Bitcoin is all the rage right now. The innovative and new all-digital currency is challenging the very nature of national currencies. So how does one create a Bitcoin? Bitvoins are created through a process called “mining.” Wondering what that means and how can someone mine a piece of digital information? Read on.
The mining process represents perhaps the most radical innovation of the Bitcoin. In short, people and organizations can use computers to solve immensely complex equations. Upon solving the equation, a “block” is created and in exchange the solver is rewarded with 25 Bitcoins. Every four years the amount of BitCoins rewarded for completing a block is cut in half, so in 2009 someone received 50 Bitcoins. And in a few more years, the reward will be cut in half again.
As mining continues, the “difficulty” metrics increases in complexity, making each new Bitcoin block harder to mine. The goal of the difficulty matrix is to make sure that a new block of Bitcoins is mined roughly every ten minutes. This helps ensure a stable and predictable flow of new Bitcoins into the market. An important thing to understand is that these equations aren’t like the ones you encountered in your High School Algebra class. The equations are extremely complex and now require a massive amount of computer power, and consequently electricity, to be solved.
When Bitcoins were launched, the difficulty was so low that basically anyone with a computer could mine Bitcoins. As the difficulty increased, the hardware requirements also increased. After a short time a simple PC processor was no longer powerful enough to mine Bitcoins. Miners found that they could use powerful graphics cards, however, to continue to mine.
Electricity costs and processing power requirements continued to increase, however, and soon hardware experts were creating field-programmable gate-arrays (FPGAs). FPGAs are essentially custom built hardware created specifically for mining Bitcoins. They feature ample power but consume low amounts of energy. Even so, FPGA’s quickly became inadequate and eventually computer hardware companies began producing BitCoin mining specific chips, referred to as ASICs, for the sole purpose of mining. ASICs represent the theoretical limit of Bitcoin mining hardware and are designed from the ground up to be powerful, but to consume little electricity. Both of these pieces of hardware are difficult to explain, but it suffices to say that they are powerful and energy efficient electricity.
One of the most important functions of Bitcoin mining is that it ties the currency to an actual value. Currently, most currencies are made up of only paper or cheap metals without any gold, silver, or other form of backing. Not only that, but Central Banks can create new money at will. In a sense, most currencies only have value because we believe they do. By tying Bitcoins to solving complex equations, mining instills a certain inherent value within the coins. At the very least, Bitcoin mining ensures that coins must actually be created through a process that requires effort and input, whereas Central Banks can simply create as much money as they want.
Further, there are only 21 million Bitcoins available to be mined. Currently, experts estimate that about half of all Bitcoins have been successfully mined. The mining system is designed to allow an equation to be solved in ten minutes on average. Every four years, however, the number of Bitcoins awarded per successful block mined will be cut in half. This will slow the flow of Bitcoins into the market substantially.
So should you get involved in Bitcoin mining? Truthfully, unless you intend to invest the thousands of dollars it now requires to buy the proper equipment, mining probably isn’t worth it. At this stage, only serious companies or individuals with large stockpiles of capital will have the funds to buy the powerful and energy efficient equipment needed to solve the complex equations.
And if you are thinking about investing in the equipment, you should be warned: it’s a high risk investment. The proper hardware can now cost 20,000 dollars or more and competition to mine coins is increasing. Not only that, but Bitcoins are such a novel form of currency that no one is really sure how much they are actually worth. Bitcoin exchange markets have seen wild swings, surging to over 250 dollars per coin, before plummeting back to less than $100 dollars within a matter of days. So before you invest your life’s savings, you should take some time to conduct further research.
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