- Bitcoin mining is the process of solving a mathematical problem to produce a hash
- Mining can create new bitcoins and verify transactions on the blockchain
- Miners use Application-Specific Integrated Circuits (ASICs) to mine bitcoins
- Anyone with the required hardware can mine, but not all miners get paid for their efforts
- Professional miners operate Bitcoin farms to increase the profitability of mining
What is Bitcoin mining?
Bitcoin mining is the process of solving a complex mathematical problem to produce a unique 64-digit hexadecimal code called a hash. The mining process requires the use of sophisticated computers, arduous human effort, and lots of electricity. There are two main reasons for mining. The first, perhaps more well-known reason, is to create new bitcoins for circulation. Secondly, miners mine to verify the legitimacy of Bitcoin transactions within the digital ledger that runs on blockchain technology.
Mining to create new bitcoins
As Bitcoin is a cryptocurrency, many may find themselves asking, where do bitcoins come from? The answer is that mining is the only way to create new coins. Aside from the very first tokens minted by Bitcoin founder Satoshi Nakamoto in 2009 in the first block in the digital ledger (also known as the genesis block), all the millions of bitcoins in circulation today were created by miners.
Mining to verify transactions
Much like forex trading, bitcoins can be traded as a pair in the Bitcoin market, an online exchange. Here at Rakuten Securities Australia, we offer Bitcoin/USD, and our traders can buy and sell Bitcoin with United States dollars. When a trade is initiated on the digital ledger, miners in the network must verify the transaction. This process is called showing ‘proof of work’, and the complex mathematical problem is solved to prove its legitimacy. After verification, the transaction is complete and added to the blockchain database. In a database that is fully online and self-regulated by its participants, using a hash prevents fraudulent transactions in the system or the double-spending of coins. This is important as it preserves the integrity of Bitcoin trading. A hash also keeps record-keeping accurate, as once a transaction has been added to the blockchain, it cannot be edited or removed.
How Bitcoin mining works
Choosing the right hardware
Miners must have the right hardware to begin mining. There used to be several different hardware miners could use to mine Bitcoin efficiently. These include CPU (Central Processing Unit) and GPU (Graphics Processing Unit) devices, including your standard home computer. However, in the last decade, the popularity of Bitcoin has increased, and more and more people have begun to participate in mining. These miners are using more advanced and specialised devices with much greater computing power, rendering mining with CPUs and GPUs inefficient for those looking to make a profit from it. These days, all serious Bitcoin miners use Application-Specific Integrated Circuits (ASICs). ASICs are optimised with an algorithm that best matches mining for specific cryptocurrencies. So Bitcoin miners will choose dedicated ASICs specifically to mine bitcoins, as they can produce as many as 100 trillion hashes per second.
Choosing the scale and operating location
Many have realised that the more ASICs operate simultaneously, the more hashes can be produced, which translates to more transactions that can be verified and more coins that can be created. As such, professional Bitcoin miners who have the means will operate hundreds of ASICs from one place to maximise production. These places are called Bitcoin farms. Bitcoin farms use a great deal of computing power and also consume a great deal of electricity. Therefore, professional miners tend to operate in regions with cheap electricity, such as certain regions in China, Russia, the United States, and Canada. However, as an individual miner mining on a small scale, it is not necessary to relocate.
How to make money from mining Bitcoin
Anyone can become a Bitcoin miner if they have the right technological tools and skills to participate. However, there is a condition miners have to meet to get paid for their efforts. The first step to becoming a paid Bitcoin miner is to verify one block of Bitcoin transactions, which is equal to one megabyte (MB) of transactions. This limit was set by Satoshi Nakamoto. After verification of 1 MB of transactions, miners are considered eligible for Bitcoin rewards. To get paid, a miner must be the first to solve the complex mathematical problem posed. The hash they provide must be correct, or at least as close to correct as possible. This is why Bitcoin farms are popular among professional miners. The more ASIC devices one has in operation, the higher the probability of being the first to solve a mathematical problem and getting paid.
Benefits of mining Bitcoin
Release of new bitcoins
Mining is the only way to create new bitcoins, and miners contribute to the Bitcoin ecosystem immensely by releasing new coins into circulation.
Preservation of the integrity of Bitcoin trading
Bitcoin mining is necessary to verify Bitcoin transactions, and it can protect the trading community from attempted malpractices such as fraud and the double-spending of coins. It can also enhance accuracy in record-keeping.
Miners can receive Bitcoin tokens as a reward for their mining efforts. This means they can earn bitcoins without paying for them, as traders would normally have to. When miners receive their share of bitcoins, they also have full control over their assets and do not have to worry about bank or governmental interventions.
Regulations and risks of Bitcoin mining
Is Bitcoin mining legal?
There are no laws against or barring the ownership, trading, and mining of Bitcoin in Australia.
ASICs are efficient at mining Bitcoin, but they are expensive. A unit costs at least a thousand US dollars, and depending on its model, can cost thousands of dollars. ASICs also consume a considerable amount of electricity and can rack up a hefty electricity bill. Miners looking to make a profit from mining Bitcoin with ASICs should do thorough research on models’ hash rates (measured in trillion hashes per second, or TH/s), power usage, and other costs and make profitability comparisons between units before making their purchase.
As mining Bitcoin is an energy-consuming process, it poses environmental concerns such as the enormous carbon footprint of mining. Though not always possible, this problem can be solved by switching to greener energy sources, such as solar power, to generate electricity. The bottom line Bitcoin mining is one way to participate in the cryptocurrency market without purchasing tokens with traditional currency. Miners contribute to the Bitcoin ecosystem by ensuring that trading is done with integrity and security, and they create new coins for circulation in the marketplace. With hundreds of thousands of daily transactions, miners play a hugely important role. Nevertheless, not everybody wants to start mining bitcoins, as it requires a level of initial investment in hardware. The process also uses a lot of energy, which is less than ideal for those who live in residential areas with high electricity costs. Here at Rakuten Securities Australia, Bitcoin enthusiasts who do not want to mine can participate in the market through trading. We offer BTC/USD (Bitcoin/US dollar) on our MetaTrader 4 platform, so you can join the millions of Bitcoin traders out there. As all trading activities contain a certain level of risk, feel free to try a free demo account to practise trading before creating a l