More and more people are learning about the existence of Bitcoin, but the cryptocurrencies market is still a niche market. Even those who are involved in regular Bitcoin trading have little idea of the technology on which it is based.

He takes it from the fact that cryptocurrencies are still used as a tool of speculation. Many people are only interested in profit and do not need to go into details. You don’t need any advanced technical knowledge to trade, but we believe that it’s worth knowing even the basics. This knowledge will eliminate all doubts related to Bitcoin and the broadly understood cryptocurrencies market, which are still germinating in people’s minds.

What is cryptocurrency mining?

We will start with a more formal explanation how to dig up Bitcoin and then divide the topic into smaller, easily assimilated parts.

Mining is a system of dispersed consensus. This means that a huge number of people around the world are involved in maintaining the Bitcoin network. Mining is the term used to describe the process of approving transactions that are waiting to be added to the blockchain network.

The digging process allows you to achieve a chronological order of transactions. For a transaction to be confirmed and added to a chain, it must be packaged in a block, which must comply with strict encryption guidelines. They are verified and approved by miners in the network, so that no government is involved and net neutrality is maintained.

This can be compared with payment cards in a traditional electronic payment system. Each of them must be verified and recorded by the card issuer (e.g. MasterCard or Visa).

It can be said that the money circulation in the modern banking system is recorded in centralised systems that are susceptible to manipulation.

Bitcoin, on the other hand, does not belong to any central organization that would approve transactions. This is what the miners are doing, who are also creating new Bitcoins in this process!

But why is it called cryptocurrency mining? Where does this term come from?

The process of creating new Bitcoins is called mining because of its many similarities to gold mining. Both scenarios require a lot of work and energy to be invested in order to produce a very valuable resource.

Cryptocurrencies mining: Bases

I think everyone knows what gold mining is. It consists in doing a specific job in order to obtain a raw material, which in people’s eyes represents a specific value. Bitcoin does not differ much in this respect, except that it is a completely digital resource, so digging takes place in the virtual world.

Gold mining seems to be easy, but the whole process can be extremely unpredictable.

The cost of extracting one ounce of gold (labour, wages, equipment) is less than the cost of one ounce of gold. Mining is therefore profitable.

The same is true of Bitcoin, although there are some subtle differences. For example, the difficulty of extracting Bitcoin increases and requires more and more energy.

Bitcoin extraction pays off when the costs associated with digging (electricity, computing power) are lower than the value of the reward.

What kind of prize is it?

Bitcoin miningg: Prizes

The best miners are rewarded with new Bitcoins after they succeed in adding a new block to the blockchain chain.

Currently, the prize does not go to one person because nobody in the world has enough computational power to perform the necessary mathematical operations that are extremely complex.

The miners therefore merge into so-called ‘swimming pools’. (called “mining pool”), which allows them to combine their computing powers. The prize is then divided among the pool members in proportion to the amount of work they have done. Those with the most power receive the biggest prize.

The prize you can receive is halved every 210,000 blocks. At the time of writing this article, the height of the Bitcoin block is 567,000. This means that the entire Bitcoin chain contains 567,000 blocks.

Each block is connected chronologically to the previous (older) block in the chain. In this way, all blocks are connected to the original block.

Initially, miners received 50 Bitcoins, after which the prize was reduced to 25 Bitcoins in 2012. In 2016, the prize was reduced to 12.5 Bitcoins and has remained at that level to this day. The next cut is estimated for May 2020 with the addition of block number 630 thousand. The situation can be monitored here.

The prize is reduced approximately every four years. The time frame can be calculated on the basis of a simple calculation: multiply ten minutes (average time of adding a new block) by 210,000 (exact number of new blocks to be cut). Interestingly, the cuts are made in the years when the Summer Olympics are held.

Bitcoin Mining: Safety and Difficulty

A larger number of miners guarantees a safer network, as it basically eliminates the possibility of manipulating the network and its resources.

The disadvantage is that the more miners there are, the harder it is to dig (and the lower the profitability). We call this a relative measure of how difficult it is to find a new block. Generally speaking, the difficulty changes according to the amount of computing power distributed through the miners’ network.

This means that each block is added to the network every 10 minutes (never before or later, as a result of the changing number of miners).

Increased difficulty means theoretically less profit for the miners. The prize is divided into a larger number of miners, so each of them receives a smaller part. This is not a problem when the price of bitcoin is at a high level – either when miners have access to cheap or even free electricity.

It may happen that the prize for Bitcoin mining does not cover the costs of mining. In that case, many people still continue to extract because they believe that Bitcoin will be worth a lot more in the future.

To sum up, digging Bitcoins is a process of verifying transactions and creating new Bitcoins.