Bitcoin has seen tremendous growth over the course of 2017. While cryptocurrencies remain notoriously volatile, Bitcoin’s rocketing value has prompted a surge in mainstream interest and media attention. As many newcomers enter the cryptocurrency space, eager to jump aboard the Bitcoin train, one of the first things they often hear about is “Bitcoin mining.”
At first, mining Bitcoin can sound a lot like “free money.” As with most things promising “free money,” however, the reality is not so simple. During the early years of Bitcoin’s existence, anybody could use an old laptop to mine Bitcoin. Of course, at that time, Bitcoin was worth very little. Mining Bitcoin today is much more resource-intensive than it was during the early years of Bitcoin’s implementation, and it typically requires an initial investment to get started.
Despite changes in mining culture and logistical factors, many people still find themselves drawn to the idea of becoming Bitcoin miners. Before diving into how contemporary mining works, it is useful to explore the role that mining plays in the overall Bitcoin ecosystem.
The Role of Mining
Satoshi Nakamoto, Bitcoin’s creator, proposed a unique model for a digital currency that could be traded securely on a direct peer-to-peer basis. The technological framework that powers Bitcoin is called the “blockchain.”
The blockchain is, very basically, a record of every single Bitcoin transaction that has ever happened. Every new transaction is linked to the previous one with a special, cryptographically secure time-stamp, all the way back to the very first Bitcoin transaction that ever occurred, creating a continuous “chain.”
Whereas most traditional financial institutions store data in one place, on centralised servers that they own or rent, Bitcoin’s blockchain is stored on thousands of different computers spread out across the globe. Identical copies of the blockchain exist on every machine connected to the Bitcoin network.
In order for new information to be added, it must be checked against the entire previous history of transactions, across all of these different identical copies, to ensure that it is valid. Miners do the work of checking new transactions to ensure that the numbers line up according to the entire previous history of all Bitcoin transactions. If Person A sends money to Person B on Monday and then tries to send that same money to Person C on Tuesday, the blockchain will reveal that those funds were already spent and the second transaction will be rejected by the network.
What is a Hash?
Bitcoin uses an encryption technique called SHA-256. Any kind of digital data, of any size, can be processed through SHA-256 and it will come out as a string of 64 seemingly random characters, called a “hash.”
There are two features of SHA-256 that are particularly important in relation to Bitcoin mining. First, SHA-256 only goes one way, meaning that you cannot take the hash and reverse the process to access the original data. Secondly, although the hash is seemingly random, it is, in fact, determinative. This means that when you input the identical data into the SHA-256 algorithm, you will get the identical hash each time. If even one bit of the original data is different, however, you will get a completely different hash result.
Bitcoin transactions are stored in “blocks” on the blockchain. Within Bitcoin’s core software, there are very specific rules for miners concerning how that data must be submitted. For a miner to “solve a block,” they must first include information about recent transactions according to Bitcoin’s rules. The second part of the block involves finding a random number (called a “nonce”) that, when added to the transaction data, will produce a SHA-256 hash that meets the criteria demanded by Bitcoin’s core software. There is no way to do this other than trial-and-error, and this is the real “work” of Bitcoin mining.
Today, the Bitcoin network produces upwards of 500 quadrillion hashes per second, all of them attempts to find a nonce that meets the requirements for “solving a block,” and thereby earning the reward in newly minted Bitcoin. Even with that much effort going in to it, it still takes around ten minutes to solve a block.
Bitcoin Mining Today
Today, most Bitcoin miners use specialised equipment designed specifically for mining. These machines, technically called ASIC miners (ASIC stands for “application-specific integrate circuit”) are costly, often in the AU$2000 – AU$7000 range. ASIC miners are capable of performing the trial-and-error work of checking “nonces” much faster than traditional computers. These mining rigs, however, require a significant amount of electricity to run. They are also prone to overheating and often require fans to keep them cool. The costs associated with cooling alone have prompted several large mining operations to move their equipment to Iceland so as to take advantage of the colder climate and cheap geothermal energy.
Large-scale mining operations, often called “mining farms”, are a common feature of today’s Bitcoin mining landscape. In order to compete with these major operations and profit from mining, it is common for individuals with one or two mining machines to band together into “mining pools”.
Is Bitcoin Mining Worth It?
As with many decisions in life, mining Bitcoin ultimately comes down to balancing the risk versus the reward. For individuals willing to invest in mining equipment and electricity, and potentially wait for several months or years before recouping their initial investment, mining can be a potential income stream. There are several online tools, such as mining profitability calculators, which can provide insight into specific contexts.
Beyond the potential for earning Bitcoin, many hobbyists also participate in the Bitcoin network as miners simply to contribute to a project that they believe in. For Bitcoin, decentralisation is crucial to maintaining a secure infrastructure, and each new miner reinforces the overall stability of the Bitcoin network.