Mom, where do bitcoins come from? Bitcoin Mining Explained

“Mom, where do bitcoins come from?” Well, you know when a shiny young bitcoin catches the eye of an aspiring miner and because they love each other so much…

Wait, that’s obviously too hard to solve here. Besides, my whole point is to keep things simple. Anyway, bitcoins are made by solving complex math problems. This is done by a powerful machine designed to solve these mathematical problems. This process is called mining. The people who own these machines to earn money from mining bitcoins are called miners. When a group of problems is solved, it becomes known as a block. Blocks are verified by other users, and once verified, they are added to what is called a block chain. This chain continues to grow, with a new block added to it approximately every 10 minutes. This chain is actually just a ledger that will continue to grow and never end.

The very powerful machines they mine take a lot of energy and add to the miner’s monthly utility bill. The reason it requires so much energy is the genius of the mathematics involved. This requires the mining machine to run complex cryptographic algorithms. Once a math problem is solved by the machine, a block of coins is born. Every time 210,000 blocks are created, the miner reward is halved. It takes 4 years to achieve this. So it’s kind of like the Bitcoin Olympics. Currently, the block reward is 12 bitcoins (on June 23, 2020, the reward will be only 6 coins). These coins go to the miner whose machine was the lucky winner of the lottery at that time. There is a winner every 10 minutes. There are also many miners competing. Said miner now has something of value. Mine enough coins and you pay your electricity bill and then some.

There is another way to mine. It’s called cloud mining. With this type of mining, you are paying to use someone else’s network and this significantly reduces your profits. The positives of this method are that it does not require the use of electricity or even the purchase of a machine.

Sounds good to me. I want to start mining now. Is it a good idea and can I generate passive income regularly? Possibly. Wait for now and you can call later.

Let’s try to break this down.

Going back to the original way of machine mining, you will need to start by purchasing a quality mining machine. This will set you back about $2,000. Here is a picture of a good machine (Antminer S9 by Bitmain) capable of producing a high hashrate of 14 TH/s. 1 TH/s is 1,000,000,000,000 hashes per second. This machine does 14 times more. That’s a lot of hashing power. A hash is simply a very long number that the machine creates each time it tries to solve the algorithm. Again, to use my lottery analogy, all of these machines are hashing themselves in hopes of being the next winner.

Then your chances of winning become more and more difficult with more competition. Further complicating this issue is that each time a math problem is solved, the next problem becomes increasingly difficult to solve. The difficulty of the Bitcoin network changes approximately every two weeks or 2016 blocks. The number of Bitcoins that will ever be created is limited. That number is 21,000,000. Once we reach that number, there can never be any more bitcoin mined. However, the blockchain itself will continue to expand because it is used to verify every transaction or purchase.

Remember that alias Satoshi Nakamoto I wrote about too? Did you know that today’s math problems are more than 70,000 times harder for machines to solve than us, he mined the first bitcoin in 2009?! The final coin is predicted to be mined in 2140 as the system halves every four years (210,000 blocks). 16,400,000 coins (78%) have already been mined and every coin from now on will be mined at a much slower rate. Yes, you read that right. Basically 80% is mined in the first 8 years and it will take more than 100 years to mine the last 20%. If any of my great, great, great grandchildren are reading this, I hope you feel good about our family’s bitcoins now valued at 220,000 per bitcoin. We can all dream right!

Buying a mining rig or buying a cloud mining contract is risky. While there are some great success stories out there, be sure to research them thoroughly before deciding whether mining is right for you. For every person who makes money, there are many people who lose money.

By the way, a great place to see all the cryptocurrencies out there and their total coins and market cap, Coin Market Cap is a great resource. You can see all 700+ flying altcoins there. Altcoin is just another way of saying any cryptocurrency coin that isn’t Bitcoin. By now you probably know that Bitcoin is like the Rose Bowl, the granddaddy of them all! I would really try to limit my focus and research to the top 10 for now. Not that there won’t be success stories from one of the near-useless now. Simply finding one is like picking the right penny. Sticking with established companies that are recognized by mainstream analysts is a much safer play. The same goes for the exchange you use to buy, sell and trade. This is why I use Coinbase to do my trades as they are the most reliable, secure and convenient exchange. They also have the most thorough vetting process when it comes to adding altcoins.

Here is a summary of the key points from this article:

-Bitcoins are created by mining

-Mining is done by powerful machines that solve complex mathematical problems. You can also buy contracts called cloud mining if you don’t want to buy a machine.

-Problems get harder as coins are mined and the production rate slows down

-As of May 2017, there are only 72 bitcoins mined per hour (12 every 10 minutes)

-On June 23rd, 2020 this will be halved again to only 6 created every 10 minutes

-Nearly 80% of the final 21,000,000 Bitcoin coins have already been mined

– Competition between miners and increasingly complex math problems make it harder to turn a profit from mining

– The final coin is expected to be mined in 2140