How Does Bitcoin Mining Work? – Forbes Advisor

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In 2021, Tesla stopped taking Bitcoin for electric vehicle purchases. Why? Concern for the environmental cost of creating new units of the world’s best-known cryptocurrency in a process called mining.

The computers that make new bitcoins use huge amounts of electricity, often generated by fossil fuels. This real cost of electricity is one of the factors that gives real value to the digital currency, which is currently trading at around $23,600.

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Regardless of the source of electricity, and the cryptocurrency mining industry is moving towards renewable energy sources, mining is central to Bitcoin’s existence as a decentralized currency.

Whether you plan to buy Bitcoin directly, mine it yourself, or invest in the companies that mine it or manufacture mining equipment, you will first want to understand what mining is. Bitcoin in the first place.

What is Bitcoin Mining?

Bitcoin mining refers to the process by which a global network of computers running Bitcoin code operates to ensure that transactions are legitimate and added correctly to the cryptocurrency’s blockchain. Mining is also how new Bitcoin comes into circulation.

“Bitcoin mining is what makes the Bitcoin network secure,” says Stefan Ristić, owner of educational website BitcoinMiningSoftware.com.

Powerful computers compete to be the first to validate a series of transactions called a block and add the block to the blockchain.

Miners receive transaction fees and 6.25 BTC per block for their efforts (if they solve the block correctly). That’s about $147,000 at today’s prices.

“Mining, or transaction processing, is accomplished by incredibly expensive and powerful computers whose sole function is to run algorithms to solve the mathematical problem that allows their owner to earn a bitcoin block – and the revenue from it. ensue”, explains Richard Baker. , CEO of blockchain miner and service provider TAAL Distributed Information Technologies.

Verifying Bitcoin transactions and recording them on the blockchain involves solving complex algorithms. This is all part of Bitcoin’s proof-of-work consensus mechanism, which aims to add a new block every 10 minutes.

The more computing power a miner has, the more chance they have of winning blocks.

“They have a chance of earning Bitcoin every 10 minutes depending on how much computing power they use,” says Bruce Fenton, CEO of fintech company Chainstone Labs.

The latest bitcoin mining machines use application-specific integrated circuits (ASICs) specially programmed for bitcoin mining to handle all the computing power needed, says Patricia Trompeter, CEO of cryptocurrency miner Sphere 3D Corp. .

The current generation of these dedicated bitcoin mining rigs are generating possible answers to bitcoin block equations at around 100 trillion hashes per second, says Rob Chang, CEO of Gryphon Digital Mining, a private bitcoin miner.

A Bitcoin Hash is a mining measure of the amount of computing power used on the network to process transactions.

Since Bitcoin’s release in 2009, the energy needed to produce the cryptocurrency has increased as the network increases the mining difficulty to keep the flow of new transaction blocks steady even as more miners swarm. imply.

Bitcoin mining is usually a large-scale commercial affair carried out by companies using data centers with specially designed servers. Mining farms may have many mining computers stored in warehouses.

“The input that determines whether such activities are profitable is the cost of electricity to power the mining computers,” says David Weisberger, CEO of trading platform CoinRoutes.

For this reason, farms are often located near energy sources such as dams, oil and gas wells, solar farms or geothermal sources.

“The more participants in the network, the more the difficulty increases,” says Jagdeep Sidhu, president of the Syscoin Foundation, which represents the open-source blockchain project Syscoin.

The high costs put home-based miners at a disadvantage compared to institutional miners, who can source low-cost power and save money with bulk purchases of Bitcoin mining rigs.

“While there are home-based operators who have Bitcoin mining operations in their residences, the mining process has become both expensive and regulated, which marginalizes smaller miners,” says Baker.

But that doesn’t mean that mining Bitcoin at home is impossible.

If you want to seriously mine Bitcoin at home, you will need to purchase an ASIC Bitcoin mining rig, which can easily cost upwards of $10,000.

“However, home mining may not be profitable given residential electricity rates,” says Trompeter. “Additionally, ASICs are very noisy and, if not properly cooled, can overheat.”

To explore the potential for profitability, you can check out an online Bitcoin mining calculator that factors in your electricity costs, among other inputs.

Even people with an ASIC mining machine at home tend to pool their computing power with other ASIC owners and share the Bitcoin reward based on their contribution to the pool. Although you can successfully mine a block solo, this feat is often compared to winning the lottery.

You can also consider cloud mining, where you buy or lease hardware or rent computing power hosted by a third party.

Because a new block is generated approximately every 10 minutes, a new Bitcoin is minted approximately every 96 seconds, Ristić points out. But this single Bitcoin is most likely shared among many miners around the world.

It can take a single miner a very long time to mine a bitcoin, says William Szamosszegi, CEO of bitcoin mining platform Sazmining, which connects individual retail miners to existing bitcoin green mining facilities.

Here is the scope of one bitcoin mining company: Gryphon Digital Mining reported in April that it had mined 61 bitcoin equivalents for the month.

These results require a lot of computing power. (The company even purchased over 7,000 bitcoin mining rigs in July 2021 for $48 million for its operations.)

For this reason, with such fierce competition, most Bitcoin miners work together as part of a mining pool. As part of the pool, they combine their hash rate with improving their chances of solving a block on the Bitcoin blockchain.

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