what is Bitcoin Mining

What is Bitcoin Mining: How it works | Types

Mining is a mechanism that installs special software on a computer or smartphone and uses its computing power to earn rewards such as Bitcoin.

In this article, we will thoroughly explain the method and mechanism of Bitcoin mining for individuals, and the current profit market.

Six years have passed since the birth of virtual currency, and the current mining market is turning into a harsh environment for individuals.

This is due to the decline in systemic rewards called halving and the participation of large business owners called mining factories.

Therefore, in the current environment, it is more realistic to challenge virtual currency investment to earn profits with Bitcoin and Ethereum.

What you can learn from this article

  • Mining is a mechanism by which network participants (miners) confirm the integrity of cryptocurrency transactions.
  • By participating in the mining market, you can earn rewards if you meet the conditions.
  • Due to the halving in 2020 and the entry of giant companies, the mining market is becoming more competitive than it was a decade ago.
  • There are schemes such as pool mining and cloud mining that allow individuals to earn money.

What is bitcoin mining?

Mining is the process of approving transaction data for cryptocurrencies, including Bitcoin.

Fiat currencies such as the US dollar are controlled by the central banks of each country, but in the case of virtual currencies, blockchain network participants are in charge.

In other words, when trading virtual currency, a third party (user) participating in the network checks and approves the transaction for fraudulent transactions each time.

This work is called “mining”, and the users who perform fraud checks are called “miners”.

However, miners do not operate their own computers to see each transaction.

Miners purchase equipment for mining in advance, and after that, the computer automatically takes care of the approval work.

The higher the performance of the mining machine (or the greater the number of devices), the higher the processing power, so miners can receive high rewards in return.

The reward is Bitcoin (BTC) when mining Bitcoin, and Ethereum (ETH) when mining Ethereum.

How mining works

Now, let’s explain the mining mechanism in more detail.

On the blockchain, individual transaction data of virtual currency is collectively called “transaction”.

And when a large number of such transactions occur, a “block” is generated to store multiple transaction data.

Simply put, mining is the work of encrypting transaction data such as “when”, “who” and “how much virtual currency was traded” and writing it to blocks in a safe state.

If you try to tamper with this transaction data, it is necessary to rewrite all the information in the past blocks, so it is virtually impossible for a malicious third party to do fraud.

In other words, it can be said that the safety of cryptocurrency transactions is ensured by the daily mining on the blockchain.

Bitcoin mining halving

Mining for Bitcoin is a method of mining on the blockchain where Bitcoin transactions are conducted and receiving Bitcoin as compensation.

The important point here is that the bitcoin you receive as consideration is not issued by any government or central bank.

Rewards generated by mining are born as a new currency and circulated in the market .

For example, Bitcoin has a maximum supply limit of 21 million coins.

In such an environment, if the number of miners continues to increase due to the desire for rewards, Bitcoins that reach the upper limit of issuance will be circulated in the market in no time.

Therefore, a mechanism called “halving” is introduced in Bitcoin mining.

Halving is a mechanism in which the mining reward is halved every four years.

In 2012, the Bitcoin mining reward was 25 BTC, but four years later, in 2016, the reward dropped to 12.5 BTC, and in 2020, the reward dropped to 6.25 BTC.

In this way, the amount of Bitcoin issued is adjusted by lowering the reward amount.

Not all miners are rewarded

There are many miners in the world, but who will receive the mining reward?

The answer is who finished the mining operation the fastest.

Therefore, in order to survive this fierce competition, some companies have developed mining as a business and sought to earn rewards by using large-scale computer systems in countries such as China where electricity is cheap.

Since these companies use many high-performance machines to efficiently mine, there is no chance of winning if you are mining with a single personal computer.

However, recently, methods have emerged such as participating in mining by providing the machine power of your own personal computer or investing in a company so that individuals can receive a share of the reward.

Mining types

Currently, there are three ways to participate in mining that can be done by individuals.

  • solo mining

Solo mining is a method of mining by yourself using your own computer or smartphone.

Solo mining was the mainstream when virtual currency was just born, but it can not be said that it is a recommended method now.

Currently, there are few advantages to solo mining, and the disadvantages stand out.

With large-scale organizations called mining factories, it is extremely difficult for an individual to win the mining competition.

In the case of solo mining, the reward is zero unless you win the competition.

Also, due to the difficulty of setting up mining equipment and the disadvantages of requiring a huge budget, it is not realistic to do solo mining in the current environment.

  • pool mining

Pool mining was born as a result of the emergence of large-scale business owners and the difficulty of solo mining.

Pool mining is a method in which you can rent out the machine power of your own device and receive compensation according to its performance and quantity.

Like solo mining, you need to prepare your own mining equipment, but gathering a large number of miners increases the success rate and makes it much easier to earn rewards.

Also, even if you fail to mine, you can basically get a reward.

However, in addition to the electricity bill for operating the equipment for a long time as an operating cost, there is a commission to the company that provides the service.

  • cloud mining

For beginners, we recommend cloud mining, which is the easiest to participate in.

There are many methods of cloud mining, such as how to participate in mining by investing in a company, and how to rent equipment and get a part of the reward.

In any case, there is no need to prepare your own mining equipment.

No advanced knowledge or skills are required, so even beginners can start right away.

However, the more miners participate, the less the share.

In addition, there is always the risk of fraud, so be sure to check the business details and track record of the service company.

It takes a lot of time and money to do cryptocurrency mining like this.

Nevertheless, since the reward amount is tapered due to the half-life mechanism, it can be said that the expected value of profit is higher from straightforward cryptocurrency investment than mining .

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