How Does Bitcoin Mining Work?

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Everything you should know about cryptocurrency mining

Mining satoshis creates new Bitcoin by decoding computer algorithms and long, complex puzzles. Hence, they can’t be solved by people. This is why it’s so difficult to mine cryptocurrency. Miners use lots of computational resources and many computers in order to speed up mining operations and get more out of the process.

Another key benefit of cryptocurrency mining is the increased security and established verification of transactions. This ensures that the currency mined can be used freely and safely in the blockchain ecosystem. It is similar to a central bank that prints money and stands behind its value.

A CPU, GPU or ASIC is required for mining and to complete the cryptocurrency mining process. You have to be first to mine the cryptocurrency and you have to mine 1MB’s worth, which means you need to invest in high-grade computers that have better performance to remain competitive. Technically, you are supposed to guess the cryptocurrency coin’s hash by inputting many tries of similar hashes. A hash is just a long number (64-digit hexadecimal). It’s similar to trying various keys to a lock.

To prevent inflation and devaluation, Bitcoin halves the value for its miners every now and then. So far, there have been 3 halvings, with the last one in May 2020. The halvings increase the value of the currency and make it a steady payment.

The main types of mining

There are 2 popular mining algorithms – Proof of Work (used to mine Bitcoin and Ethereum) and Proof of Stake (used for Dash and Stellar). The max supply of Bitcoin is 21 million, but some cryptocurrencies can be mined forever.

Proof-of-Work

PoW is used when users’ computers solve complex algorithms. When a matching result is made, others will confirm if it is valid, and the user who mined the block gets the coins. The crucial point is to be the first to figure out the hash.

Proof-of-Stake

In PoS, the creator of a new block is selected by the network beforehand based on the miner’s share of the coins. For example, if someone has 0.4% of the total supply of a cryptocurrency, they can only mine 0.4% of the blocks. Altcoins use this method, which was developed as an alternative to the original PoW algorithm. Those who have more coins will get more mining power. This means that it is somewhat more energy-efficient than PoW.

Where are the world’s mining centers located?

Mining cryptocurrency is most popular in China  – responsible for almost half of the total mining in the world each month. The other half is shared between the Russian Federation, USA, Ireland, Germany, Kazakhstan, Iran, Malaysia and Canada.

We need to consider the temperature, legislation, electricity prices and hardware availability before diving into mining, as these factors can significantly influence the efficiency and cost of the same.

It is very hot in Australia and North Africa, so computers may not work as efficiently and would be expensive to maintain.

Legislation is complicated, as most states require a license for people to mine cryptos. China, India, Iran, Nepal, among others, have declared a clamp down on mining cryptocurrencies.

Electricity is cheaper in the USA, Canada and China in comparison to European countries like Germany. This explains the mining distribution of users, as the cost around the globe varies highly.

How much can you earn from mining?

This depends on the price of electricity, the cost of computers, the price of the coin and the user’s reward for each block. Electricity and sophisticated computers cost more in Europe, which is why there are fewer miners there. The computer machinery required can set you back anywhere from a few hundred bucks to several tens of thousands of dollars. You also need to consider other factors in your own country – energy, electricity price and the reward for the cryptocurrency block.

In reality, it will become profitable only if you scale your mining or work in a team of miners since the electricity fee is then split. Note that computers are very loud, and you can’t have the set up at home. It could be said that mining was intended for larger profits, with larger investments.

Other crucial factors include the network capacity and the cost of maintaining the ‘farm’, such as buying cooling devices for all the computers you have.

Conclusion

If you are looking for long-term investment and have capital, you could set up in a country where costs are lower and you can buy cheaper equipment. However, if you don’t want all these complications, the easiest way to get BTC is to buy it on an exchange or swap some altcoins that you already have for BTC.

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