start mining Bitcoins today.

| February 5th, 2015 | Posted in Currency |

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