Ever wondered how bitcoins are actually made?
Over the past several years, cryptocurrencies like Bitcoin have been quietly growing in popularity, with an ever-larger number of people buying and selling them. Now that Bitcoin has hit the mainstream and become a worldwide phenomenon, more people than ever are looking to get into the cryptocurrency game.
However, the production of cryptocurrencies isn't anything like that of regular money. There's no central authority that issues new notes; instead, bitcoins (or litecoins, or any of the other so-called 'alt-coins') are generated through a process known as 'mining'. So what is cryptocurrency mining, and how does it work?
Cryptocurrency mining and the blockchain
Before getting to grips with the process of cryptocurrency mining, we need to explain what blockchain is and how that works. Blockchain is a technology that supports almost every cryptocurrency. It is a public ledger (decentralised register) of every transaction that has been carried out in that cryptocurrency.
These transactions are assembled into what are called "blocks". These are the verified to ensure they are legitimate by cryptocurrency miners. This checks if the same coin hasn't been expended again before the transaction has cleared, and that the input and output expenses tally. Then the next sequential transaction block is connected to it. This is how cryptocurrencies are created and how new cryptocoins are made.
Mining new blocks
As there is no central authority or central bank, there has to be a way of gathering every transaction carried out with a cryptocurrency in order to create a new block. Network nodes that carry out this task called dubbed 'miners'. Every time a slew of transactions is amassed into a block, this is appended to the blockchain. Whoever appends the block gets rewarded with some of that cryptocurrency.
To prevent the devaluation of the currency by miners building lots of blocks, the task is made harder to conduct. This is achieved by making miners solve complicated mathematical problems called proof of work'.
Calculating hashes
In order to successfully create a block, it must be accompanied by a cryptographic hash that fulfills certain requirements. The only feasible way to arrive at a hash matching the correct criteria is to simply calculate as many as possible and wait until you get a matching hash. When the right hash is found, a new block is formed and the miner that found it is awarded with units of cryptocurrency.
Think of it like one of those competitions where you have to guess the weight of the cake - only you get unlimited guesses, and the first one to submit a correct answer wins. Whoever can make guesses at the fastest rate has a higher chance of winning.
Cryptocurrency mining limits
In practice, this means that miners are competing against each other to calculate as many hashes as possible, in the hopes of getting to be the first one to hit the correct one, form a block and get their cryptocurrency payout.
However, the difficulty of calculating the hashes also scales - every new block of bitcoins becomes harder to mine. In theory, this ensures that the rate at which new blocks are created remains steady. Many cryptocurrencies also have a finite limit on the amount of units that can ever be generated. For example, there will only ever be 21 million Bitcoins in the world. After that, mining a new block will not generate any bitcoins at all.
Cryptocurrency mining requirements
While it used to be possible to mine your own cryptocurrencies using a regular PC, for the most part that is no longer the case. As more people start mining, the hardware necessary to mine effectively increases; from a moderately-powerful processor, to a high-end GPU, to several GPUs working together, to specialised chips designed specifically for mining.
In order to successfully mine most modern cryptocurrencies, you'll need to spend at least £1,000 on hardware, as well as footing the substantial electricity bill that having it running 24/7 will generate. In fact, most miners spend the vast majority of their mining income on covering the costs of running their equipment.
Now that the Bitcoin boom is thoroughly underway, certain companies and groups have started putting serious money behind it, with large warehouses full of floor-to-ceiling racks of expensive graphics cards, doing nothing but trying to mine new units of Bitcoin, Litecoin, Ether and the like.
For context, the Bitcoin network processes 5.5 quintillion hashes per second. Unless you have equipment that can process a vast number of calculations in a very short space of time, your odds of competing with large mining operations are infinitesimally small. This is why many miners join forces, banding together to create 'mining pools', sharing their compute power and any returns generated from their efforts.
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