Still, more and more people are becoming interested in cryptocurrency. And since you are here, we know you are one of those too.
You may have even done your initial research already about what it is. Thus, coming upon the “bitcoin mining”.
So what exactly is Bitcoin mining and how does it work? Well, you have come to the right place because we are here to tell you all about it.
Bitcoin Mining Overview
Bitcoin is a cryptocurrency and worldwide payment system that functions without a central bank or. In other words, its decentralised. There's no bank, no government, and no organisation that somehow holds all the cards.
Instead of having paper money, which a government decides to print and distribute, Bitcoins don’t have that. What they do as oppose to that is have miners who confirm transactions.
They use a special software for this where they solve cryptographic puzzles. Their job is to take transactions, mark them as legitimate, and then spread them across the network.
In exchange for their work, they are issued a certain number of bitcoins. This is the reason why many try mining. Bitcoins, in turn, have become a good incentive for them.
Therefore, mining is an integral part of Bitcoin. It ensures fairness while, at the same time, keep the network stable, safe, and secure.
How does Bitcoin Mining Work
There are very important aspects that work under Bitcoin mining. These are very important things to take note of if you want to mine soon.
When you mine, the transactions you confirmed would be placed in a general ledger called the ‘blockchain’. The blockchain contains all transactions made between any bitcoin addresses.
And as with the growing number of Bitcoin users and miners, there will be an increasingly lengthy list of all transactions that took place on the network.
A constantly updated blockchain is given to everyone who participates.
To keep this digital ledger trusted and secured, miners put the transactions through a process where they take the information in the block and apply a mathematical formula. They then turn it into a “hash”.
A Hash is a shorter and seemingly random sequence of letters and numbers that s stored along with the block, at the end of the blockchain at a point in time.
While producing a hash from a collection of data is easy, working out what the data is from the hash is proven to be quite difficult. No hash is made the same.
They are all unique and if you change even just a single character in a block, the hash will completely change.
Aside from the transactions in a block miners use to generate a hash, they also use previous data. One of these is the hash of the last block stored in the blockchain.
Using the hash from before confirms how one bock and every block after are legitimate. So if you tamper with it, everyone would know.
Faking a transaction by changing a block that has already been stored in the blockchain would immediately be identified since the hash would completely change.
This would then create a domino effect for those previous blocks of hash since it would make the subsequent block’s hash wrong too and would continue all the way down.
Proof of Work
Once a miner has sealed off or confirms a block, they will then get a reward of 25 bitcoins. The amount of bitcoins rewarded to the miner is halved as the global amount of bitcoins is progressively mined out. There's only a total of 21 million bitcoins that can be mined.
One the miner has confirmed the block, the blockchain will be updated and announced to everyone on the global network.
For this reason, there are so many miners out there who are out competing against each other by using software that is written specifically to mine blocks.
And since it has become relatively easy to produce a hash from a collection of data, the network has to find a way to make the system more difficult. If not, all the bitcoins would be cashed in in less than a second.
The network does this through a protocol they call ‘proof of work’.
The proof of work is basically a method that ensures that the new block was difficult to be made. By difficult, they mean costly and time-consuming which is a combination of a costly processing power that can be translated to:
Therefore, the bitcoin protocol demands that a block’s hash has to look a certain way and must have a certain number of zeroes at the start. There is no way of telling how the hash will look like before you produce it.
What You Need To Mine Bitcoins In Singapore
Now that we know how mining works, let us now discuss how to actually mine and what you need for it. Follow these steps:
#1 Get a Bitcoin Mining Hardware
In order to mine, you need the tools for it. For mining bitcoins, that would be getting your own bitcoin mining hardware.
Before, miners can still use their own computer to hash blocks. But due to the competitive bitcoin environment, you will need to use ASIC miners which are special computers built strictly for mining Bitcoins.
#2 Get a Bitcoin Wallet
Just like your own physical wallet to keep your paper bills and coins, you also need a bitcoin wallet to keep your Bitcoins.
With the wallet, you will have to get a wallet address, which is typically a long sequence of letters and numbers.
You will also have a public Bitcoin address aside from your private key, which works as a password for your wallet.
#3 Look for a Mining Pool
A mining pool is something like cloud mining, where you join a bunch of people already mining bitcoin and contribute hashing power to increase total output so that it is more productive than doing it by yourself. However, if you want more chances to succeed, then it helps to join a mining pool.
A mining pool is a group of Bitcoin miners that work together to make more Bitcions. What this means is more manpower.
#4 Get a Mining Program
Once you start mining, you will need to keep track of all of your transactions. You will need a mining program to run your computer so that you will be able to control and monitor your mining rig.
CEO of Dr Wealth. Built a business to empower DIY investors to make better investments. A believer of the Factor-based Investing approach and runs a Multi-Factor Portfolio that taps on the Value, Size, and Profitability Factors. Conducts the flagship Intelligent Investor Immersive program under Dr Wealth. An author of Secrets of Singapore Trading Gurus and Singapore Permanent Portfolio. Featured on various media such as MoneyFM 89.3, Kiss92, Straits Times and Lianhe Zaobao. Given talks at events organised by SGX, DBS, CPF and many others.