Bitcoin Mining

With extensive experience as an electrical/software/coding engineer along with having a diverse financial background, Thomas Wettermann’s areas of interests include Machine Learning (ML), artificial intelligence (AI), and Financial Technology (FinTech). For the past few years, Thomas Wettermann has focused on the underlying technologies that support and promote all phases of cryptocurrency ecosystems. 

How Does Bitcoin Work?

All Bitcoin transactions are recorded in a block of data and all these data blocks are chained or linked together in a blockchain. This blockchain is created by a large interconnected number of decentralized computers and each of these decentralized computers maintains an up-to-date copy of this blockchain in its memory.

These decentralized computers are not located in just one geographical area but rather are distributed all over the world. All these interconnected computers maintain a common record of each Bitcoin transaction. So, if one person sends Bitcoin to someone else located halfway around the world, this transaction will become part of the blockchain.

And, it will be recorded by every single interconnected computer that is working to place the next block into the blockchain. Working together, these interconnected computers act as a decentralized network. This decentralized network is not controlled by any central bank, government, or organization.

Blocks must first be verified and then they are entered into the blockchain. This blockchain functions like an electronic ledger where ledger entries cannot be changed or modified. In principle, this Bitcoin ledger functions similar to a ledger that a financial institution may use to log the flow of funds into and out of the accounts held by the institution.

What is Bitcoin Mining?

Bitcoin uses a consensus mechanism known as Proof-of-Work (“PoW”) to add new blocks onto the blockchain. Application of the PoW consensus mechanism will verify all Bitcoin transactions before they are added to the blockchain.

Bitcoin “miners” compete with one another to verify each transaction and then add the next verified block onto the blockchain. Generally, cryptocurrency mining refers to the process of earning cryptocurrencies by solving cryptographic equations by employing highly efficient and ultra-fast computer systems. For Bitcoin, this process involves verifying data blocks wherein each 250MB data block may include from about 1,500 to about 4,000 Bitcoin transactions.

Aside from this block verification process, cryptocurrency mining involves the process of adding transaction records (in the form of a block) to a public record or public ledger. This public ledger is known as the blockchain. Complex encryption techniques are then used to secure this transaction data. This is where the term “cryptocurrency” came from.

On January 3, 2009, the first Bitcoin was mined by its alleged founder Satoshi Nakamoto. At the time of its launch, Bitcoin could be mined by way of central processing units (CPUs) using ordinary laptops or desktop computers. Essentially, CPUs control how computer code is processed and executed.

In these early Bitcoin days, there was not a lot of miner competition. Therefore, the processing power required to create new blocks and earn mining rewards could be processed on ordinary CPU devices, like desktop and laptop computers.

However, as the price of Bitcoin began to escalate and Bitcoin’s popularity grew, global mining activities and mining competition increased. This increased competition brought more hashing computer power online to compete for solving these equations. Hash power is the power that a computer must expend to run and solve different hashing algorithms.

As Bitcoin mining continued to attract competition, mining difficulty increased, requiring more and more hash power.

To gain a competitive advantage, Bitcoin miners began implementing graphic processing units (GPUs) to harness more hashing computer power. Unlike the predecessor CPU devices, GPUs perform a very specific range of computational tasks. GPUs were originally designed for gaming applications since they excel at computing mathematical operations in parallel. These devices can also be programmed to compute other mathematical operations such as the ones required to mine Bitcoin. 

Chinese Bitcoin Mining Farm (source: aljazeera.com)

Miners used GPU devices for many years before the launch of more superior mining hardware in the form of ASICs (Application Specific Integrated Circuits). As block difficulty continued to increase, hardcore Bitcoin miners started mining with ASIC-based machines. These ASIC-based machines are often installed in thermally-regulated data centers or mining farms. This technology was developed solely for mining with hash rates significantly higher than GPUs.

The successful miner must first verify a block of transactions and then solve complex mathematical problems. The first miner to solve the mathematical problem earned financial rewards in the form of newly minted or “mined” Bitcoin. Miner competition is intense as there can only be one successful miner for each verified block.

All the views expressed on this site are those of Thomas Wettermann and do not represent the opinions of any entity whatsoever with which Thomas Wettermann has been, is currently, or will be affiliated.

Trading digital financial assets such as cryptocurrencies can carry a high level of risk, and may not be suitable for all investors. Before deciding to invest, purchase, and/or trade cryptocurrency you should carefully consider your investment objectives, level of experience, adversity to risk, and volatilities.

The possibility exists that you may sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with cryptocurrency trading, and seek advice from a qualified and independent financial advisor.

Thomas Wettermann is not an independent financial advisor. Any opinions, news, research, analyses, prices, or other information contained on this website is provided as a general market commentary of Thomas Wettermann and does not constitute investment advice. Thomas Wettermann will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. All opinions expressed on this site are owned by Thomas Wettermann and should never be considered as advice in any form.