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  • ELI5 Bitcoin Mining: Explain Bitcoin Mining Like I’m Five

    ELI5 Bitcoin Mining

    ELI5 Bitcoin Mining: Mining Bitcoin is one of the fastest growing industries and the processing power that comes from mining hardware devices verifies every transaction and secures the Bitcoin Network.

    There is literally billions of dollars being invested in the Bitcoin mining industry, and its for good reason: It’s a way of turning energy into value, and getting involved at the base layer of Bitcoin and the new decentralized financial industry.

    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, or would simply like an easy to understand explanation of how Bitcoin mining works, read on…

    ELI5 Bitcoin Mining

    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 in the mining game, a specialized ASICs mining rig is recommended.

    Whether it’s a GPU mining rig, or an ASICs mining device the mining hardware will be connected to the Bitcoin Network.

    Essentially, the work of a mining device is to verify all transactions and secure the Bitcoin Network.

    Here’s a simple explanation of how Bitcoin Mining works:

    All Bitcoin transactions are broadcast to the Bitcoin network. Every one is eventually picked up by the Bitcoin miners, who work together to add the transactions 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.

    Related Reading: ELI5 Bitcoin – Explain Bitcoin Like I’m Five

    These blocks contain up to 1MB of data, and that can be anything from as little as one transaction 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.

    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 the device.

    Once they are in majority agreement that every transaction in the block is ok, they send the block back to the miners who then race 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.

    ELI5 Bitcoin Mining

    The more powerful mining machine you have, the more likely you are to find the answer first, but this is pretty much an impossible task if working solo.

    The first mining device to discover the cryptographic puzzle gets to add the block to the blockchain, and is rewarded with the Bitcoin block reward, which is currently 6.25 BTC.

    This processing power combined helps the Bitcoin Network run and also secures it, and as more miners join the network the more secure the Bitcoin network gets.

    Let’s Take A Deeper Dive Into Bitcoin Mining

    ELI5 Bitcoin 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 that is added to the Bitcoin blockchain.

    Bitcoin block reward

    The block reward is cut in half every 210,000 blocks, which is roughly every four years in an event that is 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.

    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 the 420,000 block the Block Reward was cut to 12.5 BTC, where it remained until May 2020 when it was halved to today’s reward of 6.25 BTC.

    The next Halving will see the Bitcoin Block Reward cut to 3.125 BTC in 2024 sometime. This will continue every 210,000 blocks, roughly every four years, until the last fraction of Bitcoin is mined around the year 2140.

    The Bitcoin Halving is hard coded into the Bitcoin protocol and will take place exactly as each 210,000 blocks are added to the Bitcoin blockchain.

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    ELI5 Bitcoin Mining Difficulty Adjustment

    There is no exact science for understanding Bitcoin mining, because there’s a difficulty adjustment in the cryptographic mathematic puzzle every 2016 blocks.

    This ensures that the average time of block production will always remain about 10 minutes, and also determines the difficulty and amount of electricity need to mine bitcoins.

    The mining devices all work together to add transactions to the latest block, and then separately 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.

    Difficulty Adjustment

    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 and the combined hashrate of the Bitcoin network grows, the hashrate will go up. And because there are more devices working on the network, a mining device will discover the answer quicker than usual.

    If the average time for producing blocks decreases the difficulty of the cryptographic puzzle increases, meaning 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, which usually happens if the electricity becomes too expensive and mining Bitcoin profitability drops, the difficulty will ease for the next 2016 blocks.

    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.

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    ELI5 Proof of Work

    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.

    Proof of Work

    Of course only one device will discover the answer so all of that processing power that goes into mining the Bitcoin is known as the ‘proof of work’ that creates each and every Bitcoin.

    Producing PoW takes a lot of processes and has a very low probability of success, so 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 if you have the most powerful mining device is highly unlikely, 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.

    ELI5 Bitcoin Mining Pools

    The competition for BTC is so fierce, and rising every year, that it’s almost impossible for any person wanting to mine Bitcoin alone to win the block reward. This is where Bitcoin mining pools come into play.

    Basically, a mining pool is many miners uniting to work together to boost their combined hashrate.

    ELI5 Bitcoin Mining

    This ensures they are more competitive when it comes to discovering the answer to the complex maths the Bitcoin protocol asks.

    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 for their percentage of hashpower. For example, if Alice has the most powerful mining device and contributes 110 TH/s, but Bob has an older device and his hashpower 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.

    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

    Bitcoin Mining can be technical, but with a bit of research and practice anybody can get into it, and earn Bitcoin.

    There is so much free information on the Internet a lay person can even learn to build their own mining rig from scratch.

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    Anyone who gets into mining Bitcoin has the opportunity of turning power into value and earning the Bitcoin Block Reward.

    Not only that, Bitcoin is the most decentralized and democratic hard money ever created, and every piece of hardware that works for it makes it more secure.

    It is already the most secure network ever created, and as every block is added to it, 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 start mining Bitcoin and get involved in the most exciting innovation of the century.

    Author: Tommy Limpitlaw

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    Bitcoin FAQs

    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 can I buy Bitcoin in India?

    Laws change quite regularly in India and although It’s legal now, things change, so it’s recommended to use global exchanges such as paxful.com or cex.io which are probably the most widely used marketplaces and exchanges in the world.

    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.


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