If you’ve ever wondered where Bitcoin comes from, or what Bitcoin mining is, you’ve
come to the right place.
Learning about Bitcoin or other cryptocurrencies is a bit like opening Pandora’s box, for
every new term you learn it seems there’s 100 more you now need to look up.
So me and some of the investing experts at Finder put together this simple guide to explain
what Bitcoin mining is and how it works.
Before we get stuck in, let’s cover some Bitcoin basics.
Bitcoin is a form of digital currency known as a cryptocurrency.
It was originally created as a quicker, easier and cheaper alternative to using regular money,
but these days most people buy it as a speculative investment.
What’s really special about Bitcoin compared to regular money is that no single bank or
institution is in control of it.
Instead, Bitcoin works on a decentralised, distributed ledger, which is essentially a
massive network of computers around the world that keeps track of all the payments and transactions.
In this way, it’s very hard to defraud the Bitcoin network.
This is because, with computers all over the globe verifying the same transactions, if
one were to record an inconsistency the system would reject it and the transaction would
be cancelled.
The Bitcoin ledger or record is called a blockchain, because the data can be thought of as blocks
chained together by what’s called a hashcode, in this case, a 64 digit string of letters
and numbers.
Bitcoin mining is the process by which new Bitcoin are created, or excavated from the
Bitcoin network.
But it is also the process by which the Bitcoin ledger is maintained.
Similar to gold, part of the reason Bitcoin has value is because there is a finite amount
of it.
To stop the system spiralling out of control, plus a number of other very complicated mathematical
reasons, there can only ever be a maximum amount of 21 million Bitcoin.
And to date, over 18 million Bitcoin have been mined, so you can imagine it’s become
a very lucrative business.
Back in the day, with the right software, you could have mined Bitcoin on your home
computer in front of the tele.
Today, however, people have set up these massive computer systems in the race to mine Bitcoin
as quickly as possible.
So, how does it actually work?
The first step is for Bitcoin miners to verify or process at least 1 MB of Bitcoin transactions,
which effectively amounts to a new block of data on the Bitcoin blockchain.
This initial step is key in helping to maintain the Bitcoin ledger.
Once they’ve done this, they’re eligible for a reward as long as they can crack a code.
This code is the hashcode, remember that 64 digit string of letters and numbers, that
links the new block onto the existing blockchain.
This is where those powerful computer systems come into play as they can crunch a ridiculous
amount of numbers very quickly, giving the miner who owns the system the best chance
of being the first to get the correct or closest hashcode.
These days, a new Bitcoin block is created on average every 10 minutes.
With the number of Bitcoin available to be mined decreasing every 10 minutes, the amount
of Bitcoin you can win for your hard work will reduce roughly every four years.
Back in 2009, mining 1 block got you around 50 Bitcoin.
In 2012, that amount halved to 25 Bitcoin.
This happened again in 2016 and 2020, so the amount of Bitcoin you get for mining 1 block
today is only 6.25.
If you want to keep track of these reductions, I’ve put a link to a really cool Bitcoin
clock in the description below, that tells you the days, hours, minutes, seconds and
blocks until the next halving.
It’s worth noting that with so many millions of miners and systems working to crack the
code, it’s very unlikely that one miner will ever earn the full 6.25 Bitcoin.
Instead, most only get a fraction of this amount.
But with 1 Bitcoin worth tens of thousands of pounds at the time of publishing this video,
a fraction ain't half bad.
For more information on Bitcoin and other cryptocurrencies, visit finder.com.
I’ve tagged a whole bunch of useful links in the description below.
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Thanks for watching.