What is Bitcoin Mining?

bitcoin mining

There have been times when you wonder where Bitcoin comes from including the process it enters into the circulation. Well basically, Bitcoin comes from being “mined into existence and bitcoin mining contributes to two things: adding transactions to the so called block chain and for the release of a new bitcoin.

There is a mining process which includes gathering new transactions into blocks as well as attempting to solve a puzzle which is computationally difficult. The first player who can solve the puzzle has the chance to put the next block into the block chain and can take the rewards.

The rewards given can give encouragement to miners in mining and consist of transaction fees (given as payment to the miner in Bitcoin form) and also a freshly released Bitcoin.

Network Security

Bitcoin mining is not centralized. All you need is a stable internet connection and a decent hardware to begin with. Seeing that Bitcoin network forms a decision based on consensus, its network security is dependent on this decentralization. If a disagreement about the decision to include a block in a block chain occurs, it will then be made by certain simple majority consensus which needs to be more than half that the mining influence agrees.

At least 51% of the total BTC network’s mining power should an individual person or an organization have control with in order to obtain power to corrupt the block chain. Hence the concept is name “51% attack”. The attack’s cost will be most dependent on the quantity of mining power concerned in the BTC network. Therefore, the network security of bitcoin partially depends on the amount of mining power employed.

The miner’s incentives which are the transaction fees and block reward can directly affect the total mining power which can be utilized in the network.

Block Reward

The number of new bitcoin released in every mined block is labeled block reward. It is halved practically every four years or every 210,000 blocks. It only started at 50 in 2009 and is currently 25 bitcoin in 2014. The decreasing block reward will end up resulting to the total release of all bitcoin that comes close to 21 million. With accordance to the current protocol of Bitcoin, its cap is 21 million and no more can be mined when that certain number has been achieved.

What provides the huge majority of incentive for miners is the block reward. During the time of writing, during the last 24 hours, represented by transactions fees is 0.3% of the mining income.

Transaction Fees

The miners will be less encouraged to mine bitcoins for block reward purposes since its declining over time that will someday reach zero. A major problem in security may arise for Bitcoin unless the usual incentives given by the block reward will be replaced instead by transaction fees.

Transaction fees are an amount of Bitcoin contained in the transaction as the miner's reward for mining the block in which that transaction is included. It is somehow voluntary for the person who sends the transaction as well as the inclusion of a transaction by a miner in a block is voluntary also.

That's why, users can make use of the transaction fees in sending transactions to verify it. That version of Bitcoin client issued by team of core developers which is utilized to send transactions, requires a minimum fee by default.

Mining Difficulty

How exhausting is Bitcoin Mining? That depends though on the effort made in trying to mine across the network. Subsequent to the protocol outlined in the software, the BTC network adjusts automatically the difficulty of mining around every two weeks or every 2016 blocks.

The purpose of adjusting itself is to keep the block finding rate constant. The more computational power employed, the higher the difficulty, the harder it is to mine. The removal of computational power of the network, makes the opposite happen. To make mining more easy, difficult needs to adjust downward.

There is less profit for miners when the difficulty level gets higher. Therefore, if there are more miners, there is is less profit for each participant. Depending on Bitcoin's price, the transaction fees' size and block reward is the total payout but if there are more people mining, only a smaller piece of pie each person gets.

Mining Hardware

Anybody with access to the web and appropriate equipment can take an interest in mining. In the most punctual days of Bitcoin, mining was finished with CPUs from typical desktop PCs. Representation cards, or illustrations handling units (GPUs), are more compelling at mining than CPUs and as Bitcoin picked up prevalence, GPUs wound up plainly overwhelming.

In the end, equipment known as an ASIC (which remains for Application-Specific Integrated Circuit) was composed particularly to mine Bitcoin. The initial ones were discharged in 2013 and have been enhanced since, with more productive outlines coming to showcase.

Today, mining is so aggressive; it must be done beneficially with the most recent ASICs. When utilizing CPUs, GPUs, or even the more established ASICs, the cost of vitality utilization is more noteworthy than the income created.

As ASICs are progressed and more members enter the mining space, the trouble has shot up exponentially. A ton of this action has been boosted by the expansive cost increment Bitcoin experienced in 2013 and theory that the cost may rise promote.

There is likewise political power inside the Bitcoin environment that accompanies controlling mining power, since that mining power basically gives you a vote in whether to acknowledge changes to the convention.

There are many organizations which make mining equipment. A portion of the more unmistakable ones are Bitfury, HashFast, KnCMiner and Butterfly Labs. Organizations, for example, MegaBigPower, CloudHashing, and CEX.io likewise permit clients to rent facilitated mining equipment.

Mining Pools

Mining prizes are paid to the miner who finds an answer for the astound to begin with, and the likelihood that a member will be the one to find the arrangement is equivalent to the segment of the aggregate mining power on the system. Members with a little rate of the mining power stand a little shot of finding the following piece all alone.

For example, a mining card that one could buy for a few thousand dollars would speak to under 0.001% of the system's mining power. With such a little shot at finding the following square, it could be quite a while before that excavator finds a piece, and the trouble going up aggravates things even. The digger may never recover their venture.

The response to this issue is mining pools. Mining pools are worked by outsiders and arrange gatherings of mines. By cooperating in a pool and sharing the payouts among members, diggers can get an enduring stream of bitcoin beginning the day they initiate their excavator. Insights on a portion of the mining pools can be seen on Blockchain.info.

Electricity Cost

For the purpose of running the miners and also producing enough cooling and ventilation, the miner's primary operational costs are both the electricity and hardware. There are large-scale mining operations that have intentionally situated near cheap electricity.

MegaBigPower, the North America's largest mining operation, located around the Columbia River, Washington State in which there's plenty of hydroelectric power and the electricity's price is at the lowest.

Also CloudHashing, which operates a huge mining operation in the country of Iceland, wherein electricity is hydroelectric and geothermal power generated making it cheap and renewable as well as the northern climate's cold produces cooling.


Just early this year, the IRS or Internal Revenue Service that issued a tax guidance for Bitcoin and pronounced that mining income could establish self-employment income therefore needs to be imposed to tax.

FinCEN (Financial Crimes Enforcement Network), a bureau of Treasury in U.S. who collects as well as analyzes data regarding financial transactions aiming to fight against financial crimes especially terrorist financing and money laundering. FinCEN issued a guidance telling that bitcoin miners and also cloud mining services providers on not being considered as Money Transmitters as written under the U.S. Bank Secrecy Act.

The Bottom Line

Bringing bitcoin into circulation is done by bitcoin mining and it was capped to only total at 21 million bitcoin. A lot of miners are in the race to set up the latest chips for mining bitcoin and most of them chooses to settle in areas where electricity if cheap. If there is more computing power used, it rises the puzzles difficulty, making profitability in check.