Mining

Bitcoin Mining for Dummies – How Bitcoins are Mined

Marc Kenigsberg - July 9, 2018

bitcoin mining for dummies

One of the most common questions about Bitcoin and one of the most misunderstood is the idea of mining for Bitcoins. This article will explain how Bitcoin mining works in plain and simple English.

The first thing we need to address is what actually is Bitcoin? Does it exist anywhere physically?

Mining for Bitcoins Basics

Bitcoin is a digital currency which means it exists in digital form only. It is essentially a set of numbers stored on a computer as opposed to physical money which is paper. In today’s world this part is not so difficult to understand, after all when your money is in the bank it’s not physical either. It’s only an amount stored in a computer. The only difference is that you can get the bank to give you the physical equivalent in paper cash.

In both cases, however, the buying power or value of the money is not based on the intrinsic value of the paper or coin but rather what the markets has determined its worth. But that is for a different post, do let’s move on.

The important takeaway here is that Bitcoin is in digital format, made up of numbers. That’s the form it is created in and stays in for its entire life. When Bitcoin was first created it was setup to “mint” or print money at set intervals. And at each interval a certain amount of coins are released in a batch. The interval is roughly every 8 minutes and each batch is called a block. So every 8 minutes a block of coins is released. Each block currently contains 25 BTC (~$19,000) and every four years the amount of coins halves.

What is Mining for Bitcoins Actually

Mining is essentially the act of releasing these blocks. The coins don’t release automatically, they have to be unlocked and that process is what has been termed Bitcoin Mining. Every block of Bitcoin is locked with a series of complex mathematical equations which need to be solved. When these are solved the block is released.

There are millions of these equations surrounding and each block and they are math problems that need massive amounts of computer power to solve. Not every equation has to be solved to free the coins, in each block there is a winning equation that unlocks the block but this could be the first, seventieth or second millionth equation attempted.

A computer takes one equation at a time and solves it, at which point the block either unlocks or says ‘try again.’ The computer then tries the next equation and so on until the block releases the coins. How fast each equation is solved depends on the speed and power of the computer solving the equation. In a nutshell that is all there is to mining cryptocurrency like Bitcoin.

As a user you tell your computer (using a software mining program) that you want to mine and it will take one equation at a time and try and solve it. Today there are thousands of computers working on each block at the same time and most miners have dedicated mining rigs built solely for this purpose which have much more power than an average home computer.

There have been four generations of Bitcoin mining hardware and most mining today is done in a pool where users share their power and split the rewards from blocks, but that’s another article.

How Long Will Bitcoin Mining Last

Mining will continue until all the Bitcoin are finished being created, which is scheduled to be in 2140. Until then people will keep trying to get them through mining. Each day it gets harder and less profitable but that’s a question of margins and economics.

In Simple English

To mine Bitcoins your computer solves complex math problems one after another until the winning equation is solved and then the block is unlocked and the coins are transferred to you. Simple, right?

Let’s look at it by way of an analogy.

Imagine that there was a treasure chest (block) full of gold coins (Bitcoins) and this chest was locked with a padlock. Next to the chest is a guy with a pile of keys (complex equations) and one of these keys opens the chest.

Now you and a hundred other people all want the coins inside this chest, so the guy tells you to form a line. The first person steps forward and is given one key to try. When it doesn’t open he goes to the back of the line and waits and the next person tries. This continues until someone’s key opens the chest and they get to keep the gold.

Now, whether mining is profitable or a good idea for the average person is another question entirely. I hope that helps explain things a bit and would love to hear your comments, so please post below and share in the discussion.

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Comments

  1. Itseng Saudu says:

    Well done Marc for the simple and precise explanation of bitcoin mining. It is one of the best explanations I have come across

  2. Joseph says:

    Thank you for this article. I am very new to bitcoin. I have heard a lot about it but still very confused as to how I will be making money off it. Are you saying for me to make money off bitcoin I have to do bitcoin mining. I thought it was more like stock market that you observe current rate and decide to sell your bit coins when you see that the value has increased from the rate at which you bought it. Could you kindly help explain how to make money. What do I need to do

  3. Jimmie Johnson says:

    How does one get into this and why is a good GPU so vital to the operation?

    • Steven Gleiser says:

      Hi Jimmie,

      GPU rigs are rarely used to mine for Bitcoin nowadays. ASICs are much more powerful, so GPU miners have been largely displaced. There are several advantages and disadvantages in GPU mining in general. You can still mine for other cryptocurrencies with GPU rigs, and the advantage is that you can point that rig towards the most profitable coin at the time, while ASICs are algorithm-specific. An ASIC that works for Bitcoin – SHA256 – will not work on DASH or on Ethereum for example.

      A GPU rig can be good for several coins in different ways. Efficiency, high quality and hardware cost are the main features that would make a rig good. GPU rigs are almost always custom made.

  4. Moneck says:

    Great explanation. Thanks!

  5. Saraqael says:

    A really good explanation, for a dummy like me when it comes to this whole concept. It’s very intriguing but the one question that comes to my mind is this: what’s the real world value of this whole enterprise? I mean, just sitting there crunching numbers to come up with an answer and giving a reward at the end for succeeding seems quite pointless. Are these calculations being used for something useable in the real world, or is this thing just a gigantic computer game. And if that’s the case, how on earth could any actual monetary value be attached to this? I guess I’m left with more questions than I came in here with, so if you could answer any of them I’d very much appreciate it.

  6. Cix says:

    Wow.
    This is the best explaination of Mining I have ever come across. Please do me a favor, could you explain other terms such as futures, fork etc in a lay man’s term.

  7. Nonhlanhla Ngwenya says:

    Thank you Marc, your article is great and nicely written!! It serves it purpose off explain how Bitcoin mining works. One big thing about the article however is the assumptions you place on that the reader understand how markets work. Since your article is called Bitcoin mining for dummies, a discussion on why mine Bitcoin would have been refreshing.

    I have a few dummy like questions that I am hoping you will choose to answer,

    1)Why would anyone wait in line to mine?
    2)Why would an average person would stop using the bank and choose to mine? This question is closely related to your question raised in article
    3)Why does this Bitcoin read like a computer game?
    4)What are some of the problems one faces when Bitcoin mining?
    5)Why use mathematical equations to mine the coins?
    6)Why do the questions get harder?

    • Bitcoin Chaser says:

      Hi Nonhlanhla

      Thanks for reading and the great feedback and questions.
      I’m going to put together some answers and I’ll reply shortly.
      Thanks.

    • Tedlc says:

      Hello’ yes, that was great explanation of Mining”….. NOW’……..can you please’ explain how the price is increased …….the price “NUMBERS” go up and down….dollar up dollar down……… i kinda know,……more public buy ….”UP”………sell off price ‘down’……but’ its not dollar for dollar up and down……. what manipulates the ticker…….
      thks
      tedlc

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