ELI5 Bitcoin Mining: Bitcoin Mining is one of the fastest growing industries. And the processing power the mining hardware devices generate verifies every transaction and secures the Bitcoin Network.
Bitcoin’s mining and the Proof of Work concept is one of the key functions that makes Bitcoin what it is, but mining Bitcoin needs some knowledge of how it all works.
If you’re interested in getting into mining Bitcoin, this article explains Bitcoin mining in an easy to digest manner.
ELI5 Bitcoin Mining – Explain Bitcoin Mining Like I’m Five
Bitcoin Mining requires powerful computational power. It is possible to mine Bitcoin with some powerful GPUs, but to be most competitive, a specialized ASICs mining rig is recommended.
Whatever your device, the mining hardware will be connected to the Bitcoin Network, and will work with all the other BTC miners to help run and secure the Bitcoin network.
Bitcoin Mining Explained
ELI5 Bitcoin Mining: All Bitcoin transactions are broadcast to the Bitcoin network. Every transaction is eventually picked up by the Bitcoin miners, who work together to add them to the latest block.
The block is the latest block of data (transactions), and after roughly 10 minutes the miners will have filled the block with transactions.
These blocks contain up to 1MB of data, which can be anything from as little as one and up to thousands of transactions. It all depends on how much data is connected to each transaction.
When the block is ready to be added to the Bitcoin blockchain, it’s automatically sent to the thousands of nodes who have to validate that all transactions in the block are valid.
Related Reading: ELI5 Bitcoin – Explain Bitcoin Like I’m Five
Nodes are also hardware devices, and these act like validators of the transactions. There are tens of thousands around the world and they all have the Bitcoin protocol running on each device.
Once they are in majority agreement that every transaction in the block is ok, they send the block back to the miners. Miners then race against each other to work out the cryptographic puzzle which the Bitcoin protocol asks of them.
Every mining hardware device then frantically processes hashes to try and discover the answer to the cryptographic puzzle.
The first mining device to discover the cryptographic puzzle gets to add the block to the blockchain, and is rewarded with the block reward, which is currently 6.25 BTC.
This combined processing power is known as the Bitcoin hashrate and it helps the Bitcoin Network run and keeps it secure.
And the more BTC miners that join the network the more secure the the Bitcoin network gets.
Let’s Take A Deeper Dive Into Bitcoin Mining
ELI5 Bitcoin Mining Block Reward
The Bitcoin Block Reward is the reason most miners choose to mine Bitcoin. Basically it’s the reward for the hard work the mining devices put in to power the Bitcoin network.
It’s Bitcoin’s inflationary system that is paid out with every new block added to the blockchain.
The block reward is cut in half every 210,000 blocks, which is roughly every four years. This is what’s known as the Bitcoin Halving.
At the moment the block reward is 6.25 BTC, but when Bitcoin launched in 2009 the block reward was 50 BTC for every block.
Back then the hashrate was low and you could mine Bitcoin on your laptop. The first Bitcoin Halving to 25 BTC took place after the first 210,000 blocks had been produced in 2012.
Then in 2016, at 420,000 block height, the block reward was cut to 12.5 BTC. And then four years later, in May 2020 it was halved to today’s reward of 6.25 BTC.
The next halving will see the the block reward cut to 3.125 BTC in 2024 sometime. This will continue every 210,000 blocks (about 4 years), until the last fraction of Bitcoin is mined around the year 2140.
Bitcoin Mining Difficulty Adjustment Explained
There is no exact science for understanding Bitcoin mining or trying to work out the costs, because of the ‘difficulty adjustment’.
The difficulty adjustment is a change in the cryptographic mathematic puzzle, which takes place every 2016 blocks.
It ensures that the average time of block production will always remain about 10 minutes. It also determines the difficulty and amount of electricity needed to mine bitcoins for the next 2016 blocks.
The mining devices all work together to add transactions to the latest block, and then against each other when racing to solve the cryptographic puzzle, which is a seemingly-random 64 character output (hash number).
To do so, Bitcoin miners use the SHA-256 Hash Algorithm to input data into each block.
The data of each block contains among other things: a timestamp, a record of the transactions, and a reference to the previous block. It also contains the answer to the cryptographic puzzle needed to win the block reward.
The difficulty of the cryptographic puzzle is determined by the amount of hashrate working on every block. The hashrate of any device is the speed at which a miner hashes per second.
As more miners join the network, the combined Bitcoin hashrate grows. And because there are more mining devices working on the network, a mining device will discover the answer faster than usual.
This will lead to a shorter average time for block production, and when this happens the difficulty of the cryptographic puzzle increases. This guarantees it will take more hashes, more time and more electricity to discover the answer and mine bitcoins.
Conversely, if miners drop out of the network, the difficulty will ease for the next 2016 blocks. This usually happens if the electricity becomes too expensive and Bitcoin mining profitability drops.
This means it will be easier for the Bitcoin mining devices to find the answer, ensuring more profits, and likely faster block production.
This difficulty adjustment is coded into the protocol and takes place every 2016 blocks, which is roughly every 2 weeks. It guarantees that Bitcoins cannot be over or under produced, and that the network will run as coded.
Proof of Work Explained
Bitcoin is known as a Proof of Work (PoW) consensus algorithm, but the PoW actually refers to the miners processing hashes in order to find the latest block.
At time of writing there is 117 quintillion hashes per second in the entire Bitcoin Mining Network, and the most powerful Bitcoin mining rig hashes at 110 trillion hashes per second.
There are hundreds of thousands of mining devices working on the Bitcoin network, all with the same goal: to find the answer first and win the 6.25 BTC block reward.
Of course only one device will discover the answer so all of that processing power that goes into mining the bitcoins is the ‘proof of work’ that creates each and every BTC.
Producing PoW takes a lot of processes and has a very low probability of success. Therefore, any miner contributing should run their Bitcoin mining hardware device as much as possible to ensure better returns.
To win the block reward alone, even with the most powerful mining device, is highly unlikely. This is because there are many mining companies distributed around the world, each with thousands of the same powerful mining devices.
It’s recommended, therefore, to join a mining pool, especially if you’re a solo miner.
Bitcoin Mining Pools
ELI5 Bitcoin Mining Pools: The competition for BTC is so fierce, that it’s almost impossible for any person wanting to mine Bitcoin alone. This is where Bitcoin mining pools come into play.
Basically, a mining pool is a large group miners uniting to work together to boost their combined Bitcoin hashrate. Thus, giving them a chance of winning some block reward.
All miners in the pool will connect through the mining pool’s software and work together. The more miners that join the pool, the more likely that pool is to win the block reward.
Every miner is paid by their percentage of the Bitcoin hashrate, which the mining pool provides.
For example, if Alice has the most powerful mining device and contributes 110 TH/s, but Bob has an older device and his hashrate is 55 TH/s, then Alice will earn twice as much BTC from the mining pool payout.
There are many mining pools, and they all have different fees, so your circumstances will determine which mining pool is best for you.
Be careful though, some mining pools claim to have zero fees, but there are always hidden fees. It all depends on your circumstances, so doing some due diligence before joining a mining pool is highly recommended.
Bitcoin Mining Isn’t As Complex As It Seems
ELI5 Bitcoin mining is no easy matter. Bitcoin Mining is technical and the jargon is hard to understand. With a bit of research and practice, however, anybody can get into it, and earn Bitcoin.
There is so much free information on the Internet a lay person can learn to build their own mining rig from scratch for free.
Anyone who gets into mining Bitcoin has the opportunity of turning power into value and earning the Bitcoin Block Reward.
Bitcoin is already the most secure network ever created, and as every block is added, it becomes more secure, and that on its own adds more value to Bitcoin.
Billions of dollars is being invested in this exciting and nascent industry every year, and as a result mining Bitcoin is getting ever more competitive.
But the best thing about it is, with a small financial and time investment, anybody can get into mining Bitcoin.
Author: Tommy Limpitlaw
How long does it take to mine 1 bitcoin?
On average, the time it takes for miners to mine BTC is 10 minutes. But they don’t just mine 1 BTC. Mined Bitcoins are created with every new block and these produce the Bitcoin block reward which at the moment is 6.25 BTC, so you could say it takes less than 2 minutes to mine each Bitcoin.
How much should I invest in Bitcoin?
Bitcoin is a new technology, and an asset that is finding its value. It has great potential, but the price is volatile, so investing in it should only be for those who understand it and have faith in it. And only invest as much as you can afford to lose.
Who is the CEO of Bitcoin
There is no CEO of Bitcoin. There is no central authority that directs or controls Bitcoin. It was created by a pseudonymous programmer Satoshi Nakamoto, but he gave it up to the community, and now all decisions are made by the hundreds of thousands of miners and nodes who work for the Bitcoin network.