The basics of Bitcoin mining: the complex math problems behind the cryptocurrency revolution

The basics of Bitcoin mining: the complex math problems behind the cryptocurrency revolution

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The largest mining holding of the cryptocurrency universe has a market cap of over 5 billion US dollars, which is more than many traditional mining companies. But Wait. How is making that much money out of a virtual coin that only exists within our phones and computers even possible? And how do you mine something that does not physically exist? 

To answer this question and comprehend the creation of value in cryptocurrencies, we need to dive into the basics of Bitcoin mining.

What’s Bitcoin mining?

Since the beginning of time, humans have been mining for resources. It’s the way we are able to get gold, iron or copper. And it’s also the way we create Bitcoins, though the process is not nearly similar.

Bitcoin (BTC) mining is a digital process which verifies the transactions and seals them to avoid double spending when introducing new Bitcoins into circulation. It involves thousands of computers solving complex mathematical problems by using sophisticated hardware and software to verify and make transactions immutable in the Bitcoin blockchain, a virtual ledger in which every operation is stored.

Every time one of these operations is completed, new Bitcoins are issued in return. This BTC protocol requires a lot of energy. As energy cannot be duplicated, it computes the algorithm which seals the transactions. Somebody willing to revert a transaction would need to bring at least 51% of the energy consumed by the network.

How does Bitcoin mining work?

Mining is an essential part of the BTC ecosystem. It involves operating with the Bitcoin blockchain, the decentralized structure that has been key for the coin’s success. It seals the transactions making them immutable and, at the same time it generates new Bitcoins. Miners validate transactions and maintain the blockchain, ensuring its integrity and chronological order.

The process works as it follows. Miners put their computing power to work in the Bitcoin network. They perform calculations in order to be the first to guess a 64-digit hexadecimal number known as a nonce. The successful miner is rewarded with freshly-mined Bitcoins and transaction fees. 

An algorithm regulates how difficult it is for the miners to mine a certain block. As there will be a maximum of 21 million Bitcoins in circulation by design and the number of miners has increased over the years, that algorithm has been increasing mining difficulty. 

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What’s the reward for the miner?

Nowadays, miners need to purchase expensive hardware equipment in order to successfully complete the operations, such as top application-specific integrated circuits (ASICs). While ASICs reach tens of thousands of dollars, miners also need to pay the electricity bill.

Such economic effort needs to be compensated. Each time miners solve a block, they get rewarded through two components: a payment of freshly created Bitcoin and transaction fees paid by users for including their transactions in the block.

The payment in Bitcoins have been decreasing over the years. Mining one block in 2009 would earn the miner 50 BTC. In 2012, the amount was halved to 25 BTC, four years later, to 12.5 BTC, and in 2020, to 6.25 BTC. The reward will halve again in April 2024, decreasing to 3.125 BTC. This comes from the fact that by design the BTC is limited to 21M, in reaction to infinitely printing money. Therefore, new coins cannot be introduced forever at the same rate.

BTC Circulation in 2009

Source: Bitcoin protocol

Bitcoin was designed for a massive adoption which, combined with scarcity, would increase the coin’s value over the years. That’s why even though the reward has decreased, mining Bitcoin is still very lucrative. At the current price of Bitcoin, mining one block would get the miner over 300,000 euros. Besides, a larger adoption leads to larger transaction fees, so rewards will continue increasing in the long run.

But it’s also important to highlight that it’s a risky business: the miners that try to solve the block, but can’t succeed, get nothing.

The value of Bitcoin halving

Scarcity is a key part of Bitcoin’s design, so Bitcoin halving has been a condition of the Bitcoin protocol since the very beginning. It requires the BTC block reward to be halved every 210,000 blocks. It happens approximately every four years and it’s one of the most important events in the crypto calendar.

The reason it is so important is that it is the mechanism used to limit inflation, which is the main purpose of BTC, ensuring that the supply of new Bitcoin decreases over time. Once all the 21 million BTC are mined (around the year 2140), there won’t be more halving events and the miners will stop getting Bitcoin rewards for solving blockchain blocks. However, they will still be able to earn compensation through transaction fees.

Beyond rewards and halving events, BTC mining is a key element of the Bitcoin universe. It’s the process that helps keep the integrity and security of the Bitcoin blockchain.