October 14, 2020

What is Bitcoin Mining

What is Bitcoin Mining

A lot of people consider mining as an effective method of creating an additional income. Some of them made it their main income source. If you want to earn a lot with mining, you need to understand some basic tips. For example, you need to have powerful equipment and choose a pool with great hashrate. Also, you need a quality unlimited internet connection, a lot of money for electricity, etc.

Today, we are going to tell you what Bitcoin mining is in simple words.

Cryptocurrency and blockchain introduction

First, we need to understand “How does cryptocurrency work?”. One of the most important terms associated with cryptocurrency is blockchain. This is a set of data distributed between many blocks that are connected to the network.

Every new block stores protected information about previous blocks. That’s why even if some information is changed in one block, it will be saved because the copies of information are stored in the other blocks that are connected to each other. All data saved in the blockchain is a programming code because this is digital technology.

Why do we need blockchain to carry out cryptocurrency transactions?

Blockchain is necessary to keep information protected. It is not only money. Blockchain has many more possibilities. If one member of the blockchain transfers money to another person, he can be sure that it will be transferred correctly because all data will be saved if hacker attacks are performed.

Let’s describe a very simple example of using blockchain. Imagine that your colleague asked for 1,000 dollars. You need to confirm the fact of transferring the money to make funds return possible. Usually, in this situation, a certain form of contract is used. If it is lost, you won’t be able to prove that you gave 1,000 dollars. This concerns fiat money transferring.

If we talk about blockchain, you don’t sign a contract – you send a mail that a certain person is responsible for returning you 1,000 dollars. Even if one of the messages is lost, all other people know that a certain person has to pay you 1,000 dollars. Blockchain technology works in the same way.

What is cryptocurrency?

We can’t understand how mining works without a full picture of what cryptocurrency is. Cryptocurrency is a type of programming code that has a certain value in the money equivalent. The owner of the cryptocurrency can change it to a lot of other usual currencies (such as the dollar, euro, and many others). Every cryptocurrency has its specific features. Some of them are safer, some are more convenient. The most popular cryptocurrency is Bitcoin. However, there are a lot of other cryptocurrencies:

  1. Ethereum
  2. Litecoin
  3. Ripple
  4. and many others.

This topic can be interesting not only for people who are keen on Bitcoin, but also other cryptocurrencies.

About mining

Since the number of opportunities for earning money with cryptocurrency increases, the total number of members of the Bitcoin blockchain also increases. We know that all actions in the network are a code. The size of blocks containing this information is limited. That’s why we need to create new blocks. The process of creating new blocks is named “mining”.

These are calculations that are very hard and unattainable for any individual. You need to buy special equipment because even one powerful computer isn’t enough to reach a necessary level of hashrate. For creating a new block, a user or network automatically gets a reward, which is a certain amount of Bitcoin.

The bigger the number of mined blocks is and the bigger the reward and the higher the income. The device for mining is called “miner”. It can be a simple CPU, graphic card, or ASIC. However, the CPU isn’t used now because it can’t provide sufficient hashrate. ASIC is the most popular device for mining because it is powerful and can save a lot of electricity.

What factors affect income?

There are a lot of factors that can affect the income. First of all, how powerful the equipment is. The speed of calculations depends on this factor. Also, there are more factors that affect the speed of mining and the amount of money you earn:

  1. The price of electricity and rental of premises. It depends on the place where the person lives. Miners try to choose regions with low prices.
  2. The time you need to cover your investments. You need to pay for equipment, electricity, and fees. You also have a lot of other spendings. You will get a real income from mining only when you earn more than you spent.
  3. How much Bitcoin costs. The price of Bitcoin always changes, and this is a very volatile asset. Mostly people exchange their Bitcoins to a less volatile currency. That’s why this is so important.
  4. The mining difficulty. If the total number of miners is very high, they mine blocks very fast. It is a reason why the difficulty of mining increases in this situation. If mining is too easy, the price will be too small and mining becomes unprofitable.
  5. Hashrate. This is the speed of generating new blocks.

These factors are very important for every miner. You need to consider them when you want to earn Bitcoin this way.

To sum up, mining is a very interesting process. We see that it isn’t as hard as it seemed to be when you just heard this word. We hope you understand this topic better now. Good luck.