October 27

What Is Bitcoin Mining: A Step By Step Guide

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Most people think of the stock market as they decide to invest. Today, traditional investors have discovered that Bitcoin is one of the most lucrative investment opportunities. However, there are various ways to invest in it, and Bitcoin Mining is one of them. If you’re not sure ‘what is Bitcoin Mining,’ this guide will help you understand what you need to know about it.

It’s not as easy as it was to mine Bitcoin before. Growing competition, software, and hardware requirements have made the mining process of Bitcoin complicated. However, many people still wonder if it’s still profitable to mine Bitcoin. Here you’re going to learn the following stuff about Bitcoin Mining.

  • What is Bitcoin Mining?
  • How does it work?
  • Rewards for Bitcoin miners
  • Is it still profitable?

If you are not good at solving computational problems, it might be quite intimidating. If that’s the case, you can directly trade or invest in Bitcoin through crypto exchanges. But you must consider the risks involved in Bitcoin trading and investing. 

What Is Bitcoin Mining?

Bitcoin Mining

Bitcoin Mining is a complex process of solving computational problems related to Bitcoin transactions. As a result, new Bitcoins come into circulation, making the Bitcoin network trustworthy and secure. It requires powerful computational devices to solve these problems. 

Earlier, miners were using personal computers to solve these problems. But today, using personal computers is neither sensible nor profitable. Anyway, we will discuss the software and hardware requirements later. Now let’s know about the three essential things that will help you clearly understand ‘what is Bitcoin Mining.’ 

What Are Decentralized Transactions?

Decentralized Transactions

There are two types of transactions; (1) centralized, (2) decentralized transactions. A central authority controls centralized transactions. For example, if you want to send money to your friend, you need a payment gateway, and your bank verifies and approves the transactions. 

On the other hand, decentralized transactions do not need a central authority to verify and control the transition process. Here, digital currencies like Bitcoins are transferred through a peer-to-peer network where the network members confirm the transaction. It is possible because of blockchain technology. 

Blockchain Technology

Blockchain Technology

Blockchain is the underlying technology due to which Bitcoin and other cryptocurrencies exist today. The blockchain contains two terms: ‘block’ and ‘chain.’  A block is a permanent record of several bitcoin transactions containing all the transactions’ information. It cannot be altered or removed from the blockchain.  

Many attempts failed before the invention of blockchain technology. It solved the double-spending problem associated with digital currencies. Now let’s understand what it is and how miners solve these double-spending problems by verifying them. 

Double-Spending Problem

The double-spending problem is the illegal use of digital currencies. That means a user spends a single cryptocurrency twice by creating a duplicate. It’s quite possible to duplicate digital currency, which is not easy in physical money. 

Crypto miners can identify these double-spending problems in the network. So the bitcoin miners verify the transactions before the blocks are added to the global bitcoin network. Now let’s understand what is Bitcoin Mining and how it works.

How Does It Work?

To understand what is Bitcoin Mining? You first need to understand how it works. In simple Bitcoin Mining is the verification of Bitcoin transactions. As a miner, you need to solve a mathematical problem to find out a 64-digit hexadecimal number. It involves guesswork to figure out the number, but it’s not as easy as it sounds. 

Although you don’t have to solve a problem using mathematical derivation, the guesswork requires considerable computational power. For that, you need powerful computing devices like an Application Specific Integrated Circuit (ASIC) or Graphic Processing Unit (GPU). These devices have high computing power up to tera-hash per second, far beyond personal computers’ processing power. 

Bitcoin Mining prevents the problem of double-spending. Let’s see when a miner gets rewards for solving the computational problems. Also, we will discuss the other benefits of mining. 

Rewards For Bitcoin Miners

A miner needs to verify 1 MB of Bitcoin transactions to be eligible for getting rewards. That means the size of one block in the Bitcoin network is 1 MB, set by the founder Satoshi Nakamoto. One block can contain only a few transactions to several thousand transactions based on each transaction’s size. 

Although you are eligible for getting rewards, you may not get Bitcoins if you do not satisfy the second condition. The two conditions for earning rewards in Bitcoin are:

  1. You need to solve or verify bitcoin transactions of size 1 MB. It’s comparatively easy.
  2. The hard part is to reach the right answer before anyone solves the problem. It is also known as proof of work. 

Apart from this, you will also get benefits like lower transaction fees. Also, you can become a voting member of the bitcoin network if you are a regular miner.  Now, you might wonder whether it is still profitable to mine Bitcoin. Well, we will understand it in detail in the next section. 

Is it Still Profitable?

Several factors determine whether Bitcoin Mining is a profitable business. It can be profitable for some miners while not for others. Here are a few things to consider:

Electricity Cost

Electricity cost

Today, using personal computers for Bitcoin Mining is not feasible due to the complexity of computational problems. Moreover, there is growing competition, which makes the process more complicated. 

Therefore, you need to use powerful devices with high computational power. Either a Graphics Processing Unit (GPU) or an Application Specific Integrated Circuit (ASIC) is suitable for Bitcoin Mining. These devices have a higher processing capacity than personal computers. 

However, these devices consume more power as compared to normal computers. So it’s essential to consider the cost of electricity.

Cost Of Computing Devices

Computing Devices

As you know, powerful computing devices like an ASIC or GPU can compute faster; they are costlier than PCs. It may not be affordable for some miners. It requires high investment, and it’s essential to consider the cost of such devices while thinking of profitability. 

Some of the ASIC devices are so powerful that they can compute 100 million times faster than PCs. So, it’s clear that mining with PCs is not profitable if you cannot afford such high processing devices. 

Bitcoin Halving

Another essential factor that you need to consider is shifting rewards due to Bitcoin halving. It’s an event in the Bitcoin network that occurs every four years since its inception. In this event, the reward for mining gets halved from the previous halving. 

Initially, a miner was getting 50 bitcoin units to mine one block in 2009 successfully. However, a miner will only get 6.25 bitcoin units to mine one block today. It’s because the payout is halved every four years, and it’s the fourth halving event in 2020.

Bitcoin Price

Bitcoin Price

After all, the price of Bitcoin is also a major factor for profitability. Although the value of Bitcoin is rising, nobody knows about its future value. You must have known that Bitcoin is highly volatile, and it can go in any direction. 

As a result, profitability depends on the price of Bitcoin when you get the payout. If the price is high when you get your reward, that’s good news; otherwise, you may make a net loss. However, Bitcoin enthusiasts remain hopeful about the price of Bitcoin.

Final Words

Hopefully, the article has helped you to understand ‘what is Bitcoin Mining.’ If you are planning for it, you must consider the above factors before you invest your money. Apart from that, think whether you have the right skills, such as basic knowledge of operating systems and hardware maintenance. Additionally, you need to have an interest in computation and mathematics. 

However, if you find that you don’t have the right skills or infrastructure for mining, stay away from it. Instead, you can learn to trade or invest in Bitcoin, which is a simple way to earn money but involves high risk. If you have any queries, please feel free to ask in the comment section.

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