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Bitcoin Mining Explained
Bitcoin Mining Explained

Bitcoin mining, what is it and why?

Updated over a week ago

Bitcoin mining can be seen as complex at first glance, but is relatively a simple concept once understood. This article is designed to explain what Bitcoin mining is, how it works and how it creates a network to grow ever stronger regardless of world events. Anyone can mine Bitcoin, it is a network in which the more who take part, the more decentralized and secure it is.

What is the Bitcoin blockchain?

The Bitcoin blockchain works as a public ledger that stores and verifies the entire history of Bitcoin transactions and balances. Roughly every 10 minutes, a new block is added to the blockchain made up of all transactions created in the 10-minute timeframe from the previous block.

Every block has a cryptographic hash (signature) that links it to the previous block, each block therefore is linked to historic chain that can't be altered or changed. Blocks of data forming a chain = blockchain.

The video below explains how this all works in an understandable way, give it a watch.

What is Bitcoin mining?

Bitcoin mining is the process by which new bitcoins are added to the bitcoin blockchain, the distributed ledger that underpins the bitcoin network. Mining involves using specialized computer hardware to solve complex mathematical problems, which are used to verify transactions on the blockchain. When a miner successfully verifies a block of transactions, they are rewarded with a certain number of bitcoins.

The process of mining serves two important purposes. First, it helps to maintain the security and integrity of the bitcoin network by ensuring that transactions are accurately verified and added to the blockchain in a timely manner. Second, it is the mechanism by which new bitcoins are introduced into circulation, providing an incentive for miners to participate in the network and helping to ensure that the supply of bitcoins grows at a predictable rate💡.

Because anyone can mine Bitcoin and it has a financial reward, it creates a competitive environment of computers in a race to solve the complex mathematical problems first.

💡 Bitcoin halvening

Roughly every 4 years, the amount of newly minted Bitcoin rewarded to a miner for every block of transaction is halved. This causes Bitcoin to have an ever-decreasing inflation rate as the supply increases at a slower rate over time. Read our article about Bitcoin Economics.

Capitalist Economy

Because Bitcoin mining is highly competitive and has a financial reward in Bitcoin, it creates a pure capitalist mechanism to ensure the network grows and is resilient to world events.

This has been proven by events in 2021 when China banned cryptocurrency mining. China was a popular country for people to mine Bitcoin as it had cheaper electricity rates compared to other countries.

Because the Bitcoin blockchain is fully transparent, at any time we can go view the hash rate of the blockchain. The hash rate is a measure of how much computing power is mining Bitcoin. The more computing power, the stronger and more secure the blockchain is. Due to processing power of computers ever increasing and other reasons, the hash rate of the Bitcoin blockchain has consistently increased over time.

More computers mining Bitcoin = more computing power = higher hash rate. Computers getting more powerful over time = more computing power = higher hash rate. Remember, it's a competitive race to get rewards, with more computing power giving you more advantage.

Below is a chart showing the hash rate of Bitcoin since 2009. You can see in 2021 that the hash rate declined rapidly. This was due to the ban of cryptocurrency mining in China and miners in China turning off their machines.

The decrease in hash rate caused the profitability of mining Bitcoin to rise dramatically as there was less hash rate / machines in the competitive race to work out the complex cryptographic equations. This created a short-term frenzy of people purchasing computers to mine Bitcoin, causing the hash rate to climb above all previous levels within a few months.

Mining Difficulty Adjustment

Bitcoin mining difficulty is a measure of how difficult it is to find a new block and add it to the blockchain. Because the amount of computing power that is being used to mine bitcoins is constantly increasing, the difficulty of mining adjusts over time to ensure that new blocks are added to the blockchain at a regular and consistent rate. This is important because it helps to prevent the blockchain from becoming congested with too many transactions, and it also helps to ensure that new bitcoins are introduced into circulation at a predictable rate.

If each block on the blockchain isn't being mined at around 10 minutes, the difficulty algorithm will automatically adjust. If blocks are being mined at 9 minutes on average, the difficulty will increase. If blocks are being mined on average higher than 10 minutes per block, the difficulty will be decreased.

In the example above of the China ban, the hash rate declined rapidly. This would've created less competition for mining but also would've caused an adjustment to decrease the difficulty as less computers mining would've resulted in the average block not being mined by 10 minutes. The decrease in difficulty and less miners competing would've also made mining more profitable and lucrative.

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