Mom, where do bitcoins come from? Bitcoin Mining Explained

“Mom, where do Bitcoins come from?” So you see, when a bright young Bitcoin catches the eye of an aspiring miner, and because they love each other so much…

Wait, obviously that’s too hard to solve here. Besides, my whole goal is to keep things simple. Either way, bitcoins are made by solving complex mathematical problems. This is done by a powerful machine that is built to solve these math problems. This process is called mining. People who own these machines to earn money by 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 being added to it approximately every 10 minutes. This chain is really just a ledger that will continue to grow and never end.

Very powerful machines that miners consume a lot of energy and increase the monthly utility bill of the miner. The reason it takes so much power is the genius of the mathematics involved. This requires the mining machine to perform complex cryptographic algorithms. When a mathematical problem is solved by a machine, a block of coins is born. Every time 210,000 blocks are created, the miner’s reward is cut in half. It takes 4 years. So it’s like the Bitcoin Olympics. Currently, the block reward is 12 bitcoins (on June 23, 2020, the reward will be only 6 coins). Those coins go to the miner whose machine was the lucky lottery winner at the time. There is a winner every 10 minutes. There are also many miners competing there. Said miner now has something of value. Mine enough coins to pay the electric bill and then some.

There is another way to mine. This is called cloud mining. With this type of mining, you pay to use someone else’s network and this significantly reduces your profit. The positive sides 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 make regular passive income? Possibly. Hold on for now and you can make that call later.

Let’s try to break this down.

Going back to the original way of machine mining, you would have to start by purchasing a quality mining machine. That would cost you about $2,000. Here is a picture of a good machine (Antminer S9 from Bitmain) that is capable of creating a high hash rate of 14 TH/s. 1 TH/s is 1,000,000,000,000 hashes per second. This machine works 14 times harder. That’s a lot of hashing. A hash is just a really long number that the machine creates every time it tries to solve the algorithm. Again, to use my lottery analogy, all these machines are out there hoping to be the next winner.

Then, your chances of winning become more difficult with more competition. Further complicating this issue is that each time a math problem is solved, the next problem becomes more difficult to solve. The difficulty of the Bitcoin network changes approximately every two weeks or 2,016 blocks. The number of bitcoins that will ever be created is finite. That number is 21,000,000. Once we reach that number, there will never be any more Bitcoin mined. However, the blockchain itself will continue to expand as it is used to verify each transaction or purchase.

Remember that pseudonymous Satoshi Nakamoto I also wrote about? Did you know that today’s math problems are more than 70,000 times harder for machines to solve than they were when he mined the first Bitcoin in 2009?! It is estimated that the final coin will be mined in 2140, as the system is halved every four years (210,000 blocks). 16,400,000 coins (78%) have already been mined and every coin from now on will be mined much more slowly. Yes, you read that right. Basically, 80% was mined in the first 8 years and it will take more than 100 years to mine the last 20%. If any of my great grandchildren, great grandchildren are reading this, I hope you are sitting well with our family’s Bitcoins now valued at 220,000 per Bitcoin. We can all dream well!

Buying a mining machine or buying a cloud mining contract is risky. While there are some great success stories, be sure to research them thoroughly before deciding whether mining is right for you. For every person making money, there are many people losing 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. There you can see all 700 plus altcoins that move overnight. 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 a success story of one of the almost worthless ones now. If only finding one was like picking the right penny stock. Sticking with established companies recognized by mainstream analysts is a much safer bet. The same goes for the exchange you use to buy, sell and trade. That’s why I use Coinbase to trade because 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 performed 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.

-The problems become more difficult as the coins are mined and the production rate slows down

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

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

– Almost 80% of Bitcoin’s final 21,000,000 coins have already been mined

-Competition among miners and increasingly complex mathematical problems make it difficult to achieve profitable mining

– It is estimated that the final coin will be mined in 2140