Bitcoin & Cryptocurrency Learning

Since its inception, Bitcoin has become the world’s largest cryptocurrency, captivating the general population, tech enthusiasts, investors, and cryptocurrency aficionados alike.

As Bitcoin gains mainstream traction, more people are eager to understand its inner workings and how to invest in bitcoin. They want to know how the technology functions, how Bitcoins are created, and the computing power required for this process. While a comprehensive explanation would take considerable time, we can briefly explain how Bitcoins are created.

Bitcoins are generated through a process called mining. Before diving into Bitcoin mining, let’s go through the basics of Bitcoin again.

What Is Bitcoin?

Bitcoin was the cryptocurrency that started the crypto boom. It is a decentralised digital currency that enables peer-to-peer transactions and transfers without any third party like banks or other intermediaries.

Bitcoin uses blockchain technology to guarantee complete decentralisation. This is a public ledger that stores a record of each transaction on the Bitcoin network. Once miners verify and confirm 1 MB worth of Bitcoin transactions are confirmed, it is added to the blockchain as a block.

Miners receive Bitcoins as a reward for verifying and adding blocks to the blockchain. The current reward stands at 3.125 BTC and this reward is halved roughly every four years or every 210,000 BTC mined. This will continue until the 21 million Bitcoins are created as this is the defined cap.

However, let’s start at the basics and go into more detail.

How are Bitcoins created?

Bitcoins are given as a reward to Bitcoin miners as they verify and add blocks to the blockchain. Therefore, Bitcoins can be considered as a by-product of Bitcoin mining.

However, not every single Bitcoin in circulation was created this way as it had to start somewhere. This is called the genesis block, or also Block 0, that started everything.

Since then, every Bitcoin has been generated through the mining process. This process includes periodic “halvings” which occur approximately every four years, reducing the mining reward and leading to a decreasing rate of new Bitcoin creation over time.

Bitcoin Supply V.S Blocks Created

What Is A Bitcoin Block?

A Bitcoin block is what contains the data related to the Bitcoin network. It contains records of transactions that have taken place or are about to take place on the network, acting as a record book page. Once data is stored in the block, it cannot be altered or removed.

How Does a Block Work?

Transactions that are executed on the network are stored in a block. A block represents a part of the blockchain that contains information about the network, such as transactions. When one block is completed, it becomes part of the blockchain and becomes a permanent record of transactions, with new transactions recorded on the new block.

Each block also contains a reference to the block that preceded it, making it almost impossible to tamper with the records stored.

How long does it take to verify a block?

Creating a new block for Bitcoin takes approximately 10 minutes. This timeframe is determined by the Bitcoin network’s design, which adjusts the mining difficulty every 2,016 blocks (roughly every two weeks) to ensure this average block time is maintained.

This also explains why it roughly takes 4 years to build the 210,000 new blocks until the halving of the miner’s rewards takes place.

Development of Difficulty Level to Create New Block Illustration

In practicality, this means that the system automatically makes the mathematical puzzle that needs to be solved to validate the new block becomes more complex when more miners are present to solve it and vice versa.

What is the Blockchain?

The blockchain is the chronological order of all these blocks above.

It is a public distributed ledger that records all transactions which are stored within each block on the Bitcoin network. It ensures transparency, security, and immutability. This decentralised verification process ensures that the ledger is accurate and prevents fraud or double-spending.

What Is Bitcoin Mining?

We already know that miners receive new Bitcoins as a reward for the mining, but what does this actually mean?

Bitcoin mining is the process by which new transactions are added to the blockchain ledger and new Bitcoins are created. It involves miners using specialised hardware to solve complex mathematical puzzles, a process known as Proof of Work (PoW).

Proof of Work (PoW)

In PoW, miners compete to find a hash—a fixed-length string of characters—that meets certain criteria defined by the network’s difficulty target. This hash is derived from the block header, which includes the current block’s transactions, a timestamp, the previous block’s hash, and a nonce (an arbitrary number).

The hash rate, or the computational power of the Bitcoin network, is a critical factor in mining. It measures the number of hash calculations performed per second across the entire network.

A higher hash rate indicates more miners and more computational power, leading to increased security and resilience against attacks. The hash rate also affects the previously mentioned automated adaptation of mining difficulty to ensure the 10 minute frame.

This dynamic balance between hash rate and difficulty ensures that Bitcoin’s issuance rate remains steady, adhering to the protocol’s predetermined schedule and maintaining the network’s stability.

The first miner to find a valid hash broadcasts the block to the network, where other miners and nodes verify its validity before it is added to the blockchain. This process ensures the integrity and security of the blockchain, preventing fraud and double-spending.

Why Do People Mine Bitcoin?

Some people find mining appealing, mostly because of the chance to earn Bitcoin for their efforts, given the current price of Bitcoin.

This was, of course, extremely lucrative in the beginning as the rewards were so high at 50 Bitcoin in 2009. Moreover, as the competition was not very high back then, normal

Reward Scheme for Verifying One Block

Moreover, as the competition was not very high back then the difficulty level of the mathematical puzzle was quite low in order to ensure the 10 minutes per block created. Therefore, the initial set up cost was rather low as a normal computer was sufficient.

Development of Bitcoin Mining Illustration

As Bitcoin’s popularity grew, however, this has changed and nowadays, specialised computers and software are necessary to mine with a profit. Therefore, mining pools with several miners, have organised that share their resources and increase their chances of successfully verifying a block. However, most of these pools charge to be part of it and the rewards are shared.

When Does Bitcoin Mining Stop?

Bitcoin mining will stop when the total supply of Bitcoin reaches its maximum limit of 21 million coins, which is expected to occur around the year 2140. At this point, no new bitcoins will be created, and miners will no longer receive block rewards for mining.

However, mining will not cease entirely; instead, miners will be incentivised solely through transaction fees paid by users to process and confirm transactions. This shift will underscore the importance of transaction fees in maintaining the network’s security and ensuring that miners continue to have a financial incentive to validate and add transactions to the blockchain.

The transition is anticipated to increase competition among miners, focusing on efficient transaction processing and potentially leading to higher transaction fees. Despite these changes, the fundamental principles of Bitcoin’s decentralised and secure nature will remain intact.

Additionally, Bitcoin mining also gives miners voting rights, meaning they can vote on changes or proposed changes to the protocol.

How to Start Mining Bitcoin?

Bitcoin mining can be a feasible occupation provided you have the right tools for it.

This is a list with some of the most important steps, you should consider before starting:

1. Choose Your Mining Method

There are two primary methods for mining Bitcoin:

Solo Mining: Mining independently, which requires substantial investment in hardware and electricity, and has become less viable for individual miners due to the high level of competition.
Mining Pools: Joining a mining pool allows you to combine your computational power with other miners. This increases the chances of earning rewards, although you will share the rewards with other pool members.

3. Acquire Mining Hardware

To mine Bitcoin effectively, you need specialised hardware known as ASIC (Application-Specific Integrated Circuit) miners. These are specifically designed for mining and are far more efficient than regular CPUs or GPUs.

Before purchasing an ASIC miner, it’s essential to do thorough research on where you are buying it from. Take the time to verify the reputation and reliability of the store or individual seller. Check reviews, compare prices, and ensure they have a good track record. This extra effort will help you avoid scams and ensure you get a quality product.

4. Set Up Your Mining Rig

Once you have your hardware, set it up by following these steps:

Connect your ASIC miner to a power source.
Connect your ASIC miner to the internet via Ethernet.
Install necessary cooling equipment to prevent overheating.

5. Choose and Install Mining Software

Select mining software that is compatible with your hardware and preferred mining method. Download and install the software on your computer, and configure it to connect to your mining pool or set it up for solo mining.

6. Select a Mining Pool (Optional)

If you decide to join a mining pool, sign up for an account with a reputable pool. Again, please make sure that it is a reputable mining pool before you get involved.

7. Set Up a Bitcoin Wallet

You need a Bitcoin wallet to receive your mining rewards. There are a few options to do so:

Wallet on a trustworthy crypto trading platform, such as Virgo
A cold wallet that is not connected to the internet

Create your wallet and ensure that you securely store your private keys.

8. Start Mining

Once everything is set up, start your mining software. Monitor the performance and ensure your hardware is running efficiently. Keep an eye on temperatures and power consumption to prevent overheating and minimise costs.

9. Monitor and Maintain Your Mining Operation

Regularly check your mining operation to ensure it’s running smoothly. Monitor the hash rate, temperature, and earnings. Keep your software updated and consider upgrading your hardware as technology advances.

By following these steps, you can start Bitcoin mining and potentially earn rewards. However, keep in mind that Bitcoin mining is competitive and requires significant investment in hardware and electricity. Always calculate your potential profitability before investing.

Problems and Opportunities in Bitcoin Mining

Bitcoin mining is straightforward to understand and can be profitable, especially in regions with low electricity costs. It’s a great way to learn more about the Bitcoin network while earning some Bitcoin.

However, mining also comes with risks.

Crypto-Jacking:
- Public WiFi Networks: Some miners exploit public WiFi to access and use other users’ devices for mining, a practice known as crypto-jacking.
- Compromised Websites: Malicious software can be loaded onto devices without user consent, leading to significant slowdowns. To protect yourself, avoid using public WiFi, use a VPN, and keep your devices secure.
High Electrical Costs:
- Bitcoin mining requires substantial computing power, often achieved by combining ASIC miners. This increases electricity consumption and costs. Miners can consider more economical protocols like Proof-of-Stake to mitigate expenses.
Centralised Mining Risks:
- The manufacturing and use of coin-specific ASICs can lead to centralization. A few miners might influence how ASICs are designed and which coins they target, creating an imbalance in the mining ecosystem. To counter this, the community can work towards decentralising ASIC manufacturing and developing new hash algorithms to disrupt existing ASIC miners.

By being aware of these risks and taking appropriate measures, Bitcoin mining can be a rewarding endeavour.

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