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What is Bitcoin Mining?
- Bitcoin mining is the process by which new bitcoins are minted. It is analogous to the process of gold mining, with the expenditure of CPU time and electricity in place of the manual labor and tools. Miners use specialized hardware to solve complex mathematical problems in exchange for new bitcoins. Bitcoin mining ensures that the network remains honest and protects it from attacks. Bitcoin mining is also a highly competitive industry, with slim profit margins.
- Bitcoin mining is critical to enabling people to securely make Bitcoin transactions. To understand why, let’s look in more detail at how Bitcoin works. The Bitcoin network is a globally distributed public ledger consisting of a giant list of timestamped transactions. Miners are the ones who propose updates to the ledger and only miners who have successfully completed the Proof-of-Work (PoW) are permitted to add a new block. Miners are free to select valid transactions from a pool of potential transactions that are broadcast to the network by nodes.
- Winning the right to create a new block is settled through a competition known as “Proof-of-Work.” Proof-of-Work (PoW) mining is a way to mathematically prove that a network participant has skin in the game. It works by forcing participants to prove that they have completed some arbitrary calculations that consume energy (work)
- Most nodes simply store the history of the ledger, validate the authenticity of new transactions according to the rules of the protocol, and pass on new blocks of transactions to other nodes. In this way, the state of the network propagates around the world until all nodes have the same information. At that point, there is a new ‘truth’ about who owns what
- Note that a block which doesn’t end up becoming part of the longest chain (version B) is known as an orphan block. It is estimated that such blocks are created between 1 and 3 times per day. Transactions that are included in an orphan block are not lost as they will end up being added to the next block of the longest chain
- Bitcoin mining is a naturally equilibrating system. As the price of Bitcoin rises, miner margins increase. This entices more miners to join the market. However, new entrants cause the difficulty of minting new blocks to increase. Sustained downturns in the price of Bitcoin have historically resulted in a portion of miners quitting due to costs exceeding revenue
- Bitcoin mining is a highly competitive industry with narrow profit margins. The primary input is electricity, although significant upfront investments in hardware and facilities are also required. The key hardware involved is the Application Specific Integrated Circuit (ASIC), which is a computing device specialized for running the Bitcoin hashing algorithm exclusively. Profitably relies mainly on consistent access to low-cost electricity applied to the most efficient ASIC hardware
- Bitcoin miners are awarded BTC when they find a random number that can only be generated by running the hashing algorithm over and over again. Bitcoin mining is legal in most countries, including the U.S. and Europe. In some regions, local regulators have imposed or moved to impose restrictions on Bitcoin mining due to its negative impact on electricity grids or the environment
- Miners sell a significant portion of their earned bitcoins to cover the costs associated with mining. These costs contribute to the net sell pressure. Miner's attempts to maximize profitability by holding or selling Bitcoin based on market momentum may have an impact on Bitcoin’s price volatility. Bitcoin’s energy use is certainly a concern, it is a multifaceted issue that needs a nuanced examination
- Bitcoin’s environmental impact is also a concern, which needs to be weighed against the potential benefits, which in Bitcoin’s case include reducing international remittance fees, financial inclusivity, and the creation of economic freedom
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