Mom, Where Do Bitcoins Come From? Bitcoin Mining Explained

“Mommy, where did the Bitcoins come from?” Well, you see, when a shiny young Bitcoin catches the eyes of an ambitious miner, and because they love each other…

Wait, that’s obviously hard to solve here. Besides, my whole goal is to keep things simple. However, Bitcoins are created by solving complex mathematical problems. This is done by a powerful engine built to solve these mathematical problems. This process is called mining. The people who own these machines to make money mining Bitcoins are called miners. When a set of problems is solved it is known as a block. Blocks are verified by other users and once they are verified, they are added to the so-called block chain. This chain continues to grow with a new block added to it roughly every 10 minutes. This chain is just a master ledger that will continue to grow and never end.

Very powerful mining machines zap a lot of electricity and increase a miner’s monthly utility bill. The reason it takes so much power is the sophistication of the mathematics involved. This requires the mining machine to perform complex cryptographic algorithms. When a math problem is solved by the machine, a block of coins is generated. Every time 210,000 blocks are created, the miner’s reward is halved. It took 4 years to accomplish this. So it’s like a Bitcoin Olympics. Currently the block reward is 12 Bitcoins (on June 23, 2020 the reward is only 6 coins). Those coins go to the miner whose machine is the lucky winner of the lottery at that time. There will be a winner every 10 minutes. There are also many miners competing there as well. Said miner now has something of value. Mine enough coins and you’ll pay your electricity bill and then some.

There is another way for me. This is called cloud mining. With this type of mining you pay to use someone else’s network and that cuts your income significantly. The positives of this method are that it does not require using your electricity or even buying a machine.

Sounds good to me. I want to start mining now. Is this a good idea and can I generate passive income on a regular basis? Likely. Hold tight for now and you can make that call later.

Let’s try to break it down.

Returning to the original way of mining machine, you should start by buying a quality mining machine. That will set you back about $2,000. Here is a picture of a good machine (Antminer S9 from Bitmain) able to make a high hash rate of 14 TH/s. 1 TH/s is 1,000,000,000,000 hashes per second. This machine can do 14 times that. That’s a lot of hashing power. A hash is simply a long number that the machine generates each time the algorithm tries to solve it. Again, to use my lottery analogy, all these machines are out there hoping to be the next winner.

Then, your chances of winning are more difficult with more competition. What further complicates this matter is that every time a math problem is solved, the next problem becomes more difficult to solve. Bitcoin network difficulty changes roughly every two weeks or 2,016 blocks. The number of Bitcoins that can be generated is infinite. That number happens to be 21,000,000. Once we hit that number no more Bitcoin will be mined again. However, the block chain itself will continue to expand as it is used to verify each transaction or purchase.

Remember that pseudonymous Satoshi Nakamoto I wrote about too? Did you know that today’s math problems are more than 70,000 times more difficult for machines to solve than they were when he mined the 1st Bitcoin in 2009?! The estimate is that the last coin will be mined in 2140 because the system will be created every four years (210,000 blocks). There are already 16,400,000 coins mined (78%) and every coin from here on out will be mined at a slower rate. Yes, you read that right. Basically 80% is mined in the first 8 years and it takes more than 100 years to mine the last 20%. If any of my great, great, grandkids are reading this I hope you are sitting pretty with our family’s Bitcoins currently worth 220,000 per Bitcoin. We can all dream right!

Buying a machine for mining or buying a cloud mining contract is risky. While there are some great success stories out there, be sure to research them carefully before deciding whether mining is right for you. For every person who makes money, there are many people who lose money.

By the way, a great place to see all the cryptocurrencies out there and their total coins and market cap, Coin Market Cap is a great resource. You can find all 700 plus fly-by-night altcoins there. An altcoin is simply a way of saying any cryptocurrency coin that isn’t Bitcoin. By now you probably know that Bitcoin is like the Rose Bowl, the Granddaddy of them all! I really want to limit my focus and research to the top 10 for now. Not that there aren’t success stories from one of today’s almost nothing. It’s just that finding one is like picking the right penny stock. Sticking with established companies recognized by top analysts is a much safer play. The same goes for the exchange you use to buy, sell, and sell. That’s why I use Coinbase to make my trades because they are the most reliable, safe, and easy exchange. They also have the most thorough vetting process when it comes to adding altcoins.

Here is a recap of the key points from this article:

-Bitcoins are created from mining

-Mining is done by powerful machines that can solve complex mathematical problems. You can also buy contracts called cloud mining if you don’t want to buy a machine.

-The problems get harder as the coins are mined and the production rate slows down

-In May 2017, there were only 72 Bitcoins mined per hour (12 every 10 minutes)

-On June 23, 2020, it will be reduced again to only 6 performed every 10 minutes

-Almost 80% of Bitcoin’s finite number of 21,000,000 coins have already been mined

-Competition among miners and more complex mathematical problems make it difficult to perform a profitable mining

-The last coin is estimated to be mined in 2140