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.

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Bitcoin: An Introductory Post

As a bitcoin enthusiast, I listen to the Let’s Talk Bitcoin podcast. I’ve learned a lot about bitcoin and cryptocurrency in general, but by no means am I an expert. I’ve heard about the amazing products and services that people are thinking of, and millions of dollars have been flowing into the bitcoin space, by venture capitalists and those looking to start businesses that cater to this amazing currency. I’ve been meaning to write some blogs about bitcoin for a while, and a couple of people I know have recently wondered what it is, and said they’re confused.

I understand that if you’re not a “techie,” it can quickly become confusing when people who talk or blog about it start using jargon, and perhaps not fully explaining what things are and what they mean. There is also a lot of misconception and misinformation coming from the mass media, so it’s important that people get the truth. I’m going to be writing more than one blog, so if you’re more interested in the tech side, I will eventually get into that too. This post will be just a basic guide to what bitcoin is, how you can get some, and how it can be used.

What is bitcoin? Or, more broadly, what is cryptocurrency? Because bitcoin is just one cryptocurrency; there are actually many. This is actually a two part answer, but this first is this: cryptocurrency is a currency that exists on the internet. That might throw some people off because you can’t physically hold it in your hands. However, let’s think about this for a moment. How many of your transactions are online? More and more, people are using the internet to transact money, no matter what currency it is. Online banking, paperless billing statements, and online bill pay are very popular ways of transacting money. PayPal is a major player in online money transactions. And, there are more internet dollars than paper dollars. What does this mean? It means that if every single person and business with money in an account were to go to the bank and withdraw their funds, there wouldn’t be enough paper dollars and coins to give. I think that speaks to the volume of online transactions that are made in the world today. So, the fact that it exists on the internet really isn’t that big of a deal. We will come back to the second part of the answer in a little bit.

How does bitcoin work? This is where it can start to get jargon-y, so I’ll try and keep it simple. Just like gold, bitcoin is mined. However, unlike gold, it’s digital mining, and there is also a finite amount of bitcoins that can be mined. Part of where bitcoin differs from other cryptocurrency is how many of the currency will be mined. For bitcoin, it will be a total of 21,000,000 bitcoins. That doesn’t seem like much, but it actually is. The reason it’s a lot? Bitcoin goes out 8 decimal places. So with the dollar, you have two decimal places: $1.00. (Fuel, for some reason, goes out a third decimal place, but it’s unusual in any other instance.) With bitcoin, the smallest amount looks like this: .00000001. So you can visualize it this way: when BTC (bitcoin) is fully mined, it will look like this: 20,999,999.99999999 + .00000001.

I’m not going to go into the technical side of mining here, because that part isn’t really pertinent to being able to use it. Having a basic understanding of where bitcoin is coming from is relevant information, but it’s not necessary to understand the tech side of it. So, other than being a digital currency, it’s also decentralized and it’s open source. Open source, for those that don’t know (not that long ago, I had no idea what open source meant!), means that the digital code that writes the software, the meat of the program, if you will, is completely visible to anyone who wants to see what the code says. Why is open source important? I’m not saying that all open source software is safe, but the more reputable people that know coding look at it, the more we can trust the computer nerds that it’s a good program. People can check and see if the NSA has built in a backdoor, and they can also check the code for anything malicious, such as viruses and trojans. Now that we’re talking about the coding of the program, I can also tell you that if it’s deemed necessary, more decimal places can be added to the code, so that we have more than 8 decimal places to work with. However, there can never be more than 21M full BTC.

So now that we know some of the background, we can talk about how you can use it. First, you need a wallet. You can download the bitcoin client, but that will literally take days. I’ll have to tell you in a moment why that is. However, I would recommend an online wallet. I would highly recommend blockchain.info for this wallet. The wallet is encrypted in your browser. Encryption is very important, because without it, you’re very vulnerable to hacker attacks. Since the encryption takes place in your browser, it’s not saved on anyone’s server, and you’re taking control of the security of your money. When you get your wallet, you have two “keys”: a public key and a private key. The private key is the one you never, ever want to share with anyone. This is how you log in to your account. The public key is the one you use when you want to receive payment, or your bitcoin address. You can create multiple bitcoin addresses within the same wallet. Using different addresses within your wallet is helpful for maintaining anonymity within the bitcoin space.

The reason this is important is because every transaction is visible on the network. Your identity isn’t tied to your bitcoin address, but what people see is the from address, the to address, and how much the transaction is for. No one can see any other information. So using different address for different purposes is helpful in maintaining some semblance of anonymity when doing transactions. Going back to why I wouldn’t recommend downloading the client is because every transaction ever made is visible to the network, and therefore, all transactions need to be downloaded to your computer. There have been so many transactions on the bitcoin network, it literally takes days to download. An online wallet is much easier and faster.

So now that we’ve gone through how to use bitcoin, we can go back to the question: what is bitcoin? Not only is it a currency, it’s also a payment system, as we’ve seen from how it’s used. Transferring money is contained completely within the network, the protocol, or how we transfer the money, makes it a payment system as well as a currency.

Back to a little technical here, but what makes this better than any other currency? The ease with which money is transferred. It’s instantaneous if you want to pay a very small fee that literally equals pennies. The reason a fee is required for instant money transfers is technical, so I’ll bypass that for now. But if you don’t pay a fee, it could take quite a while for the payment to show up in the other person’s wallet, from hours to a few days. With bank account transfers, you have a 2-4 day window with which payments are processed and cleared, even if you’re doing a completely digital money transfer or with a credit/debit card. You don’t have the option to pay a tiny fee for instant money transfer.

This has actually gotten quite long, and longer than I intended for an introductory post, but I can’t think of anything I should cut out of it. I actually wish I could add more! But, there is one more important factor to discuss before I leave this post: and that’s how you can acquire bitcoins. It’s not always easy to get them! Because of laws and regulations, most companies that offer the service are having difficulties. Previously, the government hadn’t made a determination as to whether or not bitcoin is a currency. Recently, a court somewhere determined that it is, I don’t recall the case. But now, services that offer to take other currencies and give you bitcoin for them have to register as money transmitters and with FinCEN. This has created a lot of problems, because the company has to seek expensive permits in every single state, because the laws surrounding money transmission are different in each state. Most of the bitcoin exchanges are therefore having difficulties. But there is one place you can get bitcoin, and you don’t even have to link your bank account! You can go to cashintocoins. I’ve heard very good things about it. Just follow the instructions, and you get your bitcoins to your bitcoin wallet no more than 4 hours after sending the email!

I think that should be all for now! If you have any questions, let me know! I will get more into detail on some things in later posts 🙂