Bitcoin mining is a protocol that generates Bitcoins. With the recent Halving event generating more crypto-hype and media attention than ever before, we'll be looking at what mining means, how Bitcoin and the process of mining works and if Bitcoin production is profitable.
What is 'Bitcoin Mining'?
The term mining refers to a series of processes achieved by supercomputers. High-powered computers attempt to solve enormous mathematical equations through a process called hashing.
Bitcoins are also mined when someone makes a transaction request.
How does Bitcoin Mining work?
Here’s an example:
Somebody wants to make a purchase using BTC.
A transaction is initiated by signing a digital message using a private key. The message contains information regarding the recipient and amount of currency of the transaction.
Transaction requests are grouped together and sent to the Bitcoin network of computers, or nodes.
Some nodes known as miners compete to solve these complex mathematical problems in order to verify the transactions, using algorithms in a process known as proof of work.
Once the transactions are validated they are added to a block.
A single block can store between 4000-8000 transactions.
The first miner to complete the validation process of a new block receives some of the freshly mined BTC as a reward for their work.
This is the process of creating Bitcoin which is known as mining.
Use of Blockchain Technology
With each transaction verified, more computing power is required to solve the increasingly large mathematical problems.
This means that over time, mining difficulty increases as the blockchain size continues to grow.
Is Bitcoin Mining Profitable?
The more computing power a miner has, the better chance they have of winning the race.
When Bitcoin was first created, mining required relatively affordable computers to generate the first blocks. Over time, as the block size becomes larger and demand for the cryptocurrency increases, supercomputers are required to solve the equations – which cost a fortune to buy and require a lot of electricity to run in order to verify transactions.
Bitcoin production can be a competitive industry; if you have enough electricity to carry out these equations then you could stand to make profit from thin air. Some central nuclear power plants are even considering using excess energy for Bitcoin production.
There are many novel ways in which cryptocurrency can be mined, as the use of blockchain technology expands and becomes more widespread, the opportunities for miners will increase, as will the difficulties they are faced with.
Bitcoin Halving Event
The Halving of Bitcoin was coded by the cryptocurrency’s creator known as Satoshi Nakamoto. This was done in order to control inflation.
To control inflation and the stock to flow ratio of BTC, the reward for miners is halved approximately every 4 years (or 210,000 blocks). This is what is commonly known as the halving event, which took place hours before the time of writing. The Bitcoin rewarded for mining has once again been reduced by 50%.
The price of Bitcoin can be affected by changes to the mining ecosystem.
In 2009 when BTC was first mined, the Bitcoin Miners were rewarded 50 BTC per block.
That equates to more than 50% of all BTC in circulation today being mined in the first 4 years!
- 2012 – 1st Bitcoin Halving event – from block 210,001 onwards miners were rewarded 25 BTC per block.
- 2016 – 2nd Bitcoin Halving event – from block 420,001 onwards miners were rewarded 12.5 BTC per block.
- 2020 – 3rd and most talked about Bitcoin Halving event – miners now receive 6.25 BTC per block after block 630,001 was mined.
- 2024 – The next predicted halving will see miners receiving only 3.125 BTC per block after the 840,000 block is mined.
What happens to the Miners after the Halving event?
Fewer blocks are mined as miners shut down or liquidate, meaning that new opportunities arise for Bitcoin and the potential for new mining opportunities.
This was the third halving event since its creation in 2009. Previous events have had little media attention yet seemingly had a great influence on the volatility of the crypto market. This time however, the volatility has not been as dramatic as it has historically and global media attention has been considerably higher.
As the world of cryptocurrency evolves, so too does the way in which cryptocurrencies are created. It is both an exciting and worrying time for miners at present. Once the dust settles it will be interesting to see how mining is adopted across the world and the many ways it will be used to generate digital wealth.
DISCLAIMER: This is NOT financial advice. Beginners Crypto Guide does NOT OFFER formal nor informal financial advice and accepts no liability for such service. You should always do your own research before making any financial decisions.