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Bitcoin Mining

How Does Bitcoin Mining Work?

Generally speaking, there are three common methods to obtain Bitcoin. You can buy it on an exchange, you can accept it as payment for goods and services and you can mine new Bitcoin. “Mining” is the term used for the discovery of new Bitcoin, as it is akin to panning for Gold. Bitcoins are a finite resource that have to be “discovered,” so mining provides apt terminology. In actuality, though, mining is simply using computer power and specific software to verify Bitcoin transactions. The process is simple, but not easy.

Who Can Be a Bitcoin Miner?

Technically speaking, anyone with a computer can be a Bitcoin miner. The theory of Bitcoin mining is that miners use specialized, open-source software to solve mathematical equations and are awarded Bitcoins in exchange for their work. This forces the currency to be issued at a measured rate and incentivizes contributing to the Bitcoin community, making for faster and more secure transactions.

How Are Bitcoins Mined?

This is the simple-but-not-easy part. Once you have uploaded the readily available software onto your computer, assuming your hardware offers sufficient computing power, you simply run the software on behalf of Bitcoin, processing Bitcoin transactions. For example, Daphne buys a television from Fred and pays with Bitcoin. To assure the transaction is being made with genuine Bitcoin to the proper accounts, miners verify the transaction. To increase efficiency, miners do not verify just one transaction at a time. A block of transactions is gathered into a file with a virtual padlock, called “block chains.” Miners run mathematical software to find the key that will open that padlock. Miners earn a small transaction fee, but they also uncover new Bitcoin through this process. They do theoretically get paid twice, but the cost of the hardware and the electricity used to run and maintain it can add up quickly. 

Can Bitcoin Mining be Profitable?

The developer of Bitcoin planned for the measured release of Bitcoin onto the market. In order to keep the rate steady, the difficulty of uncovering Bitcoin must increase as more miners begin running the software. When Bitcoin was introduced in 2009, people running the software on their personal computers at home could mine a couple of hundred Bitcoin in just a few days. In 2014, it would take one person on their home computer about a hundred years to mine a single Bitcoin. Today, the figures are astronomical. To work against the increasing difficulty of mining Bitcoin, it became necessary to purchase and employ ever more powerful hardware. The process grew into a sort of arms race of who had the most powerful computer, and that hardware can be prohibitively expensive. Now there are mining pools where computer power is shared and each miner earns a portion of the fees and Bitcoin discovered.

There is still potential profit in Bitcoin but the difficulty of being the one to earn it is dwindling.  Experts from every sector of the financial industry say while Bitcoin is exciting and has its applications, it is important not to keep more capital in Bitcoin than you can afford to lose. However, if you’d like to try Bitcoin mining for fun and in hopes of a little profit, knowledge is the first step of your journey.

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