What is Bitcoin Mining and How Does it Work?
Bitcoin is the world’s first real digital currency. Called a “cryptocurrency” because it relies on cryptographic methods for transaction handling, it is a distributed, peer-to-peer protocol that is purely virtual in nature. In other words, it’s a monetary system that’s controlled by the online community rather than a government. Bitcoin mining is an activity that creates and pays in bitcoins. But what is it really, and how does it work?
The Bitcoin system has no central authority to generate or release new bitcoins, so there has to be some way for them to be “found” to manage inflation and normal currency growth. This is what the mining process does. It’s a very complicated, technical setup which makes the original calculation (on the “mining” end) very long and processing-intensive, while keeping the administration checks short and easy.
In technical terms, mining is the process of finding a value that, when hashed twice with SHA-256, begins with a certain number of zero bits. The amount of work required to find such a value increases exponentially with each extra leading zero, which gives rise to the long, complicated technical setup on the mining end. When fewer new coins are required, more zeroes are added; when more coins are needed quickly, fewer zeroes are used. For verification purposes, a single double SHA-256 hashing is sufficient, making results quick and easy to check.
If you’re not the technical type, it is sufficient to say that the mining process involves tying up CPU power in calculating the same thing over and over again, incrementing the input by one every time and checking whether the output matches what is desired. Think of it as trying to find a thousand-word password by cycling through the list of all possible letters and numbers. It’s actually a lot more complex than that, but you get the idea: lots of processing and time are involved!
Bitcoin mining has two or three main investments, depending on how it is done. At the very least, it requires time and electricity; a third investment in hardware is optional. As a return on the mining investment, each new bitcoin (worth several hundred US dollars) is assigned to the processor who generates the first correct “block” of information in a successful mining result.
Back when Bitcoin was new, the mining process was relatively simple. There were more values to find and fewer people looking, so to keep a steady flow of new bitcoins appearing in the system, less processing was required. Home computers were used at this stage.
As Bitcoin became more popular and the mining effort more competitive, the processing requirements grew significantly, with two results. Firstly, the return on investment dropped off as much more processing time and electricity was required to generate successful mining results. Secondly, the more intensive processing pushed miners to switch from computer CPUs to graphics card GPUs (which process this sort of thing quicker).
This “processing power arms race” has continued as Bitcoin continues to grow in popularity, with the current standard requiring either dedicated mining “rigs” which run hard-wired mining ASICs (microchips) or communal mining efforts based on pooled resources or cloud computing setups.
For people interested in mining bitcoins, any individual effort is almost worthless: the investment in time and energy far outweighs the potential returns. It is far better to join a mining consortium and provide extra processing power to the group, or to hire processing power from specialist companies who make their living from mining bitcoins.