You have probably heard of bitcoin mining. That arcane process by which new Bitcoin and Altcoins are brought into circulation. While the European Central Bank only has to press a simple button to create new euros, mining bitcoin takes a lot of energy and computer power. The search for new bitcoin and altcoins is in a sense similar to the search for precious metals, which is why the process is called bitcoin mining. Mining plays an important role in the ecosystem and ensures that not all 21 million bitcoin are spent at once. Those who work the hardest have the best chance of finding new bitcoin.
The great quest for digital gold also plays an important role in the security of bitcoin and other cryptocurrencies. Bitcoin is a decentralised network of computers in which anyone can participate. The rewards miners receive for their work motivate them to secure the network and verify transactions before adding them to the blockchain.
How did bitcoin and other cryptocurrencies originate?
Of course, we’ve already hinted that miners need to invest time, energy and computer power to earn bitcoin and other cryptocurrencies. The computer code specifies that only 21 million bitcoin will come into circulation. But how does the process of bitcoin mining actually work? We are going to discuss this now. Of course not with a technical story, but in a way that is understandable for everyone. In essence, it is not that complicated at all.
Bitcoin mining started out as a game for nerds who could do it quietly in their attic at home. Nowadays, however, it is a billion-dollar industry that you can’t get into with your gaming computer. Serious amounts of money are involved in the bitcoin mining industry and there are even several listed mining companies in which you can invest.
All these miners together are constantly looking for new bitcoin. They do this by searching for a special number which is in fact the key to new bitcoin. The only way to find that special number is to gamble as fast and as often as possible until the right number is found.
You can compare this to a competition where you have to guess the weight of a cake. You can try as many times as you like, but the one who guesses the weight first wins the game. The person who can guess fastest has a higher chance of winning. This is also how bitcoin mining works.
The more powerful the computer, the greater the chance it will find the special number. If a miner succeeds in finding the special number, they will be rewarded with a small amount of new bitcoin. Currently the reward is 6.25 bitcoin and every 4 years the reward is halved. The reward halves until it finally reaches zero. At that point the maximum of 21 million bitcoin has been reached and no new bitcoin will be added.
The lucky miner who is the first to find the special number will send his solution to the other miners to show that he has succeeded and publish the next bitcoin block. That block also contains transactions. After publishing the block the entire network will adopt the same block and start looking for the next special number to publish another block. It is a constant race with miners finding a new special number about every 10 minutes which allows them to add a block to the blockchain. This is why the technology behind bitcoin is called blockchain technology.
The bitcoin transaction database is basically a chain of blocks connected by the special numbers of the miners. In essence this is how bitcoin mining works and how new bitcoin or altcoins are created.
Blockchain in Brief
Contrary to what many people think, blockchain technology is not a magical solution to build money and other applications. It is actually nothing more than a chain of blocks which are connected to each other in an ingenious manner. Each block is in fact a container of data, filled with transactions and a fingerprint from the previous block, among other things.
That fingerprint is the special number we talked about in the previous article. Because each new block contains a fingerprint (the special number) of the previous block, the entire history of the blockchain is embedded in each new block. As soon as you change something in a block, its fingerprint (the special number) changes and the chain is broken. So it is immediately noticeable when people modify transactions.
For more information on blockchain technology, please refer to the page: What is blockchain?
Maximum of 21 million bitcoin
Unlike the euro, bitcoin has a fixed maximum of 21 million units. In times where the euro is rolling out of the European Central Bank‘s printers in billions, more and more people are understanding how valuable that limit actually is. There is a cap on the number of bitcoin in circulation as the reward for miners halves every four years. At the time of writing, miners still receive 6.25 bitcoin for finding a new block. But by May of the year 2024, that reward will already halve to 3.125 bitcoin per block found.
So far it has been found that halving the reward for miners is a positive shock to the bitcoin price. In the months following the halving, the bitcoin price traditionally skyrockets. It is fair to say that over the past 12 years bitcoin has moved to the rhythm of halving the reward for miners. But the most important thing to take away from this section is that miners receive a reward for finding a new block which decreases according to a set schedule. In addition to the fixed reward, miners also receive all the transaction costs of the transactions they include in their blocks.
The increasing difficulty of bitcoin mining
The final and perhaps most important element of bitcoin mining is the so-called difficulty adjustment. The higher the price of bitcoin, the more interesting it naturally becomes to mine bitcoin. You would expect that as the price rises more miners will become active and more bitcoin will be found. To prevent all 21 million bitcoin from being found today by enthusiastic miners Satoshi Nakamoto has added a dynamic difficulty level to the mining process. The more computer power in the network searching for new bitcoin – the so-called special numbers – the higher the difficulty. As there is less computer power in the network the difficulty goes down.
The adjustable difficulty ensures that the number of bitcoin issued stays within the set schedule. After every 2016 block, the network automatically adjusts the difficulty and the special numbers miners are looking for have to meet more or less requirements.
This is in a nutshell how the mining of bitcoin and other cryptocurrencies works and how new bitcoin or altcoins come into circulation. Of course we have oversimplified everything and in reality it is a lot more complex, but if you understand the above story you have a good idea of the process we call mining. Thanks to this process, decentralised coins like bitcoin can be issued in a secure manner without having to rely on the European Central Bank, for example. Pretty cool right?