Computing power from Bitcoin mining is what runs bitcoin network, and verifies transactions.
Bitcoin mining is how new bitcoin blocks are minted, and how new bitcoins are systematically added into the the circulating supply (through the block reward).
The block reward is a way to incentivize participation in bitcoin mining. It is a reward for completing blocks of verified transactions, which are added onto the blockchain.
What’s A Blockchain? Check out this article to learn more.
How Often Are New Bitcoin Blocks Created?
Bitcoin was designed in such a way that one new block is created every 10 minutes. This is achieved by an algorithmically controlled mining difficulty adjustment.
In simple terms, as more miners come onto the network to compete for the right to mint a new bitcoin block, the difficulty is adjusted upwards so that the target block time of 10 minutes is maintained.
The bitcoin mining difficulty adjustment takes the total global network hash rate (the hashing power of all bitcoin miners), and makes it more or less difficult in order to maintain a constant supply issuance of bitcoin blocks.
This difficulty adjustment is updated every 2,016 blocks (or about every two weeks).
What Are Bitcoin Miners Doing?
What are bitcoin miners actually doing, and how does it all work? They’re using specially designed, powerful computers to solve extremely complex computational math problems to generate hashes (more on hashes in the next section).
But why????
The true genius of bitcoin is how this is all cryptographically accomplished though a fully decentralized, peer-to-peer, trustless, and 100% secure system.
To understand this system, you also need to understand Blockchain Technology and hashing.
What is Hashing?
Without delving too deeply into cryptography or computer science, hashing is a way to verify the authenticity of a file or piece of data (without being able to reconstruct the original content).
The key difference between hashing and encryption is that hashing is one-way only, meaning the original data cannot be obtained from the hash. Encryption is a two-way function where encrypted data is still present, and can be decrypted with the proper key.
In short, hashing makes bitcoin not just impractical to hack, but fully impossible.
The cryptographic hash function SHA-256 is used for bitcoin (SHA stands for Secure Hashing Algorithm).
Bitcoin uses blocks strung together on a blockchain that are secured and verified with hashes. This is the underlying technology used to create bitcoin as a publicly available peer-to-per money system that is not susceptible to theft, or seizure.
How Bitcoin Mining & Gold Mining Are Similar
Bitcoin mining is somewhat similar to gold mining. In the case of gold, heavy duty equipment and machinery are utilized and gold is ‘produced’.
I have a background in Economics, so I see everything through the lens of an economist. Let’s take a look at the economics of a gold mine vs a bitcoin mining operation.
Economics Of Mining
In a simplified scenario, the variable input cost for a gold mine is diesel, while fixed costs are machinery, equipment, and land (for paydirt).
In the case of Bitcoin, ASIC miners are used to ‘mine for bitcoin’. ASIC (Application-Specific Intergraded Circuit) miners are purpose built, extremely powerful computers that are designed specially to produce hashes while competing for the right to mint new bitcoin blocks.
In this comparison, an ASIC miner does the same job as the gold mine’s dump truck, excavator, and wheel loader. Gold mining equipment is powered by diesel, and produces gold. Bitcoin mining equipment is powered by electricity, and produces bitcoin.
The variable input cost for a bitcoin mining operation is electricity (to power the ASIC miners). The fixed input costs would be the cost of the ASIC miners themselves, as well as facility where they are operated.
Why Are Gold and Bitcoin So Similar?
It’s no accident that bitcoin was designed in this way. Gold has value because it is scarce, and difficult to produce. In the same way, bitcoin has value because it is scarce, and very difficult to produce.
Although bitcoin is fully virtual, it is valuable because it is representative of real work being accomplished in the real world. Money is stored value for past work, time, and effort, that can be exchanged for another party’s work or value – Bitcoin is money, and it’s the best kind of money.
Learn more about bitcoin as money: What is Bitcoin, And Why Is It Valuable.
How Profitable Is Bitcoin Mining?
Bitcoin mining can be extremely profitable. Many miners expand their operations because mining profitability usually scales well (they remain profitable at scale).
Many bitcoin mining companies operate hundreds to hundreds of thousands of ASIC miners at facilities called bitcoin mining farms.
Want to know more about bitcoin mining profitability? Check out this article: How Profitable is Bitcoin Mining? It goes over all the details about mining profitability.
Thanks for reading along! Please leave any comments or questions below!