Bitcoin Mining Explained

Bitcoin serves as the backbone of the crypto economy, with 44% dominance of the total $2 trillion crypto market cap. But how are new Bitcoins actually created? Today, we'll explore Bitcoin Mining.

Bitcoin (BTC) today serves as the true backbone of the global crypto economy, and has been in existence since 2009 when it was first unveiled by an anonymous developer or group under the pseudonym Satoshi Nakamoto.

But how are new Bitcoins actually created?

Bitcoin was launched as a decentralized digital currency, without a central authority or single administrator. BTC can be sent from user to user on the peer-to-peer Bitcoin network without the need for intermediaries. 

Bitcoin is a completely transparent financial network since it runs on an open source blockchain, with every transaction being recorded on a public and decentralized open ledger for all participants to see, verify and . 

BTC is borderless, permissionless and trustless, meaning users do not need to trust a third party, but instead can rely on the mathematics of the Bitcoin protocol.

Bitcoin was born out of the financial crisis of 2008–09, when the world was hit by a major recession and many countries plunged into major financial instability. 

The idea that no one controls Bitcoin while everyone globally is free to participate is a powerful combination following decades of irresponsible financial policy from central banks and governments worldwide.

Bitcoin offers a financial policy written in stone, with a finite supply of 21 million BTC providing a predictable and fair monetary network for all participants.

The adoption of Bitcoin has been steadily increasing along with its mainstream acceptance. An increasing number of institutional players have entered the Bitcoin market, primarily as a hedge against inflation of the U.S. dollar and other fiat currencies, propelling the entire crypto economy to reach new heights. The entire cryptocurrency market cap has once again passed $2 trillion in market cap, with Bitcoin accounting for a dominance of 44% the entire crypto market valuation.

But besides increased adoption and uptick in investor interest, many new to the crypto space often ask: 

How are Bitcoins actually created?

New Bitcoins are created through a process called Bitcoin mining.

We aim to explain Bitcoin mining in today’s article in simple words.


Bitcoin Mining

New Bitcoins are created through a process called mining. Mining of BTC is done by advanced computers solving encrypted mathematical equations at an incredibly rapid speed.

By solving these encrypted math puzzles, the miners on the Bitcoin network validate transactions on the open ledger, and new BTC is created in the process and paid out to the miners.

There are today 11,903 Bitcoin nodes, or computer points, active and operating on the Bitcoin network, making it the world’s largest decentralized network and most powerful distributed supercomputer.

What’s important to note is that centralized ledgers, like a bank, validates transactions as a central authority, and banks have the power to approve or disqualify a banking transaction whenever they or a government so please. The same applies to central banks, whose financial policy of quantitative easing (fancy word for excessive money printing) is the cause for currency debasement and inflation globally, and one of the main reasons Bitcoin was created in the first place.

In contrast, transactions on the Bitcoin network are approved by the entire network as a whole, in a process called Proof-Of-Work, also known as POW.

Today, specialized equipment such as Application-Specific Integrated Circuit (ASIC) machines are required to successfully mine BTC. Most miners today join a so-called mining pool, which is a group of BTC miners who combine their computing hash power and then split the mined Bitcoin rewarded to the pool.


How Bitcoin Mining Works

Miners receive Bitcoin as a reward for completing blocks of verified transactions, which are added to the blockchain for all participants to see and verify on the transparent, open and public ledger.

Mining rewards are paid at random to the miner who discovers a solution to a complex hash puzzle. The new rewards for Bitcoin mining are also reduced by half every four years, in a process called “halving”.

When Bitcoin was first mined in 2009, mining one block would have earned you 50 BTC. In 2012, this was cut down to 25 BTC. By 2016, this again came down to 12.5 BTC and currently, it is pegged at 6.25 BTC after the 2020 halving.

The halving process is also the basis of the popular Stock-to-Flow (S2F) model developed and coined by the anonymous Dutchman simply known as Plan B (@100trillionUSD), which emphasises the reduction in new Bitcoin being created through the halving process gives ground for BTC’s meteoric rise in value and price, both in the past as well as in the future.


Is Bitcoin Mining Legal?

The legality of mining Bitcoin depends entirely on the country and legal jurisdiction you are residing or operating in.

As the concept of a decentralized cryptocurrency as powerful as Bitcoin inherently threatens the dominance of fiat currencies and government control over domestic financial markets, some countries globally have attempted to either ban Bitcoin, or prohibit Bitcoin mining itself. But banning Bitcoin is not as easy as it seems, and whenever an attempt to ban Bitcoin or its on/off ramps, the network has adapted and only become stronger.

A good example of this is China, which recently prohibited Bitcoin mining in several regions previously known as global centers for Bitcoin mining. This action by Beijing forced many miners to move their equipment to other countries, where there is more regulatory clarity or an openness to welcome industry participants. As a result, Bitcoin mining is now more decentralized geographically than it was prior to China’s most recent BTC crackdown.

The U.S. and especially states like Texas are on the other hand opening up in an attempt to attract and absorb some of these miners. Eventually, it is a highly profitable and innovative business model.

Additionally, numerous North American mining firm are now publicly traded companies available for trading on U.S. stock exchanges. Some of the more prominent ones include Marathon Mining, Bitfarms, Canaan, Bit Digital and Riot to mention a few.

Moreover, initial Bitcoin and crypto regulation made it into the latest $3.5 trillion Infrastructure Bill passed recently, creating a fiery debate over crypto regulation into the heart of U.S. Senate.

Although the terminology surrounding the definition of a “broker“ required to report to tax authorities in the bill is not satisfactory, this was only the first round and there are more regulatory discussions to be held on the highest level in the coming months and years ahead. Nonetheless, the fact that just 12 years after the creation of Bitcoin, crypto regulation has risen to the highest level of U.S. politics is indicative of the crypto industry’s rise.


Bitcoin Hashrate

In simple terms, the hashrate is the measuring unit of the total processing and computer power of the Bitcoin network. That is, it is the speed at which any given mining machine, or a collection of miners, operates on the Bitcoin blockchain.

Mining is simply the operations that occur when verifications of transactions are happening on the blockchain. In the case of Bitcoin and many other mineable cryptocurrencies, this involves powerful mining hardware machines solving complex mathematical and cryptographic equations to produce blocks, which contain the immutable transactions.

In terms of the total BTC hashrate, BTC’s Hashrate/second (H/s) is the number of calculations, or hashes, that the BTC network is solving as a whole, every second at any given time. Put differently, the Bitcoin hashrate is a calculated value or estimate of how many hashes are being generated by BTC miners attempting to solve the current Bitcoin block or any given block in the chain.

This also means that the higher the hashrate, the more miners (or mining rigs) are actively in the mining operations of Bitcoin, trying to solve the block and get the block rewards. Since a higher hashrate means that miners are increasing in numbers, the difficulty and competition to get the BTC block rewards grows as well.

As exemplified in the chart below, there was a major drop in hashrate between May-June 2021 as a result of the Chinese government crackdown against Bitcoin miners operating in the country. However, the quick rebound of hashrate that followed demonstrates the resilience, robustness and strength of the global Bitcoin community of miners and the Bitcoin network as a decentralized protocol.


Bitcoin Mining & Power Usage

Although the latest round of criticism against the Bitcoin mining industry has been surrounding the alleged high energy usage from fossil fuels, reports indicate that more than 50% of all BTC miners actually use renewable energy sources to power their mining rigs. 

This figure makes Bitcoin mining one of the most sustainable industries worldwide, and green energy is becoming a industry goal.

Moreover, there are interesting opportunities opening up for the usage of so called waste energy, meaning energy that is generated from either fossil or renewable energy sources, but due to the difficulty of or high price associated with transporting that energy, is simply not used today for electricity. Instead, today’s waste energy can assist in powering the world’s largest decentralized network and generate a profit through Bitcoin mining. 

Bitcoin mining is not only powering and securing the BTC network, but has recently turned into one of the most profitable major industry on the planet for BTC miners. But that is a subject for another time.


Sincerely,

Misha Lederman

Director of Communications at Klever

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