Demystifying Bitcoin Mining: A Beginner’s Guide

Bitcoin mining goes beyond creating new bitcoin and releasing them into circulation. The mining process also secures the network, prevents double spending, and brings the network to a consensus, ensuring that Bitcoin operates successfully.

Bitcoin mining provides an excellent way to acquire bitcoin but you can also buy BTC using Trust Wallet. Trust Wallet is a non-custodial digital wallet that enables you to securely buy, store, and manage your bitcoin.

In this beginner’s guide to Bitcoin mining, we’ll look at a brief history of Bitcoin, how the Bitcoin network works, the Bitcoin mining process, mining difficulty, and block rewards. Also note, this guide is purely informational and should not be used as financial advice. Always do your own research.

What is Bitcoin?

Bitcoin is the first decentralized digital currency secured with cryptography, built on a distributed network and is designed to act as money outside the control of any government or central authority.

The Bitcoin network is an autonomous and self-sufficient system that uses peer-to-peer value transfers recorded on the blockchain (a digital ledger).

History Of Bitcoin

Bitcoin was first announced in 2008 when an anonymous individual (or group) using the pseudonym Satoshi Nakamoto published the Bitcoin whitepaper. The title of the whitepaper, ‘Bitcoin: A Peer-to-Peer Electronic Cash System,’ captures the goal of Bitcoin to create digital money that eliminates the need for intermediaries and that anyone in the world can use.

Bitcoin was launched in January 2009 during the fallout of the global financial crisis (GFC) to give financial power back to the people and away from centralized regulators. The first-ever use of bitcoin in a commercial transaction was in 2010 when a programmer purchased two pizzas for 10,000 bitcoin. In 2011, Satoshi Nakamoto disappeared.

Bitcoin has since become the world's best-known and most valuable cryptocurrency, with a total market capitalization higher than most countries' GDP. However, even with Bitcoin dominance, the founder’s identity remains anonymous to this day.

The Concept of Digital Currencies

Digital currencies like bitcoin have no physical form, like minted coins or printed bills, and their transactions are verified online. They exist in electronic form and are only accessible through phones and computers. Bitcoin and altcoins are digital currencies that use cryptography to secure transactions. However, not all digital currencies are cryptocurrencies.

Cryptocurrencies are powered by blockchain technology, a distributed ledger system secured by encryption. Bitcoin’s blockchain is fully transparent, immutable, highly secure, and censorship-resistant.

How Does Bitcoin Work?

The Bitcoin network is powered by blockchain technology. A blockchain is a digital database that securely records transaction data across a set of distributed computers referred to as nodes.

In a blockchain, transaction data is organized in chronologically arranged blocks linked using cryptography. The Bitcoin network maintains a secure and immutable record of transactions that is essentially impossible to tamper with or hack.

Transaction Process on Bitcoin

To transfer bitcoin, you need a Bitcoin wallet like Trust Wallet. The wallet gives you an address made of a cryptographic key pair consisting of a public and a private key.

A public key is known by everyone and is used to send you bitcoin, and a private key is only known by the wallet owner and is used to sign transactions and authenticate the spending.

These keys allow you to initiate and digitally sign transactions when you spend bitcoin. The transaction is broadcast to the P2P network of computers, where all nodes check the transaction's authenticity. For example, if the sender has sufficient balance to carry out the transaction. Once the transaction is verified, it is added to the node's “waiting room for unconfirmed transactions” called a mempool.

The pending transactions stay in the mempool until a miner picks them up to add to a block. After that, the transaction is completed, and the data is permanently stored in the Bitcoin blockchain.

Bitcoin: A Public Ledger

In a blockchain ecosystem, each block contains data, including a unique identifier, the cryptographic hash of the previous block, and timestamped records of recent transactions.

When a block is full, the data is encrypted, creating a hash number that is entered in the next block. These cryptographic hashes chain the blocks together, forming a blockchain.

The network has different nodes run by individuals, companies, and miners that run software, keeping them compatible with an identical blockchain.

In simpler terms, blockchain is a distributed and public ledger like a Google spreadsheet that records transactions across many computers. Everyone in the network can see the data, but unlike in a Google spreadsheet, no one can change or corrupt the data once it's recorded.

What is Bitcoin Mining?

Bitcoin mining is the process of verifying transactions and creating new bitcoin by solving mathematical equations.

Bitcoin uses the Proof of Work (PoW) algorithm to validate transactions. PoW is a consensus mechanism that governs how nodes on the network agree on the validity of transactions. It incentivizes miners to verify the validity of Bitcoin transactions by rewarding the first miner who solves a math equation and finds a new block.

Difference Between Bitcoin Mining and Trading

Bitcoin trading is exchanging BTC for other cryptocurrencies or fiat currency, while mining refers to processing transactions on a blockchain.

Bitcoin mining differs from trading for several reasons, including flexibility, costs, hardware requirements, and power consumption.

You only need your phone or PC and a steady internet connection to trade bitcoin, whereas Bitcoin mining requires costly specialized equipment. Moreover, Bitcoin mining is a power-intensive process that consumes a lot of electricity and isn't as flexible as bitcoin trading, which you can do anywhere with an internet connection.

Finally, bitcoin trading requires little investment to get started, whereas Bitcoin mining requires high computational power and expensive specialized software.

Roles of Miners in Bitcoin Mining

Miners are an integral part of the Bitcoin mining process. Their roles include:

• They run the nodes that broadcast new blocks to the blockchain.

• Processing the legitimacy of transactions and getting them added to the block.

• Helping maintain the security of the blockchain by ensuring fraudulent transactions are not recorded on the blockchain.

Miners also improve network decentralization since anyone with the right equipment can mine bitcoin, and the process isn't controlled by a single entity. Moreover, maintaining the network is in the miners' best interests since they are rewarded with bitcoin for processing transactions.

The Mining Process: What’s Involved?

Early on in Bitcoin’s history, people could become a Bitcoin miner with just a personal computer. However, as the mining difficulty increased, more energy was required, and the mining process required more rigs.

However, things have changed. These days miners typically need a lot more in terms of software and equipment. Let’s have a look.

Powerful Hardware

The Bitcoin network is set up to have one block produced approximately every 10 minutes for the smooth running of the ecosystem. However, when there are a lot of computers fighting to solve the equation and produce a block, the difficulty of the mining process increases to keep block production stable.

Therefore, miners need to invest in powerful computers to compete in solving the complex equation. The mining hardware they need includes either application-specific integrated circuits (ASICs), computers with powerful graphics processing units (GPUs) and Central Processing Units (CPUs) with top-of-the-line graphic cards, or field programmable gate arrays (FPGAs.)

Currently, ASIC-based hardware is more powerful and efficient at mining bitcoin, with more hashing power and energy efficiency than other hardware. However, setting up these rigs is an expensive endeavor.

Mining Software and Wallet

You need to install Bitcoin mining software to manage your mining operations. Some software you can download includes CGMiner, BFGMiner, and many more. Mining software can run on Windows, Mac or Linux, and once installed, you can start Bitcoin mining.

You also need a Bitcoin wallet to store your BTC rewards. Trust Wallet is a secure multi-chain cryptocurrency wallet that supports Bitcoin and has a Chrome browser extension.

Mining Pool

As a solo miner with limited mining power, your chances of finding the next block are small. The increase in mining difficulty might further reduce your chances of recouping your investment.

Mining pools are groups of miners that pool their resources and work together to increase their chances of earning block rewards. Mining pools were invented to promote efficient Bitcoin mining and deal with the growing mining difficulty through combined computational power.

Mining pools share payouts depending on each miner's share of work. They are a great way for smaller miners to get involved in Bitcoin mining and have a fighting chance at winning block rewards.

The Mining Process

Once you have your rig and software set up for solo mining or joined a mining pool, you can start mining.

Your mining software will bundle up as many transactions as needed to fill up a block. The software will compete with other computers to generate a cryptographic hash that solves the complex math problem within the 10-minute window.

The first miner to generate the string of 64 letters and numbers (hash) that is less than or equal to the target hash wins the reward for completing the block. The more powerful your rig, the more hash you can generate per second. The miners are rewarded with the new BTC released from the process.

Once your block has been checked by other network participants, it is added to the Bitcoin blockchain.

Understanding Mining Difficulty and Rewards

The PoW consensus ensures the blocks are mined every 10 minutes, and miners maintain the integrity of the network by making them compete to solve complex math equations. The miner who solves the equation first is then rewarded with bitcoin. This algorithm ensures bitcoins aren't mined too fast, maintaining the scarcity of the cryptocurrency.

Mining Difficulty

Mining difficulty measures how difficult and time-consuming it is to solve the complex mining math equation and find the right hash for each block. The difficulty is adjusted automatically depending on the number of miners in the network and their combined hash power. The higher the number of miners, the higher the mining difficulty.

Mining difficulty is adjusted after every 2,016 blocks are mined. The mining difficulty is adjusted around every two weeks since it takes 10 minutes to mine one block. The difficulty maintains a steady mining rate since bitcoin has a finite number of 21 million coins.

Moreover, the higher the mining difficulty, the less likely hackers are to conduct a malicious attack on the network.

Block Rewards and Transaction Fees

Bitcoin miners are rewarded with block rewards for successfully mining blocks. The network’s block rewards are new BTC that incentivize miners to process transactions.

The block reward is halved every 210,000 blocks to counteract bitcoin inflation and prevent over-saturation, maintaining BTC scarcity. Bitcoin halving cuts the rewards from Bitcoin mining in half every four years. Currently, the block reward is 6.25 BTC but will be halved in 2024 to 3.125 BTC.

Transaction fee is the amount paid to transfer bitcoin from one wallet to another. Transactions fees are determined by:

• The size of the transaction

• Demand for block space

• The speed of transaction

The faster the transaction speed and the larger the amount, the higher the fees. Additionally, the higher the demand for block space, the higher the transaction fees. These fees are paid to miners so that they prioritize verifying the transaction.

Closing Thoughts

Bitcoin mining is an integral part of the Bitcoin ecosystem that creates new BTC, upholds integrity, and is linked to a reward system that motivates people to participate in the network.

However, its execution requires a significant amount of hardware and electricity, which can lock out smaller bitcoin enthusiasts. Moreover, the increase of large players and mining pools has skyrocketed the mining difficulty, making it harder to find blocks and cash in on the mining reward.

Fortunately, the demand and liquidity of bitcoin ensure that miners can earn an income from block rewards and transaction fees.

If you own bitcoin and want to store and manage your assets in a safe, non-custodial wallet, consider Trust Wallet. You can buy, sell, swap, and store your bitcoin securely on Trust Wallet.

Download Trust Wallet today to securely buy and store bitcoin (BTC).

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Note: Any cited numbers, figures, or illustrations are reported at the time of writing, and are subject to change.