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Business News/ Money / Calculators/  What is bitcoin mining? How to get started

What is bitcoin mining? How to get started

Bitcoin mining was initially conducted on the CPUs of individual computers. Now, mining activity is dominated by advanced hardware

Bitcoin was first introduced in 2009, when the algorithm was created under the pseudonym Satoshi Nakamoto. Photo: iStockPremium
Bitcoin was first introduced in 2009, when the algorithm was created under the pseudonym Satoshi Nakamoto. Photo: iStock

Bitcoins or cryptocurrencies, in general, are like digital currencies and act like a tender or an asset class. However, bitcoins are mined like gold. If mined properly and taken the right investment risk, you could be successful in mining your own bitcoins. Bitcoin was first introduced in 2009, when the algorithm was created under the pseudonym Satoshi Nakamoto. He also set a finite limit of 21 million bitcoins that would ever exist, of which close to 16.95 million are in circulation. That means that a little less than 4 million bitcoins are waiting to be discovered.

What exactly is mining?

One can obtain bitcoins in three ways–directly buying it from any cryptocurrency exchange, accepting bitcoins as a mode of payment for goods and services and by mining new bitcoins. Bitcoin mining is the processing of transactions in the digital currency system, in which the records of current bitcoin transactions, known as blocks, are added to the record of past transactions, known as the blockchain. In other words, it’s simply the verification of bitcoin transactions.

Originally, bitcoin mining was conducted on the CPUs of individual computers, with more cores and greater speed resulting in more profitability.

However, over the years, the system is dominated by multi-graphics card systems, field-programmable gate arrays (FPGAs) and application-specific integrated circuits (ASICs). This constant elevation in technology has made it more difficult for prospective new miners to start. To get around that problem, individuals often work in mining pools.

What is blockchain?

In simple terms, blockchain is a digital ledger that forms the backbone of bitcoin. The blockchain (database) is extremely different from other conventional databases. Blockchain tends to distribute its data among a network of bitcoin softwares rather saving everything in a central location.

A complete history of every bitcoin transaction is stored on the blockchain, and all of these recorded transactions are open to public scrutiny. Before a bitcoin transaction is approved and processed by the network, it is verified using a cryptographic algorithm that checks the transaction against the histories stored on every computer in the network.

This process is complex, but it has one big advantage: it makes the blockchain very difficult to hack. Blockchain allows two parties to execute a transaction without any intermediary. Blockchain allows financial institutions to execute and verify transactions discretely without any human intervention.

What are nodes?

A node is an authoritative computer that runs the bitcoin software and helps to keep bitcoin running by participating in the relay of information. In a distributed network, the simplest way to define a node would be to say it is a point of intersection or connection with the network. It can act as both a redistribution point and a communication endpoint. Nodes spread bitcoin transactions around the network.

However, bitcoin doesn’t just need nodes, it requires lots of fully functioning nodes — nodes that have the bitcoin core client on a machine with the complete blockchain. The more nodes, the more secure the network is.

How does it work?

By solving a complex mathematical puzzle that is part of the bitcoin program and including the answer in the block. The puzzle that needs solving is to find a number that, when combined with the data in the block and passed through a hash function, produces a result that is within a certain range.

The end result

Once the miners solve the puzzle, the block pops open and the transactions are verified. Miners used to get awarded 25 bitcoins for finding this key, but in 2017 this has been reduced to 12.5 bitcoins and will continue doing so every four years.

Praveenkumar Vijayakumar is chief executive officer and founder, Belfrics Global

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Published: 19 Jun 2018, 08:27 AM IST
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