Bitcoin Mining Basics

If you’ve heard about Bitcoins then you have probably come across the term Bitcoin Mining as well. I wouldn’t blame you if the word mining presented a misleading idea into your mind — of course, you may have figured out that bitcoin mining is entirely different from traditional mining in the way it is done. However, just like a lot of resources are used to mine coal or gold, bitcoin mining too uses extreme CPU power of your computer. So how is a Bitcoin mined? Let’s find out.

How does mining work?

Let's recap my previous article, where I talk about how Bitcoin is a decentralized alternative to the current banking system. Bitcoin creates a system consisting of a decentralized ledger — independent people like you or me have the ability to update the ledger with the most recent Bitcoin transactions without the power to control the entire blockchain (read more about blockchains). Anyone who wishes to mine Bitcoins and update the ledger must guess a random number that solves an equation generated by the system.

Sounds simple, right?

Well, all the guessing is done by your computer. Once the computer comes up with the right guess, it determines which pending transactions can be updated freshly on to the next block of the blockchain. Compiling this block is nothing less than an achievement for a miner, as they become a temporary banker who gets to update the Bitcoin transaction ledger. Finally, the new block added by the miner along with the solution to the equation is shared with the whole network for the other computers to validate it. As each computer in the network validates your solution, they update their own Bitcoin ledger with a copy of the transactions you chose to include in the block.

As a reward for the computing effort involved in solving that complex equation, the system rewards the miner with Bitcoins (currently 6.25 Bitcoins). All the transactions entered in the block have now been confirmed by the Bitcoin network and it is irreversible.

Now if you find the above explanation a bit too technical, think of it this way — suppose you decide to treat yourself with a candy each time you solve a Rubik’s cube. Solving a jumbled Rubik’s cube is extremely difficult but once done, it is easy for anyone to verify that the cube has been solved right. Now imagine there are many people like you trying to solve the Rubik’s cube at the same time. The person who is the first to solve the Rubik’s cube and share the solution with all other participants ultimately gets the candy. The competition was designed to reward participants who solve the cube before anyone else does.

That’s bitcoin mining in a nutshell.

It’s called mining because of the fact that this process helps “mine” new Bitcoins from the system. But if you think about it, the mining part is just a by-product of the transaction confirmation process. So the name is a bit misleading since the main goal of mining is to maintain the ledger in a decentralized manner.

Mining Difficulty

Now that you know what bitcoin mining is, you might think, “Cool! Free money! How do I begin?” Well, do not get carried away and allow me to explain the challenges here…

Satoshi Nakamoto, the mysterious inventor of Bitcoin, created the rules of mining in such a way that the more mining strength gets accumulated in the system, the harder it becomes to solve the equation. Simply put, if more and more miners join the network, they’ll find it much more difficult to mine Bitcoins. The difficulty of mining has been set to be directly proportional to the combined mining power of the network as a whole.

Mining difficulty keeps adjusting itself so as to avoid Bitcoin inflation, i.e., prevent too many Bitcoins to be mined at once. This helps elevate the value of existing Bitcoins in circulation, thereby behaving differently than your regular fiat money (concept of fiat money explained in my previous article).

On average, a new block gets added to the Bitcoin blockchain every 10 minutes. We can have two blocks being added minute after minute and then wait an hour for the next block. In the long run, this will even out to ten minutes on average. The adjustment of mining difficulty is evaluated each time 2016 blocks are added (approx 2 weeks). The system looks back at the last 2016 blocks to check the average time taken to add a new block. If the average is more than 10 mins, then the mining difficulty is lowered and if the average is less than 10 mins, the mining difficulty is increased.

So can I mine my own Bitcoin?

When Satoshi Nakamoto invented Bitcoin, it was only him and his friend who mined Bitcoins using their personal computer. It was easier to mine back then, with few miners in the network. Today, the scenario has totally changed. Today, leading Bitcoin miners use something called as Application Specific Integrated Circuit (ASIC), which are pieces of hardware specially manufactured for the purpose of mining Bitcoin. The processing power of an ASIC is easily more than a thousand times of a regular personal computer, giving ASIC miners a clear edge in the intense Bitcoin mining competition. The cost of ASIC mining hardware can run into thousands of dollars, which in turn would require enormous amount of electricity to keep the ASIC running. This makes Bitcoin mining a very costly affair for a normal person with a slim chance of achieving success.

Hence, in my opinion, it makes more sense to buy Bitcoins on a reputed exchange depending on its price than mine it.

I hope the above article helped you gain a fair understanding of the mining process of Bitcoin. Happy learning!