Bitcoin Mining is the process by which new bitcoin is added to the cash supply. Mining secures the bitcoin network against illegal transactions, for example, the same exact transactions happening twice, also known as double-spending. Miners give computing power to the bitcoin network in exchange for the opportunity to be compensated with bitcoins.
How does bitcoin mining reward miners?
To be rewarded with new bitcoins, the miners compete to solve a difficult mathematical problem that is based on a cryptographic hash algorithm. The solution to the math problem is then incorporated in the new block and acts as proof that the miner utilized significant computing power to solve the problem. This verification method is called Proof-of-Work. The competition to solve the Proof-of-Work math problem to acquire payment in bitcoin and the instantaneous distribution of the complete transaction record to all nodes on the blockchain is the essence of bitcoin’s security model.
Bitcoin mining in more detail:
Cryptocurrency is form of digital currency that has an open and decentralized system, and uses cryptography to ensure security as well as to control the creation of new units. This new currency form and technology is being touted to be an upgrade to customary financial transaction systems. Even though, in general, the space seems to be shifting from mining (Proof-of-Work) to staking (Proof-of-Stake), most cryptocurrencies still use mining as a way to verify their network transactions. Bitcoin is however still the most popular cryptocurrency for mining.
When a transaction is propagated on the bitcoin network it doesn’t become apart of the blockchain until the transaction is checked and incorporated in a block by the bitcoin mining process. The mining process fills two purposes on the bitcoin network:
- It creates new bitcoins with each block, relatively like a central bank printing new cash. The amount of bitcoin created per block is fixed and is reduced overtime.
- Bitcoin mining also ensures trust by validating that transactions are affirmed and also that enough computational power was committed to the block containing the transactions. More blocks mean more calculation which means more miner reward and block validation.
There is also mining difficulty after some time. The difficulty level changes automatically – fluctuates up or down – and is directly proportional to the amount of computational power available. With high computational power the difficulty level will increase and with low computational power the difficulty level of the mathematical equations will decrease. Also, as the number of miners rise, the percentage of benefits allocated to each miner decreases and everyone winds up with smaller slices of the benefits – and visa versa when the number of miners decrease.
Profitability of bitcoin mining in today’s environment:
Though the bitcoin mining market is now saturated with miners which will decrease the amount of bitcoin awarded to each miner, bitcoin mining can still be profitable. The equipments are more easily accessible and are more efficient for the same price. For example, some equipments enable users to change settings to bring down vitality necessities, consequently lowering overall costs.
Before mining, prospective miners ought to perform a cost/benefit analysis to comprehend their breakeven price. This should be done before making fixed-cost purchase of the hardware. Your breakeven price would be the price level at which bitcoin mining becomes profitable for you. To do this calculation online, you will need to first figure out the following:
Cost of power: what is your electricity rate? Keep in mind that rates may vary depending on the season and the time of day among other factors. You can find this data on your electric bill measured in kWh.
Efficiency: what quantity of power will your bitcoin mining system consume? This is usually measured in watts.
Time: what is the anticipated length of time that you will pay for mining?
Bitcoin value: what’s the worth of a bitcoin in U.S. dollars or your official currency?
Miners will need to bare in mind that bitcoin mining is only profitable if the price of bitcoin surpasses the cost to mining. Also, with the latest changes in technology and the design of professional mining centers with enormous computing power, many experienced miners are questioning whether bitcoin mining still profitable or not.
For a better answer to the question of whether its still profitable, we recommend that you use a web-based bitcoin mining profitability calculator to do an analysis on your personal situation. You’ll be able to try different number inputs and realize your breakeven point, determine if you are willing to put out the required initial capital for the hardware, and estimate the future value of bitcoins as well as the level of Proof-of-Work problem difficulty.
When both bitcoin prices and mining problem decline, this indicates that fewer miners are on the network and there is more ease in receiving bitcoins. When bitcoin cost and mining problem rise, expect the opposite – more miners competing for fewer bitcoins.
Featured image source: Pixabay.
Edited my Marc Johnson.
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