What is Bitcoin mining? How it works and what it takes to make it pay?

Bitcoin mining

Bitcoin is the most popular and expensive digital currency among other cryptocurrencies in the UK. However, most of us are not aware of what exactly is bitcoin and bitcoin mining. Here, in this guide, we will have a basic understanding of the same.

Buying Bitcoins has never been easy. Suppose you are wondering about buying some for yourself. In that case, you need to understand the selling and earning process, the principles and technologies related to bitcoin, and how you can invest in bitcoin.

Here we will cover the following:

What is bitcoin?

A bitcoin is a decentralised digital currency that removes the need for any central authority or banks to control transactions. Instead, it uses peer-to-peer networking over the internet to successfully purchase a bitcoin.

It is unnecessary to buy an entire bitcoin if you cannot afford it; instead, you can buy a small amount. Each bitcoin is divisible up to 100 million satoshis (or, we can say 100 million satoshis makes one bitcoin), as £1 is divisible up to 100 pennies. Remember, Bitcoin is the most divisible currency in the world.

Why buy Bitcoin?

why bitcoin and cryptocurrency

There are several reasons why people crave bitcoins over standard currencies.

  • It claims that it is not affected by inflation,
  • It may be a currency of the future world, and
  • It has been one of the the fastest-growing asset in the last ten years.

One question that may strike you is: Are bitcoins legal to invest in the UK?

The answer is, Yes. It is entirely legal to buy bitcoins in the UK. When it comes to taxes, you don’t pay tax for purchasing bitcoin, however, a tax liability may arise at disposal of bitcoin. Bitcoin traders running a business of buying and selling bitcoins are liable to pay tax.

What is Bitcoin mining?

Bitcoin mining is the process of solving complex puzzles, validating blocks of transactions, and adding them to the bitcoin blockchain. But, the process is not easy; as the demand keeps rising and the presence of bitcoins in the market lowers, the competition gets more challenging.

Miners compete with each other to solve complex mathematical puzzles using their computers. However, much-specialised computing hardware is available in the market to efficiently solve these complex problems. The miner solves the puzzle to get an opportunity of creating a block and validate them. The miner adds the block to the Bitcoin blockchain. Finally, they broadcast the newest block to the network.

Some miners collectively work in mining pools, share computing resources and the earn bitcoin rewards. In contrast, some miners prefer mining other cryptocurrencies that require simple computing resources and have lower competition in the market.

How does bitcoin mining work?

·  Mining requirements

❖    High-performance computer with Hardware and Mining Software

Before starting bitcoin mining, get a high specification technology system with computer chips like Application Specific Integrated Circuits.

You can also find different mining software available on the internet to download for free and run on Windows and Mac computers.

❖    Wallet

Create a wallet to store Bitcoins. It is an encrypted online account that helps you store, accept and transfer Bitcoins.

❖    Join a mining pool

Once you have started mining, you can join a mining pool to maximise your profits. A group of miners in a pool who combinedly uses resources and computer hardware for Bitcoin mining and shares the reward earned.

·  Elements of bitcoin transaction

Three elements are involved in a Bitcoin transaction, transaction input, transaction output, and the transaction amount.

When the transaction initiates, mining software generates a unique cryptographic hash puzzle for every transaction input. The software then groups several transactions to form a block into a Merkle tree.

·  The Merkle Tree

The Merkle tree is a data structure of several hashes in a block. The tree summarises every transaction in the block. The individual transaction is known as transaction IDs. The mining system uses the SHA-256 algorithm to repeatedly pair every transaction ID until one hash identifies the entire tree. The hash is known as Merkle root or root hash.

The Markle tree is responsible for enabling the verification of Bitcoin transactions in the network efficiently.

·  The Block Header

The block header stores the Markle root, the identifier of a Markle tree. It contains information related to the block along with the following components:

  •  Bitcoin software version number
  •  The hash of the previous block
  •  The Merkle root
  •  Timestamp
  •  Cryptographic nonce
  •  The target

All this information are necessary for a miner to solve the hash puzzle and add a block transaction to the blockchain.

·  Solving the hash puzzle

Miners must solve the hash puzzle by searching the hash in the given target. The Target in the header is a 67-digit number that determines mining difficulty. The difficulty level depends on the number of miners competing to solve a hash function.

The difficulty level changes after creating every 2016 block, depending on how much time miners took to solve an equation for the previous 2016 blocks.

Miners try to calculate the hash of a block to solve the hash puzzle. They need to constantly add a nonce to the block header constantly until the hash value is less than the target. Once they solve a puzzle, the miner successfully creates one new block and validates it into the Bitcoin network.

After validating a block, we need to verify the transactions bundled to add the block to the blockchain. After every 10 minutes, miners create a new block, and by April 2021, there are more than 677,000 blocks in the history of Bitcoins. Every time a miner creates a block, they receive new bitcoins.

block transactions

Credit: Finder.com

How to earn money from bitcoin?

There are different ways to earn money from bitcoin. We will discuss the most popular ways to make money from bitcoins in the latter part of the guide.

Direct investment

One can directly invest in Bitcoins to earn money. We can make investments in different ways, such as:

·  Long-term investments

Here, you buy a Bitcoin at a lower price and hold it for a long time, allowing it to grow its value. You can sell your holdings when you feel the raised value meets your goal.

·  Short-term investments

Here, you buy a Bitcoin, hold it for a few weeks to a month, and when the value reaches your target, you sell it.

·  Day trading

You can consider one or two trades of long or short terms to earn a profit.

·  Scalping

It is an investment technique where a trader uses the Algo-trading method to make multiple trades in a single day.

You can seek help from a cryptocurrency accountant to help you understand that investing in bitcoins is suitable for your financial health.

Write about Bitcoins

If you are passionate about writing articles, you can select a bitcoin and blockchain technology topic to show your writing skills and earn money. You can also start a blog on bitcoin or digital currencies that will bring you more profits in the future.

Developing blockchain applications

If you understand Bitcoins and have a good grip on coding and programming, use your skills to develop blockchain applications. Initially, it may seem quite hard, but once you gain experience in this field, there will be considerable opportunities to grow in the future.

Wrapping up

Before investing in Bitcoins, know how Bitcoin and the crypto market work. Also, ensure you are ready to take the level of risk in the crypto market.

The bitcoin mining process is becoming difficult as the number of Bitcoins in the market reduces. Therefore, if you have enough capital to set up a high-performance computer with proper hardware resources and mining software, then you can put your step into the process.