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If dollar bills are printed and pennies and quarters are minted, Bitcoins on the other hand are “mined.” The process of mining adds transactions to the blockchain as well as to release new digital currencies.
This also involves the compilation of recent transactions into the blocks then solving complicated computational problems. Whoever solves the problem will have the incentive of adding the next block on the blockchain and will receive new Bitcoins.
This incentivizes mining and involves both the transaction charges (paid to the miner in Bitcoin form) as well as the newly generated Bitcoin. You can send and receive BTCs over the network.
But unless someone could keep a record of these transactions, no one can monitor who had paid what.
The blockchain technology manages this by gathering all the transactions that happened during a specific period of time known as a block. It is the job of the miner to verify these transactions and record them into a public ledger.
The public ledger is composed of a long list of blocks referred to as the blockchain. Anyone can review the transactions made within the Bitcoin network.
When a member of the network creates a new block of transactions, it will be linked to the blockchain, which builds an expanding list of all the transactions that ever happened in the network.
Everyone in the network will receive the latest version of the blockchain so they are continuously in the loop. However, the public ledger must be built on trust, and it should be digitally held.
The miners are crucial in the blockchain system because we need to make sure that the platform will be intact and not compromised. Once a block of transactions is generated, miners will confine it via a process.
They will access the data within the block, use a mathematical formula, and convert it into a shorter version that is composed of numbers and letters called the hash.
This is kept alongside the block at a certain point and at the end of the blockchain. Hashes are quite interesting because it is quite easy to create a hash from a group of data similar to a Bitcoin block.
However, it is almost impossible to read what the data is all about if you just look at the hash. And although it can be a piece of cake to create a hash from huge volume of information, every hash is one of a kind.
If you modify at least one character in a Bitcoin block, the hash will completely change. In generating a hash, miners are not only using the transactions within a block. They also use other bits of information such as the hash of the preceding block relative to where the new block will be connected.
Because every hash of the block is created using the block’s hash that precedes it, it is often referred to as the electronic version of a wax letter seal.
This is used to verify that this block, including other blocks that succeed it, are genuine as if anyone tries to make any unauthorized modification, every member of the network will be notified.
If one member tries to alter the block, which has already been added to the blockchain, the hash of the block will be changed.
If the network tries to verify the authenticity of the block by using the hash function in the blockchain, it will be easy to find that the hash is quite different from the one that is already linked along with that block in the platform. Hence, the compromised block will be flagged as fake.
Since every hash of every block has an effect in the linking of the next hash, altering a block will also make the hash of the subsequent block not genuine, too. This will result in a domino effect as other succeeding blocks will also be affected, which will make the platform unusable.
So this is how Bitcoin miners verify the block. They are all in a competition to be the first one to verify the authenticity of the new blocks.
They use software that is designed specifically for verifying blocks and for Bitcoin mining. Each time a member of a network is successful in creating a hash, they will be rewarded with 25 BTCs, the system will update the blockchain, and every node in the network will receive the updated copy.
This is the incentive to keep mining and to make the transactions verifiable and genuine. The challenge is that it can be quite easy to generate a hash from a data set because advanced computers are powerful enough to complete the verification process in several minutes.
Therefore, the Bitcoin network must increase the level of difficulty, or else everyone in the network will be able to create hundreds of hashes in no time, and all BTCs will be mined in a matter of days.
The Bitcoin network makes this more difficult through the concept of proof of work. In addition, the Bitcoin network will not accept any old hash, and it requires that the hash of a new block look a certain way.
It should have a specific number of zeroes at the beginning. You also can’t tell what the hash will look like before you create it. When you include a new piece of information in the group, the hash will be completely modified.
In general, Bitcoin miners are not allowed to interfere with the transaction data within the blockchain. However, they are allowed to change the data that they are using in order to generate a hash.
They can do this using a nonce, which refers to a randomized piece of information. This is used with the transaction data in order to generate a hash. If the hash does not fit the needed format, the nonce can be modified, and the entire block should undergo hashing again.
It may take several attempts to look for a nonce which works, and all the Bitcoin miners in the network may try to do this simultaneously. This is how miners are earning BTCs.
The early years of mining Bitcoin was usually described as a gold rush. This disruptive technology opened up a whole new field in the financial world that provided freedom from banking dependency and the chance to make a lot of money.
Those who saw the potential in Bitcoin and decided to hit the hills were cryptographers, programmers, and like-minded libertarians. But with the popularity of Bitcoin and thousands of miners digging in the digital hill, is there still gold to be mined? The reality is, Bitcoin mining has achieved a lot of success from a few early adopters.
A specialized industry has reached a massive scale in the financial industry. The chunks of profits were already mined a few years ago, and there are very few blocks to be mined as we are nearing the cap of 21 million BTCs.
And even if there are still enough Bitcoins to mine, only those with powerful hardware and those who have access to affordable electricity can take advantage of Bitcoin mining these days.
While it is still possible to mine for Bitcoins, those who have low-powered set-ups will soon discover that the investment for upkeep and power is higher than what they could generate through Bitcoin mining.
To put it simply, mining is not lucrative for small-scale operations unless you really have access to a cheap power source. It is also true that even large Bitcoin miners are experiencing a threat to their profit margins because of the tight competition. In fact, in 2016 the mining company KnCMiner already filed bankruptcy.
You should also take note that the rate of development in hardware is very fast. At any time, more sophisticated and more powerful mining hardware could be introduced in the market, even though experts believe that we are not hitting the technological peak of developed efficiencies. Meanwhile, even if you pre-order these hardware, there are also delays caused by customs, shipping, or manufacturing.
There are also some possible problems such as price crashes, network disconnections, power disruption, and hardware failures. Bitcoin mining can be considered as a business, and in any kind of business, you should consider these risks.
The average freelance Bitcoin miner could struggle to make money or recover the cost of mining hardware as well as power. Becoming profitable might be unlikely given the present situation.
This could still be improved in the near future if ASIC hardware hits the point of diminishing returns. With this, combined with affordable and sustainable electricity, could once again make mining for Bitcoin more profitable for freelance Bitcoin miners.
Bitcoin Cloud Mining
If you are interested in becoming a Bitcoin miner, but you don’t want to shoulder the burden of buying hardware, you can try cloud mining as an alternative method.
Cloud mining, as the name suggests, uses the cloud to mine the Bitcoin network and earn BTCs in the process. In general, cloud mining makes use of shared processing power to operate data centers that are located remotely.
You only need to have Internet access through a reliable device so you can communicate with the network, manage your Bitcoin wallets, and more.
But there are specific risks when you choose to perform cloud mining, which you must understand first before trying this alternative method. Cloud mining is recommended for you if you want a quiet operation.
If you have experienced traditional Bitcoin mining, you have to survive the constant humming of fans all day to successfully mine BTCs. And because the mining is done remotely, you don’t have to shoulder significant expenses for power.
Also, you can avoid the problem of dispensing equipment if you are no longer interested in Bitcoin mining. On the downside, cloud mining is vulnerable to fraud.
That is why you must first check the credibility and reliability of the cloud mining service that you are considering using. The profits are also low as the operator will have a share on your mined BTCs to cover their costs of running the system remotely.
You also don’t have full control in the mining operations, and there are also mining services that usually issue contractual warnings that the operations may cease depending on the Bitcoin price.