Bitcoin is one of 2017’s hottest topics in financial markets, technology circles, and general news headlines across the world. Even though it nearly broke a price of $20,000 per unit – that’s up from less than $1,000 per unit on January 1st, 2017 – few people understand how Bitcoin actually works, or the true reasons behind Bitcoin’s creation.
First, let’s dig into the history behind Bitcoin, and why its creator, the folklorish Satoshi Nakamoto, created it.
Bitcoin’s Early Origins
In January, 2009, Bitcoin was birthed into existence by a still-anonymous source named Satoshi Nakamoto. Bitcoin was created in direct response, believably, to the 2008 global financial crisis.
The first cryptocurrency’s major feature was – still is – being free of central banks’ control, which sides hand in hand with giving anybody in the world to sort through a public ledger of all transactions ever made using Bitcoin. Traditional “paper” money, technically referred to as fiat currency, is always controlled by a central bank, and its transactions are remarkably non-transparent.
A major problem with fiat currency is the tendency for governments to control the creation and destruction of currency through fiscal policy, which would be better off if left to society, at large – no fiscal policy, at all.
Further, fiat currency transactions can’t be verified, unless an independent third-party is overseeing such transactions, like notaries, escrow agents, and other bank officials. Bitcoin transactions, conversely, are always verified, meaning it’s significantly less likely fraudulent transactions could take place. Can you say, “Security?”
The Barebones Basics Of Bitcoin Mining
To verify transactions between parties, independent miners utilize special, high-powered computers, Internet bandwidth, and electricity to power the pair. The more powerful such hardware is – ASIC miners – the faster miners can solve cryptographic math problems.
Bitcoin transaction verification – mining – combines loads of transactions into blocks. Once blocks’ cryptographic problems are solved, payouts are finally distributed based on how much effort each miner put into cracking the blocks’ codes.
The blockchain is essentially a ledger of all transactions throughout the history of Bitcoin that promotes true transparency, requiring all involved parties to willingly engage in such transactions. Further, as blocks’ codes are cracked, new units of Bitcoin are released, making governmental control of currency supply entirely unnecessary.
The In-Depth Steps Of Mining Bitcoins
Up first on the list is the verification of transactions to ensure their collective validity. Transactions that aren’t valid aren’t included in blocks, effectively making their existence obsolete.
Once such validity is confirmed, transactions are bundled together into blocks. Requiring miners to compile transactions into blocks encourages them to work together, rather than simply verifying one or two transactions, receiving immediate payouts, and jumping ship.
Next, the header of the block most recently created is inserted into the brand-new block as a hash.
Here’s where the cryptography – using encryption to solve puzzles and math problems – comes into play. Bitcoin miners are herein required to solve proof-of-work problems, which further verify the legitimacy of blocks in the blockchain.
Once the proof of work is solved, the brand-new block is finally connected to the blockchain, then immediately propagated throughout the Internet for the entirety of planet Earth to see.
Proof-Of-Work Problems Are Vital To Bitcoin’s Existence
The whole point of proof-of-work problems is to make certain new blocks are expensive to create. As such, it increases the value of Bitcoin, and can be expressed in terms of time, computing power, or electrical energy.
Once proof-of-work problems are completed, however, verifying their accuracy and legitimacy isn’t difficult, at all.
Mining Difficulty
When blocks are being hashed, a hash must be below the target value. As mining difficulty increases, the target value becomes lower, effectively requiring more time, energy, and computing power to mine Bitcoin.
In technical terms, the target value is defined as a numeral 256 bits in size. Mining difficulty holds steady and is only recalculated for every 2016 blocks that are mined.
As more blocks are mined, the mining time per block decreases. However, to offset such increased mining activity, mining difficulty increases. As such, an immediate decrease in block creation rate occurs. As time passes, average mining time returns to a normal level, which results in more Bitcoin miners joining the mining network.
The above process cycles in perpetuity, and will until the 21st million bitcoin is mined. After that time, portions of every transaction will be rewarded to miners for verifying
The Gradual Release Of Bitcoin Into The Crypto-Sphere
Currently, there are just short of 16,800,000 bitcoins in circulation. New bitcoins will stop being released into circulation once the 21st million is mined. As time goes on, fewer bitcoin will be released with every block that’s mined, making its value increase even further.
Cloud Mining Could Be The Future Of Bitcoin Mining
Although mining is integral to the concept of Bitcoin, it’s downright expensive, deterring many people from getting involved in the activity. Plus, cooling systems are required to keep highly expensive ASIC miners from getting permanently damaged.
As such, Bitcoin cloud mining involves buying into pools with other independent investors, slicing off a tiny, tiny fee for delegating such demanding, risky responsibilities to data centers that do all the mining.
All investors have access to a cloud that informs investors of progress, current Bitcoin statistics, and a means of getting paid. The central benefits of cloud mining include absolutely zero hassles related to maintenance, not worrying about electricity or Internet costs, and not setting up mining equipment.
However, the worst part of Bitcoin mining colocation through cloud interfaces is getting ripped off. Fortunately, this is highly unlikely to happen when you thoroughly research service providers and only choose the most reputable vendors.