Where do Bitcoins come from? With fiat money, the central bank regulates the issuing and distribution of cash. The Bitcoin network is decentralized and instead of the government, it has the miners who provide their computing powers to issue new Bitcoins and secure the network.
How mining works, how big are the rewards, and how hard is it to set up your own mining farm? Read this article to find out.
Bitcoin was structured in a way that the mining of the cryptocurrency is mutually profitable, both for the network and the miners.
Miners install special software to solve math problems embedded in the Bitcoin network. In return, the network rewards the miners with the new Bitcoins every 10 minutes. Why exactly 10?
Because the Bitcoin network automatically changes the difficulty of the math problems depending on how fast they are being solved. Bitcoin is programmed that way to ensure the fairness of the system and to avoid cheating and the creation of Bitcoins out of nowhere.
This provides a wise way to issue the currency and motivates more people to mine. But why does the network need miners?
Miners record the transactions made on the Bitcoin network in their blocks.
Block: Similar to a record book, a block registers the most recent Bitcoin network transactions.
Bitcoin network only documents those transactions which were confirmed in a block. Only then those operations become formally recorded in the blockchain.
Larger payments require more confirmations. For example, if your transaction is less than $1000 one confirmation will be enough, while larger transactions may require up to six.
The network also needs miners as they secure the blockchain. More miners — the more decentralized the network. This makes the blockchain less vulnerable to attacks.
The biggest disruption of the network may happen because of a so-called 51% attack. It can be done by a group of miners who control the majority of the network’s mining hash rate.
Hash rate: measuring unit that indicates the computational power of the mining hardware.
If the group of miners controls over 51% of the blockchain network hash rate they can cut off the recording of new blocks by limiting other miners from completing the transactions. The idea here is simple — the more decentralized the hash power of the network the more it is secure.
At first, the miners were using the processors (CPUs) to mine Bitcoins. Those were pretty effective for the network at that time because the math problems were simpler. As the industry evolved, miners figured out that the gaming graphics cards (GPUs) are much more effective mining hardware, and most of the miners switched to them.
Soon, the commercial Bitcoin mining products entered the market. They included the processor chips reprogrammed for mining Bitcoin. These chips were faster than the graphics cards, but still very power-hungry.
The industry then came up with the ASICs — processors that are designed specifically for mining. They are faster than the first commercial mining chips, but their main advantage is less energy consumption. Smaller electricity bills mean less operational spendings and therefore higher profits.
If you want to start mining Bitcoin you should never use your home PC. You will earn pennies, and will most likely damage your hardware as it will work at maximum power all the time.
For the same reason you should also never install the mining software on your smartphone — an average Android smartphone will earn you literally less than a cent per year. At this stage of the Bitcoin mining industry development, it only makes sense to use the ASICs hardware.
But is there even a point to individually farm Bitcoins?
As the popularity of Bitcoin increases, more miners join the network. This forces the blockchain to be more decentralized and therefore secure but also makes it more difficult for individuals to solve math problems. To overcome these challenges miners have developed a way to work together in pools.
Pooled Mining: combining the efforts of multiple miners to work on the same goal. Such teams find solutions faster than individual miners, and each member of the pool is paid proportionally to the accomplished work.
The rewards for mining are directly linked with the Bitcoin supply and decrease with years because of halving.
Halving: A process in the Bitcoin network that occurs every 210,000 blocks, resulting in the reduction of mining rewards per block by half.
Right now miners receive 6.25 Bitcoins per block, while before May 2020 halving the reward was 12.5 BTC. Halving happens approximately every 4 years and will keep going until the last Bitcoin will be mined in approximately 2140.
Even though miners already farmed 85% of Bitcoin supply, it will take approximately 120 more years to mine the last Bitcoin. Why do people still mine if the rewards decrease?
Because the dividends are shifting from the block rewards to fees. Even after the mining of the last Bitcoin, the miners will still profit from the fees that Bitcoin users pay them for recording each transaction.
When we speak about big mining companies, the key features that they are looking for are cheap electricity and cold location. The colder the climate the more it can dissipate the heat generated by mining.
The most popular country in mining is China, which is responsible for around 70% of the overall hash rate. The country’s West specifically is a very popular Bitcoin mining location, due to the cooler mountainous climate and very cheap electricity bills. Despite China, mining companies spread all around the globe — the most popular locations include Iceland, Canada, Switzerland, and Russia.
The location is also important because just as Bitcoin itself, mining the coin is also illegal or highly taxed in some countries. It does not usually affect smaller miners as it is almost impossible to detect them. Larger mining farms, even those with big names in the industry, sometimes hide their location due to strict regulations.