Bitcoin Mining 101

Bitcoin Mining 101

Amidst the steady fall of bitcoin prices, skeptics continue to express their lack of faith in the cryptocurrencies as potential investment tools. But while investors debate the plausibility of bitcoins, we are forgetting the people behind the scenes -the bitcoin creators. Yes, bitcoins are created through specialised networks of computers. The process of creating bitcoins is known as bitcoin mining. We will get to the details of bitcoin mining in the subsequent sections. The people those who engage in bitcoin creation also validate all the transactions across the world and protect the system.

The process of bitcoin mining uses blockchain technology and is quite complex in nature. It’s highly likely that your search for a grassroot level understanding of bitcoin mining has led you to this page. With so many complex explanations on this topic, it can get really confusing to understand what is bitcoin mining. So, here is a brief guide on bitcoin mining for the layman who is far away from the complex world of technology.

What is bitcoin mining?

Unlike regular fiat currencies, bitcoins are not exactly tangible (although bitcoin banknotes are in the pipeline). They are storing as codes in a blockchain. Blockchain is a technology that enables you to store information in a highly secure network. Authors of the Blockchain Revolution, Don and Alex Tapscott, describe blockchain technology as an incorruptible digital ledger of economic transactions that can be program to record not just financial transactions but virtually everything of value.

Bitcoin mining involves adding mining data to this global ledger. Every bitcoin transaction that is made anywhere in the world is recorded in this ledger and bitcoin miners verify the authenticity of these transactions before they are added to the ledger. So bitcoin miners not only create bitcoins but also maintain its credibility.

Need for bitcoin mining

To understand the need of bitcoin mining, it is important to know why bitcoin miners are necessary. The word ‘mining’ is synonymous to metals such as gold. Miners mine below the earth to discover gold. But in case of bitcoins, you are not exactly unearthing anything from a tangible source. When bitcoins are mined a valuable service is provide to the bitcoin network. There is recordation and validation of a decentralized transaction.

As mentioned above, bitcoin miners also check for authenticity of transactions maintaining t  he credibility of the entire bitcoin network. While checking the transaction, they make sure there are no malicious users trying to seek undue advantage of the bitcoins being transferred. This way they manage to tackle the problem of ‘double spending’ that is inherent in any system of digital currency.

How does bitcoin mining work?

This is the most complicated part. Decoding how bitcoin mining works is no child’s play. Having said that, it is not impossible to become a bitcoin miner. Plus, it can be a great way of making some extra money. Every bitcoin miner is rewarded with 25 bitcoins every time they discover a block. This system of reward is collectively agreed by everyone in the bitcoin network. The miner also gets the fees that users pay while making transactions. Hence, there is enough incentive for people to become bitcoin miners.

But this still doesn’t really answer the question of how does bitcoin mining work?

Well, to begin with, miners connect to a bitcoin network and assemble a list of transactions. They then use an algorithm to check for the authenticity of these transactions. To understand this better, let’s delve deeper into what happens in a bitcoin transaction. Bitcoins are usually transacted to various public addresses. Each public address has a matching private key and only the holder of that key is capable of digitally signing a new transaction request. Additionally, the request must have inputs. Inputs are the previous transactions that the sender is using to fund the new transaction.

Miners primarily check for two things in every transaction. They check for the digital signature and verify if it is by the relevant recipient and also check if the inputs sent to the recipient were not used earlier (double spending).

What is proof of work?

According to bitcoin.com, bitcoin mining is intentionally design to be resource-intensive and difficult so that the number of blocks found each day by miners remains steady over time, producing a controlled finite monetary supply. Individual blocks must contain a proof-of-work to be considered valid. This proof-of-work (PoW) is verified by other Bitcoin nodes each time they receive a block. Bitcoin uses a PoW function to protect against double-spending, which also makes Bitcoin’s ledger immutable.

What are bitcoin mining pools?

Bitcoin miners are realising the potential of mining as a collective team as opposed to doing it single-handedly. These groups are known as mining pools. Mining pools allow small miners to receive more frequent rewards. This helps miners to find blocks more frequently. Although this trend might benefit individual bitcoin miners, it leads to concentration of power in the hands of the mining pool owner.

With a fair understanding of bitcoin mining, you can consider going for bitcoin mining as opposed to bitcoin trading. You can avoid the stresses of volatile bitcoin markets and still earn well through bitcoin mining. All


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