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Have you ever wondered how new Bitcoins are made?
It’s not like a Reserve Bank, who can theoretically dish out money whenever and to whomever they please.
Instead, new Bitcoin is created and distributed through a process you’ve probably heard of – mining.
So sharpen your pickaxes and let’s descend the shaft!
What is Bitcoin mining?
Mining is the process that completes transactions on the Bitcoin blockchain.
Thousands of “miners” run a copy of the Bitcoin network on their devices. Each time a new batch of transactions (a block) is proposed, miners compete to solve a complex cryptographic algorithm.
The “winner” earns the right to execute the transactions and add new blocks to the chain.
From the spender’s side, all you’re doing is sending (or buying) some Bitcoin and twiddling your thumbs for a few minutes.
But while you’re waiting, some serious machine labour is happening behind the scenes.
This mechanism for confirming transactions is called “Proof of Work.”
How does mining work?
Okay, this is where things can get a little complicated – so you better strap in.
Bitcoin’s blockchain is secured by a cryptographic algorithm, SHA-256.
So, whenever a bundle of transactions is made on the Bitcoin blockchain, they are encrypted via the SHA-256 algorithm. This process is called “hashing.”
From here, miners are tasked with finding the string of numbers that correspond with the new data.
This is no mean feat – because the algorithm is so complex, the only way to solve it is through brute force.
So, high-powered machines make trillions of guesses until one eventually stumbles upon the answer.
The data is then broadcast to the rest of the network and (if everything is legit) the transactions are confirmed and the miners get to work on the next block.
Think of it this way – miners aren’t trying to “crack” the hash and figure out the original data input. This would take an almost inconceivable amount of computational power. Rather, miners are competing to find a key that unlocks the block and lets them add it to the chain.
How does mining create new Bitcoins?
Okay, that sounds like a lot of effort. So what incentive do miners have for getting their hands dirty?
This is where things come full circle.
The reason so many people are competing to solve the hash function is because the victor receives new Bitcoin as a reward.
Each Bitcoin block comes attached with a “block reward.” The miner that earns the right to add it to the chain also earns the block reward.
And that’s how new Bitcoin is issued.
The block reward is not a static figure – every four years, it reduces in a process known as “Bitcoin halving.”
In the early days, each successful verification would reward the miner with 50 Bitcoins (wouldn’t that be nice!).
Over time, this has fallen to 3.125 BTC per block.
This forms Bitcoin’s deflationary mechanism. As time passes, less BTC is entered into circulation – which has historically corresponded with an increase in value.
Can I mine Bitcoin?
Unfortunately, the answer is probably not. Not on your own, anyway.
In the early days, people could set up copies of the Bitcoin blockchain on dying laptops and successfully solve the hash function.
But as BTC blossomed in value, so too did the number of people wanting a slice of the pie.
Eventually, the competition became so stiff that it’s basically impossible to successfully mine Bitcoin without a literal militia of powerful machines dedicated to solely solving the function.
Startup costs for realistically having a chance at Bitcoin mining can be close to the tens of thousands – and even then, you’d likely need to join a pool and share your rewards.
Not all hope is lost though. Several other cryptocurrencies use a similar mining mechanism to Bitcoin, without anywhere near the same level of competition.
Examples include:
Swyftx: Start your crypto investing journey
Swyftx is an Australian-based crypto exchange with over 750,000 users. Start your investment journey off with $20 of free Bitcoin when you sign up and verify.
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