What is Bitcoin Mining and How Does it Work?
Bitcoin and how it works is still a mystery for a lot of people. When you go into specifics like bitcoin mining, people become even more confused and start asking questions like “Does this mean I can make free money from my computer?”
Before we get into the question of “What is bitcoin mining?”, let’s start with the basics.
What is bitcoin?
Bitcoin is a digital currency created by Satoshi Nakomoto in 2008. Bitcoin can be separated into two components: the first is bitcoin is a token, a snippet of code that represents a form of digital currency; the second is bitcoin is a protocol, a decentralized network that allows users to update and maintain a ledger of balances of the token.
Bitcoin is different from the traditional banking system in that it operates on a decentralized system. This system can operate and transfer funds without passing through any central authority (e.g. a central bank). Bitcoin also has a limited quantity as there can only ever be 21 million bitcoins in existence.
What is the difference between fiat currency and Bitcoin?
Fiat currency is legal tender that is assigned by a government decree. This decree regulates coins and banknotes to have a specific value and must be accepted when offered as payment. Examples of which are the Philippine pesos and the US dollar.
Unlike bitcoin, its quantity is not limited. Essentially, a central authority can print and make as many banknotes and coins at any given time. This makes it susceptible to drops in value and rises in commodity prices since the purchasing power of your currency becomes less (a.k.a. inflation).
Fiat currency also has a central authority. Today we transfer funds through a central authority like a bank. To do this, we “tell” the bank to remove a specific sum from our account and add it to another person’s account. In this case, the bank is the central authority because they are the only ones allowed to see and update the ledger of everyone who holds the balance of everyone in the system.
Bitcoin was made to be a decentralized form of currency and a more democratic way of controlling the currency’s ledger through a protocol that allows anyone to participate in updating the ledger of bitcoin transactions (a.k.a blockchain), also known as bitcoin mining.
Related: How does a bitcoin transaction work?
What is bitcoin mining?
Bitcoin mining is a process of adding and verifying transaction records to the blockchain. Once your computer solves a set of equations, your mining program groups together a block of currently pending transactions and sends it to the network (or chain) so that other computers can validate it.
Each computer that validates your solution updates its own copy of the transaction ledger with the block of transactions that your computer included in the next block. After this is complete, the system generates a fixed amount of bitcoin and awards it to you to compensate for the time and energy spent in solving the mathematical problems and updating the ledger.
How difficult is it to mine bitcoins?
In the early days, profiting from bitcoin mining is easy and can be done at home on a personal computer. Today, bitcoin mining has become a specialized industry. Miners use specialized and expensive hardware that eats up an incredible amount of electricity to mine for bitcoins. It’s capital-intensive and it’s very difficult to make a profit from bitcoin mining if you don’t have the resources.
Nowadays, it’s easier to buy bitcoin than to mine them. All you need is a digital currency wallet (such as your Coins.ph Wallet) to get started. Learn more
Disclaimer: Buying bitcoin and other virtual currencies carries a high level of risk, and may not be suitable for everyone. Read the full BSP advisory to understand the risks of buying, holding, or trading cryptocurrencies.
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