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Mommy, Where Do Bitcoins Come From? Bitcoin Mining Explained
“Mom, where do Bitcoins come from?” Well, you see, when a young, bright Bitcoin catches the eye of an ambitious miner, and because they love each other so much…
Wait, that’s obviously too hard to solve here. Also, my whole point is to keep things simple. Anyway, bitcoins are made by solving complex mathematical problems. This is done by a powerful machine that is built to solve these mathematical problems. This process is called mining. People who own these machines to earn money by mining Bitcoins are called miners. When a batch of problems is solved, it is known as a block. Blocks are verified by other users and, once verified, are added to what is called a block chain. This chain continues to grow and a new block is added approximately every 10 minutes. This chain is really just a ledger that will continue to grow and never end.
Very powerful mining machines use a lot of power and increase the miner’s monthly utility bill. The reason it takes so much power is the genius of the math involved. It requires the mining machine to perform complex cryptographic algorithms. Once a math problem is solved with the machine, a block of coins is born. Every time 210,000 blocks have been created, the miner reward is halved. It takes 4 years to achieve this. So it’s like a Bitcoin Olympics. Currently the block reward is 12 Bitcoins (on June 23, 2020 the reward will be only 6 coins). These 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 competing miners out there. The mining finger now has something of value. Take out enough coins and you pay your electricity bill and a little more.
There is also another way to do it. It’s called cloud mining. With this type of mining you pay to use someone else’s network and this significantly reduces your profits. The positives of this method are that it does not require using electricity or even buying a machine.
It sounds good for me. I want to start mining now. Is this a good idea and can I generate passive income on a regular basis? possibly Hold on for now and you can make that call later.
Let’s try to break this down.
Going back to the original form of machine mining, you should start by buying a quality mining machine. This would cost you about $2,000. Here is a picture of a good machine (Bitmain’s Antminer S9) 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 does 14 times more. That’s a lot of hashing power. A hash is just a very 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 and more difficult with more competition. Further complicating this issue is that every time one math problem is solved, the next problem becomes increasingly 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. This number becomes 21,000,000. Once we reach that number, there can never be another Bitcoin. However, the blockchain itself will continue to expand because it is used to verify each transaction or purchase.
Also remember the Satoshi Nakamoto pseudonym I wrote about? Did you know that today’s math problems are more than 70,000 times harder for machines to solve than when we mined the first Bitcoin in 2009?! The estimate is that the final coin will be mined in 2140 because the system is halved every four years (210,000 blocks). There have already been 16,400,000 coins mined (78%) and each coin from now on will be mined at a much slower rate. Yes, you read that right. Basically 80% was mined in the first 8 years and it will take over 100 years to mine the final 20%. If any of my great grandchildren are reading this, I hope you feel great about 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 great success stories out there, be sure to research them thoroughly before deciding whether mining is right for you. For every person who makes money, there are many people who lose 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. You can see the 700+ fly-by-night altcoins out there. An altcoin is just another way of saying any cryptocurrency coin other than Bitcoin. By now you probably know that Bitcoin is like the Rose Bowl, the granddaddy of them all! For now, I would try to limit my focus and research to the top 10. Not that there aren’t success stories of one of the almost worthless ones now. It’s just that finding one is like choosing the right penny stock. Sticking with established companies that are being recognized by mainstream analysts is a much safer bet. The same goes for the exchange you use to buy, sell and trade. This is why I use Coinbase to do my trades as they are the most reliable, secure and convenient exchange. They also have the most thorough verification process when it comes to adding altcoins.
Here is a summary of the key points of this article:
-Bitcoins are created from mining
-Mining is done 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.
-Problems get harder as coins are mined and production rate slows down
-As of May 2017, there are only 72 Bitcoins mined per hour (12 every 10 minutes)
-On June 23, 2020, it will be halved again to only 6 spawns every 10 minutes
– Almost 80% of the finite number of 21,000,000 Bitcoin coins have already been mined
-Competition between miners and increasingly complex mathematical problems make it harder to mine for profit
– The final coin is estimated to have been minted in 2140
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