March 08, 2018 15:11:33
Bitcoin can be mined by users who solve complex equations. (Reuters: Benoit Tessier)
You can buy Bitcoins with fiat currencies — legal tender backed by the issuing government, like Australian dollars — through online exchanges, or you can create brand new Bitcoins in a process known as mining.
So how does the mining process work?
It’s all about the blockchain
The main feature of cryptocurrencies is that they operate on a decentralised peer-to-peer network, with no central authority or government backing.
The underlying technology that makes cryptocurrencies such as Bitcoin possible is what is known as the “blockchain”.
The blockchain is essentially a public ledger of all the transactions ever made in the currency.
It keeps a record of which user owns what coins.
When a transaction is made it is added to the end of the blockchain and confirmed using a series of complex computations by the computers of other users who are on that currency’s network.
Those users are then rewarded with new Bitcoins for letting their computers do the work.
The most recent transactions made on the network are bundled up into a transaction “block”, which is finalised roughly every 10 minutes.
Once a computer solves the block’s complex equations and finds a valid hash key it is added to the blockchain, verifying Bitcoin transactions between users, while at the same time rewarding the miner with new Bitcoins.
It can take a while for miners to reap rewards, as only the first user to solve the block by finding one of a number of valid hash keys is rewarded with Bitcoins.
But it’s not as easy as it sounds
A chain of block erupters designed for Bitcoin mining. (Reuters: Stephen Lam)
During the early days of Bitcoin in 2010-11, a common household computer would have been powerful enough to mine for dozens of new coins using its CPU or GPU.
But that is not the case today.
The currency automatically regulates the difficulty of the mathematical problem (adding complexity to the hash value computers need to find) as well as the number of Bitcoins received as a reward.
If a lot of people are connected to the network to mine for Bitcoins, the difficulty of solving a block increases. This is known as the hash rate.
Similarly, it decreases when less people are seeking new Bitcoins.
The number of Bitcoins rewarded also adjusts, with an end result that means every four years only half the amount of coins created in the previous four years can be made.
So … you’re going to need a bigger computer
Recently, the invention of specialised computers used solely for mining has dramatically increased the difficulty of obtaining Bitcoin.
These expensive machines mine for coins 24/7 and can perform the needed computations hundreds of times faster than a standard home computer.
Bitcoins can be mined solo or as part of a pool, but even then the Bitcoin or fraction of the coin you receive will likely not be enough to cover the electricity cost.
Bitcoin mining was extremely easy when the network first began, but it is now out of the realm of common home computers.
Due to the way Bitcoin was coded, there is a limit of just under 21 million Bitcoins that can be created.
Once the limit is reached, no more Bitcoins can be made.
However, a single Bitcoin can be subdivided as far down as the eighth decimal place (0.00000001BTC) to buy smaller goods using just a fraction of the coin.
Want to know more about Bitcoin? Read our explainer to see exactly how the cryptocurrency works.
March 08, 2018 14:18:24