Mining Bitcoin

I got a request to talk more about mining. With mining, we can also talk about the network itself and confirming transactions. I started doing research, and realized there’s not a lot of information out there to discuss what mining is and explaining it in broad terms. I know basically how it works, but I wanted to make sure that I got my tech terminology right, and it can be a little hard to find. I ended up using good ol’ Wikipedia.

So what’s bitcoin mining? As an aside, I recently listened to a podcast in which the hosts debated the terminology of “mining” and whether or not it’s a good term. I can explain, and you can decide for yourself, but the more I think about it, the more I don’t think it’s accurate. But anyway, bitcoin mining is essentially your computer solving math problems. Sounds simple, right? Sort of.

The math problems are computed using blockchains, or long strings of blocks. As a computer works through the numbers of the algorithm (the math problem), it passes through an individual block in the chain. When a blockchain solves the problem, the reward for the work is a bitcoin, and the computer that receives the bitcoin is the computer that had the last block in the chain. Now, the reward might seem to be large, but it’s actually not. When a computer is mining, it’s actually part of a pool of miners. The miner that receives the reward has to split it up between all the miners in the pool.

As far as how often a bitcoin is generated as a reward for the computer work, it’s about every ten minutes. Sometimes it’s longer, sometimes it’s shorter, depending on how long the blockchain ends up being. So this brings us to computing power. Mining bitcoin is very taxing on a computer, meaning it takes a lot of energy. Bitcoin miners have high electric bills at the end of the month because of it. I’m sure you’re asking yourself if it’s worth it to mine at this point. The answer is, it depends. If you’re just going to use your computer, I would say no, at this point it’s not. A new technology has emerged, and that is ASICs (pronounced ace-ick), which stands for application-specific integrated circuits. It’s a special chip that has very high hashing power, or how fast your computer can move through the blockchain. These are very powerful, and makes a regular computer obsolete and ineffective at mining, and here’s why.

Mining bitcoin also generates and perpetuates the bitcoin network. The bitcoin network, and through mining, is also what confirms bitcoin transactions. As the math problem is traveling through the blockchain, so are payments. The transaction is moving through the individual blocks, and this is how they are confirmed. This is why a transaction is confirmed within seconds, versus 2-4 days at a bank. The way it works for transactions, is that a person who puts a small fee (pennies) on the transaction is a transaction that is given priority to be confirmed in the blockchain before transactions that have no fee. The reason for this is that bitcoin miners also receive these fees in addition to new bitcoins as proof of work as a reward for perpetuating the network. Even after all 21 million bitcoins are “mined,” there will still be a reason to have people mining. Receiving the transaction fees is incentive to continue creating blockchains, thus keeping the up network (which is important, because without miners, there’s no network..without the network, no one could transact bitcoins).

So you have the entire bitcoin network that you’re generating through mining. Now, the more computing power you have in the network, the higher the difficulty of the math problems the computers are solving. The bitcoin code has a feature written into it that increases the difficulty (referred to as simply “the difficulty” to those who regularly discuss bitcoin) of the math problems for a reason. It’s a way to control the output of bitcoins as rewards and not flood the market with new bitcoins. As more and more computing power comes online, this is what makes regular computing power obsolete. If your computer has to use regular hashing power to solve increased difficulty, it’s not going to get very far.

ASICs can be very expensive, starting somewhere around $3K, and getting more expensive as you buy more powerful chips. If you are interested in mining, you can get involved in something called cloud mining for a lot cheaper, though I honestly don’t know what they charge. But the basic idea is that you create a contract with a company who already has mining technology, and you pay to rent the space and it also helps with the electric bill of the person who has the mining hardware, and you can be involved with mining.

As far as myself, I mined a little bit over a year ago and got very meager returns. I didn’t do it much or often, because it took all the power of my computer to do so, and this was even long before ASIC technology came on board. The shipping of ASIC chips is actually pretty new, because the companies who produce them just started shipping not that long ago. Even if I could afford it, I probably would not be interested in buying mining hardware. Depending on the chip you buy, you can see returns just a couple months after starting to run it, but I still wouldn’t be interested. I support the idea of those that do invest in this, because supporting the bitcoin network is very important, but not something that I personally want to do.

I hope this post was easy to follow, because bitcoin mining is actually kind of complex and hard to understand. I didn’t even go into all the other tech stuff, which I honestly don’t understand all of it! If you have any questions, or something is unclear, just let me know, and hopefully I can clear something up!

As an afterthought, I thought I should mention how bitcoin differs from other crypto currencies. Other currencies (also referred to as “alt coins,” or alternative crypto coins) use different criteria to generate their coins. Most of the ones I know about use different algorithms and math problems, and one example is primecoin, which is a coin that’s generated by looking for very large prime numbers.

Advertisements

3 responses to “Mining Bitcoin

  1. This is still all Chinese to me, haha. I think I’m more confused, and I even read the main Wiki article on Bitcoin. I’m just not much knowledgeable much in cyber/technology in general.

    So what’s the exchange rate for BTC and USD? Like, how much would a $10usd book cost in BitCoin? I’ve read that the rates have been volatile – when or how can it stabilize? How or can bitcoins be taxed? How will rates/prices change as more bitcoins are mined? …. and I feel like I have more questions, but I don’t know how to word them or whatever. (and it’s past my bedtime now haha)

    Now I really miss my economics courses, but I also wish that I had had a chance to study more on monetary economics then as well, because the concept of money is incredibly fascinating. Sigh.

    • Haha, no worries. Mining bitcoin is very technical, so not everyone is going to get it. I had to listen about it being talked about a bit before I started understanding what thing mean.

      1- the exchange rate is different depending on which exchange you use. If it’s hard getting bitcoins, the price is high, but then it’s usually easy to get your bitcoins out of the exchange. If it’s easy getting bitcoins at the exchange, the price is low, but it’s hard getting bitcoins out of the exchange. Currently, Mt.Gox shows their rate at $139.80 per bitcoin, while BtcE shows $124 each. The merchant you’re buying from has to determine which exchange to use as their baseline for determining cost, because everything is currently held against the dollar.

      2- depending on the exchange used, a $10 book would be about 0.07974BTC.

      3- the price is volatile because it’s pretty new. I don’t think we will see it flatten at a fixed price until they are all mined and most of the world is using them. Even then, they will be competing with other alt coins. Some people say the price for one bitcoin will some day be thousands of dollars. No one really knows what’s going to happen with price. But really, the value is beholden to the user. Whatever people are willing to pay is what what the price will be.

      4- bitcoin transactions cannot be forcibly taxed. There’s no way to achieve this.

      5- as more bitcoins enter the marketplace, I only see the price rising. They are already entering the market at a steady rate, and I don’t think that effects the exchange rates. The kinds of things that effect price are bitcoin adoption..how many people start using them, and also how often they are being used for transactions. More and more real world products and services are being made available for purchase using this currency, and that’s what really effects the value that people place into them.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s